Spend Blowback — How Strategy Consulting Firms are Responding to Sourcing/SOW Initiatives

Earlier this fall, I had the chance to catch up with a friend in Chicago who will go unnamed (as will his firm). He works for one of the old-school consultancies associated with business strategy work (and some operations consulting as well). This chap has worked his way up through the years after business school and has been a partner for some time. It's important to understand this firm's structure in that it's not a vast towering pyramid model -- partners are still actively involved in their client's work and strategy and project teams remain relatively small.

In talking to my friend, I was curious both about how business was in the ivory tower strategy world -- I was only a part of it for two years in Boston earlier in my career before slumming it in procurement and supply chain after that -- as well as how he viewed increasing efforts from some of their clients to put strategy firms out to bid and to more aggressively manage costs, scope, expenses and payment through SOW platforms and programs. What I found was enlightening and will likely help some firms to better set their own strategies for getting the most from their strategy consulting dollars.

In terms of utilization and growth, I learned in our conversation that the strategy world is surprisingly healthy and that his firm in particular had succeeded in keeping its day rates at what many outsiders looking in would consider high, even by consulting standards. But more germane to the services procurement topic at hand, I learned that the firm in question did not necessarily have a uniform policy for responding to competition where the services buyer was looking to drive down costs through formalized strategic sourcing, RFP and SOW management processes. Rather, each partner could take their own approach.

Moreover, it was rare that partners would respond positively to requests to lower fees (and if they did, it would be the client who would ultimately realize less value, for reasons I'll get to in a minute). Even in the case where a client might be looking to consolidate strategy spend with fewer providers, simply offering up a larger commitment might not be enough to get the firm to sharpen its proverbial pencil -- that is, unless it was a multi-year fixed agreement (where longer-term commitment would matter at least as much as the degree of increased volume). But one way he did tell me to make sure you were truly getting value was to work with two firms -- and strategically shift spend between them and to let them both know their performance and fees would play into future buying decisions.

In the case where the firm was forced to lower their fees, my friend told me the client would get a lesser result by design because the partner would put on a less experienced project team, reserving the proverbial "A team" for more lucrative work. And it would also be likely the partner, who would be actively involved in the initiative per the firm's client engagement approach, would also scope in less of their time. This is especially important from a value standpoint because in the case of strategy consulting, the time spent not just presenting study results but during non-engagement conversations with the CEO or CFO or day-long board meetings with just the partner representing the firm, would likely be the times the client truly got the most value out of the relationship.

Of course there are most certainly supply/demand economics at work here. Smaller strategy firms without the reputation of top providers might not be as busy and would be willing to cut fees for the chance to establish a relationship (i.e., they would be open to being "sourced"). But my friend was quick to point out that his own office had a reputation for coming in and fixing the failed engagements of one smaller firm, in particular, who would undercut his firm by 50% or more, resulting in a much higher overall cost to the client to get things right (not to mention the added delay in moving from strategy to implementation).

Given this knowledge (and some other elements), it seems that the best way of getting value out of a strategy firm relationship outside of a one-off engagement is to follow the following steps:

  • Work with more than one strategy firm and benchmark pricing not just for day rates (e.g., analyst, associate, engagement manager, senior engagement manager, partner) but also for the type of assignment; and make sure you do so for like-for-like types of capabilities and expertise so you don't lose credibility with the client in a fee discussion (don't position it as a negotiation).
  • Consolidate spend, but only do so if you can make a longer-term commitment, rather than just bringing together a large chunk for the next quarter or two; partners value predictability and relationships, not feast/famine type situations.
  • Build the closest working relationship with your partner as possible -- rely on him (or her) as a confidant and sounding board and get as much out of the broader relationship as you can (outside of specific engagements and presentations).
  • Manage invoices and payment through an SOW approach by tying payment to specific deliverables and acceptance/approvals.
  • In the area of T&E, don't just be binary (i.e., you stick to our policy, or we can't work with you). Many larger strategy firms have fairly good hotel and air discount rates established for popular locations and routes. But see whose rates are better. However, don't cram the partner you're depending on into coach or a crappy, non-flatbed seat to China or London for the overnight flight when he needs to present to your management team or board the next morning.

- Jason Busch

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