By: Swetha Lepakshi -- Senior Research Analyst, Professional Services
20 March, 2018
Companies across the globe spent more than $250 billion on consulting firms in 2016, and this amount was expected to increase in 2018 Most of the companies regularly resort to consulting firms to avail solutions for various business issues ranging from strategy and finance advisory to hands-on implementation support. There are different types of consulting firms in the market specializing in different sub-categories of consulting services, such as strategy, operations, finance, and human resources (HR) consulting. Consulting firms have a specific set of rate cards, which are unique to each client. These rate cards include various components, such as overhead costs and margins.
This white paper will provide insights into the management consulting cost structure and margins and negotiation opportunities on the consulting margins.
Cost cutting and realizing savings has become a corporate mandate across many organizations. Companies are trying to reduce spend in their direct and indirect categories. Organizations spend considerable amount of indirect services budget on management consultants. These consultants are needed to support the buyers across various business issues. The consulting firms across the globe are regularly scrutinized for the fees they charge. These consulting firms, especially the tier 1 firms, do not disclose their cost structure. The fees they charge vary by the buyer and services offered. Hence they keep the fee structure under tight control to avoid the threat by competitors or for having to negotiate the fee with their buyers.
As a result, there is relatively less information on the cost structure and margins of the consulting firms. It is important for buyers to understand the cost structure of consulting firms, which will, in turn, help in understanding the margins made by these firms effectively, thereby improving the negotiation plans.
This whitepaper will address the following questions:
• What are the key components of a consulting firm’s cost structure? What is the percentage contribution of each component?
• What are the out-of-pocket expenses and the total project expense comprises what percentage of these expenses?
• How are consulting firms earning their profits?
• What are margins, mark-ups, and multipliers?
• What does a mark-up percentage consist of?
• How are multipliers arrived at?
• What are the typical margins set by consulting firms?
• Do margins vary by service line, job role, pricing model, and the type of consulting firm?