BearingPoint Bankrupcy

In the news today is the announcement that the consulting firm that was an outgrowth of KPMG, BearingPoint, has filed Chapter 11. I have a few questions for the community.

  1. Did they bill by the hour? If so, how do you lose money? The only way I can think of is by keeping on people that you have no work for.
  2. If they did not bill by the hour, they were clearly terrible pricers. Who would hired a consulting company that was clear managed by inept business people?
  3. What happens to intellectual property in these cases? The real value of the company is the knowledge of the people (with the exception of those on pricing engagements), what do the creditors do, extract brain cells?


  1. In my experience consulting and IT firms are much more likely to use fixed-price agreements than accountants.

    A number of such firms have made serious losses on these agreements in recent years – IT projects of course being notorious for going over budget. I would expect that this is the reason for BearingPoint’s problems. While government IT projects used to be notorious for going over budget at the taxpayer’s expense, they are now getting just as bad a reputation for causing losses on the supplier’s side.

    I certainly don’t believe this is a strong argument against fixed-price agreements – in my own software firm we almost exclusively use fixed or value pricing – but it does highlight that pricing is an area where these companies seem to make some expensive mistakes.

    I’m sure most firms make a profit on the majority of their engagements; but IT projects in particular are highly asymmetric. If you fix a price of $1 million for a project, the highest profit you can make on it is $1 million. But the loss you can make is, in principle, unlimited. Inevitably a large loss will occasionally happen, and can wipe out the profits from many other projects.

    This makes it incumbent on consultants to become good estimators. There is a certain amount of research on this in the software field, but I think not enough. At any rate there is still no universally accepted method.

    Many consultants will accept hourly rates when they can get away with it, specifically in order to avoid such problems. Others will write their fixed-price specifications skilfully and therefore be able to charge more when circumstances change. Others will get themselves stuck with too-loose specs and lose money on changes.

    I don’t know whether the greater acceptance of fixed price agreements among the IT sector is because they see the opportunity for greater profit, because of a better understanding of how to profit from intellectual property, because of a greater attachment to ‘a logical way to do business’ or because clients have got wise to IT overruns and put greater pressure on suppliers to fix their prices. Probably a combination of the above. I’m sure both the consultants and the accountants have things to learn from each other.

  2. Leigh, thanks for furthering the dialogue. I think you are right and would add two things:

    1. Poor or (non-existent) scoping. It has been my experience that IT folks fall into the trap of allowing the customer to cut the planning process short in the name of getting to “real work.” This leads to prescription before diagnosis, which, even in the non-medical world, is MALPRACTICE! If this is the case, they deserve to go under since it is in the end, unethical behavior.

    2. Even if they scope well, there is lousy (non-existent) project management. Change requests are often misused or go completely unused.

  3. I fully agree. I can’t give any real data for these phenomena across the industry, but my feeling is that they are widespread.

    I do think that value-oriented pricing is a way to help resolve some of these issues, but it doesn’t let us off the hook. We sometimes use what we call ‘structured pricing’, where our reward is tied directly to achieving business goals for the client. In some cases this is a revenue share, in others it’s a reward for achieving measurable productivity gains or similar goals.

    This helps to reduce scoping arguments because it’s in the mutual interest of client and supplier to expand the scope if it will better meet the business goals. It also encourages strong and deep understanding of the client’s business within the supplier. But it doesn’t eliminate the need for planning – and especially for good estimation of the amount of effort to achieve a given objective.

  4. From what I understand, BP had made several acquisitions to expand international business prospects and increased its debt load. They had the cash available to pay off debtors, but that would have left zero operating capital to pay employees and subcontractors while waiting for A/R funds.

    The experience that I have with BP is a good one, I am a subcontractor to them and my dealings with BearingPoint have been solid for the past 18 months.

    How the contracting works is for us is that the government has a task to perform and needs bodies to do it. Bearing Point and others compete for the job and bid on the positions using whatever contract type the government requests, eith Firm Fixed Price (unusual these days) Cost plus fixed fee (CPFF) which is what the government prefers since it reduces the risk to the contractor.

    Most contracts nowadays are CPFF. This means you open up the books to government auditors to determine what your actual costs are for each person being bid on a proposal. If you get the award, you bill monthly based on the costs you proposed (plus your fixed fee), and at the end of your period of performance, the government reconciles and calculates your actual costs to close out the contract. If your costs went down during the contract period, then you owe uncle sam a big check, if they went up, the government reimburses your costs back, but the fee is always fixed. This takes the risk of bidding a firm fixed price off of the contractor and shares risk with the govt.

  5. Leave it to the Feds to completely look at knowledge work in terms of the Marxian Labor Theory of Value. It explains quite a bit though doesn’t it.

    I am morally opposed to government, so I would not do any work for them.

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