For decades, consulting firms have been providing strategic guidance for their clients for decades, largely working within framework that the industry began in – charging clients an hourly or daily rate to have access to the firm’s expertise.
This model leads consulting firms to 1) hire lots of people, the best if possible, and 2) sell, sell, sell. The more people working on a project, the more available billable hours the firm can invoice, which focuses the client on buying more expertise more often than necessary.
The majority of consulting and professional services firms work in this model and clients just accept it. Over the past five to ten years, technology has enabled more beneficial relationships and opportunities between clients and individual consultants and freelancers. At the same time, many creative agencies have adopted a more performance based approach for their services, moving in a more transformative direction and improving results both for their clients and their own bottom-lines.
New Variable Consulting Model
Traditional consulting structures are based on clients using their consultants as much as possible and being charged for that time. With this model, the firm and the client begin their engagement at odds with each other and with opposite motive:
- The client wants to be billed less and is motivated to reduce resources as much as possible
- The firm wants to provide more consultants, thus increasing the billing time as much as possible
From the client’s perspective, you really end up with very little control or choice when working with a consultancy. If you are presented with a $150k proposal and you want to reduce it down to $125k, you are typically going to be met with some hostility and reasons why your new partner just simply can not deliver the expected results when $25k is cut out of the plan.
At Bold, we take a more strategic approach when working with our clients and pursue opportunities that are more aligned as an investor rather than service provider. Our goal is to fundamentally change how consultants, consulting firms, and clients collaborate together and provide an environment where success leads to bigger rewards for both our clients and our firm through various models of engagement.
We believe all consulting and agency agreements should be performance-based rather than cost-based. While there is room for some cost structure between freelancers or independent contractors and their clients, the work that’s being completed in a cost-based structure is typically more administratively focused rather than revenue growth or savings focused, so those arrangements can make sense.
For example, a client may just need some data cleansed or a website cleaned up and rebuilt. These are maintenance tasks that the client does not have the resources in-house to allocate towards and are easily outsourced.
From a strategy perspective, however, clients receive better results when the motivation to provide lasting business value is the core of the relationship. When a business contracts with a firm and pays not for time, but for value delivered, the relationship is aligned from the start and the firm evolves from a traditional deliverable-based resource to a strategic partner, which is exactly what you want as a client.
With the performance-based model, both the client and the consulting firm share the risk of failure. If the firm falls short or underestimates the time or effort involved, it will lose out on revenue from the work and the client does not pay for time involved. However, the inverse is also true in that if the program works well and results are achieved or exceeded, not only does the client gain but the consulting firm would be paid for value delivered, regardless of the amount of time and resources it took to achieve the results.
Performance Based Consulting Example
Let’s say that a growing startup, Beta Corp, wants to introduce a new product to market and start expanding its offerings. Their team has no experience in this new market, but are confident in their research and the impact this product will have on their business.
Beta needs a group of experts to guide their product launch, so they hire Acme Consultants to deliver and execute a strategy that both parties agree should increase sales by $1 million over the next six months with this new product.
Without this help, the product will fail. So Acme takes on the project and charges a 10% success fee ( $100k ) for managing the product launch. For additional motivation, Beta and Acme adds an incremental 2.5% bonus for every $500k in sales achieved beyond the targeted $1m.
Now Beta does not have to worry about how much time Acme takes, nor do they have to worry about how many consultants are on the project. Instead, they collaborate freely so that they can both achieve their goals. To ensure that Beta has some skin in the game, they allocate 30% of the expected success fee ( $30k ) and pay this monthly over the six month agreement ( $5k/mo ). Now both parties are invested in this project’s success.
At the end of six months, sales of Beta’s new product reached $2.5m, higher than anyone had hoped for. Beta’s launch was a huge success and Acme has earned themselves an additional $62k in bonus commission.
Revenue and Equity Share Consulting
Like a performance-based model, both the consultant and the client come to an agreement before the engagement begins to determine what the total opportunity, value, and success metrics are for the entire project. However, rather than the client paying for value gained ( or saved if the objective is a cost savings program ), the consulting firm would either take an equity position as an investor would or a percentage share of attributable revenue ( or savings ) over a specified period of time.
This type of engagement is where Bold seeks opportunity and partners. While not for every client or engagement type, when the revenue or equity share agreement is available, the client would pay only a small monthly fee and then the remaining fees come only after success and would come directly from the revenue or savings derived from the program, either as cash or equity depending on the agreement. The consulting firm has skin in the game just like the client does, and both are equally rewarded at the end.
Programs built on value-based and revenue / equity-based agreements are where I believe the future of consulting, strategic innovation, and business growth will come from. These three models directly align the client, the consultancy, and the consultants with the same objectives and outcomes, and all parties are equally rewarded for wins, or, they share equally in the losses.
In this example, Beta’s product launch continually gets delayed because of poor program, project, and vendor management, causing them to lose $50k each week of delays. Beta decides to work with Acme to speed up the launch and get their program moving successfully.
Acme comes in with a plan to shorten launch date from 12 weeks to 6 weeks, or a 50% improvement from before. This efficiency will effectively save Beta $300k. Acme proposes a monthly retainer of $3k and a bonus commission of 12% of the total savings. This aligns both parties to get this project launched as quickly as possible. The faster Acme delivers, the more they will be paid and the more Beta will save.
Acme delivers one week earlier than anticipated and earns themselves a $42k bonus for completing the project in five weeks, earning a total of $67k and saves Beta over $300k.
The relationship between agency and client is evolving, and hopefully more agencies move into either a full-performance model or some sort of blended structure.
We believe that the most innovative business ideas and opportunities come when more than 60% of our fee is contingent on the results that our ideas deliver in the market. Certainly a Bold idea, but one with the greatest client / agency alignment and produces the most profitable results for both.