Introduction to Consulting Agency commission
Operating indirectly with the client through a consulting agency presents a number of risks and drawbacks.
One of these centres on the commission earned by the agent. There are two main aspects to this problem which are summarized below.
1. Open or Closed book policy?
Some agencies insist on using two sided non-disclosure contracts with the client and the consultant.
Simply put this means that the client is contractually bound not to disclose what he is paying to the agent and the consultant is contractually bound not to disclose the level of fees he is receiving from the agent.
A simple example illustrates the potential problem:
- Assume the client is paying £1,000 per day to the agent but does not know the level of commission that the agent is deducting from the fee
- The client assumes commission at a reasonable percentage figure - perhaps 10% i.e. £100; leaving the consultant with an assumed £900
- In reality the agent is taking 50% and therefore paying the consultant only £500 per day
- The client would be quite justified in expecting a higher level of expertise - one that is commensurate with a cost per day of £900. Hence there could easily be a misalignment between the commercial reality of the arrangement and the client's expectations
It is therefore very important that during preliminary discussions with both the agent and the client that there is a clear understanding of the commercial basis of the contract and the allocation of fees and margins.
If the agent is not willing to operate an open book policy then you should think very carefully before committing to a contract through that particular agency.
2. One-off Commission or Indefinite Annuity?
Agencies operate on different bases; some being more reasonable and forward looking than others.
Each agency will operate somewhere along the continuum as follows:
At one end of the spectrum the agency will only expect to earn a commission from the first piece of work undertaken through its introduction of the consultant to the client. Thereafter the client is free to contract direct with the consultant without penalty.
At the other end of the spectrum the agency has what is in my view an unrealistic expectation that any work undertaken during an indefinite future period will be contracted through the agency as the intermediary, and fees will be subject to a commission payable to the agent. At no point will the consultant be free to contract direct with the client to the exclusion of the agent.
Many consultants view this as profiteering and refuse to agree to such an open ended arrangement, which effectively results in an ongoing stream of commissions to the agency, potentially without a time limit; a reward that is disproportionate to the work undertaken by the agent.
It is of course reasonable that the agency receives a commission on the initial introduction but to expect an indefinite stream of commission thereafter is unreasonable and in my view greedy.
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