How times have changed for consultants. Once the Don Juans of the IT world, they briefly courted their prospective partners, performed whatever service was required of them, secured their fee, and just as quickly flitted off in search of their next conquest. Now they must be the Faithful Freddies, prepared to step up to the alter and commit to a long-term relationship, for better or for worse, and — heaven forbid — for richer or for poorer. That’s right, poorer. With their clients focusing more and more on business results, such as improved profits or shorter time to market, consultants are finding themselves caught up in a trend that ties their remuneration to the success of the projects they help deliver.
In the old days, information systems projects were defined in terms of building systems that would process transactions. “If you did that you were successful,” says David Seibel, Canadian managing partner for Andersen Consulting. In what Andersen calls value-based consulting contracts, the desired outcomes are defined in terms such as faster delivery times or reduced costs, and consultants are rewarded — or not — based on whether they deliver those results.
“What you’re really focusing on is the outcome, and that’s the difference. The business outcome,” stresses Seibel, “not the business case analysis, not the high-level specifications or even the system design. Typically there’s some outcome you want, more than just automating a bunch of processes.”
“We used to be paid to just come and give advice,” says John Thorp, a partner with the Montreal-based IT consulting firm DMR Group Inc. Today, though, clients increasingly want consulting firms to stay around and help put the advice they give into practice.
In a traditional, non-risk-sharing relationship, the consultant is paid for a recommendation. The idea is that clients are offered a depth of experience they may not have in-house, and perhaps a fresh point of view on the issues at hand. But Tudor Negrea, a partner at PricewaterhouseCoopers and leader of the firm’s Canadian process improvement practice, says recommendations are not the whole story. Much depends on how well the recommendations are implemented, and that can vary considerably from one organization to the next.
“A very significant portion of what clients are looking at right now,” he says, “is a depth of understanding in the processes under consideration and the implementation.” Clients want not just recommendations, but advice on how best to implement those recommendations.
“Organizations want you to be around for the implementation and see the actual action,” Thorp says. He adds that organizations are tired of dealing with many different consultants, and prefer to form stronger relationships with a few. “They’re really looking for two or three strategic partners,” he says.
WHAT’S IN A NAME?
Asking consultants to be around for the long haul does not necessarily imply changing the way they are compensated. However, the idea of forming partnerships between consultants and their clients does fit well with tying consultants’ rewards more closely to the results they deliver.
The concept goes by many names. Some call it risk-sharing, some partnership, some call it value billing or benefit sharing, and government organizations like the phrase “common-purpose procurement”. But all these are essentially different names for the same thing. Boiled down to its simplest form: how much money the consulting firm gets depends on how successful the project turns out to be.
This is not an appropriate arrangement in every case. For example, it is not the best approach when objectivity rather than commitment is most important, and it is not a good idea when some of the work in a consulting project is done for a third party. Generally it works well in many kinds of information technology consulting jobs, and especially those that combine consulting with business-process outsourcing.
Risk-and-reward arrangements work best where there is a business problem to be resolved and the consultant is brought in at the early stages to help determine how to solve the problem, says Seibel, not in cases where the client has already determined what needs to be done and simply needs a consultant to help with implementation.
Whatever the type of engagement, one thing is critical: you can’t have responsibility without control. Consultants cannot be expected to share the risk if they do not have control of the outcome. So the sharing of risk and rewards must be proportionate to the amount of influence each party has over the course of the project. Says Negrea, “The proper name would be risk, benefit and control sharing.”
This is perhaps one of the hardest things to do, and consultants know it. “There is a very high appetite for risk-sharing — in other words, for transferring risk to the consultant — and very little appetite on the part of the beneficiary, both public and private sector, to share the corresponding control,” says Negrea.
DMR’s John Thorp agrees, especially when it comes to the public sector. “They’re great at offloading risk,” he says, “but not always great at sharing the rewards.”
RISK-SHARING ARRANGEMENTS
How you go about sharing risk and reward will depend on the type of work to be done and on both consultant and client. There are many different ways to do it. Negrea offers three examples, saying there are many other variations.
One is the fixed-price contract. This causes the consultant to assume the risk of cost overruns and “scope creep”. It does not directly tie rewards to whether the anticipated benefits are actually realized.
Another approach puts the benefits of a project into a pool for a fixed period, such as a year, and shares them out between consultant and client according to some predetermined formula. Thorp suggests a kind of variation of this in which the consultant takes a percentage of the profit on each transaction conducted through the system the consultant helped to implement. Obviously, this model presupposes a project with financial results that can be measured with a fair amount of precision.
A third model uses a “success fee”, payable to the consultant if the project is successful according to some predefined definition. There may be a basic fee to be paid on completion of the work, and then the success fee is paid later if the set criteria are met. In some cases, there is no basic fee. Seibel says Andersen generally will make its entire fee contingent on delivering the desired results.
In any of these models, Negrea cautions, success needs to be well defined, and the baseline — where things stood when the project began — has to be measured and documented. Then the two parties together should determine, bilaterally and mutually, whether success was achieved. “We’ve got to know where we want to be,” he explains, “and we’ve got to understand precisely where we started from.”
Seibel says success is usually not defined by one variable alone. Generally there will be at least five to 10 different factors to be considered in deciding whether the project has done what it was supposed to do.
One model that should be handled with great care is giving the consultant a share of cost savings, warns Thorp. “That tends to motivate odd behaviour.” When compensation is based mainly on the amount by which costs are reduced, the consultant has a strong incentive to spill blood all over the floor and leave.
In fact, any risk-and-reward-sharing deal should be drawn up with careful consideration as to whether or not it motivates the kind of behaviour you actually want to encourage. It’s an old rule of thumb that you get what you measure, and sometimes that backfires. “If you measure productivity on lines of code,” notes Thorp, “everybody writes more lines of code.”
While defining the right sort of deal is one way of avoiding self-serving behaviour, another is building a real partnership between the consultant and the client. This is vital to any risk-and-reward-sharing contract. Partnership means trust. That may mean having the consulting firm explain to you where and how it makes its money — something businesses don’t generally do for their customers.
It ought to be obvious that trust is essential to this kind of consulting arrangement. For that matter, surely trust is an important element of any consulting deal, but it is even more important when you’re talking about sharing the outcome rather than simply paying a pre-arranged fee for predetermined services. It will not work in every case, but it can make sense in many circumstances, which no doubt accounts for the growing number of risk-and-reward-sharing deals.
Grant Buckler is a veteran freelance writer specializing in information technology and IT management. He lives in Kingston, Ont.