How much do consulting firms charge clients?
In this article, I will explain the reasons behind variations in consulting project cost and debunk 4 misleading myths about cost composition in consulting projects. Keep reading!
Read more: What is management consulting?
How do consulting firms charge a project?
No. 1: Project cost varies depending on the volume of deliverables
Generally, the more deliverables a project requires (the larger a project’s scope of work), the higher number of consultants will be involved. This leads to significant increases in project cost.
No. 2: Project cost varies depending on project type
Diagnosis projects are the cheapest among the three types because deliverables are limited to diagnosis of root causes. Meanwhile, implementation projects have lower cost per unit of deliverable relative to the other two types.
Strategy projects are usually the most expensive because (1) deliverables contain long-term strategies to resolve the identified root causes and (2) they are usually the first projects that client companies hires consulting firms like McKinsey, BCG, and Bain (from the second project onwards there’s usually discounts).
No. 3: Project cost varies depending on client location
For example, a client company simultaneously requests two projects, one in China and one in the UK. When these two projects are billed on paper, say, in USD, the one in Thailand might cost less than that in the UK. One reason is that the consultant pay rates are lower in Thailand than in the UK.
No. 4: Project cost varies depending on client relationship
First few projects that clients sign are often the most expensive. After these first few, prices gradually decrease for second, third, fourth projects and so on. Discounted prices also apply to clients purchasing more than one project type (Diagnosis, Strategy, Implementation).
No.5: Project cost varies depending on partner’s decisions
At McKinsey, for example, Engagement Directors (ED) might want to establish new offices in Busan (Korea) for many reasons (personal, professional, etc). In this case, the ED will likely offer discounts to secure projects in Busan.
Four misleading myths about consulting project cost
Myth #1: Projects involving large numbers of people cost considerably more
In reality, the number of people only alter project cost by a negligible amount. Whereas, because consulting salaries are the highest, the number of consultants (which depends on a project’s scope of work) is the significant influence.
Myth # 2: Distance from client base to office base play a big role in costing
The truth is, commuting and traveling costs account for a very small part of the entire project cost. Location-wise, the differences that matter are salary rates, currency, the standard of living, etc.
Myth #3: Projects with more support services cost considerably more
It is true that consulting firms value consultants’ time, offering them a wide range of resources to capitalize on, from expert coach sessions, professional slide designing, to Excel expert support. However, these costs are extremely trivial relative to other costs, and will barely change the overall project cost.
Myth #4: Competition significantly affects project pricing
Although this sounds valid theoretically, it is rarely the case in reality. Most projects at MBB firms have their own price range. Changes in these price ranges are rarely subjected to competition, and will only vary by a notable margin depending on the five factors mentioned above.
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Management consulting is an industry providing expensive and professional advice to organizations to improve their overall performance, through better “management”, which includes strategy, governance, operation, organization, finance, and marketing. The three most prestigious management consulting firms are McKinsey, BCG, and Bain (the Big Three).