When budget time rolls around, CIOs know that once again, they’ll be called upon to defend that line item tagged “professional services.” All CIOs know the value of consultants, but when we study the numbers at the enterprise level, we have to admit the figures seem very large for what, at the project level, often should be a short-term, nonrecurring expense.
The question is, do you really need all the consultants you use? If you do, is your company getting the value from them that it should? What rate will offer the best resources at the lowest cost while ensuring that your partner (the consulting firm) achieves a reasonable, but not usurious, rate of return?
In this article, I'll talk about how you should justify your consulting hires, the different types of consulting firms and what needs they fulfill.
The justification process
In most organizations, there’s a process in place to justify consultants, and most IT leaders do adhere to it. If your firm doesn’t have an enterprisewide process for this, however, then creating one is the place to start.
The process of justifying a consultant should be structured much like the hiring process for a new employee. The right candidate, consultant, or employee will have a specific job to perform, corporate standards to maintain, policies to abide by, etc. Make sure to complete a written job description, performance standards, and a clear organization structure, as well. Be aware that any shortcuts during this process will likely result in unnecessary, and unqualified, consultants being hired on.
If your justification process is already in place, you'll first want to determine whether hiring a consultant is a better choice for your purposes than hiring a full-time staffer. Most often, obviously, if the work is project-based, you'll need a consultant; if it's a permanent need, you should hire an employee.
If, after you go through the justification process, you find you do need the consultants, then you should ask yourself whether your company is getting the full value from them. To determine if your consultant partner is truly fulfilling your needs, you'll need to have a greater understanding of the different types of consulting firms and how they work. This knowledge will make it much easier to look at consulting firms with a discerning eye to determine their value to you and how that translates into a rate structure that benefits you both.
Types of consulting firms
IT consulting firms can be categorized by size, type of work, amount of project risk assumed, amount of industry knowledge brought to a project, and their respective staffing setup.
Size and organization
Consulting firms range from large, project-oriented shops, such as the Big 5 firms (Accenture, PWC Consulting, Deloitte Consulting, Cap Gemini Ernst & Young, KPMG), to national and international firms offering both project and staff-augmentation work (IBM Global Services, Computer Sciences Corp, Hewitt Associates, Stopka & Associates) to “boutique” shops targeting a specific local area and/or industry combination to independent consultants.
Depending on an organization's needs, each type of firm offers a unique value proposition, so knowing your specific project requirements before beginning your search is a must.
Project-work firms vs. staff-augmentation firms
Consulting firms can also be differentiated by project approach: Some do project work, and some concentrate on staff augmentation (see Figure A).
Project-work firms are brought in early and are responsible for staffing, development of a project plan and execution, and delivering an agreed-upon set of deliverables. Staff-augmentation firms, however, are responsible for obtaining resources with specific skills to execute the project plan. When project-work teams are brought in, the management effort on the client side is much less than when staff augmentation is used, as the individual specialists hired by staff augmentation likely require more direction and management.
The extra crew an augmentation firm brings onto a project could consist of full-time employees of the consulting firm (known in the industry as a "bench") but more than likely is made up of specialists hired only for that specific project. Staff-augmentation services normally don’t have a bench, and in the rare cases when they do, it is often limited to highly skilled professionals such as J2EE programmers or security experts.
Time-and-materials vs. fixed-bid firms
Another big difference between firms is whether they are primarily time-and-materials based or fixed-bid based (see Figure A). As the labels imply, fixed-bid firms quote an implementation based on a set “not to exceed” price. Time-and-materials firms supply resources under the direction of client managers and are compensated not by what has been completed but on time spent.
Time-and-materials firms supply resources based on time and materials required. While they may provide a “not to exceed” quote, the client is billed by the hour, plus expenses. If a consultant is extremely efficient or the scope of the project is less than originally envisioned, the cost to the client will likely be less than expected. But if difficulties arise or the scope changes, the project very likely will cost more than expected. This type of firm is a good choice when the consulting resources work under close client supervision, the scope of a project is ambiguous, or whenever close monitoring of milestones is required.
While fixed bids are easier to manage from a budget standpoint, firms generally determine that bid by calculating internal costs on a time-and-materials basis and then adding on some number to account for any unexpected expenses or problems. Of course, the less uncertainty they anticipate, the closer the final bid will be to the actual project cost.
Firms that price on a fixed-bid basis assume some business risk, but that risk is related to performance and not scope. So, on projects with no scope changes—where requirements are absolute and clearly specified—the project must be delivered for the fixed bid amount. But because few projects fall into this category, there are normally add-on costs associated with fixed-bid contracts.
To effectively manage the consulting budget line item, CIOs need to be familiar with the type of firm supplying the resource and match them with the specific requirements of the project to gain the greatest value proposition.
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