by Barry A. Liebling
For more than 100 years American businesses have been spending money to obtain the services of consulting firms. And there are two ways that consultants set their fees. It is very common for a firm to inform the client that the bill will be based on the hours it takes to complete the engagement. This means that more hours spent results in more revenue for the consulting company. That is also the method that law firms and accounting firms typically use.
The alternative to hours-spent billing is a fixed-fee for the consulting assignment. Here the consultant estimates in advance what it will take to do the work and then quotes a price for the engagement. In the fixed-fee scenario the consultant typically keeps track of hours spent, but this does not have to be revealed to the client company.
Recently the Wall Street Journal reported that AI (Artificial Intelligence) is creating a problem for consulting companies that are selling their clients hours. The firms’ staff are using AI to help them do the work – including research, quantitative calculations, and writing reports. Because AI – used properly – increases efficiency, the time required to complete an assignment is shrinking. That means that firms that sell hours will see their revenues diminish.
https://www.wsj.com/cfo-journal/inside-consultants-messy-shift-from-hourly-billing-7bd9b802
Of course, the consultants have no desire to reduce their income, so they are turning to fixed-fee billing. And many are complaining that switching away from selling hours is a difficult task. I regard this complaint as remarkable, because management consultants should have used fixed-fee as their default a long time ago. And changing from selling hours to selling results should not be difficult at all.
AI does make professional consultants more productive and permits them to accomplish tasks more quickly. But that is not a novel development. When personal computers became ubiquitous individual productivity (and speed) increased enormously. Before that, the availability of mainframe computers had a similar effect. And before computers typewriters made the work consultants do easier and faster.
Let us go back 50 years to 1976. I was a young management consultant at a famous, large, international firm. It was the company’s policy to have all professionals charge their hours for everything they did. When a client asked for a proposal, the document would include the names of the key professionals who would be doing the assignment with their billing rate and estimates of how many hours they would need to do the job. Typically the proposal stated that if the assignment took less time, the client would be presented with a smaller invoice. And if it turned out that it took more hours to complete the job the consultant would inform the client and revise their bill.
How did this work out in practice? I do not recall any client getting billed for less than the proposal estimate. If the job was finished efficiently and early, a high ranking member of the firm would “check the work” to be certain that it was correct which would add enough professional charged hours to justify the original estimate.
And of course there were many occasions where it took more professional time to do the work than the consultant anticipated. Sometimes the client would be informed that the fee would be more than what was originally quoted. But frequently the top executives at the consulting firm were reluctant to disappoint a client, so even though it took more time than originally planned, the final bill did not exceed the initial quote.
Sometimes a potential client would visit my large firm and request a proposal. The soon-to-be customer would insist on a fixed-fee and did not want to get involved in scrutinizing and fretting with professional hours. Even though the official way of calculating the clients’ bills was charged-hours, the prospects were not turned away. The firm accommodated to those who wanted to lock-in what they would be spending before the work started.
When I created my own independent consulting business I always charged my clients fixed-fee. I sold results but not my time. Sometimes a client inquired what my billing rate was and opined that it would indicate whether or not my service was reasonably priced. I replied that the way to know that is to compare my fixed fee to that of other consultants. Figure out if my fee is worth what I will deliver, and proceed accordingly.
There are lessons here for both the customers of consulting services and for providers. Hey customers, insist on a definite price for the work you want done. Purchasing professional hours gives the consultant an incentive to take more time – which is disadvantageous both to you and your supplier. Note that when you buy anything your concern should be what you will obtain and how much it will cost. Providing you receive your consultant’s report when it was promised, the number of hours it took to finish the project is not your concern.
A word to consultants: Savvy clients will always prefer fixed-fee contracts. Treat all your clients as intelligent business professionals.
Apparently some of the largest consulting firms that are now discovering the merits of getting rid of hourly billing. It is interesting that these companies regard themselves as the smartest people in the world of business, but it took them a very long time to figure out that selling hours is not the way to go.
*** See other entries at AlertMindPublishing.com in “Monthly Columns.” ***