March 2021 | Point of View

Demonstrating the financial value of consulting

Every dollar a business spends should come with the expectation of financial return—including consulting engagements

Demonstrating the financial value of consulting

Corporate leaders call upon management consultants for a number of reasons. Consulting firms implement new digital experiences that enhance customer engagement. They identify operational cost-saving opportunities. And they help clients enter new markets and launch new products. No matter what the specific brief calls for, the intent behind the efforts—and more importantly, the investment—is typically the same: increasing revenue, lowering costs, or both.  

At the 20,000-foot view, consulting represents a business model that appears pleasingly simple. But when we zoom in, things get more complicated. It takes a lot of transparency and alignment to create the kind of partnership between businesses and consultants that delivers the best results.  

A stubborn gulf persists between buyers of consulting services and their perceived return on investment. Fewer than half of consulting firm clients report that the value created from their engagements was greater than the fees paid. In our view, this is unacceptable.

It is hard to think of another area where it would be acceptable for an investment to pay off less than 50% of the time.

At West Monroe, we know our business depends on delivering real, apparent value. Unless the ratio of clients who measure financial value improves dramatically, the consulting industry is in danger.

In the best cases, engaging business consultants around a specific opportunity can lead to tremendous growth. Deployed strategically, the investment can yield outsized returns. Recently, a private equity client engaged West Monroe to lead the integration of two merging health providers. In just 150 days, the newly integrated entity emerged with $4.5 million in annual savings on a new EMR platform, an additional $3 million in savings from eliminating redundant technology solution—and a 10x return on our project fees.

Why was this project so successful? The client and our team identified specific financial return targets at the very beginning.

Business leaders and consultants can work together to change the perception of value with a relentless focus on delivering ROI—before and during the engagement. Defining the value of a potential engagement requires doing the math to calculate expected returns. That needs to be followed by consistent communication at the beginning and throughout to execute a clear, specific business case. 

While math may be the easy part, building the equation is the trickiest, and that requires an understanding of financial value drivers. Focusing on financial value creates alignment between both parties so that the priorities are identified and everyone can be on the same page making informed decisions and responding to business needs. Far from a burdensome exercise, focusing on mapping out financial value with robust business cases and models will help create a more nimble, cohesive team.  

With solid business cases in place at the outset of engagements, clients can increase the chances that they will experience outsized returns. Without business cases, clients are wasting time and money — and the consulting industry as a whole will continue to experience lackluster customer satisfaction.  

Bypass the crucial step of building a business case—at your own peril  

The operations of a business come down to hundreds of decisions about how to allocate budget. Some are on the smaller scale: Should we change snack selection in the break room? Or more likely these days, should we increase employee benefits for home offices?  

But the decisions made at the other end of the spectrum, the kind that determine the future strategic direction of a company, are also the ones that come with the largest price tags: Should we go after a new customer segment? Should we offer a new product line? Should we invest in machine-learning technology? Is now the time to rethink our back-office processes? How do we remain competitive to avoid losing market share?  

The answers to these questions are the same: It depends on the business case.  

A business case is the lens through which market conditions, industry trends, and customer experiences are viewed together to provide a business rationale for one strategic direction over another. The business case is the financial reasoning behind any decision. It takes into account the financial cost—how much time, labor, materials, and capital—and weighs it against the projected gains. It should be a formal exercise with plenty of written documentation and mathematical models that can be used to articulate the potential returns of any given investment.  

Under the guise of “moving fast”, we see too many clients bypass this crucial step — or turn to us to answer these harder, long-term strategic questions for them. They want us to tell them how they should be investing in the future. 

But before signing on with a consultant to address these questions, we want to empower clients and prospective clients to build their own internal business cases first.

In fact, we’d like to make it standard practice that if a new client hasn’t done a thorough business case exercise internally before meeting with our associates, that will be the first thing we do together as partners.  

The best leaders build business cases into everything they do. At Amazon, one of their most famous practices is the six-page memo business case. In the new book, Working Backwards, two of Amazon’s most senior product executives detail why well-written business cases that explored potential future directions of the company were so critical to their success: “The stakes of these decisions were so high, and the potential consequences were large,” they wrote. “Before we make an important decision about where to invest time and money, we need to have a thorough understanding of the variables, market conditions, and reasoning.”  

Like any important strategic question deciding whether or not to engage consulting services will benefit from Amazon-esque business case rigor. Focusing on financial value as a clear signal to direct strategy is an effective way to drown out the noise and home in on what really matters at the end of the day.

OUR ADVICE: Lay the foundation for your business case by asking:

  • What are you hiring the consultant to do and why?

  • What is the opportunity, in terms of economic value?

  • Why am I doing this?

  • What are the value drivers and the metrics that will define success?

Your financial model can evolve over time—its existence matters more than perfection  

Answering big picture, strategic questions to build the narrative business case is just one piece of the ROI puzzle. Attaching numbers to words through a financial model is absolutely essential to determine the most important question you need to answer: will the investment be worth it?  

If, for example, you are considering entering into a new market could be worth $47 million, then spending $2 million with consultants to do that would make sense. Numbers, in terms of dollar amounts, help crystallize thinking and provide the ultimate justification for budget allocation on any strategic activity—whether it be purchasing consulting services, building an in-house team, or acquiring a company.  

For some, the mere mention of the subject takes them right back to algebra test jitters. But regardless of one’s comfort, digging in at the spreadsheet-level is a must. Quantifying the potential benefits of the investment in consulting services will give you an idea of the size of the return and timeline, and act as a precise marker with which to hold firms accountable. While necessary, it’s not necessarily easy, but we can start by dispelling some myths.  

Several myths that abound in the business world act as barriers to more widespread use of financial modeling. Some may think you have to have all the specific variables in place before you can start to put numbers to Excel. “We have to wait for the data” is a common refrain.

This is false. You may not have all the relevant variables when you start building the model, but you can make and document your assumptions.

For example, in the case of a call center considering transitioning employees from on-site locations to remote work, they can project that closing just two facilities would save $50 million, as well as increase productivity and reduce attrition for an additional $27 million in savings. How would they know how to calculate the dollar figure for employee productivity and satisfaction? By taking into account available internal and external research (e.g., employees who spend at least 20% of the work week remote are 10% more engaged) and building those estimations and assumptions into their model.  

After identifying all of the value drivers, and putting numbers down to solidify value assumptions, they should be able to fill in a financial model such as in the example below.  

In the case of our imaginary call center, engaging consultants to help them move 5,000 employees from in-person facilities to at-home work would result in an approximated savings of $77 million, with another $212 million of additional potential revenue from customer growth for a total of $290 million of expected value from the engagement. While eliminating the real estate costs of office space might provide tremendous savings, it’s important to weigh against the impacts to culture. In the case of a call center, or another type of work environment where individuals perform their jobs in cubicles with little collaboration, the projected real estate savings may be worth it.  
 
Understanding the amount of expected value a consultant engagement would return (and the tradeoffs beyond simple costs) would allow them to comfortably make the decision to move forward; confident the returned-value-to-consultant-fee ratio would work heavily in their favor.  

This level of detail in projecting future financial value is not a step that ought to be missed, and yet too many clients eschew the practice. They may think there are too many variables, or they don’t have all the data to develop an accurate picture.

OUR ADVICE:

For consultants and clients building new models: start simple, identify the levers that matter and how they relate to each other, document assumptions, and align on decision making. This is a critical step which we cannot stress strongly enough; and it will pay dividends in creating a partnership that delivers returns.

Putting value creation into practice  

A robust business case and financial model are tools that should be utilized on both sides of the consultant and client relationship. The key is for both sides to come together to align on the business case rationale and expected financial returns at the outset, and throughout the engagement. Value needs to be calculated (with math) and communicated (with narrative) throughout the process, not just at the beginning, to maintain a partnership that produces outstanding results.  

Value is a word that has multiple definitions and dimensions. Here we argue that it’s most important for consultants and clients to recognize and prioritize value creation in financial terms. But it is also true that there are types of value an organization may recognize that aren’t expressed in dollar amounts. Certain efforts might lead to more enjoyment of a job or a new process might make a certain function easier for employees. But within these amorphous “wellbeing” indicators you can find expressions in terms of dollars. And it’s critical to do the work to catalog the inputs, create assumptions, and translate open-ended strategic questions into answers with concrete financial reasoning.  

For any business deciding how to allocate budget, expenses must be justified. And the best way to justify an expense is with an expected return. 

Focusing on financial returns through robust business cases, financial models, and a commitment to accountability will help business leaders realize more value from their consultants and help the consulting industry improve its standing with clients.

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