Making contingent fee procurement consulting assignments work

In our last piece on contingent fee based consulting and cost reduction assignments, we outlined some of the risks. But that’s not to say that there isn’t a place for such options.

Perhaps the best example is where the value obtained by the consultant is totally identifiable as coming from their work, would not have been obtained by the client alone, and produces hard cash. Good examples are audit recovery services, and utilities bill analysis. In the case of recovery, the consultant analyses invoices to look for duplicate or overpayments, or even compliance to contractual terms. Money is then recovered directly from the supplier(s).  In terms of utilities or telecom bills, again the consultant identifies incorrect, duplicate or over payment, and gets real money back. Taking a share of savings approach seems a good risk / reward approach in such cases.

Where the savings are coming from improved procurement, care needs to be taken. We had an excellent comment on our last post from “Market Dojo”  (MD as we’ll call him) who has obviously had personal experience of working in the industry, so I’ll combine my thoughts with his. So here are some points to consider to make sure any contingent fee arrangement is set up to work well.

Baselining is key – you must know where you are starting from if you’re going to base your payment on improvements from that point.  That sounds obvious but you’d be surprised... put serious effort into this stage.

Then you need to define the scope of the assignment carefully. Perhaps exclude the real ‘low hanging fruit” – why not do that yourself? Otherwise any sensible consultant will start with pretty obvious targets that may not give you the best long-term benefit. Here’s MD:

Don’t let the consultancies focus on the easy areas, limit them to the spend/project types where skilled resource and advanced tools and techniques would be most valuable.

We’d also suggest making the payment based on a fairly short period - one year perhaps rather than three for instance.  Things change over 2 or 3 years; you may not even be buying that item, but you might still be locked into a share of savings pay-out.  And remember the percentage fee is highly negotiable, as is the period over which it will be applied.

Implementing a cap on the contingent fees has pros and cons.  I’ve heard the argument that a cap is counterproductive – it stops the consultant perhaps looking for the harder to find, but potentially large savings. That may well be true.  On the other hand...  I may just feel uneasy about paying embarrassing amounts of money. So it can pay to be creative – a sliding scale perhaps so the contingent fee percentage reduces as the savings increase.  Or perhaps the cap should apply at a category level rather than in total?

Another approach is to make the contingent fee just part of the mechanism – pay a certain amount as a fixed consulting fee then a smaller contingent percentage. As MD says,

...consider a fixed-fee model based on estimated time and materials, and add in a small contingent element, say a quarterly 5% of savings achieved as a result of the tender, to incentivise the optimum results.

Transparency is also key so the customer can decide which mechanisms they’re comfortable with. That is particularly important if the consultant might be getting payment from the supply side. MD again.

 With specific regards to energy consultancy, it was not uncommon that we asked the winning energy supplier to pay the consultancy fees. If this whole arrangement is written in black and white for all parties to see as part of the tender process, you could say that it is a fair request.

We would always suggest that fees are payable on “delivered benefits”,  or, at the very least, “contracted”,  rather than purely “identified savings”. Fees are only paid when you are actually implementing what the consultants have recommended.

And finally, the contract should lay out governance and dispute resolution processes, just in case of any disagreement about savings and payment.

Put these principles in place, and there’s no reason why contingent arrangements can’t work well.

First Voice

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