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Consulting Firms Accept Assignments with Contingency Fees, Business and Industry Trends Analysis

With the understanding that today, more than ever, corporate clients want fast results and a high return on their investments in consulting, many consulting firms are accepting contingency payment for part of their fees.  This practice, sometimes called variable pricing, recognizes the fact that client companies are frequently taking big risks and facing large fees when hiring consultants.  Results matter, and contingency fees reward consultants when goals are met, while protecting the client when consulting projects fail.  Some consultancies now bid from 30% to 75% (occasionally even 100%) of their jobs with contingency pricing.  Under such a plan, a base fee is typically paid regardless of results, but a considerable increase in the fee is paid when goals are met, such as cost savings, increased efficiencies, increased sales or higher customer satisfaction levels.  In rare cases, consultancies may take part of their fees in shares of stock in a deal such as a leveraged buyout.  Another way of describing this type of contract would be a retainer (or base pay) plus a success fee (or bonus).  Bain & Company was an early proponent of contingency pricing which is now commonplace among many consultancies.
Similarly, many outsourcing agreements now call for “gain-sharing.”  This is a practice in which the outsourced service provider receives much higher fees if cost-cutting and quality goals are met.
The most important thing in pricing is for consultants to make their fees understandable and justifiable.  Consequently, the number of pricing plans used varies widely, depending on the nature of the client and the business practices of the consulting firm.  Additional fee plans may include fixed total price, hourly price (with or without a cap on maximum cost) or a base retainer plus variable costs.
Contingency pricing puts pressure on consulting firms that make substantial investments up front in facilities, equipment and staff in order to facilitate their assignments.  Additional pressure is coming from competitors in countries that work under lower cost structures, such as those in India, often driving consulting prices downward.

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