Financial Services II: Consulting Services Procurement Profile
Monadnock Research (V2, N37) - 10 July 2009
Monadnock Research (MR) recently interviewed the Vice President of Global Strategic Sourcing at one of the largest providers of financial services globally, where we discussed their consulting services sourcing and procurement practices. Based in the US, this individual has responsibility for global spending on consulting services, and also has "vertical" responsibility for the category globally.
This client organization White Paper summary provides the company's perspective on current consulting trends; analysis of competitive bids; consulting category management; contracting strategies and getting more value from engagements; demand management; vendor rationalization; firm performance management; consulting spend analysis and analytics; common errors made by sourcing professionals; procurement challenges; reigning-in maverick spend; changes in the way firms market services; procurement group structure; and internal consulting organizations. Internal Consulting Organization The organization has strong views about maintaining its intellectual property as proprietary. As a result, it has developed significant internal capabilities in the areas of strategy and business process consulting. Internal consulting groups can be hired by individual business groups to support any range of needs. Many of the individuals that work in these groups are former consultants from firms like McKinsey and Boston Consulting Group. They also hire MBA students right out of top business schools like Harvard. Senior management believes that the intellectual capital that exists and is created by the organization should remain within it, and has a bias toward using internal consultants. There is a charge-back scheme to allocate expenses associated with internal consulting resources to the groups utilizing their resources. In the last year, however, the senior management recognized the need for significant transformational change. A reorganization resulted and there have been significant changes in senior leadership. More external consultants were engaged in the areas of strategy and operations management than was customary to obtain an independent objective assessment of the company, and to determine how each of the businesses and functions compared to industry expense benchmarks. An analysis was done to identify areas of opportunity and put improvement initiatives in place to drive immediate transformational change that better align expenses with those of competitors. One of the many findings of the expense benchmarking study was that IT expenditures were significantly higher than those of industry peers. As a result, initiatives were launched to better align expenses in this area. To capitalize on key opportunities top tier strategy firms were engaged to help drive a number of cost reduction initiatives. Significant value was realized as a result of the work of those firms, especially in viewing opportunities from a total cost of ownership perspective. They are now using their internal consulting groups to capitalize on the opportunities that were identified by the external consultants. One challenge they have experienced with their internal consulting group is that, at times, it is encumbered by the organization's extensive managerial hierarchy and the communication and approval layers that come with it. Also, as an internal organization it does not "have a hand on the industry's pulse" to understand what is happening real-time outside of their company and bring that back to internal clients. Analysis of Competitive Bids The organization performs an analysis of each firm's response to RFPs. It benchmarks the average cost per resource, including travel and related expenses, and evaluates the return on investment for each project. The company normally considers the total value that a firm brings to the table. When appropriate and feasible, they try to look at return on investment (ROI) in terms of the cost and benefit associated with every project. But it is difficult to perform an ROI analysis with many strategy or business process projects. When sourcing engagements are conducted, the company assess whether firms deliver against cost reduction or avoidance targets, utilizing its existing savings approval methodology. This tends to be more quantifiable than projects associated with many other functional areas. Costing models for services range from fixed fee to contingency based arrangements, where identified returns offset professional fees. The organization likes contingency-based arrangements because they self-fund efforts. Although they used this approach for few projects. When they use a contingency compensation structure, the fee is paid based on milestone achievement. Payments are released to firms when they deliver tangible results that comply with an agreed-upon set of criteria. But there are natural challenges with these arrangements in defining impacts and outcomes in advance, and understanding how to track and recognize accordingly. The reality of managing contingency fee arrangements is complex and certain types of engagements are not a good fit.
The company looks for a 10:1 return on investment when evaluating consulting project proposals.
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