Show me the ROI — the consulting ROI

Ensuring your business gets value from its consulting investment requires careful thought about the terms of engagement. Michael Foreman reports

Lend them your watch and they’ll charge to tell you the time. So goes the old and rather unkind joke about consultants. But whether its earned or not, the consulting profession has developed a bit of reputation for hiding behind fluent management-speak. How can you guarantee, or even measure, your return on investment when you are dealing with nebulous concepts like cross-brand marketing opportunities or potential business upsides?

Lee Boell, consulting director at Fujitsu, says clients should be very clear about the value they expect a consultant to provide before they even begin discussions.

“Clients need to ask themslves why they want the help of a consultant — is it because they want an outside view or is it because they don’t have the staff resources to achieve a particular goal?”

When assessing the value of consulting services, clients should also examine the cost of the consultant not doing the work as much as the potential benefits.

“Clients should ask what would be the effect if we didn’t do this work, or how long would it take us to to do it without the consultant.”

Duncan Millar, business executive at IBM Global Business Services, says the key thing to establish at the outset of any consulting project are measurable objectives. Often these measurables are industry specific — utilities might be looking at the annual cost of servicing customers for example while call centres might be interested in the average time taken to handle a call.

Millar says IBM regards goal-setting as an intrinsic part of the consulting process, and in many industries it can draw on its vast global resources.

“We can break down all the processes in a business and using our industry knowledge we can can assess where a business is in relation to the rest of the industry.”

Alan Sinclair, general manager of consulting and integration at Hewlett-Packard New Zealand, says that in partnership-type contracts it’s quite common for HP to be partly responsible for developing the business case as well as being responsible for the outcomes and deliverables. Like IBM, HP will often apply its global IP and methodologies and, he says, clients usually recognise the broader value and industry insights that the company brings.

According to Matthew Hitch, managing partner of consulting at Deloitte, the objectives you set will differ depending on whether you have engaged a consulting firm for a short term project such as a review or an assessment, or whether you are entering into a longer term partnership.

Naturally the first case is usually simpler, because you are looking at getting a lot of yes/no answers in a short timeframe, whereas a longer term project will involve performance milestones, quality measurements, issues of control, and perhaps some risk sharing.

“It’s ‘give us a view on this’ versus ‘we want you want you to work with us on a problem,’” he says.

Performance based contracts

Boell says Fujitsu has entertained the idea of success fees and performance-based contracts but in reality it doesn’t happen.

“We do spend time talking about that but it goes nowhere, usually because people are not prepared to put the time in to establish the necessary measures.”

Millar at IBM agrees. He says IBM will commit to a price or a timeframe but the company doesn’t work on a contingency-only basis. Clients often suggest performance-related contracts but they tend to go off the idea when they realise the detailed planning such agreements involve.

“Usually those discussions only last until lawyers sit down and try to capture it in a contract,” he says.

Sinclair says HP’s contractual models differ according to the nature of the project but HP will take some financial risk, particularly with the more “holistic” longer term partnerships. Contracts can also be milestone-based with staged payments and some degree of retention based on performance.

Hitch says quite a few organisations ask for fixed price contracts and Deloitte is usually happy to oblige — provided the scope of the project is clearly defined at the outset. If such a project goes pear-shaped then consultants will continue to work on a project until the desired quality outcome is achieved.

“It’s not a case of whether you get paid or not,” says Hitch. “We’ll ‘make good’ in the same way a plumber or a builder would.”

Hitch says taxation consultants sometimes work for a fee based purely on a percentage of the first year’s tax savings, but such deals are very rare in IT.

“The real problem is quantifying, you need to have really good data and a good baseline. You also have to be able to seperate the changes which have resulted from your input and the changes which occurred from variations in the business as usual state.”

Hitch adds that it takes “a huge amount of time” to work out the details of a contingency deal and over-emphasis on the metrics can be a distraction to the successful completion of a project.

“Some people can get very hung up on this,” he says.

Another problem with performance-related contracts in consultancy is that clients are sometimes unwilling or unable to put consultant’s recommendations into effect.

Hitch says Deloitte does a lot of cost reduction work and in theory it would seem simple to agree that if the consultancy firm managed to save say $100 million then it could keep 10%. “But there’s an issue of controls, what happens if they needed to fire people for example. The client may not have the wherewithal to implement our recommendations or they may be politically unacceptable.”

Bait and switch

One commonly heard complaint about consultants (as well as IT vendors) is that they have a habit of putting their brightest and most senior people in front of you at initial presentations but these key staff seem to melt away during the course of the project. One consultant jokingly called this tactic “bait and switch”. Other consultants had heard of the practice but denied it had ever occurred at their organisations.

Hitch says that from the consultancy firm’s point of view, keeping a project team on tap can present big logistical problems.

“We bring a team together for a client proposal but in the six weeks that passes before the client makes up their mind, another client comes along and bags them. We can’t specifically guarantee that a certain consultant will be available but if we don’t supply that person we’ll replace them with someone of equal skill or seniority by agreement with the client.”

Boell at Fujitsu says consulting contracts commonly include named people and in New Zealand’s tight labour market he sympathises with clients who are increasingly keen on “eyeballing” the consultants they will be working with.

“After all, the whole subject of rates and fees becomes pretty small beer if the consultant can’t do the job,” he says.

Consultant-speak 101: consulting terms explained

Binary metrics: Yes/no answers

Specific deliverables: Results

Human resources augmentation: Contract staff

Quality expectations gap: Failed project

Value expectations gap: Rip-off

Gamer: Client who questions consultant’s recommendations

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