Deliver tangible outcomes to your clients - A paradigm shift in consulting

The world of professional consulting firms is highly competitive. Well, everything is, so why am I asserting that it isn’t just a cliched statement? Increasingly, newer entrants have been entering the market and doing very good work too – trumping the Big 4 in many areas. But it’s not easy to always wean away business from big brands. After all, who can deny their brand strength and credibility built over 100 years? 

Over time, competitive pricing models have evolved and helped niche players seek out their place in the sun. It needs to be emphasized here, it’s not about under-pricing or doing things cheap at all. This article should not be seen as a means to use pricing as a competitive advantage over established brands, this is an attempt to ensure that consulting firms build clear differentiation (Why & How) to scale and compete & make the impact of their work felt by delivering tangible & measurable outcomes. 

The idea of Time & Material pricing is on its way out, if not redundant. There was a time and place when you could ‘trade’ people’s time & make an arbitrage. This is similar to what trading companies do. As a client, why should I pay for 80 hours, if that work could have been done in 60 hours (say)?

Essentially, clients can't pay for the inefficiency of a service provider & take all the risks while the consulting firm has no or very little ‘skin in the game’. While we all agree that manufacturing is where the ‘value-add’ is, it is similar to professional services companies with deep expertise & with ‘IP’.  

The Global Financial Crisis of 2008, accelerated great change and put much greater emphasis on “value”. The distinction between discretionary spending and the non-discretionary ones grew far more pronounced, as purse strings tightened. End-clients wanted greater clarity on whether their money was being spent well and the outcomes optimized too. 

Value is defined as something where tangible outcomes measured in $ terms are agreed and committed between the client and delivered by the service provider. This is no longer a best-case effort where the outcomes will be discovered at the end of the project.  The Fixed Pricing model was the natural successor and arguably the precursor to the outcome-based approach. 

A fixed price may be beneficial for clients in some cases as there is certainty on the quantum of fee after factoring service provider’s inefficiencies. But it leads to professional services getting commoditized without firms irrespective of the brand and size using pricing to lure the client. Over time, that’s a sure-shot way of becoming complacent & not focusing on the firm’s core strengths including to work on innovation. 

Enter Outcome-based Model         

Outcome-based business models keep delivering ‘true value’ to their clients and tweak their business models including their team’s DNA to make this happen. For instance, If the firm can bring down the Days Sales Outstanding(DSO) significantly which releases cash flow to the client then it makes perfect business sense to treat this as a valued outcome. Price then is no longer the only factor for the client’s decision making, the basis of discussions then becomes the return on the fee that the professional services firm is able to deliver. 

It’s also an effective way of establishing niche competencies, clear differentiation, building a company DNA that is hard to replicate and stay away from becoming commoditized in the market-place. The playing field gets level if firms irrespective of their size are able to promise and deliver returns consistently. 

This is truly a win-win situation which gives the firm to earn a higher fee pegged to the outcomes delivered while keeping the firms on their toes as underperformance will only lead them to not being able to make the desired margins which they would otherwise have in a T&M or a fixed price model. Over a period of time, greater efficiency and cost-optimization is established in the firm’s internal processes and delivery. This is a natural outcome, as ‘wastages’ in every form and sense gets minimized. 

This is where we see great firms looking to disrupt the space heading towards to challenge the incumbents who may find it hard to change given their size and structure. Defining in clear terms in the contract on what an “outcome” is will not be easy especially when the value may be realized over a period of time and its also about starting this with select clients where trust levels are high to ensure that firms have a realistic chance of getting the fee. 

The Post-COVID World 

With all kinds of restrictions, there are many sectors that are adversely impacted and will be substantially challenged in the next 12-24 months and beyond.  This may be a moment of reckoning for firms willing to introduce and develop expertise in this model. The client will continue to demand greater clarity on WHY they should hire firm A amongst several other firms & will view this through the paradigm of ‘input vs output’, i.e between the money spent and the value created. The professional firm needs to be a “trusted partner” to them and be an integral part of their growth/survival strategy as the case may be. The sense of collaboration will only intensify in the times to come. 

The whole idea is to shift from cost arbitrage to something that is tangible & outcome-driven. Risks going forward will need to be shared in some proportion between the firm and the client. With an increased focus on digital transformation, the focus on an outcome is only going to become stronger. These are tough times – the success and survival of a professional services firm will be determined by how well they differentiate through their Why and follow this up with their execution capability through the How.