‘Share of savings’ and other contingent fee based consultancy reward mechanisms

Someone asked me the other day about the benefits or otherwise of  'share of savings' and contingent fee mechanisms in terms of procurement cost reduction consulting assignments.

I've seen some horror stories here, but I can see the benefits as well, and I suspect in the current climate, these approaches will be growing in popularity. In theory, the client can't lose; anything they pay to the consultant is more than covered by the savings.

A few tips though if you are considering them (looking at it from the client side here).

  • Be aware - the consultant will focus ruthlessly on where they see the biggest return, with the least risk,  for each day of effort.  That may not be the spend areas that could actually bring you the biggest benefit.
  • Baseline very carefully - your payment will be based on savings against the baseline, so invest in getting this right.  Agree baselines with the consultant before they start looking for opportunities.
  • Ideally, you should reserve the right to accept or reject any proposed changes to supplier, specification, contract etc, and only pay the fee based on those that you accept.  I've seen cases where the consultants find a 'saving' that in fact is based on a lower specification, and charge their fee based on this potential saving even if the client in the end does not use the new product.
  • Negotiate on the percentage fee and the length over which it applies.  Firms may start by looking for 50% of savings for three years.  This is highly negotiable.
  • Consider a cap or tapering mechanism.  I heard of a case where a firm found a £ million pound saving after one week's work - and claimed their 50% for three years based on that!  OK, so the client got a benefit as well ...but a contract that said 50% of the first £100K saving, 30% of the next £100K and so on (and probably for the first year only) would still have been acceptable to the consultant and would have saved a fortune for the client.
  • Take up references.  There are some very reputable suppliers in this space and some sharks.
  • If you are a public sector organisation, my understanding is that this will still be considered a contract to which regulations apply, even if you don't know the value (i.e. how much you will pay to the consultant) when you let it.  So if you think you might end up paying the consultant over £100K for instance, it probably needs to go through OJEU or an appropriate framework
  • There are other payment options which might be more appropriate and encourage the consultant behaviour you are seeking; for instance, a (low) day rate or fixed price contract but with a significant success payment based on hitting a targeted level of savings.

Always happy to help anyone putting this sort of thing in place...a range of payment mechanisms avaiable....!

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