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Have No Fear, the Consultants Are Here

Hiring outside expertise has long been a perilous exercise, but clients are gaining the upper hand.

How CFOs will and won't use consultants in 2010

Of course, clients also bear some responsibility for engagements that come unglued. One of their main peccadilloes, some experts say, is driving too hard a bargain. “We’ve seen buyers press the consulting firm to discount services so far that they ended up with the ‘B’ team on their projects,” Kennedy’s Schneider says, resulting in “bargain basement” advice.

Clients also suffer for not being well prepared. A “major trap,” says Sutton, is allowing the consultant to define the scope of the engagement. “It’s up to the buyer to know what problems it has to solve. And it should do that by spending more time upfront defining its needs,” she says.

On the bright side, new pricing options may help firms avoid some disappointment with their consulting engagement. Contingent pricing contracts (also known as gain-sharing pricing), in which clients and providers share financially in a project’s outcome, are becoming more common, with an estimated 5% of all engagements using this type of structure, according to Gartner. Its appeal is intuitive: if a consultancy says it can wring $500,000 in cost redundancies from the buyer’s supply chain, for example, the contract can be structured to provide half that amount as a fee to the consultancy, but only if the savings are achieved. “It puts the emphasis on results rather than projects,” says Erick Burchfield, director of research at Kennedy Consulting.

Henderson says he has priced some of his engagements on a contingency basis, both for easily measured projects like cost-reduction initiatives and for more-difficult-to-quantify engagements involving strategy. “We like to make an element of the fee contingent upon meeting specific goals or milestones,” he says. Otherwise, “the contract is structured to hold some of the fee back” until the company can assess its satisfaction with the result.

While the concept puts more of the provider’s skin in the game, it may not be the right move, depending on the nature of the project. Gartner’s Tan notes that it is difficult to measure softer outcomes like productivity gains, an increase in client loyalty, or improved employee morale. “Gain-sharing became quite popular during the recession and is a good thing for cost-reduction engagements, which are quick and easy to measure,” she says. “But measuring revenue as related to client loyalty is very hard, and could lead to a contentious engagement.”

Slice and Dice

For those reasons and others, some CFOs, including Don Lofe at mortgage insurer The PMI Group, tend to avoid contingency-fee arrangements. “We prefer flat-fee arrangements based on the scope of the service and a specific timetable for deliverables,” he says.

That can mean slicing projects into parts, each with a specific deliverable and fee. Some 40% of finance chiefs responding to CFO’s recent survey said they plan to take this approach this year. Peter Iannone, former CFO of software firm Envenergy and now managing director at national accounting provider CBIZ MHM, advises his clients to do the same. “Explain what your problems are and what you need fixed, then insist on discrete milestones or project phases, each one measurable in terms of services and cost,” he says. “An invoice is not the place to control the engagement.”

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