Chicago’s procurement savings deal with Accenture

We featured the Accenture deal with Chicago a few weeks ago.   Jason Busch and I hoped to get a telephone call with the Mayor's staff the other week when I was in Chicago to ask a few questions about the contract -  it didn't happen unfortunately. But Strategic Sourcerer, another US based blog, has really gone to town on the contract, doing a very detailed and insightful analysis of it. In fact that their report runs to 9 parts!

I've had a quick read through, and it is an impressive pieve of analysis that raises some very interesting questions about the deal. The angle that shocked me a little was in terms of what is an "agreed" saving, for which Accenture would be rewarded with their 10% cut, and how that process is implemented.

For major recommendations, the City only has 2 weeks to agree (or otherwise) to an Accenture proposal - not long at all when you can imagine some of the recommendations could be quite fundamental - a major change in process, or product specification for instance. Here's the blog:

So when is Accenture due its 10% of savings? After a contract is executed with a new vendor? After implementation? After testing and approval of an alternative specification? No. Accenture bills their fee, in whole, 2 months after they present the savings opportunity to the City. And that’s where the major problems with this agreement start.

That could be even more of a problem given the City clearly don't have a good baseline of spend to start with.

And some of the allowable savings are not what I have usually seen in these deals - for instance, stock reduction counts as a saving,even though it is in effect a one-off  cash flow benefit rather than a sustainable P & L type benefit. So let's assume Chicago hold $50M worth of stock (of "stuff") and Accenture "prove" that this could be reduced to $30M - they get 10% of the $20 million "saving" immediately! That just does not seem appropriate to me.

I think we can confidently predict that Accenture will be recommending lower stock levels across all sorts of products, justified by some smart stockholding / re-ordering algorithms.  And who knows whether a hard winter will then see them running out of salt or snow blowing equipment given lower stock levels.

There's also a "purchasing process improvement" heading. We've all used this in dodgy procurement business cases - the problem is, introducing slicker processes, like automating AP, may be a good thing to do, but the savings tend to be "arms and legs" - small amounts of staff time that don't end up in job cuts and real tangible savings. As Strategic Sourceror puts it:

Besides the lack of a clear definition, the problem is this really isn’t a cost reduction to the City. Sure, people will be working more efficiently, and additional time available may mean that they will get to projects they didn’t have time for before. In the long run it might even mean the city doesn’t have to hire additional staff. Identifying these types of efficiencies is important, but they have zero budgetary impact. This should be considered a value-add, not a cost savings.

It's obviously a pretty complex deal, and the complexity of the contract and the reward mechanisms do make you wonder who in Chicago had the capability to negotiate this - and then to manage it properly?  If the City's procurement team aren't best in class (otherwise why would Accenture even be involved), are they up to the task? Accenture are pretty smart people after all. And remember, this deal was not awarded after a competitive process.

I'd stress again that this may all turn out to be a good deal for Chicago, and the 10% savings share is hardly excessive by the standards of many of these gain share deals. By all accounts Rahm Emmanuel has made a great start as Mayor, and Accenture are a firm I nearly joined, twice.  Great people, so nothing personal guys.  But there are a few warning signs here - and well done to Strategic Sourceror for getting into this. You can read their whole analysis, starting here - they link to all 9 parts from this page.  But let's leave you with their conclusion, succinctly and well put.

Most leading-class companies would define gainshare payments to be based on actual hard dollar savings that have been obtained, and paid AFTER they have been realized. This contract does not spell that out. Accenture’s payments are, in fact, contingent upon a report that only forecasts savings and puts the burden exclusively on Chicago to make sure that the results are achieved, providing little time to ensure results are realized before fees begin. In truth, the contract is Gainshare only in theory; in reality Accenture will be paid well regardless of what the City actually implements.

First Voice

  1. Bill Dorn (From StrategicSourceror.com):

    Thanks for the coverage of our analysis. It was your blog that tipped us off in the first place as to the award of this contract.

    -Bill

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