In a recent interview, Mr Judson Rollins, a former strategy consultant to the aviation industry turned ‘Scale Whisperer,’ discussed his role in helping self-employed professionals deliver more value to their clients with less effort and greater rewards. He highlighted that AI and machine learning will catalyse the end of hourly billing in professional service firms and usher in the rise of value-based pricing. He also reassured that not all consultants need to be concerned just yet.
Disruption at the Junior Level
“The gap between what firms charge for junior consultants and their salaries is far greater than for senior staff.”
Rollins stated that AI’s ability to automate “rote tasks” — such as market overviews, PowerPoint creation, and basic research — threatens many junior roles in consulting as it makes up eighty percent of their workload. This has already led major firms like McKinsey, Bain, and BCG to lay off many low to mid-level consultants. While economic downturns plaguing all industries play a role, AI’s efficiency gains are a contributing factor.
The “double whammy” for firms lies in junior consultants’ profitability. As Rollins explained, “the gap between what firms charge for junior consultants and their salaries is far greater than for senior staff.” Cutting down on the large employee pool that delivers a high volume of output at a low cost could mean a significant loss in the profit margins of firms. This disruption not only threatens the firm’s bottom line but also the relevance of hourly billing, as I shall now lay out.
Time vs. Value in the Age of AI
“Will firms go from billing by the hour to billing by the second?”
To underscore the inherent tension in hourly billing, Rollins played out two scenarios. The first of a client scrutinizing the time billed for a task, “What do you mean this took two days? It should have taken you half a day.” The second is of a client, hesitating to ask questions or share crucial information, fearing the additional cost related to ‘scope creep’ and further lengthening of a project. These two simple situations demonstrate the strain put on client-consultant relationships by the potential of being overcharged based on billable hours. A point of frustration for clients with large and small budgets alike.
With AI solutions delivering results in seconds, Rollins raised an honest question, “will firms go from billing by the hour to billing by the second”? And since higher revenues are a result of more time charged, this might lead to the perverse incentive of intentionally slowing down AI to increase billable hours, which neither clients nor providers favour. The status quo forgives clients for imagining that solutions which take longer are better. In an era where AI can accelerate work, this premise will be much harder to defend. “AI exposes the inefficiencies of billing by the hour,” accelerating the shift to alternative pricing models that focus on outcomes rather than time spent.
A better alternative
Rollins advocates for Value-Based Pricing, a model that prioritizes the value created for the client over hours billed. He outlined two main approaches:
1. Fixed Fee Upfront: Consultants and clients set a price based on the expected value, irrespective of the time spent. For example:
- Basic Advisory: €50,000 for providing strategic advice where the client manages implementation.
- Enhanced Engagement: €100,000 where the consultant supports some implementation work and engages in regular strategy meetings.
- Full Service: €300,000 for an all-inclusive “white glove, everything done for you” service, start to finish.
This model ensures all efforts are directed towards client success without time tracking. However, more risk resides with the provider.
2. Performance-Based Pricing: This is where the fee is partially contingent on the project’s success. Starting at €100,000, the consultant may claim 40% of the first million dollars in client gains. This model includes a risk premium for the consultant, increasing the accountability large firms are often criticised for lacking and focusing on longer-term outcomes. As Rollins put it, “Holding your feet to the fire”.
These models reflect a shift from traditional hourly billing, potentially transforming client-consultant relations for the better by fostering deeper collaboration and trust.
Barriers to Change
Despite these challenges, the shift toward value-based pricing necessitates a deeper level of trust between firms and clients…
While value-based pricing offers numerous benefits, it is not without its challenges. First, quantifying value upfront in complex consulting projects can be daunting and requires transparent dialogue between the consultant and client to agree on a fair valuation. Second, consultants face heightened risk if the project fails to deliver the expected value. Despite well-thought-out strategies, unforeseeable factors may negatively impact outcomes of the advice, ultimately leaving firms with more financial implications than they are accustomed to, under traditional models. Lastly, persuading clients to commit to substantial upfront fees without guaranteed outcomes remains a hurdle. Especially for companies that hold higher scepticism to the value addition of consultants. Despite these challenges, the shift toward value-based pricing necessitates a deeper level of trust between firms and clients, emphasizing results over billable hours.
Who can AI not replace?
“When AI can replace your local GP, that’s when all consultants should start worrying.”
Rollins emphasized the enduring demand for certain skills that AI is unlikely to replace, particularly the ability to ask clients useful diagnostic questions—a skill comparable to that of a medical doctor. He noted that the essence of consultancy lies in this uniquely human capability. According to Rollins, “When AI can replace your local GP, that’s when all consultants should start worrying.” Until then, the most valuable consultant skills will involve diagnosing their clients’ complex issues, crafting tailored questions, and interpreting nuanced responses.
The Future of Consulting in an AI-Driven Era
The relentless advancement of AI poses a profound challenge to traditional consulting practices, such as hourly billing. The cost savings of staffing fewer junior and mid-level consultants may be undermined by the loss in their margins. The speed and efficiency provided by AI make hourly billing increasingly unjustified, however transitioning to value-based pricing is fraught with its own set of challenges.
At this crossroads, the crucial question remains: Will consulting firms and their clients adapt to a pricing model that prioritizes value over volume? Or. Will they adhere to time-worn practices despite the seismic shifts brought by AI? While AI pressures firms to innovate, the true measure of this evolution will be whether the industry can fully commit to a value-first approach.
Acknowledgement Statement
This blog is part of the student competition in Management Consulting Master Program at the School of Business and Economics
