Life is like a circle, they say: It comes around. In other words, often the person who is on top one year gets his or her comeuppance the next. That is also true for technologies and for the companies that sell and service those technologies.
About 18 months ago, e-business consultancies like Razorfish were about as hot as companies could be. They could choose their clients and got a ton of business without ever having to compete on price. Most other technology consulting firms were doing equally strong business.
Of course, those days are over. Unfortunately, some technical managers don’t seem to have realized that the rules have changed and that the relationship between buyers and sellers of consulting services has pivoted during the current period of economic uncertainty. In this column, I’ll give my views on the consulting landscape and some suggestions for how IT managers should respond.
A look back at the Good Ol’ Days—at least for consultants
Last year, I wrote a column for our IT Consultant Republic offering advice about how to position cost estimates to potential clients. In that column, “Managing client expectations: The difference between sticker shock and Rusher’s Gap,” I explained the theory of Rusher’s Gap. At the time I defined it this way:
Rusher’s Gap is named for the former magazine publisher William Rusher. It’s easiest to explain the concept with an example.
Suppose you want to build an in-ground pool on your property. You call a contractor out, and he submits an estimate of $35,000 for the entire project. You look at the estimate, and you say to yourself, “I’ve been around the block before, and I know how these things work. If he says it’s going to cost $35,000, I know it’s going to cost $50,000.”
Therefore, you budget $50,000 for the project and tell the contractor to go ahead.
When the pool is finished, you get a bill for $62,000.
Rusher’s Gap is the difference between the extra amount you figured it would cost and what it actually did cost. In this case, Rusher’s Gap would be $12,000.
The point I was making to consultants was that when they made a proposal to a prospect and quoted cost X for a project, the prospect wasn’t necessarily blanching at the quoted figure but rather was terrified that the true cost would end up being some number higher than his or her own inflated allocation for the job.
What I left unsaid in that article (because it seemed so obvious that it didn’t need to be said) was that consultants traditionally have a poor track record estimating the actual costs of major technology deployments. Of course, you can argue over the reasons for that: Is it incompetence or greed on the part of the contractor, or is it poorly drafted RFPs (requests for proposals) or scope creep on the part of the client? Whatever the reason, projects rarely seem to hit the estimated costs, and even more rarely was the estimate higher than the actual cost.
For a long time, that seemed like the natural order of things to an IT manager. He or she received a proposal from a consulting firm. Being prudent and experienced, the manager would mentally add a percentage to that cost, knowing that the project would probably go over budget. When the thing was finally done, the technical manager was disappointed to learn that the final cost was even higher than the additional provision he or she had made. That is why Rusher’s Gap was important for consultants to understand when pitching to a prospect.
The science fiction writer Arthur C. Clarke once said, “The future is not only stranger than we imagine. It’s stranger than we can imagine.” Rusher’s Gap tells IT managers, “The project will not only cost more than you imagine, but more than you can imagine.”
The brave new world of technology consulting
In today’s economic climate, Rusher’s Gap works in reverse. The consultant drives to the appointment and thinks, “It’s a shame. Last year, we could have proposed the same scenario and they wouldn’t have blinked at spending $100K. This year, we’ll be lucky to get $80K.” After the meeting, the consultant drives back to office in shock after learning that the client can’t spend a penny more $60,000.
Due to tightening IT budgets and the general economic cloud hanging over many companies, consultancies find themselves fighting for shares of a smaller pie—or at the very least, a pie that is growing much more slowly than it has in the past.
As a purchaser of consulting services, IT managers suddenly find themselves with more leverage than they would have imagined just a few short months ago. A colleague of mine recalls sitting in a meeting a couple of years ago with a security consultant who started the meeting by leaning back in his chair and drawling smugly, “Well, how much security can you afford?”
At least for the time being, the shoe seems to be squarely on the other foot, and you can look across the table at the consultant and ask, “How bad do you want my business?”
So what should you be doing in this environment? How should you change your approach to consultancies? While every organization’s situation is different, here are some general suggestions:
- Don’t be afraid to negotiate: Not everyone likes to negotiate, to attempt to get the best deal. However, that is part of your job—not squandering the company’s assets. Don’t be afraid to simply say, “We’re not going to pay that much,” and see how the consultant responds. Of course, total project price isn’t the only thing you can negotiate. For example, feel free to ask for additional training and documentation for your people. You can also ask for stricter performance penalties so that the consulting firm bears more of the costs for project delays and overruns.
- Trade up: If you’re like most technical managers, there have been occasions in the past when you wanted to work with a particular consultancy but they were either too busy or too expensive. Chances are, both those factors are now more flexible. It might be time to take another look.
- Recheck those references and credit reports: While you’re taking another look, you should reconfirm the references and credit worthiness of your existing consultants. It’s a tough business climate out there right now, and firms that looked rock solid when you first checked them out could be struggling now.
- Demonstrate some loyalty: Most of this column has been about encouraging IT managers to use the temporary leverage that they have with their consultants. That’s part of your job, and it’s important. However, it’s equally important to recognize the efforts of those who have been good partners to you in the past. After all, loyalty is a two-way street. All other things being equal, that should count for something.
No one really knows what the business environment will look like this time next year. Some new technology could take off, and consultants who specialize in that technology could find themselves able to dictate terms and pricing, just as e-business consultancies could do last year. Until that day comes, you’d be foolish not to use the leverage you now have.
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