Professional Services Lessons From Sourcing Pros

          Advice From the Other Side of the Negotiating Table

                                                Part Two

I recently sat in on an all-day meeting with a dozen or so sourcing executives.  The entire day was spent discussing the acquisition of professional services.  There were a number of interesting insights that surfaced throughout the day.  Here are the second group of highlights I noted:

• Some executives whose companies utilize extensive amounts of contracted legal assistance, recommended placing lawyers on risk sharing or outcome based arrangements.  The typical deal they discussed involves the payout of bonuses when matters are resolved ahead of schedule and under favorable terms.
• Training projects are still wide open from a sourcing perspective. Practices for how this work should be negotiated, priced, etc. are far from standardized.
• The executives in attendance recommended that IT project management activities should be done by the client not an integrator or a specialist integrator. The issue involved is that a client would offer a more critical review of progress and press the integrator to stick to the contract and not find countless ways to expand the scope of work.
• The more commodity-like the services and the longer the project's duration, then the lower the target margin for the service work should be. Outsourcers and package installers should not expect nor receive the same margins that a short-term graphics artist gets for a 1-week gig.
• No consistent definition exists for professional services or consulting. Sourcing executives find it tough to apply a single set of practices that apply to the full breadth of services that companies procure.
• When service firms use delivery personnel that are different from the sales team, clients are warier than ever. They don't believe that sales pros know how to correctly estimate service work or are afraid that sales pros will intentionally under-scope the work just to get a nice commission.
• Several execs indicated that the fear of outsourcing is dissipating somewhat in their firms. It still is a touchy subject and one that must be handled carefully. One of the more interesting comments was that employees 'no longer think of travel or benefits processing as outsourcing. They (employees) just see it as a service now'. This may be true for non-core functions but it takes time for the thought process to change.
• SG&A costs of service providers are considered too high. This point was especially sensitive with sourcing executives who feel their firms are being invaded by service sales teams.
• Service firms should expect clients will pare back projects if the economy degrades further. Clients will go for shorter duration or fewer projects.
• Lastly, these executives have a new math equation they'll try out on service firms. They want to know how many clients you have so that they can calculate your revenue/client. The greater this number, then the lower margin they believe you should receive.

If you'd like more information on any of these comments, fire me off a comment or an email.

Comments

[tony]

Great insights!

I would add that most companies fail to use outside services firms in an appropriate way. For example, many companies use vendors to staff not just IT project management positions, but also the business process reengineering projects, strategic sourcing projects, etc. The firms used in these cases are the typical cast of Big 4 characters (KPMG, Deloitte, Accenture...). These firms will bill a combination of partner, director and manager resources, frequently moving the average cost of managing the project to $325-$375/hour. That's shocking. Even in the contract labor area, IT teams routinely use contract PMs that lack the understanding of the client, the interfacing systems, and the business challenges. Rates for these resources are very expensive - up to $120/hour. Since projects are typically 6-12 months long and there are projects every year, why not hire PMs? Vendor management teams need to do the analysis and tackle the problem from a human capital perspective, not from a contract negotiation perspective.

Also, I completely agree with the overuse of "outsourcing" to describe a commoditized service. Because of the "fear" of outsourcing, it's a rhetorical tool used by people who do not agree with the "make vs. buy" decision. Good examples are a wide variety of HR-related services, such as payroll, leave of absence management, and benefits. Commercial print, media agencies, and legal services also frequently categorized as "outsourcing", which they are not.

Lastly, sourcing executives need to focus more keenly on consultant and contractor utilization and realization metrics that their firms use to track their own financial performance. High utilization of resources should reduce bill rates...and, as you've mentioned, reduce the ridiculously high SG&A these firms have.

Tony
http://360vendormanagement.com