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Advice on hiring the right IT consulting firm and getting what you pay for.
Bob Violino, CFO IT
June 22, 2005
While it's often asserted that these are quiet times in technology, don't tell that to your CIO. Particularly at larger companies, the list of initiatives is as long as it is complex. Projects can range from overhauling IT infrastructures to bolstering information security to launching a supply-chain-management strategy.
Any of these efforts could have a significant financial and strategic impact on an organization, and the pressure to deliver is fierce. But with so many internal resources devoted to maintaining the status quo (a study by The Yankee Group last year found that 60 to 70 percent of most IT budgets is devoted to sustaining business as usual), companies often lack the expertise or manpower to plan, launch, and maintain new technology projects.
Enter the IT consultant, with promises of domain expertise, strategic vision, and a can-do attitude — at a price. Demand for consulting services is up as enterprises seek help with IT strategy and business transformation, corporate compliance and risk management, E-commerce, security, new outsourcing/offshoring options, utility computing, and more. There are hundreds, if not thousands, of IT consulting firms — from one-person operations that focus on small projects to midsize boutique firms with expertise in a specific technology to huge global entities that pledge to transform your business.
Fees vary widely, but Forrester Research cites the following average hourly billing rates for U.S.-based IT consultants: partners, $300; senior managers, $250; senior consultants, $175; junior consultants, $150; and analysts/developers, $100. Based on those figures and the estimated amount of effort each type of consultant would expend on an engagement, Forrester calculated a "blended" rate of $155 per hour. That means that a 26-week project involving 10 consultants would cost a company about $1.6 million.
Despite the high price tag, consulting engagements don't always result in successful deliverables, and it is incumbent upon buyers to both shop wisely and manage the arrangement carefully. In talking to finance and IT executives, and the consultants themselves, certain themes are hammered home time and again. Some of the advice may sound obvious, but as one consulting industry executive notes, it's surprising how many companies don't do their homework when it comes to choosing, and working with, outside consultants.
When looking for IT consultants — particularly for a large-scale project that could have a huge impact on the business — a company should seek a firm that is not only equipped to handle the task, but is also financially viable and understands the client's business. The term partner is thrown around rather loosely in business circles, but when it comes to this type of engagement, it's important that the consultant — er, partner — is a solid fit on multiple levels.
Blue Cross/Blue Shield Michigan, for example, tapped Hewlett-Packard for a range of consulting and outsourcing services, including help-desk and desktop support, server consolidation, asset management, and other functions. Blue Cross chose HP both because it had plenty of experience in those areas and because it had expertise in the health-care business, says Dave Doney, director of information systems customer support services at Blue Cross.
Doney says Blue Cross also wants to take advantage of the new on-demand services HP is offering for hardware, software, and services, also known as the utility computing model, which enables companies to pay for processing, applications, and consulting as the need arises.
Evaluate Current and Future Needs
Having a broad set of needs certainly helps create a (very) short list of possible candidates, and it is precisely understanding your needs now and down the road that will allow you to pick the best partner. For any consulting relationship to be successful, a company must articulate its immediate and long-term business objectives and expectations, and describe how they relate to a given technology initiative. That exercise will eventually lead to the setting of specific deadlines for every phase of a project.
Not only should you articulate your needs to a prospective consultant, but you should also discuss them with the references that the consultant provides. Spend enough time on the phone with a consultant's previous clients and you can get a good idea of how the engagement really went. Don't just ask for a thumbs-up or thumbs-down, but explore the project as a model for your own. And don't forget to ask about measurable results and how the dollars spent ultimately translated into profits.
Enterprises should identify at the outset how the consulting engagement will ultimately improve their business, says George Pohle, global leader of the IBM Institute for Business Value and a partner with IBM Business Consulting Services. "And put as much quantification on that as possible," Pohle says. "You have to set appropriate levels of expectation as to how value will be derived" from any project.
Speaking of value, IDC analyst Anna Danilenko says the market research firm has "seen a large increase in the number of consulting engagements in which price depends on a shared risk/reward structure." The traditional pricing model of time plus materials has given way to fixed-time/fixed-price arrangements in which consultants pay penalties if projects come in late. Conversely, if projects exceed expectations, the contract may give the consulting firm a slice. The service-level agreement (SLA), long a staple of outsourcing deals, has migrated into many other forms of consulting. That may be good news for clients. Since independent law firms and other experts have long experience in negotiating SLAs, they may be useful in other big-ticket consulting situations.
Once a consultant has been chosen, it's tempting to take a hands-off approach. After all, the firm has most likely been hired because it has done this kind of work before, so why not leave it be? But this invites trouble. The most successful engagements, as even the consulting firms themselves will say, include active project management by senior executives at the client company, and continuous dialogue between the client and the consultants.
In fact, when A.T. Kearney, a unit of Electronic Data Systems that provides a variety of IT and business consulting services, lands a deal, it specifies in its engagement letter what the client's role will be in the relationship, including which people from the company will be involved and what their functions will be. This is not rocket science, admits Ed Mello, COO of the consulting group at Computer Sciences Corp. (CSC). "People have known for 15 years that success depends in large part on having an executive sponsor at a high-enough level," he says, "but it's amazing how often that doesn't happen." By having a senior person at the client company sponsor the project, the client maintains ownership. That connotes both control and responsibility, of course, which may leave open the question of just how accountable the consultant will ultimately be. Those up-front talks are, again, key to making sure that the client is not to blame should things fall apart.
Depending on the type of project, the executive sponsor can be the CFO, CIO, vice president of manufacturing or sales, or even the CEO, if it's a big enough initiative. The role of executive sponsor is more than titular: overseeing governance issues and making sure that the consultants are delivering as promised requires a lot of work. Fortunately (for some), the consolidation of the IT consulting industry in recent years has resulted in many former consultants joining end-user companies as internal consultants and project managers. "That has led to better relationships between consulting firms and clients," says Mello. "These people are really knowledgeable about how to work with consulting firms."
Knowledge does not hinge on global reach, of course. When Commercial Metals goes shopping for consultants, it takes a small-is-beautiful view. "We bring in specialists when they have expertise we lack," says Craig Dow, director of corporate IS. "For example, when we moved to a storage-area network, that was a big change for us, so we brought in a team for six months. When we needed help with Sarbanes-Oxley, our CFO acted as the driver in seeking the right partner." Dow says that his firm leans toward smaller, niche consultants not only because they have domain expertise, but because the price is right. "A lot of times when you go with a large firm they'll subcontract it anyway and take an extra 20 percent. That's one reason that I'm not a fan of large-scale strategic engagements that never seem to end."
But what consultants spare you in heavy lifting, they cost you in talking. Frequent communications and strategy sessions between the client and the consulting firm are essential, says Doney of Blue Cross. Managers in different departments of the company have weekly meetings — and sometimes daily communications — with HP consultants to ensure they are doing what's expected.
One phrase that is certain to crop up in those discussions is "business project." That is, it is now commonplace to assert that there is no such thing as an "IT project," that all initiatives, no matter how dependent they may be on microchips, software, network connections, and other technologies, are to be thought of as business projects. In theory, this is more than a matter of semantics. If projects are focused on the business goals of the organization, rather than the implementation of a given technology, they are more likely to be successful.
That is the mind-set at Panasonic Avionics, which is embarking on a major upgrade to its Oracle ERP system. The effort will affect many facets of the business, including sales, demand forecasting, quality control, finance, and regulatory compliance. The company, a subsidiary of Panasonic North America that supplies in-flight entertainment systems, is making the upgrade with consulting help from CSC. Both Panasonic Avionics and CSC say that the project is being driven by a consistent focus on the business gains that will result.
Stressing the Business Angle
"We look at this as a business project with an IT solution," says Doug Penner, vice president and CFO at Panasonic Avionics. He says CSC was chosen in part because of its experience with deriving value from ERP systems. "We received more acceptance in the company when we said this was a business initiative and Oracle was an enabler."
In fact, Penner, who has been involved from the initial assessment right up through much of the nitty-gritty of implementation, stresses the business angle time and again. "There is a high value in having a consulting firm know your business and your processes really well," he says. "If they don't spend at least 80 percent of their time on that, the chances that the IT project will succeed are slim."
For that reason, he adds, a consulting firm with a proven track record is more likely to get future business. "We do have a standard approach in which we solicit bids and estimates from multiple consultants," Penner says, "but if a consultant doesn't swap out key members of the team or run over budget on one project, the next one is really theirs to lose. I can only speculate, but at this point I would say that CSC has a better chance of obtaining new business from us, based on our experiences with this project."
Hiring IT consultants to oversee projects makes a lot of sense for organizations that truly lack technical know-how or raw manpower. But enterprises should look internally to find out if there are people already on the payroll who might be every bit as knowledgeable in certain areas as highly paid consultants. These employees can help shorten a consulting engagement, or at least supplement the hired help.
There are some projects that are better handled internally because they are strategic or proprietary to the organization, and to place them in the hands of outsiders — even trusted consultants — would be perceived as risky. One common grievance regarding consulting engagements is that they never seem to end: once in the door, a consulting firm seems to magically attach itself to one project after another. Before you know it, their children are marrying yours and you find yourself related.
One way to guard against that (the long engagement, if not the marriage) is to insist on fixed timeframes. Mark Egan, CIO of Symantec, typically hires IT consultants for three to six months. "Anything after that, they're probably doing things that our full-time employees should be doing," he says. "They should be working on very distinct tasks with a specific beginning and end date. If it starts to get to the point where someone becomes like furniture, we have to ask ourselves if they are really a consultant or if they are an employee."
Penner of Panasonic Avionics continually evaluates CSC's performance, part of which includes having CSC employees debrief Panasonic IT staff so they can take over the new system once the consultants leave. After all, to paraphrase the old saw about buying and selling a boat, the two happiest days in a client's life may be when he hires a consultant and when he sends him packing.
These are good times in IT consulting, as companies look for help with everything from new technologies to new regulations. "We're seeing a lot of work in Sarbanes-Oxley-driven compliance efforts," says Ed Mello, COO of the consulting group at Computer Sciences Corp. Also hot are data warehousing and data analysis, driven by companies' desires to gain better insights into their customers. That trend is further fueled by RFID (radio frequency identification) technology, which promises to generate vast volumes of data on inventory, sales, and logistics.
Linux and open-source software are other hot areas for consulting. "Some customers are considering replacing the number of software packages they have in place from major vendors, to save on licensing costs," says Mike Rigodanzo, a senior vice president at Hewlett-Packard Co. Technology Services. That can entail a tricky cost-benefit analysis.
Another trend taking hold in the industry is the blending of consulting and outsourcing services, as more companies that launch outsourcing initiatives seek consulting help as part of the deal — and as vendors that once specialized in outsourcing offer high-level IT consulting services, and vice versa. That's true not only for IT-driven projects, but also for a range of business processes, from human resources to finance to various links within the supply chain. — B.V.