Project Funding - Cost for Strategic Advice "Big Firms"

What are they buying if a client pays BCG, McKinsey or Bain $1,000,000 for an engagement?

Strategic advice and, in the case of implementation work, hands-on guidance and step-by-step help executing it. It's important to note that, except in extremely rare cases (e.g., design firms presenting a prototype of a physical product like an IDEO or Frog might do), clients are truly paying for advice and guidance.

Thus, the advice must be top-notch and delivered convincingly and polishedly for the client to be happy with the result.

How do clients receive recommendations?

Almost invariably, the output is a series of data-driven recommendations centring around the problem. The delivery of this output is primarily a presentation, or in many cases, a series of presentations (e.g., kickoff meeting, weekly check-ins, mid-project check-in, final presentation, etc.).

In addition, the supporting data and data assets (e.g., survey results, Excel models, PowerPoint slides, raw transcripts from interviews) are often, but only sometimes, handed over to the clients. However, I would like to point out that the essential product is the recommendation itself, not the data assets. Ultimately, the data assets are just supporting arguments, essentially byproducts of their work to reach the recommendation.

Where does the work happen?

There is the most variance here as it depends on the firm itself and the nature of the work. In most cases, though, consulting firms tend to co-locate at their client sites for most of the week so they can be available to collect data, interview stakeholders, present to stakeholders, etc.

Firms like McKinsey and BCG tend to staff the teams at the client site four days a week, typically Monday through Thursday, and then bring teams to the home office on Fridays. Bain is an exception and, in most cases, attempts to keep consultants working out of their home office, unless there is a need to travel for client research or a client presentation.

Why? And when?

While there can be many reasons, they often need 1) functional expertise, 2) objective opinion or 3) on-demand, world-class brains. The "When?" is the most straightforward question: whenever the client needs help.

The unit economics of a consulting engagement

To help bring the above description to life, let's examine a specific, hypothetical case example and the unit economics of the consulting business.

Just as in a case interview, you might find yourself analyzing the profitability of a company's product; let's pull apart the revenue and cost structure of a consulting case engagement so we can understand it at a deeper level. This is the same thing you'll do in a case interview, except that, for example, instead of analyzing the profitability of a high-end furniture company, we'll be looking at the unit economics of a consulting firm.

Example: A McKinsey consulting engagement

Let's say a large consumer electronics firm hires McKinsey to help them evaluate whether they should enter the online advertising space via their footprint in digital devices. Based on the initial conversations with the client, the firm agrees to take on the case, allocates a 12-week timeline and agrees on deliverables and a loose framework for the type of analysis and research the firm will do over the course of the case.

The top line: revenue of a consulting engagement

The revenue side will likely be the superficial part of the sample engagement described above. Clients will agree upfront with the consulting firm on the price of the engagement and the deliverable (e.g., what type of recommendation and analysis will be done).

This model type is called a "Fixed fee" because, regardless of the outcome, the client will pay the agreed-upon fee for the work. While Fixed Fee is a standard pricing model used in consulting, it's worth noting that a few other alternative models pop up.

• Fixed fee: As discussed above, this is a single, agreed-upon fee for the engagement. In almost all cases, this amount will be paid in cash compensation, but in rare cases, it can be paid in company equity or a mix of company equity and cash.
• Time plus materials: This is a model where the firm and client agree on the number of people and type (level, experience) needed for the case and the price that will be paid for each billable hour. While the client will have a good idea of the engagement's cost, any deviations from the expected timeframe or resources needed could significantly change the picture.
• Milestone-based: Here, the firm and client agree on certain case milestones and the fee that will be attached to each one. Thus, the client pays when the firm achieves each milestone. This type of model is used almost exclusively in more prolonged implementation cases. For example, it makes much more sense in a year-long case where the firm is expected to help orchestrate a re-org than in a ten-week strategy case.

A typical strategy case costs between $500,000 and $1,250,000. This variance is driven by the premium the firm can command (e.g., McKinsey will usually charge more than LEK because of the premium their brand commands), the length of the case and the number of consultants required to do the work. For example, let's pick a simple round number to work with $1,000,000. So, regardless of the outcome, unless there is some rare breach of contract from the client or the firm waives the fee, the consulting firm will make $1,000,000 for this 12-week case.

The cost drivers of a consulting engagement

Now, let's look at the cost side. A typical arrangement for this type of case might be something like the following:

• One junior Partner, who sold the case, spent 33% of their time on this case
• 1 Principal, acting as the primary day-to-day lead on the case, spending 100% of their time on the case
• 2 Associates, acting as the primary "work-horses" of the case, leading the three key work streams the team will be investigating, each spending 100% of their time on the case
• 2 Analysts, helping out the Associates as needed across the work streams, each spending 100% of their time on the case
• 2 Support staff, helping 10% of their time on slide making and research tasks (e.g. pulling relevant past casework, finding external research)
• Lodging and food: For this grouping, we'll take average expenses times the number of days on the road. For a 12-week case, we'll assume four days a week at the client site for 48 days.
• Travel: For travel, we'll assume each person on the case must travel round trip to the client site each week at an average cost of $800 per ticket. Five team members are working full time on the case, one working 33% of the time (the Partner), and two support staff adding proportionally to their 10% allocation to the case. So, we'll be able to use 5.53 for the calculations.

Putting it all together

If you put all the data above together, here is the rough unit economics of a case.

• Revenue: $1,000,000
• Costs: $559,828, $324,250 from personnel and $235,578 from other
• Margin: $485,180 (48.5%)