Negotiating with consultants – know the pitfalls

Negotiating with consultants

Bill MichelsIn the indirect category of procurement, one of the tricky negotiations is with consultants. In many cases, they are brought in at high levels of the organisation for their specific expertise. Often they have already been awarded the contract and are ready to start the assignment. If this has happened to you, read on.  Bill Michels, CEO and founder of Aripart Consulting in Arizona, USA, provides some tips on improving negotiations with consultants. 

The types of consultants will vary by specialty and market. It is important to understand that not all consultants are strategic. 

There are two main types of consultants, determined by where the power rests. In the first, the power lies with the hiring company and can be tactical in nature; in the second, the consultants often have the power and the negotiations must be more strategic, outlining the principles around the engagement and the relationship.

The larger firms relate fees to the value perception of the customer, rather than a cost-based formula. The consulting firm typically deals with the prospective customer’s senior management and provides several options for solving business issues. Many of these options will be conceptual, leaving the contract details open to be negotiated. The key cost drivers for the consulting firm are margin goals, staff utilisation and opportunity cost, which are presented to the prospective customer as staffing for the project and timeline.

Pricing methods

The decision on pricing methods depends on the nature of the contract and whether a performance element is involved. This can also be tackled on an assignment-by-assignment basis. The options for pricing are to develop a structure not linked to performance; or to link consultant performance to milestones and deliverables.

Options include:

1) Pricing not linked to performance

  • Hourly rates, daily rates, weekly rates, monthly rates
  • Differential rates: partners, seniors, juniors
  • Fixed fees: annual, monthly, weekly, project [turnkey contract]
  • Retainer fees

2) Pricing linked to performance

  • Performance lump sum pricing – the parties agree a charge for work that will achieve a specified target. The service provider works whatever hours are necessary to meet the target.
  • Target pricing – the parties agree a price for performing a task or for meeting a target based upon estimated days at a nominal daily rate. A sliding scale may be applied if the actual days are more or less than estimated days: Fewer days warrant a higher per diem rate and more days warrant a lower per diem rate
  • Performance fee – the partners agree a mix of charges between daily/project rates, retainer fees and a performance fee based on an agreed quantum, linked to specified deliverables.
  • Milestone-based fee – A fixed fee (based on a retainer with milestone payments) and performance payments (based on deliverables is achievable), although the consulting firm may resist this option.

The consultant may offer a performance-only fee since some managers prefer the consultant to have skin in the game, but there is usually a dispute at the end of the assignments about who had the idea, when  the idea was generated, the ideas the company does not want to implement and who ultimately has accountability for either product or supplier failure.

One of my assignments generated over $400,000,000 in savings; if there had been a 30-40% gain share (the typical rate), the client would have been unhappy with the payment even though the value was achieved.

Key negotiation tactics

Staffing the project

The first consideration is to understand who is staffing the project.

The negotiator must dig into the background of each consultant and understand their capabilities, roles, accountability and responsibilities. It is essential at the start of the contract to define what work will be assigned to each level of consultant.

It is also important to negotiate the role of the managing consultant and the time that will be spent on the project.

Beware the ‘bait and switch’… One thing that some larger consultants do is start the project with a top-class team then remove the team and replace it with lower-level people once the project has started. It is essential that the negotiator insists in writing that the players who start the project will remain until the completion of the project.

Pay for performance

The key part of the programme revolves around the project scope, milestones, deliverables and timeline. All of these must be detailed in the Scope of Work (SOW).

The negotiator should develop a series of progress payments and incentives for meeting the project deliverable rather than a time and materials contract. The goal of any successful consulting assignment is one where the deliverables are met and the company succeeds based on the work done. The negotiation is all about achieving value for money and performance.

Caution: resistance to performance payments 

Many consultants are not held accountable for meeting all of the project deliverables and will extend timelines with scope creep as a way of increasing revenue and finding other areas to extend their longevity in the business. Milestone and performance payments keep the consultants efficient and focused on the task and deliverables at hand.

While we focus on fees, it is much more important to quantify the objectives and deliverables at the front-end of any assignment. Unfortunately, the stakeholders are trying to quickly address a business issue and are unlikely to want to dig into the detail. As procurement professionals, it is our job to educate and influence stakeholders to ensure that the service being provided meets the expectations of the company at the agreed fee rates.

Performance payments and a team that remains with the assignment from the start will take you far.

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