Cos prefer variable fee model for consultancy services

News Release

The Hindu Business Line | August 6, 2009

Cos prefer variable fee model for consultancy services

Seek expertise on cost-cutting, staff retention.

Cashing in
Though hit by the downturn, management consultancy business has picked up since March this year as companies seek experts’ help.

The frontrunners in the consultancy business such as AT Kearney, Boston Consultancy Group and Accenture also working on the model.

With the economic downturn rendering management consultancy services more popular, companies are now in favour of linking the fees, at least partially, to the benefits accruing to them.

“We are now comfortable with a variable fee model where a portion of the fee is paid upfront and the balance is linked to end results,” said Mr Hemant Kharkar, Chief Operating Officer, TRF Ltd, adding, “the fee structure being linked to the cash flow will also make the service more affordable”.

Cos prefer variable fee model for consultancy services

The variable component of the fee could be a percentage of the incremental monthly or quarterly profits.

Client demand
“A large chunk of the consultancy fee constitutes of recommendation charges. Consultancy companies are now moving towards the variable fee structure on client demand,” said Mr Satyashri Mohanty, Director, Vector Consulting Group.

“The model is still shaping up in India,” Mr Rishabh Bindlish, Manager, Accenture, said, pointing out that the system has picked up considerably over the last couple of years. “The variable component may start yielding income in about six months when the idea gets implemented,” he said.

Though hit by the downturn, management consultancy business has picked up since March this year as companies seek experts’ help in cost-cutting, talent management and employee retention exercises, he said.

The frontrunners in the consultancy business such as AT Kearney, Boston Consultancy Group and Accenture were also working on the model, an industry expert said.

“Of all the consultancy deals, 70 per cent still take place in the pure fixed fee model,” he said, adding, “the charges are skewed in favour of the fixed component (50-60 per cent) even in the combined fee model”.

Only the newer consultancy firms offer a higher variable fee component (nearly 70 per cent) in order to compete with the established firms, he added.

The applicability of the model, however, would depend on the kind of benefits to be obtained, a senior officer of Ernst & Young said. “The model may not be applicable if the performance improvement is qualitative, for instance, in the case of risk consultancy,” he said.

“We are not in favour of taking consultancy services in variable fee terms as the fee structure cannot be attributed to cases other than measurable financial benefits,” said Mr Jayant Kulkarni, Senior President, Crompton Greaves Ltd.

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