When a business decides that they are going to engage the services of a Purchasing Consultant one of the main points that they will need to clarify is how much is it going to cost. It will be fundamental to their initial decision to proceed and then for the basis of the on-going relationship.
There are a number of options available depending on the type of consultant they engage but also important factors that will affect the outcome of this question
First of all let’s consider the potential options on how the consultant presents their fees.
As far as we can ascertain there are five main options available:
We can now look at the first four in a little more detail
Percentage Share of Savings Achieved
The most common starting point within the industry is a 50:50 share of any reductions.
However, some consultants will offer discounts if there are a high number of spend areas or commodities available for review. This might also be on offer for any specific requirement that has a high value.
While it is difficult to budget for this approach it would be wise to use values in excess of 20% to calculate the potential reductions and subsequently the potential charge from the consultant.
It is important to understand what the overall service includes to ensure there are no additional costs to consider. For example, any consultant of any worth is going to require detailed and accurate data. This should be part of the service package and any costs incurred should be at the liability of the consultant.
Understand the potential impact of longer-term agreements, i.e. in excess of 12 months, as the savings and the consultant’s share is likely to be based over the agreement term. Agree on a default position of basing the work on one-year agreements unless otherwise agreed with the consultant.
Supplier commission payment to the Consultant
Initially, this might look extremely attractive, as there are no direct costs to consider but there some points to consider.
Commission values are usually single percentage figures but this is against the total value of the product. On occasions, the values can be in excess of 10% so it is important to have transparency.
From a commercial aspect, you should look to understand the level of the commission being awarded to the consultant and if this is included in the price you are paying to the supplier. It is hard to imagine any supplier giving away their margin to a consultant so also look to confirm pricing should you ever part company with the consultant and continue to use the supplier. You should not be paying for a consultant’s commission if they are no longer contracted by you.
There are also operational considerations you need should consider. Because they are unlikely to have a relationship with them, the consultant will not be able to include your current suppliers in the process. This will mean a change in supplier, which brings more risk.
A day rate
This is could range from £500 to in excess of a £1,000 a day.
There has to be total trust in the consultant to record their time accurately and while the same applies to all the payment options, solid references should be obtained.
Understand what is included such as data collection and if there are going to be any additional costs such as travel and accommodation expenses.
You could limit the assignment to a couple of relatively simple cost areas to gain an understanding of how the consultant operates and the amount of time the work takes them. You then will be able to roughly estimate how long and how much a longer assignment is likely to cost.
While it could extend the term of the assignment you could set a limit to the number of days that can be incurred each month. This will not reduce the overall cost but it will at least allow you to budget for it over a longer period of time.
A Fixed Fee
Similar to some of the other payment options you will need to know what is included and what is going to be extra.
The daily or hourly rate the consultant is looking for together with the scope of the assignment will determine the overall cost.
The consultant is likely to include some additional time within the proposal. It could be useful to understand the amount of time the consultant has allocated to the assignment and then agree on how to handle any additional time that is required. This could prevent the initial proposal from being inflated but you should still budget for an agreed potential extension.
Irrespective of the payment format, an important point for you to clarify is how the consultant is going present their initial recommendations and then how they will quantify the actual savings you are achieving. This is fundamental to the whole assignment and to ensure you obtain value for money.
At NJG Purchasing Services Ltd we believe that there are many basic tips and tricks which can help to reduce your company overheads with almost immediate effect.
We have produced an ebook to guide you through some of the more basic methods which you can implement alongside using NJG Purchasing Services.
As a procurement specialist for more than 30 years, I get the frustrations you face. Growing a business is complex and challenging, but don’t let high costs be your downfall.
No matter what size your business, any inefficiencies you have now will only get bigger as you grow. Getting lean and resourceful as early as possible, will enable you to build an efficient and streamlined business for the future…
We understand how frustrating it is when you know your overheads are high, but you don’t have the resources or expertise to get them down.
That’s why we do it all for you.