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Raviteja Kothuri Senior Research Analyst
Beroe-Inc. Dialing in from:
India
Host
Sharan Ramesh Engagement Manager
Beroe-Inc. Dialing in from:
India
Moderator
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Agenda
01 Outcome based pricing model • Approach to
Management Consulting
02 How to measure success for a project • Quantitatively or
Qualitatively
03 Case Examples validating the approach
04 Conditions to utilize the outcome based pricing
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What is Management Consulting?
01 Understanding the current problems
02
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Provide solutions in various aspects
Improving Performance and gain savings
IT Consulting
Finance Consulting
Strategy Consulting
Operations Consulting
HR Consulting
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How do consulting firms charge typically?
Time
& Material
Fixed Fee
1 What is my ROI?
2 ~$100 M Budget Overrun
Risk sharing? 3
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New Model
Strategy & HR 10-15%
2013
20%
2017
35%
Outcome based pricing model is the way to go to mitigate these risks with the
traditional models.
Operations, Finance & IT 25-30%
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New Model
Pharma Consumer Banking Energy
Global procurement managers have increased their use of outcome based pricing in their projects by around 40-50 per cent in 2013-14 according to Source for Consulting survey.
~10-15% till 2017
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What is the Approach?
OUTCOME BASED PRICING
BASE FEE VARIABLE
COMPONENT
>50%
>40%
Strategy & HR Consulting
Operations, Finance & IT Consulting
Qualitative
Quantitative
20-50%
10-40%
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How to apply the Quantitative Approach
Identify Key Parameters
01
04 05
02 Assign Weightage
03 Target Value
Actual Value % Target Achieved
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25 20% Capacity Improvement
(Actual value (15) / Target value(25)x100)
Value Score of the parameter Weightage of Parameter(20%) * % Target Achieved
Cumulative Value Score Sum (Value score of all Parameters)
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Linking value score to payment
Value Score Value Reserve –
Percent of variable component
Above 100% 95-100% 90-94%
130% 125% 120%
70-75% 65-69% 60-64%
100% 95% 90%
55-59% 50-54% 45-49%
70% 65% 60%
SAMPLE VALUE RESERVE
100% reward
+ Bonus
<100% depending
on the criticality of the project
Huge Savings for each of the
projects
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Inventory Turnover
Increase by 15%
COGS
Decrease by 5-10%
Lead time
Decrease by 10%
Increase in overall capacity
Increase by 10-15%
Variable component of 18%
Savings: 1 Million Dollars Variable component
of 12%
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FTEs holding management
titles
20%
Average Span
6.2
HR spend target
To be reduced by 40%
Time period for implementation
Increase by 10-15%
Variable component of 30%
Savings: 3 Million Dollars
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How to apply the Qualitative Approach?
Delivery and output
adoption
1 Expert Input
2 Development
of Human Resource
3 Cost Control
4 Team involved
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Score on each of the parameters on a scale of 5
Below expectations Exceeded expectations
Rewards
Score of 1 (Below expectations) Loss of entire fee reserved
Score of 3 (Meets expectations) 100% of fee reserved
Score of 5 (Exceeds expectations) 100% of fee + additional reward
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Expected impact of the outcome on
the margins
Key knowledge assets added
Satisfaction levels with the
Consulting Team
Variable component of 10%
Savings: 1.5 Million Dollars
Score on each of the parameters on a scale of 5
Below expectations Exceeded expectations
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Is it applicable to all projects?
Scope of Work Deliverables defined clearly
Internal Structure Centralized procurement Support
from stakeholders
Revenue and Value Realize potential benefits
Buyer consultant relationship Mature relationship with
consultants
Transparency Regular updates on the project
progress and knowledge transfer
Buyer Involvement More control and taking riskier
decisions
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Conclusion
Identify the applicability of
outcome based pricing to the project
1
Identify the value indicators and rewards in mutual agreement
with suppliers
2
Gain risk sharing and cost savings for the
projects
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