ROI-Based Consulting Contracts: The Pros and Cons

Engaging a consulting firm is a big commitment. The price tag for a major corporate transformation project can range from the high six figures to mid-seven figures weekly, depending on project, industry, time involved and other variables.

To justify that hefty investment, consulting firms often employ the 10x rule, assuring clients their expenditure will return tenfold via increased profits and expanded operating efficiencies. Given the stakes involved, it’s not surprising that clients have begun to press for more than promises written in the air. And in recent years, consulting companies have responded with hybrid fee-and-incentive contracts that peg payables to achieving project goals.

“Benchmarking is an increasing part of the overall mix” of firm-client relationships, notes Gary Pinkus, managing partner for McKinsey & Company in North America. “We will put an increasing percentage of our fee at risk, pending the delivery of exactly what we said we were going to do exactly in the way we said we’d do it.”

Contracts constructed along benchmark-based deferred fees mean “the consultant agrees to a smaller flat fee upfront, then sets a much larger fee down the line,” says Tom Rodenhauser, general manager of ALM Intelligence and managing director of its advisory services program.

“It’s an alignment of consulting fees with the outcome for the client,” agrees Ted Bililies, managing director of AlixPartners. “It says that if we are successful you will pay us x; if not you’ll pay less—and if very successful, you may pay us 2x. It is transparent alignment with the CEOs goals.”

Some CEOs fear that putting fees at risk can incent consulting companies to design and implement programs that meet defined short-term goals rather than build the company for sustainable performance. For example, a consultant might put together a program to boost profitability 20%. One strategy to do this would trim costs by outsourcing processes, including customer service, overseas Another might cut R&D programs, which cut short-term costs but kneecap pipeline products. In both cases, implementing the recommended changes would be likely achieve financial goals, but erode the company’s hard-earned market positioning.

However, Bililies sees such tactics as unlikely—provided a CEO has done his homework in choosing a consulting company to work with. “That shouldn’t happen with a high-integrity company,” he says. “I see it as an overwhelmingly positive trend that says we are in it with you, we have confidence in our ability and we want to align ourselves with the interests of you, the CEO.”

As valuable as ROI contracts can be, they’re no substitute for vetting potential consulting partners for competence, credibility and chemistry. “CEOs should use their networks to really check out and vet consulting firms, to find out how capable they are and what kind of engagements they’ve worked on. There is no substitute for reference-checking.”

Consultants Offer Tips for CEOs on Finding and Negotiating with Consultants

1. Determine what you want before you go in. “Make sure the change you seek is substantial enough to justify the cost and time involved. It’s frustrating to all concerned when a prospective client comes in, asks for a proposal, then decides not to go ahead.” —Gary Pinkus, Managing Partner in North America, McKinsey & Company

2. Look for a firm that thinks differently than you. “Find out their definition of success. How will they work with your team, how will they communicate with you? Do they have a good mix of team members from operations and strategy? Do they have a senior individual you view as a peer?” —Heather Ziegler, Stamford (CT) Managing Partner & Deputy Strategic Risk Leader, Deloitte

3. Know who, exactly, you’re hiring. “A core question every CEO should ask is, ‘Who is going to do the work? You, Mr. or Mrs. Consultant, may be selling the work, but who will actually be here in my office or on our shop floor actually developing the work.’ That is a major question, and of course, the CEO should meet everyone who will be on the delivery team.” —Ted Bililies, managing director of AlixPartners

4. Find out about the consultant’s experience. “As a client, I’d want to know: has the person done this before? Where have you helped other clients with this issue? Give me an example where you’ve done this before.” —Melissa Jezior, CEO, Eagle Hill Consulting

5. Know your exit plan. “‘When are the consultants leaving?’ is an important question to ask. The objective on our part is to get the client doing as much as possible themselves. The client owns the change, not the consultant. No consultant should perpetuate itself around supporting a change program.” —Perry Keenan, Senior Partner & Managing Director, Boston Consulting Group

6. Seek authenticity. “Look for solution providers that are deploying their own strategies. If they aren’t eating their own Cheerios, metaphorically speaking, then you shouldn’t either.” —Ed Konopasek, Vice President Managed Solutions, Logicalis U.S.