Hello and welcome back to Smart Consulting Sourcing, the only podcast about consulting procurement.
I am Hélène, and today we will discuss “Spend Analysis for Consulting”.
However, before we get into today’s episode, let me first give you a quick recap of what I talked about last week.
In last week’s episode, I talked about “What does an MSA for consulting look like?”
MSA is a legally binding agreement between you and your client that spells out the conditions of your cooperation on all ongoing and future projects for a specific amount of time. Unlike other consulting agreement, the MSA can be done once and for all, even though MSA is also an agreement at the end of the day.
And you should be negotiating an MSA with the most strategically important suppliers at the same time as you create your panel of preferred providers. So that the contract negotiation process maybe sped up for your internal stakeholders.
At the core of the negotiation of an MSA is often the pricing, and is typically based on a rate card. And I am not a big fan, so I would just remind you to focus on value and remember that consulting is a seasonal market, so whatever solution you choose, keep it flexible!
However, this week, I want to discuss building the Spend Analysis!
Whether you are looking to save money or simply to understand your spending patterns, spend analysis will always come in handy. Especially since most companies don’t have a clear view of how they spend their consulting budget.
What is Spend Analysis in Consulting?
In the procurement world, spend analysis is the practice of examining your company’s spending to find areas where you may save costs.
Although it might be a difficult and time-consuming task, spend analysis can also be a very useful tool for the consulting category.
I will help you to have a clear view of your consulting budget: who is spending, on what, with whom and with what impact.
You might find areas where you can cut expenses and increase efficiency. You will find some insights into building a better supplier panel and negotiating better prices with suppliers and vendors.
In the end, spend analysis is a crucial tool for every consulting procurement specialist that wants to manage the consulting category efficiently.
Spend analysis may be done in two different ways: top-down and bottom-up. The bottom-up strategy entails scrutinizing each individual transaction to identify expenditure trends. For the consulting category, you will have to look at each project individually.
On the other side, the top-down strategy examines broad expenditure categories to spot trends. Here, it means looking at trends in other categories and comparing them to the consulting category but also grouping the projects by segments such as capabilities or users and identifying patterns.
While each strategy has benefits, the bottom-up strategy is frequently more successful in locating potential savings.
There are different types of Spends in Consulting
But every project is not equal, and every supplier is not equal either. Because your procurement teams have only a limited amount of time on their hands. So they need to prioritize their energy. That’s why we usually cut the spend into three different segments.
First of all, the Strategic Spend:
The Strategic spend is the money spend on strategic suppliers and strategic projects. We are looking at initiatives that support your overall strategy and transformation. Actually, the amount spent on consulting is directly connected to how much change and disruption are occurring in a certain sector or function.
The strategic suppliers are the ones with whom you spend most of your budget, that are working on highly strategic projects or have very unique skills. The ones that you want to cater to.
The next type is the Normal Spend:
This is the recurring spend. It could be operational excellence, for instance, or HR initiatives. The point is that you have recurring projects with some suppliers. The projects are strategic because they advance the overall strategy, but either they are less strategic, or the skills they need are less unique, and you have alternatives.
Last but not least, the Tail spend:
For procurement teams, tail spend management is a well-known source of cost reductions. Many businesses are starting to observe their consulting tail spend, even in the Consulting Category, as a result of the ongoing need to reduce costs and make lasting savings.
Indeed the consulting tail spend, which is directly contracted by business line managers, is frequently ignored by companies.
They can account for up to 25% of the Consulting tail Spend, regardless of how they are aggregated at the Company level. You might not say much.
Any savings on this front, however, may greatly enhance your bottom line and please your CFO as the Consulting tail Spend can range from 0.5 percent to 3 percent of the overall revenue.
For the consulting spend, putting your spend under control means spending the right amount of money on the right projects. Are your projects strategic? Among the consulting projects done during the last 12 months, how many were supporting your strategy or were at least considered strategic when they were launched?
And the only way to make sure you have the right ROI, because that’s what we are talking about right, is to perform a spend analysis.
But how to practically implement Spend Analysis for the consulting category?
I am sure you know that data is only valuable if standardized and accurate.
Standardized data because you want to compare apples to apples. And accurate because if you want to identify trends, you need to have real data. If not, your analysis will just be a fiction novel.
In order to simplify your work, you might wish to establish a few dimensions unless you currently have an ERP that gathers the information at the proper level of detail.
Utilizing the organizational structure can help you understand who is spending money, identify habits, compile a list of skills that are pertinent to your company, and determine a cut-off point for consulting companies to participate in the investigation.
The simplest observation period to use as a starting point for your spending is often the prior fiscal year. This will give you a solid foundation for chopping and dicing the data.
And you need to collect the appropriate information before beginning your spend analysis in consulting. And avoid drowning yourself into the data.
And the type of data that you’ll be looking for would be, how much did we spend on Consulting? Who bought Consulting? What type of Consulting did they buy? How long did the projects take? Whom did they buy from?
There are several sources, including as invoices, purchase orders, and contracts, can provide this information.
To find patterns and trends in this data, you’ll also need to invest some time examining it. You will be able to better understand where and how your business is spending its money thanks to our spend analysis.
Once you have the normalized data, you can now move to organize it in order for it to make sense!
And how do you do that? Is by differentiating them into,
Financials first, what did you spend money on? How many tasks did you complete? What is the revenue to ratio? How much money was spent by each division or business unit? What is the value of the reward if you save 30%?
What are your User Behaviors? What are the functions/business units buying Consulting Services? Who are the project sponsors? How many times a year? How much did they spend? What type of Consulting did they buy?
Projects can also be organized, by looking at what were the capabilities of your projects? What was the primary purpose? How much did you spend on the different projects? How many of the projects were sequels? Are there topics where you seem to overspend? Are there topics where you don’t spend at all?
Last but not the least, we have our Suppliers, you can question about who are your suppliers? What is their profile (size, level of specialization footprint, …)? Who are the top suppliers? Who are they working with? What are they working on? How much did you spend with each supplier? How many projects did they have?
And this data’s primary goal is to help you comprehend the issue and provide you with a more precise, fact-based picture.
What benefits you are getting from your projects and providers?
So now you are aware of who makes financial commitments to a certain consulting business and why they made those decisions.
But you’re still uncertain about whether this was a wise investment. Usually, you want to analyze something along a few different dimensions.
Was the company capable of doing the task? Have they comprehended the issue you were attempting to fix? Have they gotten along with your teams well? The impact and return on investment, last but not least, were they as expected?
Utilize the parameters set out for the spend analysis while adding some details regarding the organization of the consulting firm, particularly the partner or project manager in charge.
Harvest the quick wins of your consulting spend analysis
To begin, you don’t have to initiate a company-wide transformation. You may begin reaping the Quick Gains once you have a clear understanding of your consulting spend and have evaluated the performance of your consulting suppliers. Here 4 simple levers to pick the hanging fruits:
Leverage your data:
With the diagnosis in hand, you can now outline a number of remedial measures that will provide quick outcomes and cost savings.
Play the dice, look for trends, and spot outliers. Is there a function or business unit that spends much more on consulting? Is yes, maybe it would be interesting to meet them and understand why.
You could also discover that certain consulting firms charge two times as much for comparable projects as their competitors or that the same firms charge more in Europe than in North America.
You may define the foundation for bettering your sourcing by having a clear understanding of your project portfolio.
Segments and thresholds can be identified. If you have an internal consulting group, you may talk to them about how your teams interact. Why do your teams cooperate (or not) with them? How do they compare in terms of pricing versus External Providers? Do they work well together?
You are an expert on the demographics and performance of your consulting supplier panel. This panel can be improved by getting rid of the underperformers, adding fresh talent, using supplier diversity, and seeing possible synergies across various groups and business divisions.
Finally, you may focus on the essential factors for your business as you fine-tune your study of consulting spend. This routine evaluation might develop into long-term tracking of your consulting expenses.
Streamline your sourcing strategy:
The project’s scope and objectives must be clear, as well as the team’s ability, in order for a project to succeed, whether it is outsourced or not. The same rules apply to consulting projects.
To increase the likelihood that your project will succeed, you must have a strong RFP that outlines the project’s context, objectives, and deliverables. Be cautious to only express the outcomes you desire, not necessarily how you plan to get them.
Another important aspect is to put your consultants in competition when it is relevant (hint: most of the time). One consulting firm may excel on one project but fail to make the cut for the subsequent assignment. Additionally, you could wish to research fresh concepts or contrast them with different strategies.
Implement Demand Management:
Finally, you need to take control of your expenses, in particular when you have a decentralized procurement process for Consulting Services.
Loud statements of intent are very rarely efficient. You need to have a clearly defined and objective decision-making process to ensure the budget for Consulting is spent on your priorities.
Demand Management will help you balance and strategically align demand with your consulting budget.
When you implement demand management, you keep control of what projects are launched and how much money or value they generate.
It’s a great tool if you’re in the middle of a crisis and you need to cut consulting costs for instance, or if you want to refocus your consulting space on highly strategic projects.
Implementing Make-or-Buy strategy:
To better support the overall plan, most businesses and their procurement function strive to optimize their external spending and supplier pool.
Every time you start a project, you should consider if outsourcing it to consultants would be beneficial and whether doing so would add value over managing the project internally.
Demand management and make or buy decisions are frequently closely connected. As a result, creating a Framework that enables you to make both options at once can help you save some time and effort.
To sum up, today’s podcast, spend analysis is the practice of examining your company’s spending to find areas where you may save costs and improve the impact of your projects. Although, it’s a time-consuming process, it is a great tool to maximize the ROI of your consulting spend!
The most important thing to keep in mind while analyzing your consulting spend is that you need to have the right sets of data organized neatly in order for it to make sense and to be able to identify patterns and trends.
Implementing Demand management, a Make-or-Buy strategy, or even streamlining your supplier panel can make a lot of difference in saving you some extra bucks!
A brief audit of your consulting costs might reveal considerable opportunities for rapid wins and value generation.
Also, the question of how long should you go back to analyze your spend? That will depend on how much you buy every year. Well, to make judgements, you need to have enough data. However, going back more than two years might be challenging.
And I found the perfect quote to conclude from Aaron Levenstein: “Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital.”
And that marks the end of our podcast. So, keep an eye out for me next week when I return with another fascinating topic.
Till then, stay safe and happy sourcing!
If you have other questions on how to build the right organization to source consultants, remember you can always contact me directly on LinkedIn or by email. As you know, I am always game and up for a fruitful chat!
Bye and see you next week! Au revoir!
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