Recently we ran a piece on Hidden Costs in Outsourcing which described many of the costs and overpayments you could be making when outsourcing a function in an effort to reduce costs and increase efficiency, even if the outsourcing contract results in reduced costs and increased efficiency. And while SI believes in win-win agreements, they should be above board with each party only taking its agreed upon share of the pie.

But even if the outsourcer only bills what it agrees to and doesn’t markup rates, charge you for shelfware, pass through unauthorized expenses, or hike the commissions, that doesn’t mean they are delivering all the value they are promised. This happens regularly with “full service” management or technology consulting firms, and the client never knows. But due to his unique position, the doctor knows, and having figured it out, refuses to participate in any project that denies a client organization of the full value they deserve. But this doesn’t prevent it from happening — there’s always someone else who will help the consultancy continue the practice.

What are we talking about?

The simple fact that no single management or technology consultancy, no matter how big, is an expert in every process or system you need, despite what they claim.

And the doctor knows you’re saying, we know this, so we chose the consultancy that makes it a practice to bring in experts when it is weak in an area to get us the information we need when we need it. But do they? Specifically, do they bring in true experts? Do they get the right information? Is it appropriate to your situation?

Some firms do NOT bring in true experts. Why? They have no expertise on staff, and use a model to find experts that is not congruent with what it takes to attract experts. For example, some firms are employing the “network” or “network search” model where they build a “network” of experts they can tap into for help. But this network usually consists of freelancers who self-register and/or who are invited based on automated LinkedIn profile searches. Are these people experts? Some are, but unless they are semi-retired folk looking to keep busy, probably not. Most of the people in these networks are unemployed / self-employed and in need of work. Most experts are too busy to even think about registering on another expert or social network, and will not be there. And experts such as the doctor will not engage with this type of model. The last thing the doctor wants to do is provide an hour of advisory to a Big 6 only to have it turn around, take the information completely out of context, and tell its client to consider vendor X or product Y because the doctor recommended it.

Secondly, some firms do not contract the experts for enough time to get the information they need to truly have an advanced understanding from the market. For example, many of these firms will engage experts for as little as an hour or two and expect to get deep expertise on a market and technology and, at the end of it, understand what vendors to focus on or what technologies to dive into. Then, believing they know where to focus, they will have their interns do research on the specific vendors or technologies and produce deep reports. But interns don’t understand the intricacies that help differentiate similar vendors or similar technologies and can easily fall for marketing hyperbole and overlook deep capability.

Thirdly, as they are not experts, they will not understand the intricacies of your situation, what specifically they should be looking for, and what questions they should be asking the expert, should they actually get one. So whatever they do will be of limited value from the get go.

If a company is engaging a consulting firm for help, the amount situation-specific consulting needed from an expert is significantly more than a few hours. And if all your management consultancy is doing is engaging the expert for as few hours as they think they can get away with, and then assigning a junior consultant to go and do the market research, you’re not getting the value you deserve.

A strategy used by many Sourcing and Procurement organizations to get quick wins is to outsource tactical Procurement operations and/or Category Management to BPOs or expert (niche) consultancies. This can be very successful if the BPO is reasonably efficient in processing compared to the organization or if the expert (niche) consultancy has considerable expertise and can quickly find a lot of savings the organization never could. But that doesn’t mean that you are getting the best value. These organizations are trying to maximize their profit, and if you’re happy with the value you are getting, why should they try to optimize their costs?

Before we continue, let me be specific here — we are NOT attacking the hourly rate for their (top) talent. Good category managers are worth their weight in platinum, and you should expect to pay top dollar for them. But you should also receive top value in exchange, not mid-level value and definitely not mediocre value. But that’s what you could be getting if you are not evaluating these services as closely as you would be evaluating your strategic direct material buys.

And, before we continue, let’s make it clear that while we are focussed on Supply Management, these hidden costs could be found in any outsourcing arrangement — marketing support, legal support, engineering support, etc. So what are the hidden costs?

• Rate Markup this can take many forms, including A rates for B staff or onshore rates for offshore staff; you could be paying 200/hour for the expert, but a relatively inexperienced mentee could be doing most of the work, or you could be told you are being supported on-shore when really 90% of the work is being offshored to low-cost locales in Eastern Europe
• Temporary Labour if the provider falls behind, they might hire temporary labour and bill you for it; this is okay if you ask them to, but if they do it without your permission for a fixed-cost task, this is definitely NOT ok
• Shelfware/Bloatware where you are being billed for software not being used or you are being billed for a suite license when the organization is only using one module
• Pass-through Expenses some organizations will try to pass through any and all expenses they think they can, even if they require explicit pre-approval or the contract says they are the responsibility of the outsourced company
• (Hiked) Commissions some organizations will charge-back a percentage of savings, a value fee for a successful value-add negotiation, a percentage of a recovery, etc. this is usually okay as this is usually part of an agreement, but there are usually restrictions — minimum value, maximum percentage, and so on; sometimes an organization will charge commissions beyond what they are allowed to
• Taxes some organizations will charge taxes based on their locale, taxes you may not be technically required to pay — double check the tax lines carefully

And these common overcharges could be just the tip of the iceberg. So be sure to be as cognizant about sourcing your services relationship as you are about sourcing your strategic products and services.