Reducing Spend With a Deft Touch
The right sourcing approach can substantially cut professional services spend, often improving relationships at the same time. All without alienating your business units.
There's a notion in the procurement community that selecting and negotiating with professional service firms – such as law firms, consultants, advertising agencies, and the like – is best left to business units and senior level executives.
The feeling is that the professional services arena is fraught with too many emotional and political landmines, risks to careers, and even to the company -- let the C-Level people choose their own favorite accountant firms and financial advisors.
In addition, many procurement execs feel that it's impossible to source management consultants and creative marketing services the same way you'd select a freight hauler or roofing contractor. This intangible, intellectual work is just not amenable to the same procurement principles and strategies.
We disagree. In fact, in this 'down' economy, it's more critical than ever to find ways to control spend that can easily reach a sizable percentage of a company's costs.
In our day-to-day work, we see more and more companies saving substantial amounts of money on professional services, often while receiving better service from their providers at the same time, with much less risk to the company or the bottom line. Happiness is watching your lawyers bid their rates down by 20%.
What is the Problem, Really?
As it is now, most companies purchase professional services in an ad hoc manner, project by project, usually through the business unit involved, with little or no input from the procurement team in terms of spend analysis and opportunity assessment.
The decision-makers in the business unit either choose a firm they have worked with before, or run a 'beauty contest' that produces some canned presentations and proposals from a short list of bidders.
The executives in the business units are almost entirely focused, understandably, on qualifications and skills, rather than on achieving the best value for the money or leveraging the company's purchasing power to secure improved service.
Worse yet, there can also be a minefield of political and emotional issues involved. Senior-level executives often have long-term personal relationships with their service firms, and are not always receptive to exploring new providers – or subjecting their trusted advisors to a formalized sourcing or review process.
What's more, professional firms are typically called in for high profile, mission-critical and high-risk projects – such as a major product launch, a lawsuit or company reorganization. It all involves high risks to the company and to the executives selecting the provider. (What if we lose the lawsuit, or what if the $8 million product launch fizzles out?)
The hiring executives, again understandably, select the firms that seem to pose the least risk to their personal careers. Oddly enough, this desire to play it safe and avoid failure can lead to close-mindedness and emotional reactions at the very time when coolheaded, factual decision-making is needed the most.
Market Forces Still Apply
Obviously, strategic sourcing in this highly charged environment requires a deft touch and keen empathy for the stakeholders most at risk.
But market forces still rule; professional service firms should be competitively tendered from time to time – especially when they constitute a huge spend in a soft economy.
More strategic sourcing can make for far more rational spend, greater savings, and even more productive relationships with pivotal and must-have services firms. Provided, of course, it's approached in the right way.
Your Roadmap for Sourcing Professional Services
From our experience, there are six best practices that are critical to successfully source professional services.
- Be transparent
- Use e-procurement tools
- Collaborate
- Try performance-based pricing
- Tackle process improvements
- Think locally, act globally
Be Transparent
When sourcing professional services, a rock-solid, transparent and completely fair sourcing process will help offset the relationship-driven, emotional aspects of buying these services. It will also help you assure stakeholders that facts, and not politics, will drive supplier decisions, and that 'pet' firms won't receive preferential treatment over others.
At the same time, guiding the process with procurement tools such as eRFPs and eAuctions will help assure your suppliers that they are competing on a level playing field, and that there will be no 'behind the scenes' negotiating. If existing relationship issues are a concern, use blinded scoring methods to evaluate supplier RFP responses.
Case Study - 1
When sourcing its management consulting services, a French company removed the suppliers' names from all RFP and evaluation documents, which meant that suppliers could only be judged on the quality of their submittals and not on the personal biases of the reviewers. As the company discovered, this led to some surprising revelations about their old favorites and opened their eyes to entrants that they had not considered.
A strong sourcing process helps build confidence in the outcomes and reassures anxious stakeholders that important business risks are being mitigated properly.
Use e-Procurement Tools
For guiding complex purchases, such as professional services, the current generation of eSourcing tools can be immensely helpful. The new web-based technologies provide a powerful framework for gathering objective information on potential providers, and allowing staff to evaluate it all quickly and fairly, and do an extensive total-cost-ownership analysis.
Case Study - 2
A pharmaceutical giant which has an on-line sourcing portal that gives employees a full complement of tools for sourcing and spend management, recently used the portal to source its legal services. The process included a reverse auction that guided law firms through an on-line bidding event, asking law firms about a wide range of service variables, in addition to price. Through the portal, the staff was able to objectively compare offerings and responses in a remarkably short time.
By tapping the full range of tools – supporting everything, from RFPs, auctions, contracting and vendor management, to compliance management -- they not only negotiated the best price, but were also able to make sure that those contracts were strictly adhered to.
The company set up an on-line contract and buying guide repository that provided employees the appropriate buying guidelines and the names of preferred suppliers. These tools, along with spend management solutions helped to simplify the purchasing process and embed clear spend controls. The goal was to increase spend visibility and control to significantly reduce maverick spending on professional services.
Interestingly, the company process was not merely about choosing the lowest bidder; it realized hundreds of millions of dollars of savings through strategic sourcing, and only selected the lowest price bidder in about 20% of its auctions.
Collaborate, Collaborate, Collaborate
Procurement professionals already understand that effective sourcing decisions are best forged in partnership with business units, especially on sensitive projects like deciding on professional services firms, where collaboration and cross-functional teaming can make or break the effort.
Case Study - 3
A major UK bank, which was keen on launching a sourcing project for legal services, recognized that it was critical to first get support from its five operating units. The CPO of the bank embarked on an inhouse summit that included the COO, the top-five business unit heads and their respective in-house legal counsels and purchasing leaders.
The COO presented the business challenge in very clear terms: We either work together to reduce the firm's legal spend by 15 per cent, or we reduce our internal support teams by a similar percentage.
The five business heads asked their procurement department to guide them through a sourcing process.
The procurement team quickly set up workshops with the legal teams to generate ideas and uncover any hidden concerns or issues. It also communicated with stakeholders of the bank, and all the law firms invited to participate in the process. The business teams were involved in all supplier discussions and decisions and met frequently to review progress and help clear a steady stream of organizational change issues.
Naturally, the team was challenged every step of the way by political forces looking to maintain the status quo -- which it was able to overcome by patiently involving stakeholders and building trust in the process.
After five months, the team reduced its legal stable from 50 firms to a panel of just 15 preferred firms, and managed significant fee reduction through better demand management and cross-business knowledge sharing. The bank soon found these preferred legal firms were far more responsive and consistently delivered higher value to the enterprise.
Try Performance-based Pricing
Despite a lot of press coverage for the idea, most companies still haven't adopted performance-based pricing strategies for their professional services; the majority of service contracts still involve fixed price or time-and- expense pricing.
In our opinion, this leaves too much money on the table. Risk-sharing fee structures (also known as contingency- based pricing) provide a strong incentive to professional firms to deliver results and favorable outcomes – rather than mere activity.
The idea is to compensate firms for achieving significant cost savings on a consulting assignment, or for meeting aggressive timelines on a construction project, or to penalize them for poor outcomes, such as insufficient savings or cost overruns. Performancebased pricing can also be used to cap the down-side risk of poor outcomes.
While such risk-sharing can be highly effective, it's important to set the appropriate metrics, targets and payment triggers.
Case Study - 4
A European aerospace firm hired a consulting firm on a contingency basis to lead a multi-year supply chain transformation. During the course of the project, the demand for commercial airplanes increased unexpectedly, which sharply increasing the client's revenues, as well as stock turns and other metrics that artificially boosted the consulting fee, unrelated to anything the firm did. The project was successful, but it resulted in a legal dispute over fees.
Professional Services Pricing Options
Volume Rebates
Best when total spend is large, or when demand fluctuates significantly or is difficult to forecast; leverage spend data management tools to aggregate spend data across all business units and maximize buying power.
Fixed Fees
Suitable for well-defined deliverables with predictable demand, such as registering patents or preparing quarterly tax statements; avoid this when the scope, timelines and other parameters are uncertain.
Cost Plus / Time & Expenses
These are open-ended pricing strategies based on the hourly or daily fees of those performing the service, such as partners, specialists, paralegals and others. Best used when the scope of the project is uncertain or subject to change, such as litigating a complex court case or performing drug trial testing to secure FDA approval. Push hard to cap time and expenses to a small percentage (typically 3 per cent-5 per cent) of total fees – especially if you feel these expenses are being used to invade your company with pesky sales people.
Value-Based Pricing
In this strategy, prices are based on the perceived value to the customer, or to the outcome, rather than on the actual cost of the services provided. For example, legal fees might be tied to the settlement amount or to the measurable ROI of a particular project. Best used when there is a big downside risk or when the up-side benefits are great enough to warrant strong incentives.
Contingent or Performance Based
This is a strategy in which some, or all, of the fees are linked to performance milestones. For example, the architect's fees might be linked to the delivery of a feasibility study, or consulting fees might be tied to the improvement of a metric, such as supplier cost reductions. It is best used on projects that span at least several months and when deliverables can be easily isolated and tracked.
Tackle Process Improvements
In the world of professional services, straightforward process improvements can lead to impressive savings, especially those that better manage the demand, and those that control the spend on individual projects.
Case Study - 5
After a spend analysis, a Fortune 500 consumer products company discovered that a staggering $5 million – or roughly 15% of its promotions budget – was consumed by rush and last-minute change orders, needless rounds of rework, and other expediting charges due to poor project planning and sloppy spend control. The revelations prompted the marketing manager to establish strict process guidelines for all marketing projects and to support them with an automated workflow management tool.
When it comes to buying and managing professional services, process improvements abound, so a little process re- engineering can go a long way. The table below (Table 1) lists common process improvements areas worth exploring.
Source Globally
Each year, more and more firms are partnering with offshore companies to take advantage of skilled talent pools with significant labor cost advantages through business process outsourcing (BPO).
This allows firms to reduce operational costs, access global expertise and free up critical internal resources to focus on core business issues. And BPO is no longer limited to back office or transactional work such as IT support, accounts payable or check processing. World-class firms have outsourced professional services such as legal services, market research and management consulting.
| Reduce project timelines | Look to accelerate each phase and cut out unnecessary work. For example, consulting projects come with costly ‘diagnostic’ or ‘assessment’ phases that can be avoided if the issue or project is already very well defined. |
| Shift to the Internet | Leverage new Internet-based tools and services. For example, when purchasing marketing research, exploit the use of digital media instead of paying for hard copies or physical proofs for promotional material, etc. |
| Avoid duplication and re- work | Create a knowledge management database to capture and share project learning’s widely. For example, build a legal precedents library to reduce demand for future legal opinion work or place the outcomes of a consulting study on a shared drive that can be accessed by all business units. |
| Aggregate requirements and spend | Leverage the buying requirements and spending power of the entire business to secure best deals. For example, get multi- page discounts when buying media space or placing advertising supplements such as Free Standing Inserts (FSI’s) |
| Automate workflows | Accelerate workflows and instill better process discipline by using automated workflow tools or strict process guidelines. For example, e- billings tools can monitor legal invoices and ensure that fees are billed at agreed upon rates. Share these tools with your service providers in order to better integrate them into your business processes as well. |
Table 1: Process Improvements That Drive Savings within Professional Services
Case Study - 6
A dynamic science company off-shored much of its legal services to India and beyond. Outsourcing these activities not only produced dramatic cost savings, but also freed its in-house team to focus more on 'Early Case Assessment' which shifts the focus to resolving the business problem before it reaches the courts.
Professional services outsourcing is evolving quickly. In India alone, there are already more than 50 firms offering offshore legal and marketing BPO services.
And the shift to higher value services continues. Companies start by outsourcing their high-volume transactional work, such as electronic document conversion, document coding and basic document review. Other companies have begun outsourcing higher-value 'judgment-based' work, such as litigation document preparation and insurance claim processing to a separate 'near shore' service provider.
Companies such as GEP now allow firms to progressively outsource discrete business processes in a functional area.
Theme: Procurement
