Editor's note: Paul Gurwitz is managing director of Renaissance Research & Consulting, New York.
Over the last several years, consultants have become a fact of life in marketing. Whether you are in corporate marketing, an advertising agency or a market research supplier, unless your firm has a blanket no-outsiders policy (and relatively few do), you will probably have to deal with hiring consultants - if you have not already. In this article, I will discuss some of the issues surrounding this decision:
- Why hire a consultant
- Barriers to hiring a consultant
- What kind of firm to hire
- How to pay
- How to get the most out of the consulting relationship.
Why hire a consultant?
Firms choose to hire consultants for a number of reasons.
1. Specialized expertise. A company might decide to hire a consultant to provide expertise that none of their in-house personnel has. This is particularly true if the skill is a rare one, or if it is not needed on a full-time basis. The consulting option can be a particularly attractive one in cases where visibility is an advantage - where hiring a "name" consultant can lend additional credibility to the outcome.
2. Political sensitivity. Sometimes a consultant is brought in to perform tasks that are considered too sensitive for the organization's full-time employees, or when the employees have an interest in a particular outcome. In this regard, the consultant, who has no long-term employment interest with the client firm, can serve in multiple capacities: as a relatively impartial observer and reporter, as well as a "lightning rod" for policy disagreements that might endanger the job of a regular employee.
3. Overflow. Firms often choose to "go outside" when their work flow overtaxes their regular staff. This use of consultants offers the advantage of flexibility: It allows tailoring the workforce to rapidly-changing needs, rather than going through repeated, disruptive cycles of hiring and firing.
4. Lowering overhead. Many companies choose to outsource simply to lower overhead. Using consultants rather than employees for certain tasks eliminates many of the fixed expenses associated with employment - insurance payments, vacation, sick days, social security payments. In addition, the amount of government regulation associated with hiring consultants is noticeably less than is the case with employees. This is often the reason that small and medium-sized companies go the consulting route, because it can allow them to get a higher level of expertise for a given payment level.
Barriers to hiring consultants
Just as companies hire consultants for many different reasons, they also have many reasons for not hiring them - some justified, others, on examination, not so.
1. Expense. Some companies shy away from consultants because their hourly rates are much higher than a full-time worker's would be, pro-rata. In reality, this represents a trade-off between fixed and variable costs that (all other things being equal) depends on the length and size of the assignment. It probably will not make sense to pay consultant's rates if there is enough work to keep a full-time employee busy for a year, for instance. However, the shorter the length, or the lower the intensity, of the assignment, the more it makes sense to trade a higher hourly rate for lower long-term fixed costs.
In addition, where there is periodic but less than full-time work, a retainer arrangement can often be made to trade some level of income stability (short of a full-time salary) for a preferential hourly rate. We'll discuss this further below.
2. Control. Other firms are reluctant to hire consultants because they feel that it is harder to maintain control over the process and output of a consultant. This objection is also well-taken in certain circumstances, because some jobs are more amenable to being farmed out than others. In general, the most appropriate tasks for a consultant are those that are relatively well-defined (or at least are amenable to definition), separable and do not require being immersed in the corporate culture for their solution.
Thus, the types of problems that suit the consulting mode best are those for which a concrete work plan, time schedule and deliverables can be specified and agreed on. By contrast, tasks that are amorphous, or whose requirements change repeatedly through the project life-cycle, tend to be the ones that pose problems of control when they are given over to a consultant.
There is sometimes another issue of control as well. That is the feeling that the consultant, who may have many other clients, may give less to any particular client firm than will an employee who depends on the company for his whole paycheck. To a great extent, this particular issue is illusory: marketing (or any other business culture, for that matter) is a small community. No matter how many clients a consultant has, he won't keep them for long if it gets around that he is hard to work with, or doesn't deliver! Beyond the general fear, the issue is often one of matching the right consultant to the right client and the right job, which we'll explore below.
Large or small: What's right for you?
Consulting firms come in all sizes, from individual practitioners to major establishments with famous names, scores of partners, and hundreds of analysts. What type of firm are you better off with? It depends - on your goals, on what kind of project you have, and on your own structure. Both large and small firms have their own distinct advantages.
Large firms offer a well-known name and impressive background; in some cases these can be crucial advantages, as with a politically sensitive issue in a large corporation. In such a case, a big-name consulting firm can mean credibility in front of a potentially hostile audience. Larger firms, by their very size, also offer flexibility, both in terms of timing and capacity. The multi-consultant firm is more likely than a smaller firm to be able to deploy its personnel to handle very large projects on very short notice.
By contrast, smaller firms' major advantage is cost-effectiveness. When you deal with them, you will generally be dealing with a principal, or at least a senior member of the firm. With a big-name consulting firm, however, unless you are prepared to pay astronomical rates (and perhaps not even then), you are unlikely to be dealing with a senior partner on a day-to-day basis. Instead, most of your contacts will most likely be with relatively junior analysts.
In addition, all other things being equal, any given single project is going to be relatively more important to a smaller firm than to a larger one. So, unless your company is in the Fortune 100, and your project runs into the seven figures, it is likely that a smaller firm will provide a greater level of day-to-day contact. Moreover, since a small firm probably has fewer projects going on simultaneously, your project is less likely to get lost in the shuffle there than at a larger firm.
Accordingly, if you are yourself a large company, have a high-level problem with political implications, or a problem that does not require a great deal of senior-level contact, you're probably better off with a large consulting firm. On the other hand, if your problem requires a large amount of day-to-day high-level professional contact, and the name value of a major consulting firm is not critical, go with a smaller firm.
Paying a consultant
There are basically three methods of paying a consultant; which one you negotiate will depend principally on the nature of your project.
1. Project flat rate. In this arrangement, the consultant asks a flat fee for a certain specified deliverable, based on his estimate of the number of hours the project will take.
These are the most advantageous terms for both consultant and client when the project is well-defined and the deliverables can be specified fairly precisely. The client knows the final bill in advance, so there is no risk of "sticker shock" at the end of the project. The client's sense of security is thus an advantage to the consultant as well; and the consultant's own experience in bidding is his control against being underpaid for the job. Commonly, such a bid will carry a 10 percent contingency overrun against unforeseen circumstances.
2. Hourly rate. Sometimes, however, a task cannot be defined in advance precisely enough to allow a consultant to make a firm and fixed flat-rate bid. In such cases, a client may agree to pay an hourly or daily rate, sometimes with an overall upper limit on the fee. This method permits using a consultant on a developing project without requiring the consultant to risk grossly underestimating the cost.
However, the hourly method carries with it some anxiety for the client, who is "on the meter" and consequently never knows how much the final bill will be until the job is over. With such an arrangement, close and continuing contact between client and consultant can avoid unwelcome surprises when the bill is presented.
3. Retainer. A retainer - a fixed fee paid a consultant periodically against work to be delivered later - is also used in certain cases. A retainer is appropriate when one wants to be able to confer with the consultant periodically; it avoids having to negotiate a fee each time.
In addition, a retainer can be used in the case of a long-term relationship; in such a case, the consultant commonly trades a discount on his hourly rate for the security of a certain number of hours committed.
There are many different ways to specify a retainer. It can cover a certain number of hours per month, or a flat rate for certain types of work (questions answered over the phone, for instance). The retainer can be paid against work owed, in which case unused hours are "banked" to be used later at a given hourly rate; or else, the arrangement can have a "use it or lose it" provision, in which hours not used in a given period are not banked for future use. A retainer can be for a fixed duration, or can be terminated by one or both parties with an agreed-on notice period. Finally, if the retainer is paid against a defined amount of work, additional work can be bid either at the retainer rate, or the consultant's normal rate.
How to get the most out of a consultant
Because of the nature of the consulting relationship - a working relationship that is specific in terms of objective, and limited in hours and duration - you are more likely to have a satisfactory outcome from the experience if you bear certain things in mind.
1. Start with clear objectives. The more closely you can define the outcome you want, the more likely the consultant will be able to deliver it. Remember also that the consultant, by definition, will not come in with your understanding of your firm's culture or the problem's background. So, the more detail you can fill in, the more the consultant will have to work with.
2. You're the expert on your own business. In general, a consulting relationship implies a division of labor: you are the substantive expert, and the consultant is the technical expert.
That is, you know your firm and can articulate its problems; the consultant has specialized tools with which to solve the problems. This tends to be true even when the consultant is a subject specialist. Although he may be experienced in your category, he still does not come into the picture with the detailed knowledge of your specific situation that someone who has worked in your environment for months or years.
This division of labor implies that you will get more mileage out of a consultant if you expect him to be a technician, rather than a magician; your satisfaction with the outcome will probably rise in direct proportion to the degree you take an active role in the relationship, rather than simply expecting the consultant to "deliver" a solution out of thin air.
3. Keep in touch. Along the same lines, the more contact you have with the consultant all through the project life-cycle, the greater the chance of a satisfactory outcome. This is because business problems, no matter how well-defined at the start, tend to be somewhat fluid. Their nature changes. Unanticipated questions come up in the middle of a project, or a project's preliminary results can spawn new concerns.
This can create a problem if your contact with the consultant is limited to the beginning of the project. If you are not available for input when questions come up, the consultant will use his own assumptions to answer them, and they might not be the assumptions you would have made. For this reason, the most successful consulting relationships are those that are effectively partnerships between the consultant and the client, with a continual interchange of information throughout the project life cycle.
Not for everybody
Obviously, the consulting route is not for everybody, all the time. There are organizations into which consultants simply do not fit, and even in establishments that can benefit from consulting, it is more appropriate in certain situations than in others. However, there are probably even more companies that could profit from using consultants that don't, because of unfamiliarity with the process, or perceived barriers that don't have to stand in the way.
A greater understanding of what the consulting relationship is and how it works will, hopefully, clear the way for more firms to use consultants to their mutual benefit.