Sourcing the Management Consulting Category: An Insider's Viewpoint
Over the last 5-7 years, strategic sourcing organizations have started to address complex professional services, including management consulting. Yet most of these sourcing initiatives have failed to deliver lasting savings or benefit to the organization. At best, a set of rates cards are put in place with selected consulting firms but receive very little use.
As a card carrying member of the management consulting profession for the past 20 years, let me unveil some little known secrets and best practices to better manage spend with consultants. Similar to the masked magician who exposes the illusions of his industry, some of this information will seem obvious after reading it. Also, part of the trick with addressing a complex service category like management consulting is to have a comprehensive approach that considers the full lifecycle of the source-to-settle process.
Best Practices and Key Considerations When Sourcing Management Consulting
- Properly Segment Management Consulting Spend: There are a wide range of consulting firms out there, and you need to consider a logical category breakdown before attempting to address each segment. Some common industry segments include strategy, operations, systems integration, human resources, financial services, and other specialty consulting services. Each segment is unique with respect to:
- Internal Stakeholders
- Billing Rates and Practices
Treating all consulting spend the same is one of the biggest mistakes that any procurement organization can make when first tackling this category.
- Rate Cards are Helpful, but not Enough: Rate cards are a helpful start, but to be effective you need to put in place a complete process and stakeholder training on how to use them. Having been a partner with two of the Big-4 audit & consulting firms, I can tell you that most consulting firms love rate cards, which typically have rates 10-30% higher than their company’s average bill rate. Plus most clients forget that rate cards are not-to-exceed rates at best. If anyone buys work directly from a rate card, they are clearly paying too much. Rate cards should also cover standards for the definition of a work day (8 hours; not 9 or 10) and expense caps (10-15%). In addition, rate cards should include discounts for annual volume (sometimes as much as 5-10%) as well as potentially discounts for tenure (when you engage an individual consultant for long periods of time, e.g., 9+ months).
- Proper Firm Use and Structuring Engagements: Many companies fail to consider the potential savings that can be realized from better matching consulting project requirements to the right business partner. For instance, using one of the large strategy firms (instead of a Big 4 or boutique) for a purchase-to-pay process assessment could easily cost 25%+ more and may not result in a better end product. Consulting buyers need to understand the relative strengths and capabilities of their preferred partners. In addition, buyers of consulting need to consider the real needs of the project versus the make-up of the proposed consulting team. Do you need a partner full-time? Maybe not, if the project is relatively straightforward. In addition, if the project is very strategic and requires only experienced hands, why is a business analyst being proposed on the team? Make sure everyone has an appropriate role and that their skills match the needs of the business problem at hand.
- Closed Loop Process: To make rate cards truly effective, you need to create a closed loop process for engaging, contracting and paying consulting firms. There needs to be clear guidelines on the use of rates cards and when Procurement should be involved. A company should also have basic guidelines on the use of time and materials, fixed fee and milestone-based fee arrangements. The latter two are generally better practice, but you should always understand the build-up of your project costs (by resource hours and rate). Most companies fail to do this today. All consulting projects should also be covered by a well-structured statement of work (SOW). Beyond the basics (like project approach, deliverables, timelines), the SOW should clearly spell out the financial commitments. Similarly, on the back-end, there needs to be invoice standards in place with your consulting firms. Invoices should provide detail on hours by resource, rates, expenses, and the time period (to, from) covered by the bill. With the above and a little technology enablement, you can implement an effective compliance program that ensures you are paying rates and fees consistent with your contracts and/or rate cards, and that you receive credit for any earned volume discounts.
Complex professional services, like management consulting, offer a significant, untapped opportunity for many procurement organizations. But to successfully take on this category, you need both the support of your C-suite and a comprehensive plan to address the full spend lifecycle.
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