Do Consulting for Equity-Arrangements Align the Interests of Clients and Consultants?

In this paper we provide empirical evidence on the consequences of Consulting for Equity for the client-consultant relationship. When consultants start to accept an outcome contingent compensation scheme such as Consulting for Equity, their incentives might be better aligned to those of its clients, compared to the traditional fixed fee arrangements, where conflicts of interests prevail. Moreover, clients who cannot afford high fixed fees get access to high quality advice. Based on our empirical analysis in the German consulting industry we argue that the acceptance of equity stakes imposes a variety of unintended consequences on the consulting firm. By accepting equity, the consultant risks that part of his reputation is rendered to the clients’ fate. Also, especially the internal organisation of big consulting firms requires major adjustments to prevent internal conflicts of interest when applying Consulting for Equity.