So, you are in the market for some Strategic Sourcing Consulting Services, but you don't have a budget set aside? No problem, Contingency Based Strategic Sourcing may be the answer for you. However, when you engage a provider, or evaluate your RFP responses, there are a few things that you need to watch out for.

The Strategic Sourceror's parent, Source One, is a procurement service provider, founded in 1992, that focuses on Strategic Sourcing. The majority of our customers often choose to engage Source One on a contingency basis (so there are no fees for services unless and until savings have been achieved). In this economy, the contingency model has been hot, to say the least. With procurement departments cutting staff and savings targets that are larger than ever, contingency based strategic sourcing consulting services are a model that fits well into just about any business. Over at Spend Matters, Jason predicts an increase in Sourcing and Supply Chain Consulting for 2010. He also points out that the contingency model is doing well, and more and more providers are attempting to move into that space.

What is Contingency Based Strategic Sourcing?
Simply put, contingency based sourcing consultation agreements are contracts with a sourcing consultancy in which the work will be performed exclusively on a gain sharing model. So, the end goal for both the consulting firm and the engaging company is to maximize cost reduction (and in some cases, cost avoidance) while maintaining the same or improving levels of quality of goods or services that are procured. Contingency agreements will typically bill at a percentage of savings dollars resulting in the success of the project for a period of time defined in the contract. Contingency agreements can encapsulate anything from one-off capital expenditures to ongoing indirect spend or even strategic mission-critical direct spend categories.

What to watch out for while sourcing your sourcing providers:

The Bait and Switch
This is one of the most common things we see with contingency based Procurement Service Providers, and is one of the most important things to look into when going through your vendor selection process. Make sure that the firm you engage with can provide backgrounds on the individuals that will actually be working on your projects. Many providers are simply franchises in which anyone with a few thousand bucks in their pocket can buy into, without having any serious qualification criteria. These franchise players have impressive websites, extensive client references and superior sales teams, often consisting of seasoned professionals in exactly the commodity areas that you are looking for help with. The trouble is, the team you meet in the sales process is not the team that will be working on your engagements. They hand the work off to local franchises, outsource the work, or give the work to the most junior resources within their organization, which ultimately ends with mediocre results. The people that you are introduced to in the sales process should also become your contacts throughout the life of your engagement.

Can The Provider Support the Model?
How long has your proposed supplier been proving a contingency model for? If they are reacting to market demand and just recently released the offering, chances are they have not yet perfected it. A contigency based model requires an enormous upfront investment by the service provider, as they are in fact providing their services and resources for free until savings can be achieved. If a provider is not experienced in this type of model, and does not have the financial strength to support it, they would be motivated to assign their lowest cost internal resources to the engagement and close the project as quick as possible in order to see some return on their investment. This of course will lead to mediocre savings for your organization.

Are They Getting Paid on Both Ends?
Find out how your perspective sourcing provider is truely being compensated. Many providers are simply agents or resellers of a variety of suppliers. They will find you cost savings off of your current price, bill you for their work, but also collect a fee from the supplier as a commission or "finder's fee". Sourcing providers that are collecting revenue from both ends inherintely have a conflict of interest that will always push their recommendation for their clients to the maximum revenue potential for their own organization. This is especially true in areas such as telecommunications, where it is relatively easy to be set up as an agent for multiple carriers. Your sourcing provider should work exclusively as your agent, and should be an extension of your procurement team, with only your interests in mind.

Hard Dollar Savings VS. Soft Dollar Savings
Make sure your sourcing services provider is only going to bill you for actual realized hard-dollar savings. Unless you are engaging the sourcing consultant for a true business process evaluation engagement, the language of their contract should not allow for soft-dollar savings, such as the savings that can be obtained through elimination of staff or internal process improvements. The best strategic sourcing services providers will be able to obtain profitable results for their clients without attempting to fight over the soft-dollar savings of process improvements, which inevitably always become a point of contention between a provider and their customer.

Additional Costs
Make sure your contract with a sourcing provider details any and all costs that you will be responsible for the life of the engagement. Read the fine print, many consulting firms have additional fees beyond the percentage that was agreed to in the contract. These providers can turn travel reimbursement fees or technology licensing into profit centers for their engagement with you. The best providers will not have any hidden fees and will not even require the customer to be responsible for travel costs for their analysts.

Anticipated or Estimated Savings
When conducting your RFP or negotiations and contracting with a contingency based procurement services provider, make sure that they have skin in the game to ensure you realize the savings your are anticipating with the project. Many "contingency" contracts require the customer to pay a fee based off of the estimated savings that are delivered in a report towards the end of the project. This is especially true of very large consulting firms and firms that are new or unproven with the contingency model. The results that are delivered in a report often never get 100% implemented and do not account for any changes in your business or demand for the product or service. You should never sign a contingency contract that requires you to pay based on a group of analysts research and paperwork, without seeing the ACTUAL HARD DOLLAR savings implemented. Similarly, be careful if a provider wants to bill you for an average of savings. In this case a provider may track the first two months of savings and then bill you the average amount for the life of the contract. While this works for some static spend categories, it is a poor idea for a category that has season spending or a variety of line items.

Get Help With Implementation
To expand on the point above, make sure that the provider you choose is committed to the success of your engagement by ensuring that they stick with you and help with any implementation that needs to take place at the end of the engagement. In some cases, implementation is simply a matter of signing a new pricing agreement with your incumbent supplier, and only takes a few days. However, in more complicated projects, implementation can require testing, on-site visits, coordination with multiple departments, vendors and business units, and even staff training. Your Procurement Service Provider should be helping your business with each step of the implementation, not just delivering you a report and telling you to do it on your own.

Get Help with Auditing and Compliance
Great, so now you have implemented your new savings program and are on your way to an increased profit margin. But, who is watching that spend category to ensure the results are sustainable? Your contract with your sourcing provider should ensure that they are helping you with ongoing auditing and compliance for as long as you are paying for their services. Many providers start to bill on estimated or average savings after a project has been implemented, yet never ensure that the suppliers are remaining compliant with their contracts or that the customer is doing what they need to do to obtain maximum savings. Things change. New employees, new systems, new internal policies all have a chance of derailing the anticipated results of a sourcing engagement. Not only should your sourcing provider be keeping an eye on things for you, they should also constantly be in the market looking for ways to improve the project they just completed, and hopefully bring even more savings to the table.

In summary, contracting with a contingency based Strategic Sourcing Provider can have a very positive impact on your organization's bottom line without assuming a lot of the risk and costs of a traditional fee-based consulting firm. However, there are many things that you need to watch out for to make sure you get the right firm for your business. Don't be afraid to open dialog with your proposed supplier and offer creative suggestions to your contract, that include tiered incentives, or a hybrid model of fee and contingency. If your provider is unwilling to deviate from their standard contract, look elsewhere to another provider who is looking for a mutually successful engagement.

A final plug: Source One Management Services, LLC has been helping clients with their strategic sourcing and cost reduction needs since 1992. It is not a franchise model and is willing to work on contignency, fee for service, or a hybrid model to ensure the best low-risk, high reward engagements for its customers.
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William Dorn

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  1. Great write up. I used to work for a firm doing strat sourcing work and the first point you make re bait and switch was always the case. The people doing the work were all analysts, fresh out of college. Never the one's selling or presenting the savings, thus the consulting team was never on the same page.

    Really enjoy reading your write-ups as I am somewhat experienced in this industry but always looking for shared knowledge among similar like minded individuals.

    What are your thoughts on how these services are perceived internationally? Europe, Asia, etc.