Sourcing Advisors: “A Total Waste of Money”?

By Patrick HallerThe decision for an outsourcing client to use an advisor can be daunting, especially if the buyer believes they have “been there – done that” and that they can manage any challenges or complexities they encounter. Advisors are “a total waste of money” for buyers operating in familiar territory, says John Parkinson, SVP Enterprise PMO at Axis Capital, who was also a consultant for twenty years and named as one of the world’s most influential consultants in 2003.

Part of Parkinson’s hesitancy about advisors is that, as he sees it, “They are not very flexible. They are model driven organizations trying to give standard advice, rather than advice that specifically gets the answer,” the buyer needs. However, “If it is your first time, or something new, different or complex, advisors are recommended,” he says.

In addition to complex contract negotiations, an advisor can help sort out the details of other aspects of establishing a presence in a new market such as understanding the labor force and laws, interpreting the tax code, finding a suitable location and gauging the overall cost of doing business. As Parkinson pointed out, a majority of them work from templated materials and boilerplate reports, leaving little room for specialized interpretation or customized feedback.

Do advisors often settle for giving an “average answer” to a client, rather than the best answer?

Delivering the Goods

On the other hand, Bob Randolph, Senior Partner and CFO of Avasant, says, “A sophisticated firm will have a large set of available materials that can kick start the whole process.” Preset documents avoid having to start an RFP, and other baseline procedures, from scratch. An advisor, says Randolph, brings people, processes and intellectual property to the client. Some firms, while using customary instruments, also take a different approach, “We do a tremendous amount of strategy work. We will suggest things that the client hasn’t done, or thought they didn’t need to do.”

This is especially true when negotiating contracts he advises, “These are multi-year deals. It’s not like buying a car where you can sell it a year later. Deals don’t come apart very easily, there is a set period of time where they can get out. And they don’t get certain services as part of deal unless they structure it from the beginning.”

But flexibility costs money, says Parkinson, and many buyers don’t want to spend to get the advice they need. “The trick,” for the advisor, “is to be not too wrong, rather than totally right. Often buyers don’t know what they need and advisors guide them to a safe answer rather than the best answer.” This, he says, is not as bad as dealing with a buyer who knows what they want, but they’re wrong. “Truly objective and focused advice is difficult to get because it is difficult to give.”

Advisors, Parkinson points out, will often settle for giving an average answer to a client. While the counsel won’t be wrong, “it will be the same advice that everyone in the same position is getting.” Parkinson observes that many advisors, like Randolph, try to get away from the template model, but the advisory world is built on leverage economics, and they “rapidly run out of daylight” when they try to grow. “The advisor,” Parkinson assesses, “usually only has a certain inventory to advise about, and they look at what they have and not want they [the client] wants.”

Time is Money

Randolph warns that companies often make the mistake of thinking sourcing deals can be structured as others they have engaged in. And going it alone can be more costly in the end, “Over time it costs money, frustration and missed business opportunities. Using a third party reduces this by a considerable amount. There is expertise that even larger companies are drawing on.” Some advisors will come in after a deal has gone south to assist with remediation and restructuring, “When you get out of alignment it is not a good experience,” said Randolph. Depending on the client’s needs, advisors will also guide clients in such high-level areas as economic development, where to invest and develop, hot real estate markets, and the construction of a data center.

“The best work isn’t always done by the lowest bidder,” says Parkinson. If the advisor brings a track record, good client references and a lot of free knowledge wrapped around what they are doing, they can command a premium price. Fee structures can be fixed fee, but normally an hourly or weekly rate would apply. Hourly rates can vary from $150.00 USD per hour up to $400.00 USD per hour depending on what level of expertise is needed. For large projects that gets translated into a blended rate which varies based on the scope of the project. “Firms are not in this business for $125.00 per hour as it requires senior skilled resources,” says Randolph, “Small firms can find a short term ROI challenging to have a lengthy engagement with an advisor.”

Buyer Beware

Buyers need to make sure that they are engaging a team with a broad set of resources, one that is able to handle the scope of services, and that has a wide range of expertise across the deal structure in areas such as governance, domain, verticals and law. An advisor should review all contracts and pass through services, such as a real estate agent or an attorney, and should be adaptable to market dynamics.

Advisors should also have a well-defined methodology and experience with working with service providers, which enables them to connect the client to the right people. “A lot of clients know a range of providers they think will fit, but this could be an uninformed view,” says Randolph. An advisor can also give a view of the market and the provider landscape. Furthermore, Randolph warns against being an advisors biggest customer as this is a big risk. Also, advisors should not try to do the impossible, which might entail having to inform the client that what they want is not the right thing given a particular market.

Both parties should always have an out clause in the contract. Buyers should also take care to be sure there is indemnification language in case an advisor misrepresents them. This verbiage should protect the client against any possible damage the representative causes either through malice or carelessness. If a client’s interest is misrepresented to the provider, they may not get what they need and/or want. The advisor should also be sure there is indemnification language favoring them, including non-disclosure and protection of intellectual property clauses.

“Everybody can get caught up in the project, particularly if they are working on a global scale. If you look at the success criteria for what worked before they were stamina and luck; could you keep everyone going for as long as it took and nothing really bad happened along the way?” asks Randolph. Perhaps this should be one of the first questions buyers and advisors should be asking themselves, and each other.