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7 Levers to optimize your Consulting Spend
52% of companies only involve Procurement in the last stage of the process, and towards the completion of major purchases. As a result, the Consulting Spend is scattered across the different units of the company, and not managed as a category by itself.
I can see you looking at me with that 'so-what' face, wondering ... Let me explain.
The Consulting Budget of an organization can represent 0.5% to 3% of its annual revenues, depending on industry and whether it is in a transformation phase or not. Stepping up your game on Consulting Spend could lead to 30 to 50% savings, which would improve your EBITDA directly by 1.5 points or allow you to execute many more projects within your budget.
Now I am sure I caught your attention.
If you work regularly with consulting firms, your Consulting Spend probably represents millions of dollars. If you don’t manage those expenses properly, you might be missing out on many opportunities.
LEVER #0: Know your Market
How many consulting firms serving your industry can you name? We all acknowledge that having a good grasp of the supply market is critical to get the best sourcing outcomes. However, when asked this question, most executives cannot name more than 10 to 15 rather large consulting firms. And procurement executives don’t necessarily score better at this little game. The consulting market is extremely diverse and complex.
Understanding the consulting industry is a pre-requisite to optimize Consulting Spend.
Consulting firms are not commodities that can be swapped without impacting the quality or the price of a project.
Understanding your options can cause you to explore innovative solutions and get the most of your consulting.
You probably have heard the famous saying by Warren Buffett that “Price is what you pay, Value is what you get.” We all understand the concept of “value,” but in my experience, most companies don’t apply this sound principle when procuring consulting services.
The consulting landscape today is diverse, with an abundance of innovative players. A business can create value through consulting as long as it works with the right providers.
For a consulting project, the right provider means the consulting firm with the right “Consulting DNA”: expertise, geographical coverage, industry experience, etc.
Moreover, for each project, the profile can change slightly to adapt closely to the project needs.
When choosing a consulting provider, keep in mind the associated costs to appreciate the net value created for your company, rather than the cost of the project. The associated costs can include the internal personnel cost to supervise the project, the potential rework costs, the delays in implementation, etc.
Among the 10,000+ Consulting Firms globally, there is an excellent chance to find a handful that have the right “Consulting DNA” profile and are within your budget.
It’s a good idea to evaluate several candidates by putting them in competition. This will enable you to make an informed decision on what consultant is right for your company on many levels such as skills, fit, and price. Along the way, you may even go for ideas that are ultimately out the box from what you had designed in your request for proposal.
Moreover, it has to be relevant. All the candidates need to have the skills, experience, and staff to deliver the expected results.
Indeed healthy competition is instrumental in creating value through consulting. Organizing bids with relevant competitors will naturally generate savings without impacting performance.
You cannot spend your time sourcing and finding new consulting providers for each and every project. Very quickly you will realize that, like in other categories, 20% of your suppliers usually cover 80% of your needs. You can probably anticipate what suppliers will be used, when and how, by looking at both past expenses and the strategy for the years to come.
It will also help you remove the unexpected, develop intimacy with your main providers and offer healthy alternatives to your business lines.
One point of attention though; you will need to find the right granularity when defining your sub-categories. If you go too deep, your Preferred Suppliers List could end up as high as a phone directory. However, if you are not granular enough, you may choose a one-stop shop that is extremely capable on high-level and large-scale projects, but may not be a subject matter expert or cost-efficient.
Tail spend management is a well-known source of savings for procurement groups. With the constant pressure on cost reductions and sustainable savings, many companies are starting to notice their tail spend, even in the consulting category.
Indeed, companies may tend to neglect the small consulting projects, contracted directly by the business line managers.
However consolidated at the company level, this spend can represent up to 25% of the total Consulting Spend.
Not much you might say. However, when the Consulting Spend can be up to 3% of a company’s total revenue, any savings on this front can significantly improve the bottom line and delight your CFO.
Here are a few pointers for cleaning your Consulting Tail:
- Gather data on the previous projects to map providers and assess the size of the prize.
- Assess the performance of the providers and identify the low-performers.
- Regroup the projects when you can to play on volumes or negotiate frame contracts.
- Develop your knowledge of the local consulting market.
- Fine-tune the rules for the tail projects for your internal clients.
The critical element is understanding consulting in general, and its different capabilities. In particular, this can allow the procurement team to recognize similar needs and determine the right approach.
It is also another way to take control of the Consulting Spend as a business partner while increasing the satisfaction of the business leaders and decreasing costs. It's a win-win situation.
Many procurement executives put a lot of time and effort into negotiating price and daily rates for consulting services. They leave the negotiation table with a 5% discount, and a feeling of having accomplished their duty.
Don’t be fooled; consulting firms know the game.They build the 5% discount into their pricing. Moreover, if you are asking for a more significant discount, they can descope or staff down the project. You then take the risk of making your project go down on their priority list.
Remember Joey, the junior consultant that was staffed at 2/3 of his time on your project? Could he be working at 2/3 of his time for another client? No… Your preferred consulting firm would never do that to you. When is the last time you saw Joey, by the way? There is no way you can follow the staffing, so let’s focus on the value.
However, still, 47% of companies don’t use demand management or a make-or-buy strategy for Consulting Services.The first step is to build a transformation roadmap – what you want to do and how. You can break down your roadmap into main workstreams, including skills and objectives. By doing this , you can better identify standalone projects that can be treated internally or externally.
You know you won’t be able to launch all the projects at the same time. You also know that some low-priority projects can be enablers of higher priority projects. You will need to prioritize to build your agenda.
At this point you need to ask yourself the following questions: Do we have the right skills in-house? If so, can we mobilize them timely for our projects? The traditional make- or- buy assessment relies strongly on the ability to understand finely the needed skills and potential project delivery in time and quality.
Even with a list of priority projects, you will probably not be able to launch them all. Before you start the exercise, you will need to draw the line and decide what budget you want to allocate to consulting as a whole, and to each project.
You should now have all the keys to make the decisions and execute your transformation roadmap.
Is the performance of consulting services worth measuring? Many consulting firms will tell you that as long as customers keep buying, there is no need to analyze further the performance. Is that so?
In most procurement categories, the receipt and inspection of the purchased goods is a crucial step in the process. When the product is damaged or not compliant with the requirements, it will be rejected. When the product is compliant, but the quality is not satisfying, the provider’s contract may not be renewed. When a supplier is the subject to numerous claims, it will probably be removed from the panel.
As the cobbler’s son often has the worst shoes, even consulting firms don’t always have a robust method for measuring customer satisfaction.
They realize the client was unhappy when an account is lost. Quite an accurate measure of satisfaction, but maybe it can be done better.
Building an appropriate measure of performance is the first step in creating value through consulting and taking control of the consulting category while keeping decision-making and feedback in the hands of the project sponsors.
Engage in discussion with your consulting providers to understand what feedback they expect from you, and open the door to feedback in return as well. Would you buy again from them? Would you recommend their firm? Your net promoter score matters a lot to them — a good reason to act on the feedback.
Is your Consulting Spend aligned with your strategy? Do your teams have an advanced understanding of the consulting market including trends and fee benchmarks? Did you implement dynamic management of your consulting panel? Do you use demand management to control your Consulting Spend? The answers to these questions will help you asses the maturity of your consulting procurement capability.
Aconsulting procurement organization should aim to reach a high level of maturity, where the team is using best-in-class practices and brings significant efficiency gains for the procurement group and company as a whole.
As with any other field, the consulting procurement capability is developed in stages.
You can quickly assess your Procurement Capability maturity and strive to improve upon it.
Achieving a higher standard of success with its consulting procurement capability is well within the reach of any organization.
For most companies, focus and independence are the main challenges when it comes to Consulting Spend. The key to optimizing your company’s Consulting Spend lies with navigating the demanding business landscape of today and working with the right consultants on the right projects within your company’s strategy and budget outlines.
If you take control of your Consulting Spent, not only can you realize significant savings, but you will also contribute to creating value for your business lines. This will make you a strategic business partner to your internal client, and open a seat up toyou at the C-suite table.
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