Tweet

Vendor/consultant fees: Value for money?

Written by: Jon Hansen

Article Overview: IN MY RECENT TRAVELS presenting the Changing Face of Procurement conference series, a number of interesting trends began to emerge based on the feedback from the majority of those in attendance. Beside a growing cynicism in the "reports" that are published by organizations such as Aberdeen or Gartner, the most prevalent belief is that the cost for initiatives such as the recent $24 million spent in just 9 months by the federal government on AT Kearney are largely based on supporting the vendor's (or consultant's) sizeable infrastructure. In short, the costs are not a true reflection of the service, application or results vendors are providing. With a 75 to 85 percent rate of e-procurement initiative failure, it is hard to argue this point.

Vendor/consultant fees: Value for money?

IN MY RECENT TRAVELS presenting the Changing Face of Procurement conference series, a number of interesting trends began to emerge based on the feedback from the majority of those in attendance. Beside a growing cynicism in the "reports" that are published by organizations such as Aberdeen or Gartner, the most prevalent belief is that the cost for initiatives such as the recent $24 million spent in just 9 months by the federal government on AT Kearney are largely based on supporting the vendor's (or consultant's) sizeable infrastructure. In short, the costs are not a true reflection of the service, application or results vendors are providing. With a 75 to 85 percent rate of e-procurement initiative failure, it is hard to argue this point.

As new research material and case studies become available, including the following example provided by a Canadian company, it becomes more obvious that attempting to justify sizeable expenditures spanning several years carries little weight or credibility.

And while this example in and of itself only references the satisfaction of a basic functional requirement, it is the significant chasm between what was actually paid versus what was proposed that is striking.

A simple plan:

A Canadian company approached their current vendor, PeopleSoft, to incorporate a PO tracking and reconciliation program into their existing ERP system. PeopleSoft quoted a starting price of $ 100K. The procurement department simultaneously investigated other options, in this instance a Microsoft program. Through the alternative venue, they acquired a basic template (including access to the code) for $50. With an expenditure of another $5K for customization, the company had a solution that met almost all of their requirements for a fraction of the price PeopleSoft quoted and were operational in a considerably shorter period of time.' As a result one has to wonder about PeopleSoft's "starting" $100K price tag. (As they move into the e-procurement arena, Microsoft's sizeable marketing clout and the likely impact on current cost models are also worth noting.)

One might argue that this example is simply a case of common sense being applied to fulfill a basic requirement, while in comparison an e-procurement transformation - largely a complex and timeconsuming endeavour in which a fundamental change occurs in the way an organization operates - justifies a sizeable price tag. My September 2006 column in Summit magazine provides more information on technology-centric, big project transformation strategies.2

Referencing the government of Canada's 9-month, $24 million expenditure intended to contribute to achieving an estimated savings of $2.5 billion over a 5-year period through the complex endeavour of transforming federal procurement practices, one can see how the above position could be felt to be warranted. Unfortunately the savings target or return was anything but real. This leads to the important question, "What are vendor and consultant fee structures really based upon?" Given the high and increasingly publicized rate of procurement initiative failures, it a question that needs to be answered.

While the discrepancy between the costs of an initiative versus the poor results does not imply a deliberate attempt on the part of vendors to purposely deceive, what it does suggest is that there is a definite corollary between purported savings and the software vendor's own cost (operating) model. Relying on your vendors to calculate the ROI is quite frankly tantamount to asking the fox to take inventory of the hen house. Unless this cycle is ultimately broken (and all indications are pointing to this happening), the high rate of e-procurement initiative failures will persist, and the estimated expected savings will continue to significantly exceed actual savings.

In the example above, the company understood what needed to be done and the savings that could be achieved before soliciting the services of a vendor. This was because the company had faith in the expertise of their procurement department, and in particular their front line purchasing agents. In short, the company did not abdicate their responsibility for establishing the parameters (including projected savings) for a small but important requirement.

Far too often organizations make what many on the front lines of procurement consider an "ivory tower" decision by senior management, who commonly defer to the purported expertise of the chosen vendor or consultant. In my opinion, the federal governments contract with AT Kearney, as well as the preceding IBM program, are perfect examples. Such comments as "I would have done it differently had I been asked" represent the opinion of many front line buyers within the Canadian federal government.

An open and frank dialogue is necessary for a successful and cost effective initiative, something that may be difficult to achieve at this point in time for many organizations. However, and given the alternative, it is a course of action that needs to be taken.

1 Based on a report referenced in a May 2005 Fortune Magazine article, this is a growing trend as software written by companies for their own use grew from 31 percent of total investment in 1998 to 42 percent in 2003.

2 http://www.summitconnects.com/Articles_Columns/PDF_Documents/200609_06.pdf

Related Articles
  How to Compare One Coffee Franchise to Others
  The associated document fees related to a standard UK finance agreement
  The Fee Catalyst
  Communicating With Your Bank
  Setting Coaching Fees So That Everyone Wins

Article Tags: 9 months, aberdeen, changing face, chasm, credibility, cynicism, e procurement, erp system, functional requirement, gartner, microsoft program, prevalent belief, price tag, procurement conference, procurement department, reconciliation program, research material, service application, simple plan, true reflection



Related Forum Posts
Negotiating Fees - I have set prices for my coaching fees, but when someone says to me, "That's too much!", I ask them what they are willing to pay. If it's a reasonable amount or they are in special circumstances, I might negotiate, offer some kind of payment plan, or develop a smaller custom package to meet their needs. I remember that my purpose is more than making money. Sometimes, it pays to be generous and those clients give great testimonies and generate revenue through referring others. However, if they don't see the value of investing in themselves and their business, I may not negotiate at all. I want the kind of client who realizes she is truly investing in future gains for herself and her business. The resulting value is far greater than the fees I charge. I used to be uncomfortable with this process, but I'm not any more. I finally realized the value they receive is worth every penny and more. I'm even considering raising my fees. Every one of us has something great to offer which is invaluable to someone out there. The more you believe in your product or service, the easier it will get.
Re: Anyone Uses Elance.com? Guru.com? Rentacoder.com? - What are the fees associated with the other sites listed? Basically, I would be interested to know what fees are associated for providers or people looking to bid on work. Thanks! Alan
Re: When did your entrepreneurism start? - I started organising parties and charging small fees at the age of 20. In college I was organisng concert to pay for my school fees. Dallas keep on the good work.
Re: The Top 50 Get Out of Debt Blogs To Watch In 2009 - Hi Evan, That is a very impressive list you have there. Some great resources for anyone looking to get out of debt and learn to manage their money wisely. Great discussion about overdrafts. Yes, I would be very worried about your husband's overdraft. I didn't realize you could have an overdraft that big. When my bank account was compromised recently, my account overdrafted twice, which cost me $35 each time. The fees were waived due to the circumstance, but anyone overdrafting on a regular basis would pay a lot in fees alone. I guess it would depend on what kind of account that is set up, but I imagine there is a limit on how much overdraft protection is available. For me, I have overdraft protection up to $200, which means my bank will cover the first $200 that is overdrafted. I'm not sure what would happen after that, but I don't plan on ever finding out. I would suggest not ever overdrafting as it's the same as being in debt, and I would pay it off as quickly as possible.
Going Global - johnburns - Do you have all the "accounting" done for these territories? Meaning, do you have an established price point? Who is going to pay the set-up fees? Who is responsible for the registration fees, etc.? Are you willing to pay for it out of the "cost" of the territory, or increase the cost by those factors?


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

SEO – Link Building Secrets

Selling On Ebay The Good The Bad And The Ugly

Presenting Yourself With Impact at Work

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.