11 November 2010 | Andy Allen
Bringing in professional services is one of the most challenging areas for procurement, says Andy Allen. He asks experts with experience in the sector to pass on their advice
Procurement departments have been purchasing consultancy services for many years now, yet there is still an aura of mystique surrounding the category.
The stakes are high. Fiona Czerniawska, joint MD of Sourceforconsulting.com, and co-author of several books about buying professional services, says: “The wrong kind of legal or strategic advice could cost millions, even if the fees for the service were only a few thousand pounds.”
Not only that, it is an area in which many fail to prove value for money. A case in point is the recent National Audit Office report (Web news, 14 October) which estimates that, in 2009-10, total spending on consultants across UK central government was £1.5 billion and said it found a number of areas where departments “have not been acting as intelligent customers”.
The difficulties don’t end there. Within an organisation consultancy is likely to be a subject about which many stakeholders – often the most senior – have strong opinions. Politically speaking it is much more complex than buying, say, telecoms.
Then there is the smoke-and-mirrors reputation that has grown up around consultants themselves – people who, according to the old jibe, steal your watch to tell you the time.
Sadly, novices to this area hoping for reassurance are likely to be disappointed.
“Do buyers feel nervous about consultancy? I think so,” says Colin Davies, senior director global procurement functional excellence at Pfizer.
“Do they have good reason to be nervous? Again, yes. It is almost a case of buyer beware in this area.”
The upside, however, is that procurement has a chance to demonstrate its maturity and credibility as a function at the highest levels of the highest if it can add value to the purchase of consultancy.
And what is certain is that buyers have not been deterred from purchasing such services, despite the economic downturn.
Growth
Figures from the Management Consultancies Association (MCA) showed the UK consulting sector grew by 6 per cent in the first half of 2010.
While the long-predicted decline in the public sector market has started, there has been a huge recovery in the market from financial services buyers, according to Czerniawska.
First, procurement professionals looking to influence consultancy spend must consider the numerous – and often very senior – stakeholders that they are likely to be dealing with in this area.
“Nine times out of 10 if a leader or manager is buying consultancy services they are operating at a very senior level,” says Davies.
“Ask yourself what level is the procurement person who is dealing with them? Do you have a fairly junior person within the organisation trying to deal with the managing director?”
If the answer if yes, their attempts to influence the purchase may be doomed unless they have remarkable engagement skills, he says.
Czerniawska believes the strong network of relationships that may have developed between senior board members in the buyers’ organisation and their external consultants can be intimidating to a buyer.
“These are often senior people who don’t take kindly to interference. Understandably a procurement person would be very nervous about telling an FD not to hire a particular firm to do tax.”
Yet Alan Gotto, MD of Constellia, a consultancy, and chairman of buyers’ network the Consultancy Sourcerers Group says the full picture is more complex. Whereas first-tier directors are likely to select strategic consultancies, this only tends to account for 20 per cent of an organisation’s consultancy spend.
The sums spent on systems integration consultancies or with the large accountancy firms are much higher. This an area where the purchase often takes place one tier down in the hierarchy and which procurement is able to influence much more effectively.
Early involvement
Companies where CPOs are most likely to feel comfortable buying consultancy tend to be larger organisations where procurement is at the heart of the business.
At Pfizer, which Davies says spends hundreds of millions of pounds annually on consulting services, there is a global team of specialist consultancy buyers based in the US, as well as a category manager in Europe.
Procurement has also recently set up a “client relationship management” team of around 10 people whose sole job is to build relationships with senior stakeholders and look for opportunities where procurement can support the business.
In practice this provides a means for procurement to get “early warning of what is in the pipeline as far as management consultancy is concerned” and influence that spend.
Experts repeatedly stress the need for this early involvement if procurement is to influence the purchase and avoid becoming the focus of internal discontent.
Paul Vincent is managing director at professional services buying consultancy Insight Sourcing Solutions and formerly procurement director for consultancy, recruitment and professional services at BT. He says: “In a lot of organisations procurement acts as international rescue: being brought in late in the day to make something which has largely already been decided fit, contractually and commercially.”
Vincent cites as a hypothetical example a customer service managing director who is asked to reduce his cost base by 25 per cent while increasing customer satisfaction.
“The know-how doesn’t exist internally so he searches for a consultant using his frame of reference,” says Vincent.
Once the managing director selects a preferred consultancy he will probably be reluctant to change his mind, especially if this is because of some thorny issue surrounding terms and conditions rather than one related to strategy – the priority in his eyes.
Unfortunately stumbling blocks connected with terms and conditions are precisely the kind procurement are most likely to identify.
“When procurement gets involved all kinds of corporate terms and conditions have to be closed off and you have a bit of a crash. Up until then the real stumbling blocks haven’t been discussed,” says Vincent.
In such situations the potential for a wrangle between procurement and other stakeholders with damaging fallout is high.
Another outcome if these issues are not discussed up front, according to MCA chief executive Alan Leaman, is “the client puts in lots of processes which leads to the consultant being treated with a degree of suspicion which inhibits their ability to do the job.”
Managing risk
With so many risks present, some buyers may conclude that this is a category they are better off avoiding.
Davies of Pfizer warns: “It is an area which requires the highest sourcing technical skills and even higher engagement, influencing and communication skills.
He considers that a buyer entering this space without sufficient know-how runs the risk of failing in full view of the organisation’s most senior stakeholders – something which could then cast a negative light over the rest of procurement’s work.
It is better for a CPO who doubts his ability to influence the consultancy spend to approach the area slowly, gradually establishing trust with clients and establishing enough knowledge of the market to impress stakeholders, Davies says.
Gotto stresses there are so many potential wins for a procurement function that can get to grips with this area that it cannot be ignored.
Not only does spend in this category tend to be very high, he says, but often consultants do not meet expectations – giving procurement a lot of opportunity to add value by making sure projects are well-scoped.
Consultancy activity tends to drive the agenda within the organisation, says Gotto. If the procurement department is signing off major strategic change proposals then the CPO will be better informed to navigate their way through the organisation more effectively.
“You’ll also get a heads-up on change activity driven by this consultancy which will most likely drive buying activity. This in turn means you can do your procurement job better,” he says.
Finding the best
For Gotto procurement has to aspire to control spend: “Unless you demonstrate an ability to influence who wins work and who doesn’t win work then you are dead in the water,” he says.
Finding the right consultancy can be a major challenge given the vast number of organisations in the marketplace and the fact that anybody can set themselves up as a consultant.
As Rob Douglas, retail support purchasing director at DSGi, says: “It is relatively easy to come up with a list of the best strategic consultants quickly. When you’re looking for someone to redo your supply chain for white goods it becomes much harder.
“Everybody says they have fantastic capabilities in all these specialist areas. But when you ask them to prove it you find out they’ve never actually done a project like that before.”
Many buyers will find themselves in a similar position to Paul Brimmer, head of purchasing at JD Wetherspoon, who is not involved with buying strategic consultancy but has bought specialist consultancy in non-core areas where often the biggest challenge is justifying the use of external expertise.
“You need to consider carefully whether we wouldn’t be better off employing another member of the procurement team for 12 months,”he says.
Brimmer advises buyers that it is worth learning how the market is operating in a given sector in order to set targets. He recalls a telecoms consultancy project several years ago where the consultancy was paid according to the a percentage of end of the year savings they achieved, capped at a certain level.
When the consultancy easily realised these savings the company realised that it had capped the savings at too high a level and set the consultancy too easy a task, something which more extensive study of the marketplace might have avoided.
Alan Braithwaite, chairman of LCP Consulting and visiting professor at Cranfield University highlights a different challenge for procurement when it comes to framing the terms of a deal.
Often it is understanding the outcome that is sought by the internal customer and to what extent the potential supplier can influence that outcome, that is the buyer’s greatest challenge, he says.
Once that is decided buyers can help assure the success of the project by assigning sufficient project management resources and time to allow the consultant to get the job done properly, he says.
Sharp practice
Experienced consultancy buyers identify several sharp practices procurement buyers need to be aware of during negotiations.
Douglas – who is also a former procurement consultant – says consultancies’ business models mean their margins are higher on junior consultants. Therefore projects are typically staffed by a large number of junior consultants, with the expertise of a small number of seniors widely spread around.
What it means, says Douglas, is the “A-team”, made up of credible, knowledgeable senior consultants which meets the buyer, may bear little or no resemblance to the “B-team” mainly made up of recent graduates which works on the actual project.As a result the buyer must be sure to specify in the contract who will be working on the project, for how long, who they will be replaced by if they leave.
“The only way to do that is to actually interview the consultants who will be delivering your project,” he adds. “What you often find is that the people you think are the knowledge leaders are spending very little time on it.”
Intangibles
For Douglas it is important to be able to get references on individual consultants – if these are unavailable the client should not accept that individual. The problem for hard-pressed buyers, he adds, is having the time to carry out this task.
There is also the intangible nature of consultancy contracts to contend with. John Fernau, deputy head of procurement at the Olympic Delivery Authority, points out that consultancy contracts are often let on a time and materials basis, and that the scope of the project is often insufficiently defined to allow fixed pricing.
“The problem here is that there is no incentive for the consultant to deliver within the initial timeframe and budget – the opposite applies,” he says.
Wherever possible he advises working with stakeholders to develop the project’s scope to allow consultants to offer a fixed price for the project, which is paid when defined outcomes have been delivered.
Fernau also singles out another practice where senior consultants use their project as a chance to try to sell further business to the client.
“Scope creep is the classic pitfall of consultancy contracts. Major consultancies will often be keen to bid, sometimes very competitively or even gratis, for relatively minor pieces of work in order to get access to a new client and its senior management in particular,” he says.
In such cases the consultant will seek to build strong relationships with senior managers and then extend the scope of the consultancy. One consequence of this, other buyers have pointed out, can be to isolate procurement.
A canny buyer who knows the consultancy’s business models and rates will know there are certain circumstances where they can press for discounts.
Fernau says: “More competitive rates can be obtained by offering a fixed duration of engagement, especially if it is over six weeks; by ensuring that the engagement is full time; and by allowing less experienced or transitional resources to be deployed.”
Measuring outcomes
One problem which is exercising the minds of many consultancy users and the better consultancies themselves is to find ways of measuring the outcomes of consultancy projects.
Pfizer has introduced a supplier management system which 40 designated preferred consultancy suppliers have access to, in order that they can input all of projects they’ve been awarded and provide information on key milestones, such as start and completion date, savings and benefits.
The idea is that the consultant puts the initial data in, which is then verified by Pfizer managers. Later, quick, automated questionnaires go out once project is completed to Pfizer project managers gauging satisfaction.
What it means is “we have a database of projects, savings and benefits and stakeholder views of how well they performed,” says Davies.
Lastly, he adds, any buyer intimidated by consultancy procurement should bear in mind that there are tremendous resources available to help a buyer in this area. These include free publications such as a recently published 26-page OCG guide to buying consultancies (detailed in box below), and consultancies which help purchase professional services.
“The intelligent buyer should make use of these resources. They don’t need to be doing this by themselves,” he says.
☛ Andy Allen is a freelance business journalist
INSIDE INFORMATION: RESOURCES FOR BUYING CONSULTANCY
☛ The OGC Guide to Consultancy Pricing. Excellent 26-page guide to buying consultancy services – useful for private and public sector buyers.
☛ Rip-off! The Scandalous Inside Story of the Management Consulting Money Machine, by David Craig. Lively memoirs of the author’s former life as a management consultant outing many of the sharp practices used to pad out fees and stretch out assignments. Although it’s an entertaining, informative read for buyers entering this field, it’s probably best not to quote it to consultants.
☛ Consultancy Sourcerers Group: A networking group for consultancy buyers to share best practice chaired by Alan Gotto of Constellia, email: alan.gotto@constellia.com
☛ The Management Consultancies Association
☛ Buying ProfessionalServices: how to get value for money from consultants and otherprofessional services providers, by Peter Smith and Fiona Czerniawska,
is published by Economist Books.
