How to pay for Procurement Consulting

24 February 2017

I run a consulting business.  Some would say I am probably not best to give impartial advice on commercial constructs for buying consulting advice.  But the reality is the industry is going through some shifts and I think it’s worth debating the pros and cons of the different approaches.

Consulting at its simplest form is paying someone to do something.  Generally speaking, that person is either doing what you tell them, or working on an outcome.  Is there a better way of getting access to consulting skills though?

Procurement consulting, e.g. paying someone to help you buy something, has several models.  Below are the 5 most common in my view.

 

Option 1 : Day Rates

Not worthy of much debate, you pay someone to turn up.  You take the risk on how long it takes them.  You take the risk on whether they achieve the end result.  Good for simple quick tasks, but hopeless if scope is likely to expand or there are dependencies out of your control.

Option 2 : Fixed Price Consulting

A good model to get a specific job done and measure the value of that job in direct cost equivalence.  The consultant takes the risk on delivering what you want.  However, the complexity stems from a clear and tangible deliverable.  You can spend hours defining the required detail to avoid the consultant wriggling out of delivering what you need.  A consultant will probably pack in some fat to reduce the risk he/she is taking on delivering the solution because “snagging” of the deliverable is the big unknown to both parties.

Option 3 : Commercial outcome based Consulting (e.g. “Share of Savings”)

Share of Savings is an interesting approach to cost management consulting which I quite like but presents risk to both the client and consultant.  The project size needs to be suitably large to provide good revenues to the consultant, and good savings to the client.  It’s a gamble.  The consultant will be assuming (based on their industry experience) that they can save a decent amount of cash for the client.  The client could end up paying way over the odds for something that could have been done as a fixed price piece of work.

My personal issue with this approach is when consulting is so focused on cost, there is a danger in driving a one-dimensional assessment of a service.  Unless your requirement is so commoditised that cost is the only factor; which most IT isn’t, you are likely to have to compromise on service, quality or other aspects as part of the objective to generate maximum income for the consultant.  This could cost you more money in the long term.

Option 4 : Pre-Sales Consulting

By anyone’s definition this is free consulting.  Using a supplier to advise, design or specify your requirement before you buy it from them is the most sensible approach to a complex need.  However, by using this free resource, you are restrained from shopping around for your requirements (the supplier will not allow you to share their work with other providers, for obvious reasons) and in most cases the cost of this pre-sales consulting will be hidden within the final cost of the sale so you are actually paying anyway.  If you know you are going to use a specific supplier to fulfil a service, using their pre-sales resource implicitly gives them responsibility for the service performance, thus giving you better protection longer term.  However, be aware that your choice of supply is limited.

Option 5 : Consulting paid for by commission, or Brokerage

By far my favourite type of consulting, because I genuinely believe it spreads risk and reward equally.  This model sees a cost management consultant having relationships with multiple suppliers.  The consultant’s time is being paid for by the supplier as a trade-off for them winning work.  Risk is with the consultant to broker the right service between client and supplier. This requires them successfully interpreting the client’s needs into the supplier’s language, but can still be profitable for the consultant (Broker) if he/she has good commercial relationships with suppliers and has efficient processes / methods of articulating requirements efficiently and clearly.

Obviously, independence can be an issue here, but providing all suppliers involved in a tender/project are on the same commercial footing, the consultant is not swayed in any direction by the benefit to them, so the advice is still sound.

There are thousands of cost management, sourcing, procurement or other titled consultants in the IT and Telecoms marketplace.  There is no regulation of this market, and so commercial models need to be fully understood by the client to ensure fair and equitable practices are employed.  My only advice for clients looking for external help in procurement would be:

  • Be clear on the expected outcome you need; write it down in detail, and get the consultant to sign-off on this
  • Be clear on how much you think this outcome is worth, or how long it should take, and make sure that the amount you are planning on spending justifies the end result for both you and the consultant.
  • Be clear on where you want risks to sit but be pragmatic on the implications of this.  Define / document the risks so everyone is working with their eyes open.
  • If there is only one supply option, use their pre-sales.  Roll with it; why waste everyone’s time by paying for an external consultant when you can’t shop around with the output.
  • Consider a brokerage model, subject to any constraints you have in your industry.  This does not work in public sector for instance (although one could conclude that a lot of the framework deals are precisely this), because a third party benefiting from your activity needs to be closely scrutinised

Embedded provide Options 1-3 and 5 in the above list.  We have confidence in our industry knowledge and capabilities to take reasonable risk, and will be honest about where this isn’t going to work for us.  We can probably recommend someone to provide Pre-Sales Consulting for free for you, but be prepared for us to try and extract a commission from the supplier to support our time.

And most importantly, we are happy to discuss the option that best works for you.  Feel free to give us a call.

 

 

 

 

 

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