Why should companies optimize the ROI of their consulting spend?

In this episode, we explain in detail why is it necessary to optimize the ROI of consulting spend creates value for organizations. Companies invest up to 3 % of their revenue in consulting projects but rarely they manage this category.

The lack of management makes it costly. On the other hand, companies could save at least 25 % of what they spend by focusing on optimizing ROI on consulting spend.

This optimization process must start by involving procurement from the early stage of the project. Managing consulting spend from early on can lead to immense value for the company — not in terms of monetary saving alone, but also in terms of synergy, efficiency, and collaboration value. And that answers, why organizations should put the effort into optimizing ROI on consulting spend.

Key Takeaways

  • Consulting spend that is not optimized can turn into a sizeable cost centre, but when companies manage their expenses, they can actually save 20-25%.
  • Companies can achieve cost-saving by working on the right projects, with cost effective consultants, and by negotiating costs.
  • The savings generated by optimizing ROI of consulting spend put cash into the company’s hands and add to EBITDA.
  • Managing consulting spend is also about creating value and impact – every dollar spent on consulting helps create an impact.
  • Money saved can be invested back into the company or can be utilized to advance company strategy.
  • Managing consulting spend also drives efficiency, and collaboration, and ensures better supplier relationships and reduced risk of project failure.

Transcript

Hello, and welcome back to Smart Consulting Sourcing, the only podcast about consulting procurement.

When it comes to optimize the ROI (return on any investment), people often think only in terms of monetary savings. But as far as professional services like consulting are concerned, optimization goes beyond monetary aspects.  This brings us to the question, “Why should companies optimize the ROI of their consulting spend?”

Every business needs some consulting support at various stages of its growth journey. Ironically, it’s often one of the first areas that faces a budget cut when times are tight, but it shouldn’t be! Because Consulting can produce huge benefits and will always have an impact on your bottom line – even if you don’t notice right away or ever really feel its effects at all levels of operations.

Optimize the ROI of Your Consulting Spend to Maximize Your Benefits

From our experience, we have seen that Consulting Spend can exceed millions of dollars for companies.

When companies spend millions on consulting but do not manage it, they leave millions on the table. Here lies the importance of optimizing the ROI of your consulting spend.

This approach will allow you to manage your spending more efficiently by involving procurement at a very early stage of the project. It starts with selecting the right projects and focusing on those that will have the best bang for your bucks.

Managing the expense can translate into SUBSTANTIAL savings, which creates value for your organization in several ways — adds to your EBIDTA, frees up your cash, and allows for cost avoidance.

Moreover, the savings you achieve this way are not one-time; they add up every year. And overall, the value created can be huge.

This leads us to the question – are you managing your spend well? You can ask yourself a few questions to self-diagnose how you manage your consulting spend. We will look at four key areas to assess your current management approaches: scope, panel management, performance management, and sourcing.

Scope of Your Consulting Spends

To start with the basics, the scope of your consulting spends. You need to ask yourself: Do you know the amount your company spends on Consulting every year?

The first step toward improving the management of your Consulting Spend is to be sure you know just how much you are spending, on average, each year.

After knowing the amount that your company is spending, you need to know:

How does the work of your consultants align with your key strategic needs?

What are your needs this year and from year to year?

More importantly, you need to know: What skills do your Consulting Suppliers provide that add value to your business and various projects?

What returns are you getting from all this budget?

Panel Management Questions

Coming to the panel management questions and evaluating their usefulness, ask yourself these key questions.

Do you know how to qualify a supplier for a specific project?

Ideally, you should have a process in mind to evaluate a prospective supplier for each project.

The next question would be, are you using a panel of qualified suppliers? And how easily can you find them?

And by this, you get to know whether you have a ready-made panel of suppliers who you know to be experts in fields you need for your business? And how easily can you find them?

The third and last question in panel management would be, are your usual vendors always available to provide the necessary expertise?

Consider this question carefully. Review past projects and times you needed third-party expertise from your trusted Consulting Providers. How did it go? And that should give you a clear picture.

Performance Management

This brings us to our third dimension, which is performance management.

Once you have the consultants you want doing the work you need, you still need to monitor their performance. Here are some questions to ask regarding the performance management process.

Do you manage the performance of your suppliers? And are you usually satisfied with the ROI of the project?

Ideally, you should be, but the reality is that such performance management may be slack, especially in long-term business relationships.

Once you know this, you want to get into the feedback loop and benchmark the consulting cost with your peers.

And by this, do you provide detailed feedback to your consultants? And discuss input to improve your relationship with your consultants?

Communication works best both ways. A reputable consultant will appreciate honest feedback, whether for good or foul.

Sourcing Process Management

Now coming to the last area concerning your consulting spend, and that is how you manage the sourcing process. To diagnose the effectiveness of your current sourcing process, ask yourself these questions.

Do you have a process for purchasing Consulting Services? And do you have frame contracts set up with your major consulting suppliers?

Having a clear plan in place for how you acquire consultants is imperative to improving your Consulting Spend.

And when discussing the criteria with your internal stakeholders, do you include performance in your criteria of choice?

And last but not the least, do you systematically use Confidentiality Agreements when discussing your needs with consultants?

It’s essential to ensure that your sourcing process includes a confidentiality clause so that your competitors and others will not know what you are doing and why.

Only 7 Percent of Companies Have Best-In-Class Procurement Practices. How About You?

If you have answered most of the questions in the affirmative, you are among the companies with best-in-class procurement practices.

However, only 7 percent of companies fall in that bracket, and there’s a possibility of you being in the group of the remaining 93 percent. And if you belong to the latter group, it’s high time you start optimizing the ROI of your consulting spend  to capture the immense saving potential it brings about.

So, let us tell you about the benefits in detail:

#1) Avoid Your Consulting Spend From Turning Into A Sizable Cost Center

Consulting represents 1.5 to 3 percent of revenues of businesses, which means they spend 3% of what they earn on consulting.

And this spending is added to OPEX. The higher the OPEX, the lower the EBITDA. Considering you can save 25 percent in better managing your consulting spend this translates into 0,75 percent extra to your EBITDA,

Needless to say, this can be enormous, while not managing it makes consulting a burden on OPEX.   Not bad, right? But there is more.

#2) Drive Significant Cost and Cash Benefits

Your efforts at optimizing the ROI of consulting spend can generate sustainable savings. It’s not one-time saving, but year-over-year saving. And this is what we call sustainable saving.

One part of saving is hard dollars, the amount you’re not spending. So how does that saving happen?

When you select the candidates for your project, you look at the best consulting firm. The one that will bring more value, more impact: in other words the best ROI. Then because you organize, when necessary, a bid process, you will be able to lower, on average, the costs of your projects.

Cost saving puts cash into your hands, adding them to your EBITDA. For industries having low profit margins (and hence a small EBITDA), even a small saving on the OPEX side can impact the EBITDA quite positively.

The retail sector is a good case in point where net profit margin varies between less than 5% at the most. When you properly manage your consulting spend, it can give you a saving anywhere between 25% to 30%.  This saving in OPEX can mean a big addition to an already small EBITDA.

Another part of saving happens through cost avoidance.  For instance, in the RFP process, where you are describing your needs in clear terms. This means, you’re purchasing only what you need and aren’t spending on anything that you don’t need.  Or by managing the project from an early stage, you make sure the project is delivering on its promises and adapting to change. This, in turn, will prevent incurring costs in future.

Another example, when you are managing your consulting spend, you have synergies among different departments, have better visibility, and that completely eliminates the risk of spending multiple times on the same service through different departments.

If cost saving helps you improve your EBITDA, the benefit of cost avoidance is somewhat intangible but you will see the improvement over the years.

#3) Utilize Value Creation Lever

Whether you are a saving-driven or impact-driven company, you need to improve. You can either re-invest the money you save or keep it aside. When you invest your money in consulting, and some might say a lot of money, you usually do it to get a competitive advantage or to solve a problem. Anf the move should align with your overall strategy.

But sometimes, it is interesting to launch consulting projects that may not be directly aligned with strategy but have a high return on Investment.

Numerous instances of Lean Sigma operational excellence projects have increased production and resulted in considerable savings.

Let me give you a practical example. Healthcare firms have lately used Lean Sigma to lower costs while improving patient care and safety. Lean Sigma methods were utilized in one research to cut the average hospital stay time by 25%. Over $1 million in annual savings were produced as a result.

Lean Sigma can also be used to streamline administrative procedures and cut waste. For instance, one important financial institution’s lean Sigma project cut the time needed to process customer applications by 70%.

These are just a few instances of how operational excellence and significant cost reductions may be attained via lean Sigma. But you can see the value to launch such a project that will generate quick wins, that you can use to find some more strategic projects.

Hence, managing consulting spend is not about achieving savings but creating value and impact. And you have to be strategic and pragmatic about it.

Every dollar you spend on consulting helps you create an impact — because you have selected the right consultant, you are capturing the correct value, and you are benefiting both as a buyer and user.

Thus, with the same budget as before, you now save a large part of it. You can keep that saving as cash (adding up to your EBITDA) or reinvest it to advance your strategies — both ways, you are either creating value or making an impact.

Should the returns be 5 times, 7 times or 10 times the cost of consulting? This decision is up to you and also depends on how many projects you can handle.

#4) Improve Focus, Efficiency, and Collaboration – the Non-Monetary Benefits

Many people get frustrated either because procurement is too involved and perceived as a bottleneck or because they do not like the choices and the decisions made by procurement. It can be for instance selecting suppliers that business lines do not consider as value for money. When you start to manage the consulting category early, it allows for a collaboration between the procurement and stakeholders.

This collaborative process helps the company reach an equilibrium in a power balance, where the perspectives of both sides are taken into account when selecting suppliers. And that is not easy to reach as a lot depends on the company’s culture and legacy.

This, in turn, leads to better supplier relationship management. As we said in our previous episode, Supplier relationships are rarely managed in consulting.

In the absence of a system of managing consultants through an SRM, the job is done by business lines, but it’s not their job. It’s purely a procurement job.

As a result, the relationship between the company and consultants weakens or, even worse, creates a ground for developing personal relationships — a somewhat subjective matter that can hinder hiring the right consultant.

Moreover, businesses can reduce the risk of project failure by optimizing their consulting ROI.

When you’re managing the project, you are doing everything right from the beginning; you are describing your project needs vividly in your RFP and based on that, you are selecting a consultant with the right expertise.

With detailed scoping, you know what you should pay for and what parts need no spending at all, and all these give you the ground for the best price negotiation. Covering all the sides thus increases the chance of project success.

In Conclusion,

So, to conclude today’s topic, I explained in detail how managing consulting spend creates value for organizations.

Companies invest up to 3 % of their revenue in consulting projects but rarely do they manage this category.

The lack of management makes it costly. On the other hand, companies could save at least 25 % of what they spend by optimizing ROI on consulting spend.

This optimization process must involve procurement from the early stage of the project. Managing consulting spend from early on can lead to immense value for the company — not in terms of monetary saving alone but in terms of synergy, efficiency, and collaboration value.

And now, you can see why you should put your efforts into optimizing the ROI of your consulting spend. And it’s in the best interest of both stakeholders and the procurement.

If you have other questions about 6 Levers of optimizing your Consulting spend , remember you can always contact me directly on LinkedIn or by email because I am always game for a chat!

Stay connected with us through our community on LinkedIn

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Happy Sourcing!

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Helene Laffitte

Hélène Laffitte is the CEO of Consulting Quest, a Global Performance-Driven Consulting Platform. With a blend of experience in Procurement and Consulting, Hélène is passionate about helping Companies create more value through Consulting. To find out more, visit the blog or contact her directly.

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