Contingent fee procurement consulting assignments – buyer beware!

We wrote recently about the sad death at Glastonbury of Christopher Shale, who ran Oxford Resources, a cost-reduction consultancy. Like many such firms, they work largely on a contingent fee basis – they will take a share of the savings they find for their clients. Now that has some clear advantages; done properly, it is a guaranteed win for the clients. You only pay for the consultants if you make savings, there is (apparently) no risk, and you save a multiple of the fees you pay.

We said previously that Oxford were (are) a reputable firm. But there are some real sharks in that market, who will manipulate the contingent mechanism to their own advantage. And there are also some negatives about the process that buyers don’t always consider.

So what could possibly go wrong?

Well, the consultant could find an alternative supplier at an apparently lower price but with quality or service that does not live up to the previous supplier. That may not be apparent immediately – perhaps not until after the contingent fee has been invoiced and paid.  The consultant  might even (and I have seen this happen) find a supplier who will quote a very low price for long enough to enable the supplier to claim and extract their share of the “savings” – but then the supplier withdraws or stops supplying.  Collusion between consultant and supplier? I couldn’t possibly comment......

Accurate baselining is obviously key to determining the starting point for any savings. Leaving that to the consultant is another risk if they are of the unscrupulous breed. Digging around to find the highest possible price paid for an item across an entire organisation, then using that as the baseline, is something else I’ve seen.

Then there are the issues that are not the consultants fault, but can make the share of savings route very costly. A new supplier or contract may be genuinely lower price, but procurement may have problems driving compliance across the organisation (particularly if there is a change in quality, specification...).  The share of savings calculation may assume 100% compliance to the new contract; the actual performance may be very different.

Or the need for the product or service may change over time, making the “saving” less relevant – which can be a problem if the share of savings payment has been based on a three year period.

Finally, the amount payable to the consultants may just exceed all expectations. Now that may sound great – look at all the money we’ve saved – but if the contract is based on paying the consultant before the savings are genuinely realised, the size of the payment may cause some embarrassment internally.

I heard of one case where an energy consultancy (and I should say this is an area I believe suits contingent fee mechanisms pretty well) found a long running billing error for their financial services client.  That saved the client huge amounts – but the client balked at paying an invoice for several hundred thousand pounds, far more than they'd expected. After all, they argued, the consultants “had only done a couple of weeks’ work”.  I believe the case ended up in court – and the consultant got their money, quite rightly.

So having highlighted some of the issues and points to watch, in our final part of this series, we’ll suggest some positive steps you can take to ensure that any contingent fee based assignments you get into work well and avoid the potential pitfalls.

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Voices (4)

  1. MarketDojo:

    Having worked in the contigent fee consultancy market for half a decade, I see so many truths in this article.

    I would also add one more ‘buyer beware’ point: since consultancies on this remuneration model are driven by savings, they are typically enticed to focus on the “low hanging fruit” and less on the challenging strategic activities, which is perhaps where the application of their skills and methodologies would be best applied.

    It is no surprise that one of the most frequently tendered spend categories was office supplies, as almost anyone is able to drive in excess of 40% core-list savings in that category. Apply this to a multi-million pound tender and consultancies can walk away with significant fees.

    So, my advice would be this. 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. Secondly, ensure you have a cap on the fees in place. If you can, engage in a contigency-fee mechanism that pays out monthly in line with the monthly savings that we achieved from the tender. This mitigates many of the issues that Peter mentioned above. Alternatively, consider a fixed-fee model based on estimated time and materials, and add in a small contrigent element, say a quarterly 5% of savings achieved as a result of the tender, to incentivise the optimum results.

    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.

  2. PlanBee:

    In many cases it will not be Procurement that engages this type of consultancy (at least not without one arm up their back!)

  3. Thomas Holzapfel:

    It’s also an interesting question who pays the contingent fee inside the clients organisation. Procurement might see an opportunity to use this approach, but typically doesn’t have the budget to support it – particularly if the realised saving is a significant as in your example…

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