All the way through 2024 our research has highlighted the extent to which clients, who badly need to invest but lack the budgets to do so, have put immense pressure on the fee rates of consulting and other professional services firms. But the tide, while not actually turning, may at least have stopped coming in. A recent survey of 550 senior executives indicates that 39% of clients expect prices to fall. This is still significantly higher than the pre-pandemic level of price pressure, but is lower than much of the other data we’ve gathered so far this year and is very similar to last year’s level (36%). 

One reason that the pressure on fee rates is stabilising may be that firms are offering bigger discounts. Comparing recent data with information we gathered two years ago, at the height of the post-pandemic boom, we can see that the proportion of firms offering discounts of more than 20% has more than doubled from 17% in 2022 to 42% today. At the same time, the proportion of clients that say the level of discount was the most important factor in the firm winning the work has risen from 48% two years ago to 52% now. 

But this short-term success will have medium-term consequences. Our research has consistently shown that clients make an estimate of what a consulting project will cost long before they’ve issued an invitation to tender or a request for proposals. In this new research, 53% of clients said they do so before they’ve decided to proceed with a given project in the first place, and a further 36% do so after deciding to proceed with the project but before they’ve seen any proposals from suppliers. Just 12% of clients estimate a project’s price after talking to consulting firms. Forty-seven percent of clients say that their initial estimate is based on the cost of previous consulting projects: In other words, clients will remember the discounts they’re getting this year and expect them next year and beyond.  

All is not lost, however. We’ve identified three alternative approaches that will enable firms to resist price pressure on a more sustainable basis: Focusing on existing clients; making judicious use of alternative payment mechanisms; and moving the debate from price to value. 

Focusing on existing clients: Asked to talk about a specific, recent, and large-scale project, 91% of clients said that they’d awarded the contract to a consulting firm they’d worked with very extensively in the past. And that’s important from a pricing perspective because clients will be more willing to pay a higher price in the future if the firm has demonstrated an ability to deliver high quality work in the past. The depth of a firm’s expertise and its use of proprietary tools also have a positive impact, but a weakness in either will have a disproportionately high negative impact on a firm’s price point. 

Making judicious use of alternative payment mechanisms: Since 2020, there’s been little appetite or opportunity to experiment with alternative payment methods. During the pandemic, clients were not prepared to add further uncertainty by agreeing to approaches that made fees contingent on results: Managing their cash carefully, the priority was to know what they’d owe and when. Post-pandemic, with demand for external support soaring, consulting firms had little time or need to suggest tying their fees to results. However, over the course of the last year, we’ve heard evidence of a change of heart in interviews, with clients’ saying they’re now more likely to consider performance-related pricing. That trend is now showing up in our data, with 27% of clients saying they’ve paid on the basis of outcomes. 

That doesn’t mean that 100% of the fees in these outcomes-based projects were at risk: Only 2% of clients said that more than 50% of the fees were at risk in practice; 51% said that between 25% and 50% of fees were at risk, and 42% that between 10% and 25% were. 

However, firms shouldn’t be under any illusion that this shift is because clients want better solutions: Most of the clients we talk to see outcomes-based payment as a means of keeping fees down. However, clients may be willing to go ahead with a performance-related project that they wouldn’t have been prepared to pay for on a time & materials basis. But the real advantage of outcomes-based contracts for consulting firms in the current environment is that they disguise the fact the price is lower, thus avoiding high levels of discounting, which clients might expect to continue in the future. And that takes us onto our third and final suggestion… 

Moving the debate from price to value: Readers of our material will know that we regularly point to a significant difference between positive perceptions of the quality of work consultants do and of the value consultants deliver. Over the last few years, there’s been a steady and significant rise in the positive perceptions of quality, while views about value delivered have scarcely changed. We’ve long argued that this has been stacking up a serious issue for the industry, that clients recognise the expertise consultants bring but struggle to articulate the concrete impact they’ve had. The last year, against a backdrop of extreme macroeconomic uncertainty, has seen the gap between quality and value widen even further. Unquestionably, this is one of the major reasons why price pressure is so intense: It’s not just that clients have less money to spend on consulting services, but they want to be certain that, when they do, they’re going to get a positive return. 

The best thing consultants can do to withstand price pressure now and in the future is to fix this problem. 

If you would like further information on any of the data in this article or to understand how Source could help your review and reshape your approach to pricing then get in touch.