Whether you’re seeking help from an external law firm or assisting other business units in selecting professional service suppliers, the secret to maximising value lies in defining your organisation’s exact needs and identifying the most appropriate charging structure.This is an area where the in-house lawyer can add real value to the organisation’s bottom line as these are skills that we need when understanding client needs and drafting a contract that meets them.
Getting the most from external providers
The ongoing trend in delayering (breaking down a process into multiple steps and allocating steps individually to someone who is competent to handle that step - but possibly not the whole process - to improve effectiveness and efficiency) and outsourcing shows no sign of slowing down. Accordingly the offerings of professional service providers are increasingly wide-ranging and complex. This is as true across specific disciplines such as finance, legal and human resources as it is in general management consultancy.
By design then, these firms can become a significant corporate expense for good reason. But they can also easily become a much greater and poor value expense if they are not commissioned and managed well. With this in mind, we’ve provided some tips below that will help you maximise the value you get from professional service providers.
Define the scope and the end requirement
Before engaging any supplier, especially a supplier of professional services (including your law firms) , set out:
- Your budget and the resources, such as internal people’s time and the physical working space you have available for the project;
- A clear and detailed analysis of your requirements. You could split these into must-haves and nice-to-haves;
- An explicit statement of what you want to service provide to deliver at the end of the project; and
- The day-to-day points of contact on both sides of the relationship. If different, identify who at your end will receive and evaluate the final output of the project. This is particularly important with regard to professional services firms, as they have a natural tendency to spread out their points of contact. There’s nothing wrong with this in itself, however, less scrupulous firms may use it as a tactic to overstate the amount of work they do - and overcharge you.
As well as setting out the costs and deliverables in your agreement, be sure to cover too the intellectual property (IP) and database/data analytics rights of any product used or developed in carrying out the work. To make this meaningful, consider whether you’ll use the work again and what its commercial value is to you, as the customer, and the supplier.
Ensure you get the people you need
Naturally, a professional service firm will seek to impress you with case studies and lists of past projects, glowing endorsements from clients and examples of the knowledge, frameworks and tools it has developed.
Be aware of the benefits of sector knowledge and experience but also alert to possible conflicts of interest that may result.
While it’s ideal to have a supplier in possession of such credentials, don’t allow yourself to be blinded by science. The success or failure of your project will depend on the specific individuals involved.
So, before you sign anything, get unambiguous assurances as to the make-up of the service provider’s team, their experience and the amount of time the senior members of the team will devote to the project. It’s all too easy for suppliers to promise senior expertise, and then leave the junior staff to do all the work.
Negotiate the appropriate charging model
The overall price that a professional services supplier charges will be determined by eight key elements. These are:
- The level of service you need;
- Your timescales;
- The skill mix the supplier proposes to provide;
- The use of any tools or third party products, such as software;
- The extent to which they are using you as a pilot client for a new service/learning from you;
- The degree of brand/reputation advantage that they think that they will gain from working with you;
- Whether this is a "door opening" test piece of work that may lead to further work from you; and
- Their travel and subsistence policies.
If you can, consider also the economic drivers of your shortlisted suppliers’ businesses. For example, are they driven by the need to keep their teams occupied, to secure repeat business or to maximise fee rates charged for specialist staff? Perhaps, for publicity purposes, they’ll be motivated by the total value of the contract.
Think too about how large or specialist a service provider is. You may find the smaller, niche supplier more hungry for your custom than bigger firms and, therefore, more willing to deliver added value.
The most basic method for determining an overall price is to multiply an agreed hourly rate for each skill level or activity by the number of applicable hours worked. However, over the past 20 years, we’ve seen considerable innovation in the nature of pricing models. Common options nowadays include:
Time and materials. This puts most of the risk on you, the buyer, as you’ll have to bear the cost of any unexpected events or overruns. For this reason, it’s best to agree to this structure only for pieces of work that are relatively small and tightly scoped and where the outputs are well defined. While all suppliers have standard hourly or daily rates for their work, they’re almost always negotiable if they want to secure a new client or a particular piece of work;
Fixed price. A second approach is to agree upfront a single price for a particular deliverable. This model transfers the balance of the risk onto the supplier. To cover themselves for this, the supplier will typically build in a contingency element as a hedge against unforeseen events. Consequently, the fixed price model may appear, at first sight, higher than a time and materials quote. As the buyer, you’ll get the best value from the fixed price model where your project is complex, your deadlines are tight and where uncertainties exist at the outset. It’s still critical to tie the proposed payment to a well-defined milestone or deliverable. And look out for “bait and switch” approaches in your fixed price quote. Your supplier may submit what appears a very competitive fixed fee, but exclude a large number of items for which it’ll charge extortionate add-on fees; and
Shared risk and reward. The most recent innovation in supplier charging models is the development of the shared risk and reward model. In this approach, the supplier charges a low base fee (typically their costs plus a small margin) and then receives significant bonuses when it reaches agreed targets or milestones. The bonus payments can be based on elements such as:
- Share of cost savings above a baseline target; and
- Share of profits in a new venture.
Suppliers working with early-stage start-up companies have also been known to accept shares or proxy options in lieu of cash payments.
To be effective, a shared risk and reward model needs well-defined success and benefits realisation metrics and an unambiguous payments mechanism. It’s also common to place a cap on the maximum a supplier can earn. Be careful of situations where the incentive structure may create a conflict of interest between the supplier and your firm - e.g. "getting the deal done come what may" is not always the right outcome to incent your M&A advisers on.
- Hybrid. Sometimes, clients and their suppliers agree hybrid approaches to charging models. One example of this is a fixed fee baseline coupled with an increasing percentage payable for increasing benefits.
Evaluate performance regularly
One of the most important elements of any procurement/supplier management process is pre project assessment criteria development followed by regular in project and post-assignment evaluation. The best way to do this will depend on the nature of your supplier relationship.
If the relationship is long term or ongoing, it’s important to feed the conduct and outcome of the work into a regular review cycle. This is particularly important if you’re managing the relationship on a day-to-day basis but the holder is elsewhere in your organisation.
For short contracts or one-off assignments, conduct an internal review and get feedback and learnings from everyone involved with the project. This will help you improve your supplier selection process for the future.
Without creating too much bureaucracy, aim to record your evaluations in a formal structure. If your department, or the wider organisation, has a high turnover of staff, you’ll be helping future managers learn from past experiences.
Similarly, where your relationship with a supplier is long-term, it’s in your interest to encourage them to put in place structured knowledge transfer policies.
Always make sure that you have independent access to the data that you need to assess a supplier's performance. For example if your IT helpdesk is the potential source of a data breach then you might find that they are very reluctant to hand over information that might open them up to a civil suit from you and/or to direct regulatory sanction on them.
Outsourcing is a fact of modern business life and, as such, professional services suppliers offer a complex range of services, skills levels and charging models. Before committing yourself to a service provider, define first exactly what you will need (and what you won’t need) from them. Establish your budget, what the deliverables look like and who in both organisations will be involved. Next, use this information to decide whether the time and materials, fixed price or shared risk and reward charging model will work best for you – or if you should explore the possibility of a hybrid model. Finally, keep your relationship under constant evaluation.