Managing Cost and Delivering Savings in Professional Services Agenda • Introductions • Objectives & Background • Building Blocks • Types of Fee Arrangements • Case Studies • Conclusion Speaker Bios Kala Bhatt • Current Head of IP & Legal Controlling for BASF Corporation • Over 20 years of diverse experience in Finance • Received a B.S. in Accounting (Rutgers University) • Active, licensed CPA Fred Paulmann • Founder of The Counsel Management Group, LLC • Served as the Director of Law Firm Management at Pfizer • Previously worked at a NY law firm (Kaye Scholer) • Received his BA from Boston College, JD from New York University, and MBA from New York University Background Emerging Trends in Finance “Data and analytics” represent the top strategic priority for CFOs, according to a recent survey 1 “Cost reduction is a focus of most companies globally (86 percent)”2 but “nearly two-thirds (63 percent) of organizations are failing to meet their goals”2 in this area. Evolving role of Finance: data “black belts”, change agents, fiscal discipline for savings, strong ROI to invest in growth 1 http://engage.kornferry.com/2018-cfo-pulse-survey 2 https://www.mindtools.com/pages/article/newCDV_52.htm Q&A with Kala • How would you describe the focus on cost management at BASF? • What do your colleagues want / need? • What are the challenges? Professional Services • Professional services and external expertise will be critical for future change and growth opportunities • Include accountants, financial advisers, lawyers, advertising professionals, architects, engineers, and consultants, among others • Usually provide skills / expertise that cannot be found, or in short supply in-house – highly specialized and often expensive • However, professional services can be costly and be difficult to forecast depending on the engagement Presentation Objectives 1. Illustrate emerging data modeling techniques for better budgeting & cost savings 2. Increase credibility and success for Finance Managers as trusted advisors for categories of spending historically viewed as an “unpredictable” and “unique art” Case Study: Cautionary Tale Fortune 20 company The company asked Both firms shared: was planning to hire a the firms to provide ◦ Qualifications management consulting information on their firm for a workflow re- expertise, staffing and ◦ Staffing design project. Two hourly rates ◦ Rates consulting firms were asked to bid. Case Study Consulting Firm 1 v. Consulting Firm 2 • Qualitative Comparison – Both firms had the relevant experience and seemed capable – Both firms planned to staff with primarily senior members • Overall, the selection committee felt that both firms could complete high quality work • The primary question came down to cost Case Study Consulting Firm 1 v. Consulting Firm 2: Rack Rates Comparison of Rack Rates $500 $480 $375 $350 $275 $275 PARTNER PROJECT MANAGER SUBJECT MATTER EXPERT Consulting Firm 1 Consulting Firm 2 Case Study Consulting Firm 1 v. Consulting Firm 2: Discounted Rates Comparison of Discounted Rates $456 $425 $319 $333 $261 $234 PARTNER PROJECT MANAGER SUBJECT MATTER EXPERT Consulting Firm 1 (15% Discount) Consulting Firm 2 (5% Discount) Case Study The Company selected Consulting Firm #1 due to lower rates…. However, was this the right choice? • Is comparing rates the best measure of value? • How should rack rates be viewed? • Are larger discounts an indication of a better deal? • How does efficiency (# of hours) factor into the choice? Better decision-making is possible with better analytics Building Blocks Let’s start with some basic building blocks… • Assess value to company • Understand scope • Leverage power of data • Promote right behaviors • Keep measuring #1: Consider Value to Company When engaging a professional service firm, consider how the engagement will benefit the company: – Is this a “bet the company” initiative? – Or is it a more routine project? – Is it aligned with the corporate goals? – How will this initiative help drive revenue or reduce costs? – Will the investment lead to solid return? #2: Understand Scope 90° • Clear definition of expectations: 30° o 4 Bedrooms Chimney 0° o 2 Car Garage o 3 Baths • Details matter!!! – What’s included? Paint? Wood floors? Warranty? – Who’s doing the work? #2: Understand Scope Guestimates in Nothing High Level Budgets Paragraph Form • Request information from the supplier in a format that forces the right level of detail …with …with limited many ability to verify escape cost or track • Consider what scope clauses. progress. assumptions need to be included Evolution of Proposal Details #3: Power of Data • As systems have matured, data is much more available “Structured and unstructured data can be now analyzed for insights and utilized to drive • Rather than relying on decision-making—a capability that decisions made by will need to be maintained as data 2 someone’s “gut”, find ways to continues to proliferate.” leverage the data to enable better 2https://deloitte.wsj.com/cfo/2019/02/03/preparing-for-the-future-of-finance-now/ #3: Power of Data 90° • Where possible, use available data to 30° find “apples to apples” comparisons 0° • Leverage historical data to consider key aspects of the project: – Hourly rates • What’s the cost per square foot? – Cost per key deliverable / phase • How does it compare to similar – Efficiency (how has the firm houses built? performed? On budget? On time? • What’s the duration of the project compared to others? – Industry benchmarks (if available and applicable) #3: Power of Data Example: Law Firm Costs Based on Historical Data Deliverables # of Units Cost per Unit Witness interviews 5 $5,000 Defense expert work-ups 3 $14,000 Depositions to be taken 4 $16,000 Depositions to be defended 8 $19,500 Plaintiff expert depositions to be taken 3 $21,000 Defense expert depositions to be defended 3 $24,8000 Discovery motions 4 $7,500 Summary Judgment Motion(s) 1 $32,000 Case Study: Fixed Fee Arrangements Fixed Fee Engagement A prestigious law firm After the initial year, The firm was represented a Fortune the company wanted requested to provide 100 company on a to move to a fixed fee a fixed fee budget significant case to improve cost for the upcoming certainty year Fees were charged on an hourly basis throughout the year Fixed Fee Engagement The law firm projected the same exact costs as the previous year. $500K $500K The client was perplexed - how could it be the same? – Was the work in year 2 similar to year 1? Larger scope? Similar deliverables? – Any synergies from year 1 to year 2? – Any changes to staffing? 2017 Actual Fees 2018 Proposed Fees Fixed Fee Engagement $500K Leveraging historical data, the client team analyzed the following: – Scope (how were the assumptions different?) – Cost per deliverable / milestone – Staffing (who was doing the work?) – Efficiency (was there any waste?) 2018 Proposed Fees Fixed Fee Engagement The data helped develop a cost model for certain deliverables – which provided the client to provide an apples to apples comparison. Unit Cost: Deposition Taking The client cost model showed the firm charged more for taking Per Unit depositions than similar Average Cost Average firms & similar matters 1 2 3 4 5 6 7 8 9 10 11 Matter Matter Matter Matter Matter Matter Matter Matter Matter Matter Matter Fixed Fee Engagement The analysis help negotiate a provided a more reasonable fixed fee $500K Cost Model Adjustments Staffing Adjustments Admin Slack Adjustments 2018 Proposed Fees 2018 Revised Fees #4: Promote Right Behaviors • When budgeting for professional services, consider how can you promote the right behaviors in the agreement • Some examples of promoting the wrong behavior… – An agreement without a well-defined scope may lead to constant cost overruns and delays – An hourly agreement may promote consultants to bill max hours by focusing on both value & non-value activities – A lean fixed fee may lead to a “bait and switch” from the firm – e.g., change the staffing to more junior associates in order to turn a profit #4: Promote Right Behaviors Examples of how to promote better behavior… • If a project has multiple ambiguous phases, request a fixed for the first phase and then go from there. • Consider rewarding firms with bonuses for hitting key milestones that align with company goals. Some example include: – Reaching # of website hits for a product launch – Conversion of leads to sales – Reducing support costs associated by implementing a new technology • Encourage suppliers to have some “skin in the game” by risking fees until project goals have been met. If met, provide a multiplier of fees #5: Measure (& Keep Measuring) • Identify key measures to judge the firm’s performance – % of issues resolved in a timely manner – % of accurate quarterly forecasts – % of invoices received in a timely fashion • Leverage comparisons against similar professional services firm to verify performance standards • Provide feedback timely and in regular intervals – Schedule annual performance feedback meetings – Discuss both qualitative feedback and quantitative feedback #5: Measure (& Keep Measuring) Scorecards (Used Properly) Can Be An Effective Tool Firm #1 Firm #2 Firm #3 Firm #4 Diversity & Inclusion On Budget Performance (Variance) Timely invoice submission Reliability of Forecast Responsiveness to Requests Case Study: Value-Based, Outcome-Based Fee Arrangements Value-Based, Outcome-Based Arrangement A manufacturing plant This involved The Company need needed to establish negotiations with to determine the permitting