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Management consultants’ fee structure turns variable

Management consultants’ fee structure turns variable
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First Published: Sat, Jan 29 2011. 12 01 AM IST
Updated: Sat, Jan 29 2011. 12 01 AM IST
Mumbai: The fee structure of global management consultants in India is changing. Clients of Bain and Co. Inc., Boston Consulting Group and AT Kearney Ltd, among others, are now paying more variable fees linked to their performance. Till about a year ago, most of these were in the form of one-time fixed fees.
Typically, variable fees are linked to quantitative results such as share price improvement or a spike in profit, but in many cases they are subjective and tied to qualitative results such as the consultant’s ability in transferring capabilities to the client’s organization or the client achieving the desired result.
Consultants attribute this change to the fact that their clientele is undergoing a major shift, with many medium-sized companies and small- and medium-family businesses in certain emerging verticals approaching them.
Typically, this set of clientele has a different requirement than large business groups who engage consultants for business process re-engineering over a period of time. The new clients are willing to engage consultants if they are ready to deliver fast and are willing to link part of their fees to results achieved.
Three consultants that Mint spoke with declined to disclose clients’ names or profiles.
“Companies are asking us to put our skin in the game. We are offering a part of our fee tied to the risk based on the result,” said Ashish Singh, managing director of Bain.
For instance, if they are willing to have 10% of their fees as variable for qualitative results, for a quantitative result, they are willing to go up to 30% or 50% in some cases.
However, this sort of fee structure is not applicable to long-term assignments.
According to Saurine Doshi, managing director and country head at AT Kearney, the advice on cost reductions, organizational transformation or restructuring has increased as many medium-sized companies are looking to scale up and hence the risk-based fee structure has evolved.
A survey of senior executives at global companies by audit and consulting firm Ernst and Young Pvt. Ltd (E&Y), released in December, said the next two years will see a more intense focus on growth, with respondents reporting that markets are more varied and volatile than before the 2008 global financial crisis.
In India, margins are under pressure with one in three respondents experiencing price erosion and over half the firms reporting increases in labour costs, the E&Y survey said. As much as 95% of Indian respondents felt their market will become more competitive over the next two years despite the economic recovery.
“In 2000, nearly 90% of the engagements have been to advise clients on their future strategy and at that point in time ‘skin in the game’ did not work. A decade later, 50-60% of the engagements have been about strategy and 40% have been about cost reductions or organizational transformation,” said Doshi.
Skin in the game is a term coined by renowned investor Warren Buffett, referring to a situation in which high-ranking insiders use their own money to buy stock in the company they are running.
The consultant industry in India is Rs 16,500 crore in size and is expected to grow to more than Rs 22,000 crore by 2011, according to a December estimate by industry body Associated Chambers of Commerce and Industry of India. At present, around 7,000 consultants operate in India.
“We are seeing interest from companies which historically would not have been considered our target market,” said Singh of Bain.
Earlier, companies with a turnover of Rs 300-500 crore never approached these consultants, but the scene has changed. “Companies that have Rs 1,000 crore revenue or less, but are growing 40-50% a year are approaching consultants,” said Singh. “That’s now a core market for us.”
According to consultants, small and mid-sized companies in sectors such as cement, consumer goods and retail are their new clients.
Family-owned small businesses in emerging verticals are seeking consultancy services because the landscape is changing fast, say experts. Doshi of AT Kearney points out that family-owned small companies in sectors such as media and entertainment, retail, and luxury have approached them.
Another factor behind the change is that private equity (PE) firms, which have started increasingly investing in medium-sized companies, are encouraging their portfolio companies to take consultants on board.
“If a domestic firm, which doesn’t have a global network, wants to help its portfolio companies expand in China, a global consultant, which has that sector expertise, will be very helpful,” points out Darius Pandole, partner at PE firm New Silk Route Advisors Pvt. Ltd. “We advise our portfolio companies to take consultants on board.”
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First Published: Sat, Jan 29 2011. 12 01 AM IST