It was, in its way, a perfect sign of the times. Researchers from McKinsey — the strategy consultancy, it should be noted — suggested in a recent article in The McKinsey Quarterly that Wall Street's ailing banks could save money by cutting back on, er, consultants. It seems a little like Ford or Toyota advising you to buy a bike, or Cadbury's telling you to chuck out the chocolate, but when recession strikes, cutting back on life's luxuries is entirely rational — and one perceived luxury likely to come under scrutiny is the use of management consultants.

The industry is braced for just such an argument. Critics of the profession claim that now is the time to ditch consultants being used as crutches by poor management to do the jobs they won't; but to their supporters, consultants are more valuable than ever in a recession, for their ability to save money while adding value.

McKinsey's point was that some of Wall Street's finest could make $2 billion in recurring savings if they made cuts in several areas, including property, data, legal services, IT, marketing, printing and consulting, and could do so without damaging culture or morale. But while McKinsey has advised many a banker, it is perhaps more famous, at least in the UK, for its public sector work — and it is here that a recession is likely to bring the most pressure, with civil servants, fearing a backlash from taxpayers and the media, being forced to justify expenditure.

Alan Downey, head of public sector for KPMG, the professional services firm, and chairman of the Institute of Business Consulting, said: “There is going to be less cash to spend on advisory services in both the public and private sectors. There will be a need to spend less but also a real imperative to save money in core operations. There are two obvious steps: to stop buying advice that doesn't add value; and to focus on tangible results and benefits.”

There will be more pressure on buyers to justify consultant spending. One way of doing this is to link consultants' pay to their performance. The report Rewarded in Heaven?, published by Source Information Services, suggested that payment by results, also called risk-reward payments, are gaining in popularity. Risk-reward payments come in many different forms, but basically work on the principle that if the consultant achieves X then the client will pay Y. Risk-reward is easiest for projects with defined, measurable outcomes, an IT system to be installed or £50 million of savings to be found. Some consultants use satisfaction ratings to determine success when outcomes are hard to measure.

According to Fiona Czerniawksa, the co-founder of Source, about 10 per cent of consulting in the UK is paid for on this basis, but use of risk-reward payments could double in the next five years. “Just about every major purchaser of consulting says that they want to increase the proportion of work they buy on a risk-reward basis.” The majority of clients want to be able to pay for the consultants from the savings they generate, which makes tying payment directly to those savings desirable. The alternative is for buyers of consultancy services to negotiate harder on traditional fixed-fee or time-and-materials deals.

There are many fans of risk-reward deals, including Bain & Company, McKinsey's main competitor. Paul Rogers, managing partner at the firm's London office, said: “Our whole mission is to help clients create economic value and we are very willing to put our money where our mouth is.”

Al Geddes, head of central government for Mouchel Management Consulting, is another fan. Withholding fees until a project is successfully completed ensures that consultants do not become complacent, he said.

But Charles Scott, a partner at The Berkeley Partnership, says that risk-reward schemes can compromise consultants' independence. “Imagine if you are a week away from a project going live and you are in a meeting and asked: 'Are you ready?' ... If we are incentivised to say 'yes', we can hardly be independent, can we?”

How you pay

— 50 per cent of projects are charged on a time-and-materials basis. The consultants charge for the time spent, usually on an hourly basis, plus costs incurred

— 40 per cent of consultancy projects are charged on a fixed-price basis

— 10 per cent of projects are charged on a risk-reward or a payment-by-results basis

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