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September 16, 2004
Calibrating the Value of Management Consultants
Topic: 2) The Consulting Trade
The topic of tracking the value of management consultants is fertile ground for many jokes. Ever hear the joke about the consultant using the client's watch to tell the client the time? On a serious note though, management consultants need to provide value that exceeds their "costs" (although the same standard could also be applied to employees within a firm). Outlined below are just a few perspectives for looking at the problem of setting and calibrating the value of consultants.

1) The Consultant "Rule of 10x" - In goal setting, good consultants are trained to aim for problems where solutions will yield value exceeding ten times their cost in professional fees (e.g., cost reduction, revenue growth, market capitalization). This provides a way of ensuring that the consultant and the client are aligned at the start of the engagement (and ongoing communication and updating should occur throughout the engagement). If after execution the client achieves a return of 10x or more, this is fabulous. If 5x, this is still great. Even 3x, 2x, etc. are also acceptable returns. That said, those that apply the Rule of 10x are thinking along the right lines.

2) Strategic Need - Sometimes the value of using management consultants can be viewed as a one-time cost to achieving a strategic goal. For example, executive management may say that it is worthwhile to incur $1M in consulting costs to integrate two businesses at an operational level. As another example, management may say that it is worthwhile to spend $500K to project manage the rollout of a new line of business and avoid extinction in the marketplace.

3) Running Versus Changing a Business - There are many circumstances where change management is needed. It is sometimes very difficult for those running a business to have sufficient bandwidth to both change a business and create all of the necessary tools, processes, organization, and infrastructure at the same time. The value of consultants can sometimes be looked at as a means to get over these hurdles, and good managers will recognize the potential costs of getting over a hurdle.

4) Assessment and Inventory - Sometimes third-party perspectives are simply needed to provide a fresh look at the business and to provide assessments of where things are at. Management consultants can be used to inventory, diagnose, and analyze where a company is at. The value of these types of services can be estimated by looking at comparable costs of other firms.

Steve Shu
Managing Director
S4 Management Group

Posted by sshu-s4 (c) S4 Management Group LLC at 4:14 PM CDT
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