Straight from the Horse's Mouth: Contracting with Management Consultants
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“Straight from the horse’s mouth” is said to be the notion in the horse racing world that a tip is so legitimate that it originates from one-step closer than the inner circle of trainers and owners, i.e., directly from the horse. In the business of contracting with management consultants, I am that horse. And I have some tips for you.
Tip # 1 – Remove “time & material” from your vocabulary.
Without extremely diligent oversight on project status, consumed hours, and completed milestones, you are opening the door to inflated hours consumption, lengthier-than-expected engagements, scope creep, etc., and this is just with smaller engagements. Supervising consultant teams with which you have multi-million dollar engagements while ensuring timely and successful completion of the deliverables can be virtually impossible.
Tip # 2 – Replace “time & material” with “fixed fee.”
Establish the total fee for the project from the start. Fixed fee is a simple equation of the duration of project multiplied by resource cost – don’t let consultants tell you otherwise. For situations where you are not quite sure of the total scope or duration of the project, simply segment the project into fixed fee phases (e.g., Scoping Phase < Assessment Phase < Delivery Phase).
Tip # 3 – Make sure you understand the inputs of the fixed fee equation.
We will often encounter contracts that do an adequate job of listing the deliverables and have negotiated a fixed fee, but does not contain the basic inputs used to calculate the fixed fee (i.e., fixed fee = billable days*daily cost of resources), nor did the consultants disclose these numbers during the negotiation process. Our clients negotiated the fee only on duration and deliverable completion without understanding the hours and level of expertise that would support completion of the deliverable.
All fixed fee contracts should include the fee schedule, listing individual resources and their respective billable time, level, and role on the project.
Tip # 4 – Cap billable hours per day and formulate a “cost-per-day”
Consultants rarely work eight-hour days. Instead of using total hours per resource for the fixed fee computation, use billable days with a defined cost-per-day by resource. This controls excess billing and ensures that each resource will be with the project through its negotiated duration in agreed upon weeks or months, rather than billable hours. It also allows for a fair comparison between competing consulting firms when there is a competitive bidding situation (e.g., if a rate-per-hour is used without a capped day negotiated, then a firm with nine hour days is essentially billing a rate that is 13% higher per day than the firm with an eight hour billable day)
Tip # 5 – Know the project team and protect against the resource bait & switch
You don’t go into a planned surgery without first meeting the surgeon. Why contract a multi-million dollar engagement without knowing who the resources interfacing with your company and driving the daily tasks? The talent of the project team can often mean the success or failure of that project.
As part of the negotiation process, make sure to collect the profiles of the project team. Even if a resource or two becomes unavailable by the start of the project, you still have a benchmark for the talent level for the replacement consultant, thus protecting against the bait and switch of level A resources for level B or C resources.
Tip # 6 – Use milestone payments vs. a fixed schedule
This is a simple concept that we do not see deployed enough in consulting contracts. The two most obvious benefits of using milestone payments are:
- You are ensured completion of deliverables before payment
- Your business is forced to diligently track activities to confirm completion of deliverables before release of payment can be approved, thus fostering an atmosphere of visibility and collaboration with the consulting team
Tip # 7 – In the end, keep it simple
Contracts should not require a key to decipher. If the contract takes more than a few passes to understand exactly what you are buying, then you probably need to revisit the drafting process. A good gauge on a succinct contract would be to consider if an unknowing person in your organization could pick up the contract and understand the overall purpose in one swift pass.
Final Tip – Find a Management Consultant and give him or her a hug
In the end, we have a passion for what we do and we love making a real and measurable impact on your daily lives. The best practices and innovations we bring to the table are built from years of experience, facing difficult challenges with our clients, and working hand-in-hand to prevail.
This article is not intended to infer that management consultants are seeking an advantage through contracting, rather with the right care and attention to the development of the contract, you are effectively mitigating the chance of confusion over deliverables, timing, execution strategy, and resources deployed.
A solid contract will put you on the right path to a fruitful relationship with your management consultant. Trust me, this is coming straight from the horse’s mouth.
Ryan Reeser joined Archstone in 2008 with experience in Third-Party Logistics (3PL) Management and Retail Distribution working for a $5B retail chain. As part of the Archstone team, Ryan has gained experience with Strategic Sourcing, Spend Diagnostics, Procurement Transformation and PMO Strategy while supporting leading global pharma , financial services firms, and national retail chains. Ryan graduated from Loyola College, Maryland with a degree in Business Administration, with a concentration in Marketing.
Bob Derocher is a co-founder and Principal of Archstone Consulting, a firm focused on objective business strategy and execution services in the manufacturing, consumer packaged goods, life sciences, financial services and consumer services sectors. Mr. Derocher serves as the firm’s Strategic Sourcing and Procurement Practice Leader. He has over 20 years of experience in consulting to Fortune 1000 clients in the areas of operations improvement, sourcing and procurement, supply chain, merger integration and cost optimization.