Consulting firms such as MBB firms typically charge $5 million for a project consisting of roughly 6 consultants and lasts around 6 months. Project cost varies depending on scopes of work (deliverables), project type (Diagnosis, Strategy, Implementation), client location, client relationship, and sometimes depending on management decisions.
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!
1. How do consulting firms charge a project?
Consulting firms calculate project cost based on a wide variety of factors. The most important factors are ones that cause the most significant variations in project costs. These factors are project deliverables, project type, client location, and client relationship.
No. 1: Project cost varies depending on the volume of deliverables
A deliverable is a final product of a consulting project. Examples of deliverables are tangibles such as Powerpoint decks (which lists everything done, measured and delivered), implementation plan documents, dashboards, and tools to implement the project. Intangible deliverables are technical training for employees at client company or change in their attitudes.
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
The type of project clients choose for their business problems causes major changes in total project cost. There are three main types of consulting projects: Diagnosis, Strategy, and Implementation.
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
Project cost also depends slightly on the client’s country of operation. Projects in developed countries cost more than projects in developing countries because of factors like differences in currency (which affects consultants’ rates), standards of living, and affordability (how much clients can afford per project).
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 is lower in Thailand than in the UK.
No. 4: Project cost varies depending on client relationship
For most consulting firms, clients with closer relationships (having signed one or more projects in the past) usually get discounted price on their future projects.
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
Sometimes, projects are offered discounted prices when Partners decides to leave footprints on a certain location.
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.
3. Four misleading myths about consulting project cost
The five factors listed above are the main drivers of changes in project cost. To make it even clearer, I will show you the factors that do not contribute that much to project cost, yet commonly believed to do otherwise. Without further ado, let’s debunk a few common misleading myths!
Myth #1: Projects involving large numbers of people cost considerably more
A common way of thinking is that more people means more salary to pay, which greatly increases project cost. This is thinking partly true but consultant is the keyword it misses.
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
Another common myth is that the larger the distance from a client base to consultants’ office base, the more expensive the project becomes.
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
Support services are also insignificant variables in project costing but often believed otherwise.
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
Some also entertain the idea that competition among major consulting firms (Big 3 firms) will decrease the price of certain advantageous projects by a large margin. A project in, say, Shanghai, maybe so lucrative (not just monetary-wise) that firms will significantly lower project prices to get their hands on it.
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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