Cost

Consulting is a cut-throat business where cost analysis is very important.  The service industry has to be very cognizant of competitors prices, and how they're affected by inputs.  This can be more difficult than costs in other industries.  For example, within the computer market, there are often a few original equipment manufacturers that produce components.  When the price of a component changes, it is felt throughout the industry.  As far as the computer itself, it is easy to find out how much the company is charging.

In consulting, our rates are not public.  When we compete for contracts, there is no way of knowing how much the competition is proposing.  As a result, consulting firms can go about pricing in various way.  First, however, we need to know where competitors costs come from.  The major input cost for our service is human capital.  At Deloitte, we are recognized as a top-tier consulting firm.  In order to obtain and retain the best talent, cutting salaries and benefits isn't an option.  My firm is very concerned with margins, and attempts to avoid reducing them at all costs.  We use our variety of consulting services and quality staff to justify high prices.

However, there are times when the employee costs cannot be justified.  In the federal sector, there was a large amount of hiring with the anticipation of more business.  This didn't materialize the way my firm has planned it.  Lay-offs aren't part of our business model, per se.  Now, profits for the federal practice have slowed.  While the federal practice wasn't fully prepared with a strategy to react to this problem, the commercial side has some lessons on this subject. 

For all of our consultants, training costs are very high... and they get higher based on the consultant level.  Federal consultants who were hired without a project realized that their prospects were limited the longer they went without a client.  This, combined with other administrative processes within my firm, resulted in turnover.  The approximate replacement cost for each lost employee is approximately half of that person's salary.  One way to combat this issue is through hiring less permanent staff and more project associates.

Project associates are only hired for individual projects, require less training, and typically have lower salaries.  By using these employees to reduce costs is a good strategy.  The problem occurs when there is an improper balance between skilled consultants (who have undergone more industry training) and new project associates (lower experience=lower cost).  Competitors can exploit this by challenging our expertise.  Without this vital factor, we cannot justify high prices.