Q&A from Procurement of Consulting Services Webinar You can view the replay here Featuring:
- Srini Varadarajan, Procurement Operations Manager at WellPoint Procurement
- Endre Stogard, Category Manager, Ariba
- Kevin Simurda, Manager, Global Spend Management Services, Ariba
Q: Please expand on your suggestion for performance-based fee arrangements? Examples?
Ariba Answer: Though not popular with all consulting firms, we see customers employ performance based fee structures to drive desired incentives. There are a couple of different examples of how companies employ this strategy. One option is to utilize some variation of a profit sharing model; either a share of future revenue or a gain sharing model can be employed. Another alternative is to offer a commission, where the consultant would be compensated similar to internal sales staff. Finally the pay can be performance based, this requires the project and/or tasks to be easily and objectively measured, and targets needs to be defined and agreed upon prior to the start of the engagement.
One example that I think best describes a solid performance based fee schedule was when Ariba was implementing a complex sourcing services program for a diversified manufacturer. We were asked to complete 5 sourcing projects each month for 6 months and each project had anticipated savings tied to it. The faster we were able to complete the projects, the faster our client was able to recognize savings against their bottom line/budget. Our client offered us an incentive that if we are able to complete projects ahead of schedule, and they resulted in savings, that we would receive an additional percentage gain share for the savings they were able to achieve earlier than expected.
Another example occurred when Ariba was implementing an electronic invoicing solution for a high-tech company. They had significant inefficiencies in their current, manual invoicing approval process and estimating that the electronic solution could save them a tremendous amount of time and money when implemented. They offered our team a flat fee incentive based on anticipated savings they would achieve for each week we were able to implement the solution ahead of schedule.
The other side of the performance-based fee arrangement revolves around penalties. Although it's never a pleasant discussion and often has negative tones, if you can tie losses or financial risk to a consulting provider not meeting a key deliverable, it's fair to ask them to stand by their timeline and request either a penalty or perhaps a future credit for them not meeting a critical deadline. I would not recommend requesting a penalty for every deliverable, though. Try to focus on the business critical deliverables or tie penalties/credits to the completion of the overall timeline.