Big Four consulting projects overshoot on costs

Around 70% of all Big Four audit firm consulting projects end up costing more than the client’s initial estimate, with 18% of projects costing significantly more and only 2% coming in under budget

Big Four firms did perform slightly better than major IT and technology companies, where 76% of projects overshot client budgets, according to analysis by Source Global Research.

Conversely, the two major consulting players, McKinsey, Bain & Company, and Boston Consulting Group, were the least likely to exceed client expectations on price, with only 60% of their projects doing so.

The research also found that three-quarters (75%) of US companies arrive at reasonable estimations of project costs before they receive any proposals from consulting firms.

Source surveyed US-based senior executives from major organisations that had all been directly involved in buying and managing consulting projects, 74% of which had annual revenues of over US$1bn, with 23% in excess of US$5bn.

The findings suggest most clients think consulting firms are setting their rates too high, as 74% agreed that consultants do not create enough value to justify the prices they charge.

However, the survey also found that it is the rule rather than the exception in the US market for these rates to be discounted, with consulting firms offering clients some sort of discount on two-thirds (66%) of projects. Big Four firms were the most likely to offer clients discounts, with 70% of their projects being discounted to some extent.

Outcomes

Source found that more than three-quarters (79%) of senior executives said all or most of their organisation’s consulting contracts include some sort of outcome-based element, while 88% wanted to make more use of outcome-based pricing in the future.

The top two reasons clients gave for why they want to do more outcome-based deals were to make consultants work harder (64%) and to make sure that consulting firms staff their projects with only their best people (50%).

Over two thirds (68%) of Big Four projects considered in the research included an outcome-based element, suggesting their appetite for the practice was similar to that of MBB firms (66%) but noticeably lower than leading technology firms (76%).

Furthermore, 96% of senior executives who had used outcome-based pricing said that it had a positive effect on project outcomes, with 61% stating that it had a significantly positive effect and 35% a somewhat positive effect on the quality of the work delivered by the consulting firm.

Fergus Blair, a senior analyst at Source Global Research, said: ‘The US probably has more appetite for outcome-based deals than most markets, but anecdotally we can say that we have yet to encounter a region where clients didn’t, on the whole, tell us that they were interested in doing more of them.

‘In general, however, outcome-based fees are still seen as an add-on to projects, not as a way of pricing the majority of the work. We expect that to change in the future, as clients look to tie more of their consulting spend to the actual value that consultants deliver.’

Matt David, partner and national service line leader, business model transformation at Deloitte said: ‘Outcome-based pricing works best where you have a direct relationship between the success of the project and revenue lift or cost reduction. This means it often works better for implementation projects than it does for strategy. ‘

The majority of US-based senior executives polled (84%) expect consulting fee rates to increase over the next five years, largely because of the increased demand for consultants to have specialist or technical skills (58%) and the increased use of proprietary tools and assets in the consulting process (45%). A similar number (80%) expect their overall spend on consulting projects to grow over the same period, Source found.

By Pat Sweet

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