Today’s guest post is from Robert A. Rudzki, President of Greybeard Advisors LLC, who has (co-) authored a number of acclaimed business books, including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the supply management best seller Straight to the Bottom Line.
Maybe it is the urgency of the current business environment, but in the past few months we’ve heard about several large procurement consulting projects that did not turn out well. For a recap of some of the classic reasons for potential trouble, see my earlier posting on Consultants: Use Them Intelligently.
Two of the most recent stories that came to our attention involved different firms but a common thread: “success fee” or “risk free” procurement consulting engagements. For those of you who are not familiar with the practice, “success fee” or “risk free” consulting obligates the client to pay to the consulting firm a fairly hefty percentage of the “savings” generated during the project. Often, 30 to 40% of the first year’s benefits are due as payment. These arrangements are also sometimes known as “shared savings” engagements.
Beyond the large total cost of this option (often 3 to 4 times more expensive than the classic professional time and expenses approach), major challenges/drawbacks of a success fee approach include:
- Potential misalignment of interests between client and consulting firm (the client often wants not just negotiated cost reduction, but implemented results — along with fundamental transformation and capability building; consulting firms in a pure success fee or “risk-free” arrangement are incented to drive quickly for negotiated savings, and then depart for their next client.)
- Administrative and practical complexities of agreeing on savings calculations, and the potential of disputes regarding payments due.
- Unpredictable, and potentially unproductive, behaviours from client employees if the existence of the shared savings arrangement becomes known.
When a client asks us whether we would entertain doing sourcing advisory work on a success basis, we take the opportunity to have a full disclosure conversation on the subject. For example, at a minimum, Greybeard presents the detailed pros and cons, including estimated total costs for the project scope, for three options: professional time and expenses, success fee, and a hybrid of the other two. That information is the catalyst for a meaningful conversation. And, it enables the client firm to make an informed decision that is in its best interests, not the consulting firm’s best interests.
Thanks, Bob!