Hello and welcome back to Smart Consulting Sourcing, the only podcast about consulting procurement.
I am Hélène and today we will be talking about consulting spend. But before that, let me give you a recap of last week’s podcast.
Internal Consulting is a growing trend today. Internal Consulting groups offer organizations plenty of advantages starting from increased privacy and trust when working on sensitive projects to the most significant one – cost-effective solutions and the opportunity to lower expenses in comparison to hiring External Consultants.
When making a decision about your next project, it is worth evaluating all the elements and picking the team of Consultants that is best suited for the project, and who is prepared to deliver the best results.
Listen to the complete podcast about Internal Consulting.
However, this week, I want to talk about what went wrong with your Consulting spends?
The most common situation you can face with excessive spending is that one part of the organization is spending more than others –
One part of your organization spends 20% more than other entities of similar size. What could be the root causes of this situation?
The scope of responsibilities determines Spending & Value created
All parts of the organization are not equal in their scope of responsibilities. Since Consulting is roughly proportional to revenues, a large Business Unit, for instance, is prone to higher Consulting Spend than a small one.
Looking at the ratio of spending vs. revenues can be a good way to look at a situation. Conversely, in a turnaround situation, you might be spending more on smaller business units to bring them back to value creation.
The corporate level can also be a good client of Consulting Services. For a company with an integrated Corporate in charge of Strategic decisions and Excellence programs, the Corporate can have the larger Consulting Spend. In contrast, a decentralized Company with a light Corporate should expect a small spend for the Corporate functions.
If you have spent large amounts in consulting with questionable results or strategic purposes, you may want to question your governance model or your demand management system.
How the context and the strategy affect the Consulting Spends
A regulatory change, a reorganization, or acquisition and the associated post-merger integration can inflate the Consulting spending.
If a part of the organization has launched a major transformation or has an ambitious strategy, it can increase its expenses for Consulting to accelerate the process. It can make sense to capture value faster.
However, make sure that you don’t end up overspending with luxury consultants. And put in place a monthly reporting of consulting costs. It will avoid unpleasant surprises.
Sometimes Executives use Consulting as a workaround for strict HR policies since the rules on Consulting are often looser. They end up with an unexpected bump on Consulting Spend in the middle of a recruitment freeze. The cost reduction objective for wages was then perfectly achieved at the expense of the consulting spend.
Consulting Fees vs. Consulting Spends – the footprint
Keep in mind that most Consulting Projects separate the Consulting Fees from the Expenses of the Consulting Teams during work on the projects. If you are not cautious, you might end up paying up to an additional 30% of the total cost of your project only on expenses.
If Consulting Fees are really tight, this ratio can end up being quite high. In this case, mostly make sure consultants are respecting your travel policies. There is nothing worse than consultants flying business while the rest of the company is in a travel ban.
If the entity selecting the Consulting Firms is based in Europe and tends to shop locally, every North America or Asia project will have a premium attached to it. And don’t think that you are safe because you work with a large global Consulting Firm.
Because most of them are set up with local P&Ls and are pressured to optimize their local resources, they would rather send their unstaffed European resources than find local resources for your project.
A Consulting Firm is charging more than others
When looking at the numbers, you realize that John Doe Consulting is charging 40% more than your other Consulting Providers on similar projects. Or maybe they are charging more only when working with Business Unit B, the most profitable of your BUs.
The scope and deliverables
Look closely at the scope and the deliverables of the projects. For broad projects with several phases, you can either contract in one large project or several small projects following the phases.
Another point you want to look at is the range of the projects. For instance, for a Lean Manufacturing project, one Business Unit might have decided to work on all the factories simultaneously, when another one works on a small pilot group, and then implement in the rest of the organization.
The complexity of the project can also have an impact on the price. Maybe you are using John Doe Consulting only on more complex projects because they are knowledgeable and can mobilize a huge volume of expert resources in a short period.
Obviously, this often comes at a premium. In the same way, if only a handful of companies can complete a given strategic project, supply and demand rules prevail.
The organization’s footprint can also impact the price of the projects through the expenses, as mentioned earlier. A business unit heavily centralized and solely based in one region will probably face lower Consulting Expenses than a Company based in several regions.
The price–value dilemma
Some Consulting Firms are just more expensive than others. The real question that you should ask yourself is: “What is worth the investment?”. Spending more is not always wrong if the return on investment is excellent. What matters most is the fit and the impact.
If your teams are culturally homogeneous, or on the contrary, extremely diverse, the performance evaluation will probably not be impacted by individual cultural differences.
However, if your Business Units have different cultural structures, then it might not make sense to compare the performance results from one with the other. In other words, your Brazil Headquartered business unit will probably have better scores, independently of the latest results of the soccer team.
The quality of their providers
Lower-Performance scores can come from the quality of the providers. It can be linked to the quality of the local Consulting Market. When you are sourcing the best providers for your direct business, the logic behind your direct business should also apply to your consulting expenses.
The probability of finding them in a 5-mile radius is fairly poor. Having been classmates with one of the partners or belonging to the same baseball fan club is not much better.
One Department works almost exclusively with one Consulting Firm
Working with familiar consultants is comfortable. The Consultants know very well your business, its complexity, and even internal politics. However, we are always amazed to see the same senior partner morphing from a pricing specialist to a lean expert or a digital guru.
And if it was only the senior partner teaming with other qualified partners, but you see the same phenomenon at the principal and consultant level. Or simply put, always the same team, different color jerseys.
Once you have identified the outliers in your spending, you can take corrective and preventive actions. There is a myriad of ways to approach this challenging situation. What really drives the way forward is the sense of urgency you have. Here are four ways to do so, from the simplest to the most disruptive.
Implement a systematic competition policy to keep providers on their toes So that it leaves no margin for them charging you extra and everything goes according to your set plans. The next one would be to centralize consulting budgets in each business line to align priorities.
Which would also be accompanied by setting a ceiling in consulting spend per unit vs. historical or top line and last but not the least would be to implement a demand management process to match spend and ROI.
And that marks the end of our podcast, folks. Next week, I want to talk about the top 6 trends in procurement today and why embracing digital transformation is the way to success? So, stay tuned.
Till then, stay safe and happy sourcing!
If you have other questions about how to analyze your consulting spend, remember you can contact me directly on LinkedIn or by email because I am always game for a chat!
Bye and see you next week! Au revoir!