The professional services industries in Australia are enormous, employing around 400,000 people. The combined revenue of accountants, lawyers, IT and business process consultants, consulting engineers, management consultants and advertising agencies exceeds $80 billion each year. That, of course, is $80 billion of costs to businesses and governments.
This is an area of frustration for many businesses, concerned about the high cost of purchased professional services, ambivalent about the value they receive, and uncertain about how to get these costs down. Some service providers, particularly the accountants and lawyers, are often deeply embedded in the business because of the essential transactional and statutory services they provide. Others, particularly the management consultants, are less essential but they are adroit at winning the next job and always seem to be hanging around with the meter running.
Here are some suggestions that may enable you to reduce your professional services costs and extract more value from service providers.
- Challenge your management team over outsourcing. Whenever a proposal comes up to engage external resources, your default position should be ‘no’. Your team members must demonstrate clearly and objectively why they can’t address the issue internally and they must cost-justify any proposed decision. What are you paying them for if they can’t do the job without consultants?
- Never outsource strategy. It is tempting to ask clever consultants to develop your strategy, but this is a cardinal error. Over the years I have observed the big-name strategy firms make dreadful errors of judgement, often based on slick but flawed analyses. Cleverness is no substitute for wisdom and knowledge of the business. Consultants can sometimes provide useful planning inputs, or assist with the planning process, but they must never be in the drivers seat. That is your job, and the job of your senior team.
- The default position should be…see you later. Professional services providers argue that an ongoing relationship is important to their ability to understand the business and deliver value. The truth of the matter is that this benefit is usually more than offset by familiarity (which masks their judgement) and higher costs resulting from incrementalism. Regularly changing your sources of professional advice typically leads to freshness of perspective, a more intense commitment to your interests, and lower costs. The new boys and girls try harder.
At the very least, you should be regularly tendering the work so that you know you are getting sharp prices and the best available product.
- It’s about frameworks and tools, not people. Professional service providers typically argue that the quality of their people is the key differentiator in their favour. In the case of high-level strategic advice this is true; elsewhere it is not. In the ‘bread and butter’ areas of accounting and finance, business process improvement, IT and engineering services, most firms have people of similar calibre.
The real differentiator is the uniqueness and strength of the ‘tool kit’ that is used – the frameworks and methodologies that determine how information and ideas are created, analysed, and presented. If the models are hackneyed and commonplace, the advice will normally be the same. Knowing this is helpful as you can make an objective assessment of the intellectual capital of the service provider rather than relying on an inevitably subjective assessment of its people.
- Unbundling makes sense. Here, there is an interesting tension; the professional service firms are, almost universally, trying to attach more products and services to each client via cross selling. It is generally in the interests of the client, however, to go the other way and unbundle. Unbundling will normally result in access to a better product at a lower price.
- In-sourcing also makes sense. When a law firm is paying one of its associates $100,000 and wanting to sell you that person for $350,000 or more (multipliers are commonly between three and four), you have a strong incentive to in-source, provided you can see a sustainable workload of 200 days per year, or more, for the person concerned. The professional services firms themselves are an excellent source of candidates for this; often people who have been working on your account!
- Beware the international spiel. Over the last decade, the professional service firms, especially the larger ones, have made much of the potential of their international connections to add value. Sometimes this is true. Mostly, however, accessing global resources is difficult and expensive. In assessing which provider to engage, you should be looking mainly at their local capability rather than their international pretensions.
You may feel that my suggestions above are a bit hard-edged and calculating – perhaps even a bit cynical. You are right. ‘Hard-edged’ is good. ‘Calculating’ is good. ‘Cynical’ has a place. Success in business in this day and age results from a good mix of imagination and realism. In this case, the imagination to break the mould and look for something different, and the realism of efficiency.
Christopher Tipler is a Melbourne-based management advisor and author of Corpus RIOS – The how and what of business strategy. His web site corpusrios.com contains more material on this and related topics.