INDUSTRY SYNOPSIS NAICS MANAGEMENT CONSULTING SERVICES

Transcription

1 INDUSTRY SYNOPSIS NAICS MANAGEMENT CONSULTING SERVICES I. SCOPE OF STUDY A. Industry Definition This industry comprises establishments primarily engaged in providing advice and assistance to businesses and other organizations on management issues, such as strategic and organizational planning; financial planning and budgeting; marketing objectives and policies; human resource policies, practices, and planning; production scheduling; and control planning. Illustrative examples: Actuarial, benefit and compensation consulting services. Administrative and general management consulting services. Human resources and executive search consulting services. Marketing consulting services. Process, physical distribution, and logistics consulting services. Cross-References: Establishments primarily engaged in providing a range of day-to-day office administrative services, such as financial planning, billing and recordkeeping, personnel, and physical distribution and logistics, are classified in Industry 56111, Office Administrative Services. Establishments primarily engaged in administering, overseeing and managing other establishments of the company or enterprise (except government establishments) are classified in Industry 55111, Management of Companies and Enterprises. Government establishments primarily engaged in administering, overseeing and managing governmental programs are classified in Sector 92, Public Administration. Establishments primarily engaged in professional and management development training are classified in Industry 61143, Professional and Management Development Training. Establishments primarily engaged in listing employment vacancies and in selecting, referring and placing applicants in employment are classified in Industry 56131, Employment Placement Agencies. Establishments primarily engaged in developing and implementing public relations plans are classified in Industry 54182, Public Relations Agencies. Establishments primarily engaged in developing and conducting market research or public opinion polling are classified in Industry 54191, Marketing Research and Public Opinion Polling. 4/14/ :08 AM NAICS

2 Establishments primarily engaged in planning and designing industrial processes and systems are classified in Industry 54133, Engineering Services. Establishments primarily engaged in planning and designing computer systems are classified in Industry 54151, Computer Systems Design and Related services. Establishments primarily engaged in providing financial investment advice services are classified in Industry 52393, Investment Advice. B. Contextual Overview The PPI will calculate and publish this index at the five digit NAICS level, Management Consulting Services. In order to make coding consistent with PPI systems NAICS is recoded as The six digit NAICS that fall under are treated as service line detail with publication cells of their own. The table below shows NAICS s relationship to the three digit aggregation group NAICS 541. Group 541 is the only NAICS group below sector 54, Professional, Scientific and Technical services. Group 54/541 Group % of NAICS to 541 NAICS Receipts (1,000) $579,542,139 $52,224, % Employment 5,212, , % Establishments 613,305 60, % The next table shows NAICS s relationship to the four digit NAICS group 5416, Management, Scientific & Technical Consulting services: Group 5416 Group % of NAICS to 5416 NAICS Receipts (1,000) $63,428,740 $52,224, % Employment 511, , % Establishments 80,426 60, % Source: Census of Services, 1997 Primary Output and Unit of Measure The primary output of management consulting firms is the provision of advice and assistance on management and general business services. Management consultants provide objective information, advice and guidance to clients on a wide variety of issues, and, when requested, assist in the implementation of their recommendations. Their core competency is assisting management in problem solving. They add value by using their expertise to access and interpret information for their clients. Consulting outputs are delivered in the form of written and verbal studies, advice and recommendations. 2

3 Possible units of measure for consulting services include the period of time (hour, month, year, etc.) that it takes to complete a project or a specific portion of it, or a set deliverable such as a printed report. The primary output of executive search consulting firms, a subgroup included in the scope of this study, is the identification and screening of candidates for senior-level executive positions. The most common unit of measure for this service is an individual placement of an individual into an executive position. Other potential units of measure include the period of time that it takes to complete a search project. Kennedy Information, the leading provider of research information on the management consulting industry ( estimates that management consulting revenues worldwide totaled $62 billion as of Industry growth was particularly strong in the 1990 s when the global economy was growing rapidly. II. INDUSTRY OVERVIEW A. Number of Establishments and Companies The 1997 Census of Service Industries reported that there were 42,340 establishment that operated during the entire year and 18,454 that operated for part of the year. Of these 42,340 establishments, only 12% had employment of 20 employees or more. B. Size and Production by Size The following table provides statistics for establishments in this industry based on their size. The statistics were derived from the 1997 Economic Census. Establishment Size (by # of employees) Number of Establishments % of Estab. Total* Employment % of Emp. Total* Receipts % of VOS Total* 1 to 4 28,417 67% 50,898 13% $7,948,122 16% 5 to 9 5,774 14% 36,730 9% 4,677,748 10% 10 to 19 3,168 7% 39,670 10% 4,769,593 10% 20 to 49 2,131 5% 50,769 13% 5,923,254 12% 50 to % 38,420 10% 3,980,187 8% 100 to % 44,994 12% 4,704,053 10% 250 to % 23,440 6% 2,377,548 5% 500 to % 23,967 6% 2,176,361 4% % 79,623 21% 12,250,415 25% Source: Census of Service Industries * The percentages calculated are: the number of establishments in each category/total number of firms operating for the entire year 3 NAICS

4 This industry is dominated by smaller establishments with the majority having less than 4 employees. These establishments, however only constitute 16 percent of the total industry receipts. Firms with more than four employees, on the other hand, make up only 33 percent of establishments, but provide 84 percent of receipts. Larger firms usually complete more complex, large scale projects. These firms are also more likely to offer additional non-management consulting services such as custom computer programming and market research. Large consulting firms also tend to charge significantly higher rates than smaller firms. Smaller firms tend to be more specialized in the types of consulting that they perform. These firms tend to have lower utilization rates (the percentage of how much of an employee's 40 hour week is billed to a client). For smaller firms, there is less differentiation between positions, because professionals may be required to act as partners, consultants, and support staff all in the same day. There is no significant observed relationship between the size of the firm and the type of pricing that they use. The newness of the firm, however, may come into play. A newer management consulting firm needs to prove itself and establish a name for their company. As a result, they would be more likely to use contingency pricing, in which at least a portion of their fee would be contingent upon the client attaining a pre-determined benchmark or goal. C. Major Service Providers and Concentration The following table provides concentration ratios for NAICS : Percentage of Value of Receipts Accounted for by: 4 Largest 8 Largest 20 Largest 50 Largest Companies Companies Companies Companies 13.5% 18.7% 24.3% 29.5% Source: Census Bureau D. Industry Stability The Management Consulting industry is sensitive to normal business cycles. When the economy is prosperous, companies tend to allocate more funds for consulting services. Prior to 2001, the global consulting profession grew by double digits virtually every year, and even surpassed 20% growth in many of these years. Growth slowed considerably, however, in 2001 and 2002 as the economy slowed. Still, Kennedy Information noted that 2002 was the second best year in the consulting profession in terms of overall client demand. Despite economic uncertainty, consultants in 2002 still achieved 94% of the revenue collected during 2000, the profession s peak year. 4

5 The nature of the profession has changed significantly in the last two decades. In that time, the largest firms have moved away from high-value, large-scale strategy consulting and towards lower-value, less complex offerings. These smaller scale projects tend to be less susceptible to changes in demand based on the business cycle. As the economy has slowed in the early 2000 s, the industry has become more concentrated. While smaller firms have struggled during this period, among the 75 largest firms in the world there were as many firms that grew by double digits as those that shrank by 10% or more. In the past couple of years, many of the major accounting firms have spun off or sold their management consulting divisions. These new entities are now completely separate from the accounting divisions of these firms. These companies now comprise a significant portion of the largest ten firms in the Management Consulting industry. There have recently been a growing number of firms using value-based pricing methods based on contingency benchmarks. This means that fee strategies reflect the consultant s value, rather than just their billed hours. In this sense, it is a pricing strategy based on the output of a project rather than just the labor inputs. In theory, a good consultant could boost earnings using a value-based model. However, many consultants are just beginning to experiment with this method of pricing. In fact, in a recent survey, less than 5% of consultants stated that they use value-based pricing. One impediment to wider use of contingency fees in this industry is the fact that the linkage between advice and its impact on the bottom line is often difficult to measure. III. SERVICE INFORMATION A. Service Delivery Process Executives retain consultants to help them decide the optimal course for a company and how it can be accomplished. Good consultants are analytical professionals who bring high-level, expert advice on what the client should do. Often, executives are looking for a particular outcome or result, but on other occasions companies retain consultants simply because they want to pursue a new way of thinking about a problem. A project usually begins with a formal bidding process. Initially, a potential client will send over a request for proposal (RFP). Competing firms then send over a statement of what they can do and how much it will cost, explaining their advantages and why they should be chosen. The client then interviews the candidates and chooses a firm to work with. The contract that is ultimately written often uses a time and materials billing system, sometimes including a not to exceed guideline for costs. The contract could be for any or all of the three phases of a typical project: analyzing the problem, designing the solution, and assisting with the implementation. 5 NAICS

6 Depending on the size and chosen strategy of the consulting firm, projects can be as straightforward as researching a new market, as technically challenging as designing and coding a large manufacturing control system, or as sophisticated as totally rethinking the client s organization and strategy. According to the Association of Executive Search Consultants, a complete executive search consulting project includes the following steps: 1) Meeting with the client to determine the nature of the organization, the vacant position, and the desired characteristics of the new executive. 2) Preparation of a formal position description. 3) Research to identify potential candidates. Throughout this process, which frequently takes place over a series of months, progress reports are commonly prepared and presented to the client. 4) Evaluation of identified candidates. This typically includes in-depth interviews, reference checks, and verification of credentials. 5) Presentation of final recommendation to client. At this stage, the consultant frequently assists with the negotiation of employment terms with the selected candidate. 6) Follow-up with the client to assist with the integration of the selected candidate into the client s environment. B. Types of Service and Value of Receipts The following table lists the major services provided in NAICS and their share of total revenue from the 2002 Economic Census: NAICS Cell Title VOS % of Total VOS Management consulting services $52,224, % P Primary services 48,886,654 93% Administrative and general management consulting 26,027,842 50% services Human resources and executive search consulting 9,548,099 18% services Executive search consulting services 4,594,545 9% All other human resources consulting services 4,953,554 9% Marketing consulting services 7,267,312 14% Process, physical distribution and logistics 3,176,172 6% consulting services Other management consulting services 2,867,229 5% SM Other receipts 3,338,043 7% *VOS figures from Census Sources of Receipts, non-employer data not included. The service lines are defined below: Administrative Management and General Management Consulting Services This service line includes the provision of operating advice and assistance to businesses and 6

7 other organizations on administrative management issues, such as financial planning and budgeting, equity and asset management, records management, office planning, highlevel strategic and organizational planning, site selection and new business startup. Human Resources and Executive Search Consulting Services- This service line includes the provision of advice and assistance to businesses and other organizations in one of more of the following areas: (1) personnel policies, practices and procedures; (2) employee benefits planning, communication, and administration; (3) compensation systems planning; (4) wage and salary administration; and (5) executive search and recruitment. Marketing Consulting Services- This service line includes the provision of operating advice and assistance to businesses and other organizations on marketing issues, such as developing marketing objectives and policies, sales forecasting, new product development and pricing, licensing and franchise planning, and marketing planning and strategy. Process, Physical Distribution, and Logistics Consulting Services This service line includes the provision of operating advice and assistance to businesses and other organizations in areas such as: (1) manufacturing operations improvement; (2) productivity improvement; (3) production planning and control; (4) quality assurance and quality control; (5) inventory management; (6) distribution networks; (7) warehouse use, operations, and utilization; (8) transportation and shipment of goods and materials; and (9) materials management and handling. Other Management Consulting This service line includes the provision of all services not mentioned in any of the other categories. Telecommunications and utilities management consulting services are included in this service area. C. Custom Services Almost every service provided by management consulting firms is specially tailored for each individual client. A client will normally present the firm with a specific problem and ask for help in solving it. The type of problem being solved, the methods used to solve them and the prices charged are, for the most part, individualized for each client. D. Service Descriptors For services in NAICS , the most important price determining characteristics include: 1. The amount of labor hours required. 2. The degree of professional expertise required. Firms typically employ junior staff, associates, project managers and partners. Partners charge the highest hourly rates while junior staff charge the lowest. 7 NAICS

8 3. The stages of the consulting process included in the contract. A typical consulting project could include any or all of the following processes; analysis of problem, provision of recommendation, and assistance with implementation. E. Seasonality 4. The type of buyer purchasing the service. Government clients and larger businesses typically are charged lower rates because they require large quantities of service and because the government contract bidding process is very competitive. Smaller firms have less leverage than both the government and large firms, and usually end up paying higher rates. Many service lines in the consulting industry are subject to different patterns of seasonal demand. For example, there is increased demand for benefits consulting (a subset of human resources consulting) during the first quarter of the year as clients offer their employees benefits open season to choose and change their plans. In addition, financial consultants may experience an increase in demand at the end of the year when their clients prepare their annual financial reports. F. Service Substitution The methodology for the management consulting index is based on holding features of a contract fixed and estimating the prices that would be charged if it was newly transacted each month. Because of this, substitution will be very rare and only occur when a respondent is absolutely unable to estimate the price. G. Quality Adjustment Quality adjustment may be necessary when a service is no longer offered by a consulting firm or the firm no longer deals with a certain type of client. Quality adjustment may also be necessary when one consultant is substituted for another during the repricing process. When substituting a lower level consultant with another lower level consultant, such as an associate for an associate, quality adjustment may not be necessary. When substituting a high level consultant for another high level consultant, as in a partner for a partner, quality adjustment may be necessary. This is because as consultants are promoted, more of their hourly rates and fees are based on the specific experiences and expertise of each unique individual. 8

9 IV. MARKET AND TRANSACTION INFORMATION A. Intra-Firm Transfers and Intra-Industry Sales Because of the competitive nature of the industry, virtually no cases exist in which a consulting firm would go to another consulting firm for advice on how to improve their own operations. However, for very large consulting projects, a consulting firm may subcontract certain aspects of the project to other firms. For example, if a large consulting firm is awarded a multi-million dollar contract by a large institution such as the Department of Defense, they may choose to subcontract out portions of the contract to other consulting firms. B. Price Behavior The 2003 Kennedy Information report on Fees, Utilization and Other Key Metrics states that because of a global decrease in demand for consulting services there is an oversupply of consulting talent, weak utilization rates and professional fees are at a twoyear low. The table below shows the median billing rates across all positions for 2002: Position Average Hourly Billing Rate Partner $283 Project Manager $218 Consultant $179 Associate Consultant $134 Support Staff $72 Kennedy Information, 2003 Almost half of Kennedy Information s survey participants did not change their billing rates from 2001 to The remaining portion of the sample was divided fairly evenly between firms that increased their billing rates, and those that decreased them. On average, rates climbed only slightly in 2002 (1% or less). 9 NAICS

10 The following graph shows average billing rates from 1996 to 2002: Partner Project Manager Consultant Associate Consultant Kennedy Information, 2003 As the graph shows, rates for partners, project managers and consultants all followed a similar trend, increasing between then subsequently falling in The associate consultant has steadily increased from The peak seen in 2000 can be attributed to the increase in demand of consulting services due to a strong economy. C. Types of Prices Common pricing schemes for management consulting services include: Project fee The series of billed hourly rates for all of the consultants that worked on a project. If the rates are not all separately noted and itemized, the fee may be a flat, prenegotiated rate. This is the most common type of fee in the marketplace. Unit fee A billing method that charges a certain amount per person trained, per interview conducted or some other specific task-related unit of measure. Retainer fee- This fee is a regular, ongoing payment in exchange for the consultants continuous availability to provide advice and guidance. 10

11 Contingency fee- A pricing method in which a consultant is paid a certain fee if they meet or exceed a pre-determined benchmark or goal. This fee can be a flat fee or a percentage. For example, a consulting firm may be hired to reorganize a firm s production process with the goal of increasing production efficiency by 25%. If they are successful, they will receive a fee based on achieving this specific benchmark. Consulting firms will usually have set hourly rates for each level of staff s time. These rates, however, will often be discounted. Consultants call the percentage of their established hourly rate that they actually receive for the provision of service their realization rate. For example, if a consultant lists a rate of $100 per hour and records a realization rate of 80%, they will actually receive $80 per hour. Realization rates are the standard measure used by firms within the management consulting industry to track prices. The preferred method of repricing is tracking average realization rates for the hourly rates that make up the components of the overall contract price. These average realization rates should be calculated by comparing the total amount of revenue received for all projects offered within the selected service line area (i.e.: marketing, operations, etc.) to the amount that would have been received for these projects if all consultants had billed all of their time at their listed rates. If this is selected the price will be quoted as an AVERAGE PRICE. If this average realization rate data is not available, the price would be collected as an ESTIMATED TRANSACTION PRICE. In these cases, a project will be initially selected for each item and its features will be held fixed. In future months the respondent will update the rates based on an estimation of what would be charged if the transaction were to take place each month. D. Types of Buyers The customers who purchase consulting advice include large and small firms, a host of government agencies, and many nonprofit institutions ranging from hospitals to colleges. According to Kennedy Information, the top 13 reasons clients hire consultants are: 1. New Thinking/Analytical Techniques 2. Objective/Outside Perspective, Facilitator 3. Strategies/Options/Goals 4. Process/Policies 5. Cost Control 6. IT/Systems Improvement 7. Organization/Culture/Leadership/Learning/Communication 9. Focus 10. Change Management 11. Benchmarks/Best Practices 12. Speed/Urgency 13 Extra Hands/Talent 11 NAICS

12 Discounts may be unique to a particular contract and buyer, or uniform for a specific set of buyers such as recurring clients. Since there is a great deal of competition for larger clients, the discounts offered to these clients will be the most significant. Government bodies and non-profits typically also receive large discounts. E. Adjustments to Price Many large consulting contracts are bid on by multiple consulting firms. As a result of these bidding processes, large discounts are often offered to clients. Discounts should all be reflected in the realization rates. Surcharges may also be added for projects that extend past their deadline and for additional unexpected fees that come up during the project. F. Additional Charges Additional fees may sometimes comprise a large portion of management consulting contracts. A client is typically charged for all travel by consultants, as well as fees for supplies, technologies, and other miscellaneous charges that the consulting firm incurs while completing a consulting project. G. Size of Purchase Large clients and clients who require more hours of service receive greater discounts on consulting services than the typical buyer. H. Contracts Written contracts form the basis of most consulting jobs. Normally a client will receive offers from a number of firms and then select the firm that they would prefer to work with. At that stage, the contract is negotiated and agreed upon. Contracts typically establish the length of project, the cost of service, and the additional fees. V. INDUSTRY INFORMATION AND RELATIONS A. Industry Relations Association of Management Consulting Firms 380 Lexington Avenue, Suite 1700 New York, NY Phone: (212) Fax: (212) Per AMCF s website: Since 1929, the Association of Management Consulting Firms (formerly ACME) has fostered understanding of the profession's scope and purposes; provided a forum for confronting common challenges; expanded the knowledge base of member firms and their clients; and championed a code of professional conduct. 12

13 Kennedy Information, Inc. One Phoenix Mill Lane, 5th Fl Peterborough, NH USA Phone: Kennedy Information is the leading information source on professional services including management and IT consulting, executive recruiting and investor relations. B. Currently Available Price Data There are currently no price indices relating to establishments classified within NAICS , Management Consulting. The PPI currently publishes an index for Executive search consulting services, under the title of NAICS , Retained Executive Recruiting. This index has been published since December 2001, and its price history is shown on the following page: NAICS , Retained Executive Recruiting (Dec 2001-Mar 2004) Index Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar Date C. Litigation and Other Cooperation Issues Following the various auditing scandals that occurred between , legislation was passed that restricts the relationship between auditors and consultants. This has led many of the large accounting firms to spin off their consulting wings into separate companies. Because the industry is so competitive, contracted rates are usually held confidential and many reporters may be hesitant to disclose individual rate information. Many firms have specific confidentiality guidelines that include rules against giving anyone outside the company pricing information. 13 NAICS

14 D. Service Identification Problems Many services in this industry are difficult to reprice each month because of the lack of repetitive business. Consultants could potentially work on different projects and with different clients every month. This is why the methodology for this industry calls for the repricing of projects based on average or estimated transaction prices, but not actual transaction prices. Business process outsourcing (BPO) is a significant and growing contributor to many consulting firms revenues. With BPO, a consulting firm makes recommendations on the portions of a client s operations that can and/or should be outsourced. This recommendation service is primary to this industry. However, in some cases, large consulting firms may themselves act as the contractor for the outsourced business activity. One example of this is that a large consulting firm may have a division in their company that actually runs customer service call centers. If as part of their consulting work, this firm recommends that a client outsource their telephone customer service operations, they would offer to perform that function for the client themselves. The provision of these call center services is not primary to management consulting, and should be given a chance of selection as an other receipt. There are also other situations in which a consulting project may lead to a firm providing additional non-consulting activities. For example, a consultant working on a human resources project may advise that a client s HR department could be improved by automating certain processes. If the firm merely advises on the optimal software to use for this task, this work is primary to the consulting industry. If, on the other hand, they do some custom programming and design portions of the installed software themselves, this service would not be primary to this industry. Many consulting firms draw up separate contracts for these non-consulting portions of projects, and they will often be kept as separate within the firm s records. In these cases, only the consulting portion of the project should be collected as a primary item. If the primary and non-primary portions of the project cannot be separated, the project will have to be classified based on which services contribute the plurality of the project s revenue. E. Checklist Clarifications Checklist A- Management Consulting Services (Excluding Executive Search) Type of service (Group 01, Codes ) The publication structure breaks down the industry by major areas of specialization. An individual contract should be classified as belonging to one category or another based on the tasks that contribute a plurality of project revenues. This may often be measured in terms of the tasks for which a consultant bills the plurality of total project billed hours. For example, if a project is made up of 80% administrative and management consulting services and 20% process, physical distribution and logistics consulting services, it would be classified as an administrative and management consulting service (code 001). For examples of the kinds 14

15 of services to be classified in each category, refer to the Types of Services and Estimated Value of Output section in 3B. Service identification (Group 02, codes ) Note the identifying characteristics of the selected contract and select the type of consulting offered. If a contract covers multiple subject areas, circle multiple codes in the list from code 003 to code 026. Size of client firm (Group 03, codes ) Please note the size of the firm that purchased consulting services in the selected contract. If the firm does not know the size of the client firm, leave this section blank. This information is particularly important for transactions that will be priced with an estimated transaction price, as the size of the client may be an important price determining characteristic. Type of fee (Group 04, codes ) Select the type of fee that most closely corresponds with the type of price offered by the respondent. Project fee (Group 04, code 001) This fee should be selected when the collected item is a project priced strictly based on the billed hourly rates of one or more consultants working on the project and may or may not include miscellaneous additional charges. A majority of transactions will likely be priced in this way. Please see section 5F for an example of how these transactions will ultimately appear on repricing forms. Project plus contingency fee (Group 04, code 002) - This fee should be selected when an established benchmark (for example, achieving a certain level of profitability) is set and the consultant is paid dependent on meeting or exceeding the benchmark. It is expected that contingency fees will typically be encountered as additional charges on top of normal contracted project rates. For example: a company contracted to prepare recommendations on improving a client s product distribution network may charge a project fee plus a set contingency fee if the client achieves certain benchmarks as a result of the consultant s work. If a consultant receives payment for a project exclusively through contingency fees, with no hourly labor charges, please select code 007, Other type of fee. If code 002 is selected, you must enter the achieved benchmark in the Other Features section. If the contingency fee is based on a percentage of a set dollar amount, please note this dollar amount and percentage in the Other Features section as well. The dollar amount of the payout that the consultant receives should be added to the project rate and entered as the Item Price. Please see section 5F for an example of how these transactions will ultimately appear on repricing forms. Project plus unit fee (Group 04, code 003) If the consulting firm receives payment on a unit basis (i.e.: per interview conducted, per manual created, etc.), this code should be selected. It is expected that unit fees will typically be encountered as additional charges on top of normal contracted project rates. For example: If a company is contracted to produce employee benefit manuals, they may charge a project fee for their work in creating the manuals plus a unit fee for each physical manual produced. If a consultant 15 NAICS

16 receives payment for a project exclusively through unit fees, with no hourly labor charges, please select code 007, Other type of fee. If code 003 is selected, please note in the Other Features section a description of the unit (interview, manual, etc.) and the price per unit. The total amount received for all units delivered should be added to the project rate and entered as the Item Price. Please see section 5F for an example of how these transactions will ultimately appear on repricing forms. Retainer Fee (Group 04, codes ) Retainer fees describe contractual arrangements in which a consultant is paid a set, periodic fee and is available to provide advice and assistance to the client at virtually all times. If a selected contract is priced with a retainer fee, please classify the retainer based on the length of time during which the consultant receives compensation in exchange for being available to provide assistance. If a retainer fee covers a period other than a month (004), a quarter (005), or a year (006), please select code 007, Other type of fee, and note the applicable time period. Stage of Service Included (Group 04, Codes ) Select all of the stages covered by the selected contract. A contract may cover any one stage or any combination of multiple stages for a project. These contracts will cover only one stage only if the consultant s contracted role in the project was completed at that point. Bills reflecting payment for only a portion of the contracted service should not be used as the basis for repricing. Each stage is described below: Analysis of Problem The initial stage wherein the consultant is asked to provide a written analysis that comes short of actually providing the recommendation. Provision of recommendation This is the main deliverable that usually consists of a written report and/or presentation to the client. Assistance with implementation This stage follows the delivery of recommendations and consists of the consultant assisting in overseeing the implementation of the project. Realization Rate (Group 04, codes ) Select the type of realization rate being used. If available, the preferred realization rate to collect is the service line average realization rate (code 012). This figure refers to the average amount that all transactions within the major service area (i.e. marketing, process/distribution/logistics, etc.) are discounted from the listed rates. These average realization rates should be calculated by comparing the total amount of revenue received for all projects offered within the selected service line area (i.e.: marketing, operations, etc.) to the amount that would have been received for these projects if all consultants had billed all of their time at their listed rates. If this is selected the price will be quoted as an AVERAGE PRICE. In these 16

17 cases, a project will be initially selected for each item and its features will be held fixed. In future months the respondent should update both the listed hourly rates and the average realization rate as they change. If this average realization rate data is not available, a project specific realization rate (code 013) will be collected and the price will be noted as an ESTIMATED TRANSACTION PRICE. In these cases, a project will be initially selected for each item and its features will be held fixed. In future months the respondent will update the rates based on an estimation of what would be charged if the transaction were to take place each month. The respondent may provide this estimated transaction price information in 2 ways. 1) The first way involves the respondent directly estimating the billed hourly rates that would be charged if the transaction were to take place in the current month, and providing the price as the total of these estimated billed rates. 2) The second way involves providing the current list prices for each consultant s hourly rate, and estimating the realization rate that would be charged to the customer if the transaction were to take place in the current month. Both ways of collecting estimated prices ultimately get the same information, and the respondent should be offered the opportunity to choose their preferred method of reporting. If the respondent chooses to provide estimated prices through a contract estimated realization rate, this would be noted by entering this information in code 013 in Group 04. If the respondent prefers to directly estimate the billed hourly rates, the contract estimated realization rate should be entered in code 013 as 100%. In some cases, a project might include a combination of multiple consulting services (for example, a project that deals with marketing and logistics). If this is the case and the company has separate realization rates for each service line, note each of them in the Other Features section and apply them to the separate portions of the project that involve the given service line. Realization Rate Application (Group 04, ) If the realization rate is applied to the additional charges (those listed in Group 06) it should be noted here. If the additional charges are charged to the client without any discount, this should be noted by circling code 015. Fee Breakdown for Services Rendered (Group 05) - In all cases in which hourly rates are used in setting the price, this table must be completed. Text entered under Fee breakdown may be too lengthy for the single lines provided. If so, continue this description on the next line. Please describe the level of professional (i.e. associate, 17 NAICS

18 project manager, partner, etc.) specified in the contract. The rate per hour column shows the hourly rate for the person performing the service. This amount multiplied by the quantity of hours column will be used to indicate the total charge to the client. If the available lines in this section do not provide enough room, continue the description in the other features section of the checklist. Additional Charges (Group 06) If additional charges are bundled with the actual transaction price, please provide them in this section. Instructions for Calculating Item Price If a firm s realization rate applies to the additional charges, the item price should be calculated by multiplying the realization rate by the total of the labor charges in Group 05 plus the total of the additional charges in Group 06. If a firm s realization rate does not apply to the additional charges, the realization rate should be multiplied by the total labor charges from Group 05 only. The total of the additional charges in Group 06 should then be added to this result to obtain the item price. Checklist B Executive Search Consulting Services Service Identification (Group 02) The respondent should select and identify a recently transacted executive search contract. Although the respondent does not need to identify the client by name, they should provide as much information as necessary for them to recognize the specific contract. This contract should be used as the basis from which the respondent will estimate their prices if a similar transaction were to take place in future months. Size of client firm (Group 03, codes ) Please note the size of the firm that purchased consulting services in the selected contract. If the firm does not know the size of the client firm, leave this section blank. This information is particularly important for transactions that will be priced with an estimated transaction price, as the size of the client may be an important price determining characteristic. Price Description (Group 04) In all cases, whether payment is received in the form of a commission or a flat fee, the respondent should enter the total compensation that they receive for the entire placement service from beginning to end. No partial payments should be entered unless the consultant only performed a portion of the search. If this is the case, please note that in Other Features. Virtually all executive search consulting transactions are priced as a percentage of the total first year compensation of the placed executive. This percentage is frequently called a retainer. It is important to note, however, that this usage of this term is distinct from the usage in the rest of the consulting industry, wherein a retainer refers to a regular ongoing payment and not a commission rate. Executive search consultants may receive this payment in set interval payments throughout the course of the project. 18

19 Total Compensation of Placed Executive (Group 04, code 001) The total compensation, including salary, bonuses, and all other compensation for the placed executive should be entered here. In virtually all cases, this figure will refer to the placed executive s first year compensation. If the consultant is paid based on an approximation of the executive s compensation, then that approximation should be entered here. In future months, the respondent should update this compensation figure to account for changes in the labor market. F. Industry Specific Questions and Procedures Sample Unit Identification The sample unit for this industry is the headquarters of the consulting firm, as the Washington Office experience has been that most headquarters are responsible for keeping the records of the entire firm. If records are kept at different or multiple locations, follow DCM procedures (Doc 1.14) for collection. Clusters have been suppressed for this industry, as all information should be available at the headquarters address. Please refer to the Other Receipts section below for examples of the kind of misclassified and out-of scope establishments that may be encountered in this sample. Disaggregation Procedures After the ISDWS category is chosen, disaggregation should continue amongst the most significant service line areas offered by the firm within the selected ISDWS category. These service line areas within each ISDWS category will vary based on the firm s area of expertise. The primary determinant of these disaggregation groupings will be the record keeping practices of the respondent. Depending on the complexity of the firm s record keeping, these groupings may be narrowly or broadly defined. Examples of potential disaggregation groups for selected ISDWS categories are included below; Administrative Management and General Management Consulting Services Financial consulting services Records management consulting services Senior management strategic consulting services New business startup consulting services Human Resources Consulting Services, Except Executive Search Benefits consulting Compensation consulting Personnel policies consulting 19 NAICS

20 Marketing Consulting Services Marketing strategic consulting Sales forecasting and planning consulting New product development consulting Process, Physical Distribution, and Logistics Consulting Services Manufacturing consulting Logistics consulting Distribution consulting If average realization rate information is available for only those transactions within the selected sub-category grouping, this data is acceptable to use for the price calculation. For example, if a benefits consulting contract is selected, a respondent may have average realization rate information for only benefits consulting projects, or they may have average realization rates only for all projects within the entire human resources consulting area. Either one of these figures are acceptable to use in calculating the final item price. After ISDWS and sub-category disaggregation is completed, select a typical contract for a recently completed project of the selected type of consulting service. If multiple items are selected in one category, multiple contracts should be selected as distinct items. The contract selected through the disaggregation process will serve as the basis from which the respondent will estimate prices in repricing. Collection Procedures Fax repricing is not available for this industry. In order to collect prices with realization rates, the field economist should request 3 pieces of information from the respondent; 1) A recently completed contract This contract is used strictly to establish the number of consultants that work on the project, their professional level (i.e. analyst, associate, etc.), the number of hours that they worked, and any additional charges that might apply. 2) A price list that includes hourly rates for each level of consultant Before realization rate information is applied, the undiscounted list prices for each of the consultants billed hours should be entered in the columnar data (Checklist A, Group 05). If this information is listed directly on the contract, then a price list will not be needed. 3) The realization rate The total of all the list prices used in the columnar data should then be discounted by the realization rate when filling in the item price. The 20

21 realization rate is typically expressed as a percentage less than 100. If, for example, the total of all the listed hourly rates and additional fees charged for a project is $40,000, and the realization rate is 80%, the price would be calculated as $40,000 x.8 = $32,000. (This assumes that the reporter has indicated that the realization rate should be applied to the additional charges as well). If available, the preferred realization rate to collect is the service line average realization rate. If average realization rate information is available for only those transactions within the selected service area subcategory grouping, this data is also acceptable to use for the price calculation. If a realization rate applies only to the selected service area subcategory grouping, please note this in Other Features. The average realization rate collected should refer to transactions that have taken place within the pricing month. If the respondent only has the data for another time period, such as the most recent quarter, this may be collected as well. If this is the case, please note the time period to which the average realization rate applies in Other Features. If an average realization rate figure is not available, the estimated realization rate that would be charged for a contract similar to the one initially collected should be used. If the firm enacts their discounting directly through the contract rates (including the hourly labor rates) rather than with realization rates, enter the realization rate as 100%. For repricing, the features of the contract should remain fixed and the reporter should update their listed rates. If the average realization rate is collected, the respondent should update this figure from month to month or quarter to quarter, depending on the frequency that the firm calculates this average. If the contract estimated realization rate is collected, the respondent should estimate the realization rate that would be charged if a similar type of buyer purchased the services described in the contract, in the current month. Please remind the reporter that they should update the hourly rate for each consultant involved and not just the total billed amount for all consultants that worked on the project. In virtually all cases, the number of hours worked in the project will remain fixed. The only situation in which the hours should change is if a particular process or technology change takes place that alters the length of time it takes the consultants to do the task in question. For the management consulting industry, this should be extremely uncommon. Once the collected data has been passed through the collection system, the Washington Office will edit the item specification information so that the realization rate application 21 NAICS

22 and price calculation will be clear for the respondent. The following are a series of examples of how these edited item specifications will ultimately appear; EXAMPLE 1 Project fee with a service line realization rate ITEM DESCRIPTION ADMINISTRATIVE AND GENERAL MANAGEMENT CONSULTING SERVICES. CONTRACT IDENTIFIER: COMPANY X. FINANCIAL CONSULTING. FIRST TIME/NEW CUSTOMER. CLIENT INDUSTRY: HEALTHCARE. CLIENT REVENUE: $10-50 MILLION. SERVICE CHARACTERISTICS: PROJECT FEE. ANALYSIS OF PROBLEM INCLUDED. PROVISION OF RECOMMENDATION INCLUDED. ASSISTANCE WITH IMPLEMENTATION INCLUDED. SERVICE LINE AVERAGE REALIZATION RATE: 65%. REALIZATION RATE IS NOT APPLIED TO ADDITIONAL CHARGES. PARTNER $200/HR 20 HOURS = $4,000 ASSOCIATE $125/HR 60 HOURS = $7,500 JR. ASSOCIATE $75/HR 90 HOURS = $6,750 SUPPORT STAFF $20/HR 20 HOURS = $ 400 TOTAL = $18,650 SERVICE LINE AVERAGE REALIZATION RATE = 65% TOTAL REALIZED BILLED RATE = $12, TRANSPORTATION TRAVEL EXPENSES = $ 2,500 TELEPHONE EXPENSES = $ 650 TOTAL ADDITIONAL CHARGES = $ 3,150 TOTAL PRICE = 15, In future months, the respondent in Example 1 should update the hourly rates of each employee, the service line average realization rate, and the cost of the additional charges with current month prices. The respondent should use this information to calculate a new current month item price. EXAMPLE 2 Project plus unit fee with a contract estimated realization rate ITEM DESCRIPTION HUMAN RESOURCES CONSULTING SERVICES, EXCEPT EXECUTIVE SEARCH. CONTRACT IDENTIFIER: COMPANY X. PERSONNEL POLICIES CONSULTING FIRST TIME/NEW CUSTOMER CLIENT INDUSTRY: GOVERNMENT. SERVICE CHARACTERISTICS: PROJECT PLUS UNIT FEE. ANALYSIS OF PROBLEM INCLUDED. PROVISION OF RECOMMENDATION INCLUDED. ASSISTANCE WITH IMPLEMENTATION INCLUDED. CONTRACT ESTIMATED REALIZATION RATE: 80%. REALIZATION RATE IS APPLIED TO ADDITIONAL CHARGES. 100 TRAINING MANUALS PROVIDED. PARTNER $200/HR 20 HOURS = $ 4,000 ASSOCIATE $125/HR 60 HOURS = $ 7,500 JR. ASSOCIATE $75/HR 90 HOURS = $ 6,750 SUPPORT STAFF $20/HR 20 HOURS = $ 400 TOTAL = $18,650 TRANSPORTATION TRAVEL EXPENSES = $ 2,500 TELEPHONE EXPENSES = $ 650 TOTAL ADDITIONAL CHARGES = $ 3,150 TRAINING $20/MANUAL 100 MANUALS = $ 2,000 TOTAL LIST PRICE OF SERVICES = $23,800 CONTRACT ESTIMATED REALIZATION RATE = 80% TOTAL REALIZED BILLED RATE = $19,040 22