Hello, and welcome back to Smart Consulting Sourcing, the only podcast about consulting procurement.
I am Helene, and today I’ll be talking about “What do companies do to create value through their consulting spend and why do they fail?”
But before we dive into today’s episode, let’s give you guys a small recap about our previous 6-Lever series episode.
I went into great length on how you can optimizing the ROI of your consulting expenses adds value for businesses.
The first goal was to keep your consulting expenses from growing into a significant cost center. The second goal was to provide value and financial benefits. I then offered an illustration of how to apply the value creation lever. The non-financial benefits of increased teamwork, efficiency, and focus came last but certainly not least.
I also explained why procurement must be a part of this optimization process from the beginning of the journey.
The organization can gain a great deal by effectively working on creating value from consulting from the early stages, not just in terms of financial savings but also in terms of synergy, efficiency, and cooperation value.
If you’re interested in what we discussed and want more content, follow us on YouTube or any other central streaming platform.
And now, let’s jump onto today’s topic, which is “What do companies do to maximize value from their consulting spend, and why do they fail?”
There are a lot of businesses that save time by accepting the first project that comes their way. They usually follow the FIFO process, which I talked about in my previous episode, and use up the entire allocated revenue on that first come, first serve basis project. Then they usually miss out on those important projects that would actually bring value because they need more resources.
And by doing this, businesses spend money on consulting but don’t get any long-term results. So, let me paint a picture for you of what the companies usually do to create value and why they do not succeed.
Most companies understand that they should optimize their return on investment (ROI) of the money they invest in consulting.
In fact, according to our survey conducted this summer to diagnose the consulting procurement maturity of businesses, 72% of the companies have implemented a dedicated team or individual responsible for this task. Here are a few more interesting points:
- Many companies have understood that having a clear point of focus or dedicated team helps get visibility on the consulting spend and, therefore, a starting point to improve their ROI.
- In previous episodes of this podcast, we discussed how important it is to involve the procurement team at the early stages of the project. And indeed, 59% of the companies involve procurement earlier in the process.
- We see that many organizations have started exploring how to maximize the ROI of their consulting spend. However, the problem is you need to implement company-wide measures that would change the ways of working significantly.
- Most companies usually aim to keep their consulting expenses under control by implementing practices on the process side. This includes the early involvement of procurement, competitive bid organization, and the systematic use of confidentiality agreements.
- However, even on that side, only 28% of companies surveyed are best-in-class. It means that the other 72% of companies could improve by taking cues from what the best-in-class companies are doing.
- On top of that, if many companies have implemented demand management to make sure they spend on the right projects, it is usually based on one threshold, independently of the strategic value of a project.
- In other words, everything under a certain threshold, 200k$, for instance, is directly handled by business lines without procurement support. Some others have implemented strict thresholds, like 50k€.
While This May Seem Like a Sensible Way to Manage Costs, It Can Lead to Sub-Optimal Decision-Making. Why?
By basing decisions on a single metric, companies often need to pay more attention to projects with high potential ROI. Some small but highly-strategic projects might fly under the radar.
As a result, they may miss out on opportunities to generate significant value for their business. Hence, companies need to consider multiple factors when assessing the potential benefits of consulting projects. Only then can they make informed decisions that maximize ROI.
Secondly, We also found from our survey that many companies implemented category management. Again, what we heard from them, they have a fundamental category management starting with a basic taxonomy that tends to mix up strategic and operational spend.
And when I refer to a basic taxonomy, I mean a list of subcategories, which can include a collection of capabilities or sub-capabilities.
The risk of having such a basic taxonomy, especially if it’s of a high level, is that you’d have to decrease the number of suppliers that you have for each category or subcategory.
And if your subcategory is not granular enough, you will end up having three/ four suppliers per category, and those suppliers will mostly be the ones who do it all, and if they can do it all, they definitely are the one-stop shots. And who are the one-stop shops? The Big 4s, obviously.
So, for this in French, we say, “The snake that is biting its own tail” which means that you cannot have a diversified list of preferred suppliers if you don’t have a taxonomy that reflects your needs or is granular enough.
Having basic category management also means that they have a list of preferred providers. But sometimes, they try integrating 2nd- and 3rd-tier consulting firms into the supplier list.
However, they have a complicated qualification system, which demands a lot of documentation and citation, and that makes it difficult for small players to come in.
They also have crazy-long payment terms, up to 180 days!! And no small company can afford to be paid more than 6 months after the work is done.
Companies also do a few other things, such as having panel management in place that makes sure the companies have a clear understanding of which consultants they’re using and making sure you’re getting the most out of them.
Companies also tend to monitor their consulting spend, which is a good thing! This means they keep an eye on how much they spend on consultants, ensuring they’re getting value for money.
However, the truth is that they only monitor the spend partially. Remember what I said before about basic demand management? They know how much they spend on the big strategic projects rather than the small ones.
And finally, companies also perform irregular or simple post-performance evaluations. This means taking a step back after working with a consultant and assessing whether they delivered on their promises.
Thus, we have seen companies implementing measures, and obviously, they are seeing progress. But that is not enough and they need to go further when it comes to creating value through their consulting expenditure. So, the question is, what is not working?
What Prevent Companies From Getting The Desired ROI From Their Consulting Spend
Maximizing the value while keeping the costs under control can be a daunting task. There are so many factors to consider, and it can take time to figure out where to start. However, not doing anything will definitely lead to suboptimal results.
One reason why companies fail to get the desired ROI from their consulting spend is that the market is large and scattered. With so many options available, it can take time to identify the right consultants for your specific needs.
Moreover, the market is constantly changing, making it hard to keep up with the latest trends. They have a hard time understanding the nuances of consulting work, the differences between generalist and specialist consulting, for instance. Because consulting is such a broad field, it can be difficult to know what skills and knowledge consultants you need for a given project.
And since they are not savvy enough, and do not know how to select and use the consultants effectively, they end up with the wrong consultants, and are disappointed with the results.
Additionally, many companies cannot put their RFPs on the shelf to use for various projects by tweaking them from the previous one, because every project is different. They must prepare a new RFP from scratch for almost all the new projects.
This means that scoping the work required can be challenging and requires a deep understanding of the consulting process and business acumen to articulate the needs into an RFP. Without this knowledge, it will be hardto accurately estimate the value of a project, leading to unexpected expenses and a negative impact on the overall ROI.
In addition, companies need to manage their projects because; you need to factor in the cost of internal resources when calculating the ROI of their consulting spend. You need to account for the time and effort required to manage a project internally to be able to understand the actual cost of consulting. You know TCO? (Total Cost of Ownership). Because all consultants don’t work the same, and sometimes when the scope on paper is the same, the workload expected from your teams is not…
And the other thing is that it’s a category that requires close collaboration with business lines because it’s so complex and complicated that the procurement group cannot replace the business lines in defining the needs.
What Companies Can Do to Address These Gaps?
We recommend you to collaborate closely with procurement and business lines: the knowledge of the company’s needs remains in the hands of business lines.
This information isn’t always effectively communicated to the procurement team. Even if it is shared, it remains very technical and gets hard to integrate for procurement, resulting in projects that don’t always align with the company’s objectives.
To get the most out of your consulting spend, it’s essential to establish close collaboration between business lines and the procurement department.
This way, you can ensure that everyone is on the same page and working towards the same goals.
And to work closely with business lines, you need to build solid relationships between procurement and business lines and regularly meet to exchange on your projects and your goals.
The most common reason is that the internal stakeholders who are decision-makers for consulting can be spread across different departments and functions. As a result, it can be challenging to build strong relationships with everyone and ensure everyone is on the same page.
You often find very young professionals in the procurement business, and these guys could be more experienced.
And they need to understand and influence the behavior of their internal stakeholders and suppliers. They also need to have strong analytical and problem-solving skills.
But most importantly, they need to be able to build relationships. Why? Because, at the end of the day, it’s all about people. People buy from people they know, like, and trust.
In one of the episodes of our other podcast, procurement game changers, we recently discussed this with Fred Leeds, a procurement specialist. You can get that episode here. Here we talked about the emotional link between a consulting buyer and the consultants they work with. It means that in order to challenge that relationship, you need to build trust with your internal stakeholder. They need to be convinced that you are helping them and not only applying company policy.
And speaking of trust and relationships, if you want things to change, you need to onboard top management with a solid business case. But it’s hard, right? As a result, procurement actions are often limited to their own backyard and have little impact on the company.
In Conclusion,
So to conclude today’s topic, according to the survey we conducted on consulting procurement maturity, only a few companies implement best-in-class practices.
Of course, the rest of the pack also adopted optimization measures by involving procurement, organizing competitive bids, and having confidentiality management in place. However, despite that, they still have disappointing return on investment on consulting over the long term.
And the reason why they still fail is closely linked to the maturity of their consulting procurement capability.
So how to change? They need to gain knowledge and understanding of the vast and ever-changing consulting market.
Procurement leaders and internal stakeholders alike sometimes need to learn what consultant would be best suited for their project to avoid ending up with the wrong ones.
The procurement department needs to build close working relationships with the business line and involve top management in the transformation journey that could bring high ROI of consulting spend to the company.
So they are not limited to their own backyard, processes, and category management, to play with.
The crux of the matter is that procurement must be transformed to maximize the value of your consulting spend. The transformation will only be possible if top management is involved.
So, change management in procurement is quite tricky, especially in indirect procurement. However, our six-lever technique can be helpful.
And if your company is struggling to create value on your consulting expenses, it may be time to seek help.
Share the knowledge of our 6-Levers of optimizing the ROI of the consulting spend to help them achieve the value companies need to get from every project.
And that’s it. I hope that you now know what companies do to implement value creation from their consulting spend and why exactly do they fail. Thanks for listening. That marks the end of a podcast.
So, keep an eye up for me next week when I return with another fascinating topic.
Till then, stay safe and happy sourcing and if you have all the questions on how to maximize the return on investments of your consulting spend, remember you can always contact me directly on LinkedIn or by email because I’m always game for a chat.
Bye and see you next week. Au revoir.
See you at the next episode. Till then, stay safe and stay connected with us through our community on LinkedIn
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Happy Sourcing!
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