When I was teenager I went through a phase where I equated the cost of something to the value I would receive from that item. This was during Abercrombie’s heyday, so that sweatshirt with A & F emblazoned on the front that they charged $89.99 for, must deliver more value than a Target sweatshirt I could buy for $14.99.
It took some time – and numerous battles with my annoyed parents – but ultimately I came to understand that a cost does not equal value. The A&F sweatshirt I paid nearly $100 for out of my hard earned baby-sitting money… it fell apart after three washes.
That Target sweatshirt, that my mom bought for on sale because my A&F one wasn’t up to the simple task of a few washes? I still have it stuffed in the back of my closet over a decade later.
As a society, we’ve been conditioned to believe that cost equals value. The more a company charges for something, the more value you receive from it. First-class costs more because you receive more leg room. iPhones cost more than flip phones because you have more features and functionality. Nike shoes cost more because… wait, Nike shoes cost more because Nike excels at marketing, not because Nike shoes are fundamentally better than any other sneaker on the market.
A&F sweatshirts cost more because in the mid-2000s Abercrombie and its peers – Aeropostale and American Eagle – marketed themselves as the must-have clothing items for teens. A&F’s sweatshirts weren’t inherently better than Target’s or any other brand’s sweatshirts – but their marketing blew them out of the water.
This misconception, that cost equals value, pervades every industry – including, and perhaps especially, consulting.
A somewhat cyclical process has emerged in the consulting world since the Big Five first started dominating in the 1990s. Enormous consulting firms with similarly enormous marketing budgets charge high hourly rates. Their ubiquitous marketing efforts lead many to believe that their cost must be equivalent to the value they deliver. Those firms plow those high hourly rates into more marketing efforts, ensuring they remain top of mind allowing them to continue to justify those high hourly rates. This cyclical process continues into today.
But here’s the thing – just as with an A&F sweatshirt cost does not equal value. This firms charge such high hourly rates because they can. Their marketing efforts have turned them into such powerhouses that none but the biggest can possibly compete with them. Their pervasiveness lets them command those high hourly rates, not the value they deliver.
Those high hourly rates aren’t going to the consultant to compensate them for their work. They aren’t being used to provide their team with professional development opportunities. They aren’t even being used to bring on consultants with the right experience to perform in the role effectively.
Those high hourly rates are used to bring on a junior consultant, likely just out of or 1-2 years out of college. That junior consultant can be paid a low hourly rate, so most of that high hourly rate can be plowed into massive overhead, into profits for senior partners, and back into marketing campaigns that allow them to continue to command high hourly rates.
That high hourly rate does not equal the value that a client receives. If you’re paying a firm $300 an hour in fees, wouldn’t you expect a senior consultant to be placed in that position? Wouldn’t you expect that consultant to hold their team accountable? To ensure the project is delivered on time and on budget? After all, you’re paying them $300 an hour!
Instead, you’re likely to get a junior consultant who lacks the experience to manage a team and deliver a project successfully. And, because they’re being paid a low hourly rate, they have no incentive to go above and beyond for their client.
The industry is slowing starting to change, as companies realize that a firm charging $300 an hour isn’t necessarily delivering equal value. So what should you look for instead to assess the potential value a firm can deliver if hourly rate does not equal value?
- A firm that maintains low overhead. A consulting firm’s job is to deliver value to their clients by supplementing with their expertise. It isn’t to have massive offices all over the world, with enormous benches of consultants. A firm that maintains low overhead costs is prioritizing their client.
- A firm that pays a reasonably portion of the rate they charge to the consultant. Firms that charge high hourly rates and only pay 20-30% to the consultant are not prioritizing their human resources. Consulting is a human-driven industry, it’s based off of the idea that this select group of people have expertise they can deliver to another group that does not. If a firm isn’t prioritizing their human resources by paying them a reasonable rate move on, because those consultants have little incentive to work hard.
- A firm with a targeted, rather than a ubiquitous, marketing strategy. Every firm must have some sort of marketing strategy or they’d never reach new clients. But, look for firms that maintain a carefully-curated, targeted marketing strategy rather than one that’s focused on simply being everywhere all the time. Firms that market through professional sports teams sponsorships, or massive ads at airports are likely plowing a significant percentage of their hourly rate back into their marketing efforts in hopes that at least a few of the people they are trying to target will see it. It’s an indication that not only do they not understand their target client, they are also willing to spend a massive amount of their client’s money to do so. A firm with a focused marketing strategy that is geared towards honing in and reaching ONLY their target client rather than everyone and hopefully their target client, will have a better understanding of their target client, and will prioritize their client above their marketing efforts.