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McKinsey has pitched my company on projects where their compensation is entirely outcome-based — for example, if a project generates $20 million in incremental
by alberth 1y ago
McKinsey has pitched my company on projects where their compensation is entirely outcome-based — for example, if a project generates $20 million in incremental revenue, they would earn 10% of that amount.
I have to admit, the results they demonstrated — which we validated using our own data — were impressive.
The challenge, however, is that outcome-based contracts are hard for companies to manage, since they still need to plan and budget for potential costs upfront.
So even when you have measurable benefits - it's still not so easy either.
EDIT:
To clarify the issue — companies are used to budgeting for initiatives with fixed costs. But in an outcome-based contract, the cost is variable.
As a result, finance teams struggle to plan or allocate budgets because the final amount could range widely — for example, $200K, $2M, or even $20M — depending on the results achieved.
Additionally, you almost then need a partial FTE just to manage these contracts to ensure you don't overpay because the results are wrongly measured, etc.
None of these challenges are insurmountable, but it's also not easy for companies either.
- caminante 1y agoWhat's upfront about a backloaded earnout? You model it as a fixed %, variable cost and run revenue sensitivities. It either meets your investment criteria or doesn't.
- mschild 1y agoI'd imagine the opportunity cost and man power. Even though McKinsey should do the work they will need access to people and information to accomplish it.
- caminante 1y agoParent said McK's fee is 100% contingent. If the company doesn't have the resources available to execute something they've validated, then that's a funding issue that can be solved. Either way, McK's structure doesn't make it "hard for a company to manage." The investment committee approves or rejects.
- flumpcakes 1y agoPerhaps their advice needs expenditure up front - for example if they suggested using blue photocopiers and you only have pink ones. You would have to spend the money on blue photocopiers before you see the return, and before they see their services fee paid?
- caminante 1y agoPer the parent's update, they're overthinking things like how earnouts or how capital budgeting cycles work. e.g., complaining about having to provision an FTE to manage the earnout doesn't make sense because that should be in the business plan considered for approval. You'd only approve if your NPV is positive, including the FTE overhead.
- halper 1y agoHow is that hard? They put 90% of their estimated revenue as net revenue (post-McK tax) in the budget? Seems about as hard as the underlying problem, which is guessing ("forecasting") the revenue.
- athrowaway3z 1y agoWell, that's fucking scary. I'd be digging deep if I was on the board. Either - the execs are leaving a laughably easy 20m on the table McKinsey knew they'd make (how did they know, and why didn't we) - they're dealing with insider information - especially dangerous if McKinsey is changing dependencies around. - they're doing some creative accounting
- dahcryn 1y agothat's usually in areas where they are very certain. I'd be surprised if they'd do that for GenAI projects, maybe only for really good clients that pay them 50mln+ a year anyway
- deleted 1y ago[deleted]
- stronglikedan 1y ago> they still need to plan and budget for potential costs upfront Same reason they ask for "estimates" which they then later try to hold accountable as "quotes" when it suits them. Same reason I 3x my initial estimates.