CXO

An insider's guide to consulting firms

Justifying that consultant budget line item starts way before a project launches. Here's some good insight and advice for making the right partner choice, which will make budget justification easier and also spike success with IT projects.


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).
Figure A
Consulting organization comparison
Type of work
Project work These firms generally advertise as specialists in a specific project area (e.g., CRM, supply chain) and manage the full project from analysis of business needs to development, implementation, and training. Project-work firms can be viewed as the primary contractor on a project, responsible for bringing in specific deliverables for the hiring firm. In the case of larger firms, these resources are drawn from their pool of talent or are subcontracted from a staff-augmentation firm or independent consultants.
Staff augmentation These firms generally offer specific resources for a project that has already been analyzed, defined, and budgeted. They often can offer virtually identical resources to those of a large project firm, but individual resources may never have worked together as a team. Staff-augmentation firms generally provide consultants that work closely under the direction of the client. Often, a project-work firm, acting as the primary contractor, will offer subcontract work to a staff-augmentation firm to bring specific resources to the larger project.
Amount of project risk
Fixed bid with contractually defined deliverables Fixed bid projects are desirable because they offer some certainty as to the final cost through completion. In providing this, consulting firms are assuming some business risk.
Time and materials Time-and-materials firms are compensated for each hour worked to complete a project and, therefore, assume little business risk on behalf of the client. This relationship is generally preferred when the client manages the project, when project scope is not yet known, or when specific skills are required (e.g., Oracle DBA) on a limited basis.
Tools brought to the project
Specific industry certifications and/or affiliations Consulting firms that advertise affiliations with specific industry partners, such as Microsoft Preferred Solution Providers, generally incur significant costs to obtain and maintain these affiliations. To the extent that you've decided or your environment dictates that the solutions provided within their affiliate framework meet your needs, the skilled resources available to these firms may increase the reliability and lower the initial cost of the project. If, however, you're indifferent to the implementation, it's important to recognize that by establishing these affiliations, these providers are announcing that their expertise is concentrated in the products provided by these industry partners. This is not altogether bad, but generally you pay a premium for highly trained resources. In this case, if you opt not to use their area of expertise, you may incur a higher cost by utilizing a highly skilled consultant in an area where his skills cannot be used.
Specific
project-level methodologies and/or training
Project-level methodologies are the framework within which the larger firms operate. They represent a particular approach to a solution in which all of their resources are trained and which are utilized across clients. In many cases, such as project management methodologies, their utilization increases the efficiency and teamwork among their resources but also tends to limit effective project participants to those very familiar with their methodology. For projects that are being outsourced on a per-project basis, use of these methodologies may lower overall cost by implementing an approach with which all the players within the firm are familiar and may even have used in another similar implementation for another client. If, however, there is a chance that a project may not be completed on time, the consulting firm may not have access to resources with a needed skill within their firm, or the project will need to be evaluated by an external group unfamiliar with the methodology, then use of these tools may actually slow the project down.
Staffing
Full-time employees vs. staff hired or contractors recruited for a specific opportunity Within some consulting firms, consulting resources are hired on a permanent basis and made available to hiring firms as their consulting engagements expire. In the consulting industry, this is called "the bench." Smaller firms fulfill staff requirements by recruiting and hiring consultants for specific projects. When the project ends, the consultant's employment is terminated. In both cases, the consultant is considered to be a W-2 employee of the firm; hence, it is difficult to determine which method a firm uses without specifically asking the question.

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.

Conclusion
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.

Are you using more, or less, consultants?
With the current economy and a loosening IT job market, have you decreased consultant use? Write and tell us about your current consulting situation.

 

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