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Consulting dilemma

 
#1 Consulting dilemma
07/01/2011 10:36

Wannabe

Hi all,

I have always been fascinated by the consulting world and the variety of projects it offers. After graduating, I have spent 3 years in an aggressive industry as I wanted to acquire some solid experience before joining a MC firm.

However, there is one aspect of consulting that I have trouble understanding. If someone could spare the time to explain this to me or discuss it, I would be extremely grateful.

1) I assume firms bill per man hour spent on the client’s project, so the more hours you spend on a project, the more revenue you generate for your firm.

2) The client is the emperor in the consulting world. You should do everything to keep him happy which should mean being as fast as you can in delivering recommendations (.ppt I presume ;) )

Combining point 1) and 2) creates a certain dilemma as you can't be too efficient or you will not bill a sufficient number of hours but you can't be too slow either or your client will think your firm is useless.

How do you get around this?

I suspect the project cost is negotiated up front but what if you do not need all the allocated time, or worse..you need more.

Are you seeing firms using different pricing strategies?

You could imagine a smaller firm that is trying to aggressively forge itself a reputation by charging a small fee that covers some costs and only charging full buck if the client is satisfied within an agreed timeframe.

Thanks for your thoughts on this. I may be way of track or disconnected from reality but it would also be good to know.

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#2 RE: Consulting dilemma
07/01/2011 10:50

Dave to Wannabe (#1)

Basically you bill the maximum you think you can get away with. Sometimes fixed price, other times daily/hourly rate.

How much you can get away with depends on many, many factors:

1. If client has a budget

2. If client is a tightwad

3. If client is a pushover

4. If you're in competition

5. How much time you think you will need to do the work

6. Difficulty of project

7. How desperate you are for the work

And so on.

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#3 RE: Consulting dilemma
07/01/2011 10:55

anon to Dave (#2)

In other words, exactly the same market factors as affect pretty much anything sold in any market in the world.

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#4 RE: Consulting dilemma
07/01/2011 11:41

Wannabe to anon (#3)

For a fixed price, then as Dave/anon have said, the factors are pretty standard, but what about if you bill at an hourly or daily rate. In my current position, if I am efficient, I generate more revenue, but in consulting, I would generate less revenue (Though my charts would be beautiful ;) ).

How do you balance being effective and producing great results at lightning speed whilst billing as much as you can (coz that is the ultimate goal)?

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#5 RE: Consulting dilemma
07/01/2011 11:49

rc to Wannabe (#4)

the mainstay of large consultancies is repeat business, and continuity of chargeability - there's typically more value in satisfying the client and getting an extension / another piece of work as a result than there is in protracting the project to squeeze out more revenue

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#6 RE: Consulting dilemma
07/01/2011 12:29

Shoe Polisher to rc (#5)

Don't worry about effectiveness/efficiency blah blah blah.

You'll get patronising pats on the back for those; and if they catch you lifting your skirt to other prospective employers, you'll get a bung (or a rare-skills bonus, as it is).

No, the way to be a star is to WIN THE DEAL.

Be the rainmaker, not the umbrella.

What was that one about don't predict rain, build the ark?? anyone know it?

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#7 RE: Consulting dilemma
07/01/2011 12:29

Bob to rc (#5)

Good consulting firms try to be clever about this. Examples:

- Link fees to client outcome: fees paid on basis of savings / revenue uplift for client (most applicable on something like outsourcing)

- Link fees to timely delivery: bonus paid out for delivery on time or early.

- Fixed price: Agree a fee for delivering x, then staff it with the cheapest (most junior) resources possible, and work them to death.

- Diversify: develop software that you can sell (licence fees), and upgrade and maintain (repeat business)

- Diversify: move into services (e.g. application maintenance, business process outsourcing, etc.)

Example would be outsourcing. Whatever your opinions are about it as an employer, just look at its revenue growth and profitability over last 10 years - something to admire.

Perhaps the above points are more relevant to 'delivery' type consulting as opposed to the 'analysis and recommendations' hokum that the MBB charlatans hawk.

A related question that arises (which I think is also interesting) is how one can achieve wealth through being employed in the consulting industry: if you get paid based on hours worked, then either you can work more hours (not fun), or bill higher fees (which is limited to some extend). The answer to this is that its a pyramid scheme: you grow wealthy because as you get more senior in a firm, your remuneration is increasingly subsidised by the profits brought in from the hours that the junior people below you work. This is directly related to the fact that the margin (or profitability) of a consulting resource falls the more senior they get. E.g.

Analyst bills £700 pd, earns £30k

Consultant bills £1000 pd, earns £55k

Manager bills £1200 pd, earns £70k

SM bills £1400 pd, earns £90k

P bills £1600 pd, earns £150k

So the bigger the pyramid you can muster below you, the more money you should be able to make.

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#8 RE: Consulting dilemma
07/01/2011 13:05

Wannabe to Bob (#7)

Am I right in assuming that the pyramid also applies in workload as number of hours worked should be inversely proportional to the salary earned?

Shoe Polisher, I think it was Warren Buffet: “I violated the Noah rule: Predicting rain doesn’t count; building arks does”.

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