A consultancy’s value proposition is a crucial component of its success. Are you selling only on the basis of your technical expertise or on the value you drive for your clients? The proposition describes the services you offer, such as IT implementation, strategy development or engineering design, for example. The value describes the results and benefits which clients obtain from using the services.
During our Equity Growth Accelerator (EGA) diagnostic we identify where a consultancy lies on the value-based proposition scale. At the lower end, there are resource-based propositions. These are offered and priced on the basis of the number of consultants deployed on the project. So called ‘time and materials’ projects are resource-based.
In the middle are value-based propositions, which are offered and priced on the basis of the predicted benefit to the client: the greater the value to the client, the higher the fee. Normally these propositions are fixed price and are not hard-wired to actual consulting effort.
At the upper end of the scale are gain-share propositions. These put some or all of the fees at risk, depending upon the delivery of agreed outcomes, and are structured in order to generate higher levels of fees than either resource-based or value-based. The element of risk associated with these propositions increases the unpredictability of the fees as well as the potential fee level. A typical gain share would see a proportion of savings, delivered by the project, being taken in fees by the consultancy.
Consider a supply chain consultancy working for a client to design and implement a new inventory management system. A resource-based approach would simply provide a number of consultants on an agreed day rate (or rates) and the fees would equate to the total number of days billed multiplied by the rates per day. A value-based approach would charge a fixed fee which the consultancy would price in proportion to the benefits they believed they would deliver which, in this case, could be the reduction in inventory costs that their client would enjoy at the end of the project. A gain-share approach would charge a lower fixed fee than the resource-based approach, plus a proportion of, say, the inventory savings that the project would deliver. Overall, the total fee for gain-share should be the highest of the three options.
There are benefits and drawbacks for each approach. When charging based on resource the consultancy is never ‘out of pocket’ as all days spent on the project will be billed. But its offering is more likely to be seen as a commodity and fees will consequently be lower and can come under even more pressure if rates can be readily compared with competitors. Furthermore, engagements may be easier to terminate by the client as the service is seen as paid for by the day (or hour). A resource-based approach may incur additional administrative costs if the client wishes to track – and possibly challenge – the time spent on the project.
Value-based charging can attract higher overall fees than resource-based and is light on administration. It enhances the status of the consultancy in the client’s view and provides longer term certainty of fees compared with both resource-based and gain-share. However, margins can be eroded if projects consume more consulting resource than estimated
Charging using the gain-share approach provides the opportunity for earning the highest possible fees and is easier to sell as the engagement represents a very low risk to the client. It also aligns the client and consulting goals. However, gain-share propositions carry with them the highest level of risk that the consultancy might lose money on programmes of work. Unless the benefits are very strongly linked to quantifiable metrics, and unless the criteria for benefit calculations are completely transparent, disputes over payments can easily arise.
If you can mitigate the risks of gain-share programmes then you will have the strongest propositions of all and the opportunity to really drive up revenues.
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