30
Mar

Pros And Cons of Different Consulting Fee Models (It is all about the incentives)

It’s basic human nature: people are typically driven to do what rewards them the most.  This could mean giving back to the community or contributing to the betterment of the human race.

For a business to achieve its goals, incenting employees and vendors correctly is critical.  Employees’ and vendors’ goals of success must be in alignment with that of your business’s objectives.  If aligned correctly, your employees and vendors will do what is best for themselves, and in doing so, your company will thrive.

The question is then, how to best align the goals of your vendors with that of your profitability goals? When engaging a consulting firm to help improve your company’s profitability, it is vital to understand what their own business drivers are.

There are many ways for consulting companies to bill their clients:


Fee Type
Profitability Drivers and
Key Incentives
Alignment With Your
Company’s Profit Goals
Predictability Guaranteed 
ROI and Increase 
In
 Profit
    Risk       Service Is A
Profit Center
Fixed Fee Minimize Internal Effort Limited High No Yes No
 Hourly Maximize Billable Hours Limited Medium No Yes No
Success Fee  Client Profitability 100% Low Yes No Yes

Although it can be difficult to forecast what you may pay a company with a success fee model, the trade off is better results. Paying your consultants success fees are the only way to truly align your company’s business objectives with those of your vendors.  Since the time, investment and effort risk is primarily in the hands of the consultant, not many will charge in this manner.  Even fewer companies will only charge clients after the benefit has been realized by their clients.  Many charge based on an estimate of savings upfront.

Optelcon is one of the few consulting companies that charges a success fee after the benefit has been received.  Optelcon takes the risks because we are confident in our ability to deliver added profits.  Your company’s real benifits are:

  • A vendor that is a profit center
  • cashflow positive fee structure (fees are charged only after clients receive benefit)
  • Converts other vendors’ spend directly into increased profits
  • For $3 dollars added to profits only $1 is charged
  • Requires minimal internal effort
  • Increases Productivity
  • Improves Vendor Relationships
  • Requires no systems to implement

If working with a company that provides these benefits is something that interests you, please contact us today for a complimentary review of your IT spend.

 

 

 

 

 

 

23
Jun

How to avoid revenue commitment traps and gain complete control at the negotiating table

A detailed Review of Interval, Attainment and Term Revenue Commitments

After negotiating hundreds of contracts, from dozens of carriers, for clients ranging from global 50 to $50M/year in revenue, I feel I have a unique perspective on this topic.  In my experience, I have found that revenue commitments, are to a large extent, arbitrary.  Although contrary to popular belief, I regularly find that companies who spend $1M/year will get better rates than companies who spends $10M/year with that same vendor. (I will explain why and how to avoid this phenomenon in another post).


Revenue Commitments Are Designed To:
  • Generate predictable revenue streams for carriers
  • Insure that the clients are captive customers
  • Defend current revenues from would be competitors
  • Create significant negotiating advantages at contract renewals
  • Increase margins over time

 

 

  • MARC – Minimum Annual Revenue Commitment
  • Take Or Pay – Either Use A Minimum Amount Or Pay For It Anyway.
  • MMRC – Minimum Monthly Revenue Commitment
  • MAC – Minimum Annual Commitment
  • ARC – Annual Revenue Commitment



The table below demonstrates the one of the most negative aspects of an annual commitment.

Year 1 Year 2 Year 3 Totals
Monthly Spend $100,000 $100,000 $100,000 $300,000
Annual Spend $1,200,000 $1,200,000 $1,200,000 $3,600,000
% Of Annual Commitment 60% 60% 60%  
Annual Committed Spend $720,000 $720,000 $720,000 $2,160,000
Number Of Spend Months Required Each Year To Satisfy Commitment 8 8 8
Number Of Months Remaining Before Auto-Renewal At The End Of The Term     2-3

In this case, the customer has already spent more than the aggregate committed dollar amount by month 21. Since the customer still has the 3rd year commit to satisfy, the customer is stuck for the duration.  During year 3, the customer will still have to give the carrier an additional $720K to satisfy the 3rd year annual commitment.  In effect, the real commitment ends up being $3.12M. ($2.4M for years 1 and 2 + $720k for year 3)  Unfortunately, most of the agreements we see before renegotiating have a 30-60 day auto-renewal clause. By the time your company has satisfied the commitment, there is only 2-3 months left to do anything about it. Since the incumbent knows it can take 4-6 months to move a large data network to another carrier, the customer no longer has any leverage in the form of a credible alternative.  Advantage: (Vendor)


 


 

In this example, the 60% revenue commitments remains the same however, we have removed the annual minimum requirement.

Year 1 Year 2 Year 3 Totals
Monthly Spend $100,000 $100,000 $100,000 $300,000
Annual Spend $1,200,000 $1,200,000 $1,200,000 $3,600,000
Total Committed Spend Over 3 years (60%) $2,160,000
Cumulative Spend $1,200,000 $1,200,000 $1,200,000 $3,600,000
Number Of Spend Months Required To Satisfy Entire Commitment 22 
Number of Months Before Renewal With No Revenue Commitment        14

By taking this approach, the customer satisfies the total $2.1M commitment in month 22 of 36.  This means that the customer no longer has any obligation to the carrier, but the carrier is obligated to keep the current rates and terms in place for the next 14 months.   The customer is in complete control at this point.  Figuratively speaking, the Sword of Damocles is transferred from over the head of the customer to that of the carrier.  Negotiating from a position of complete control enables our clients to get better SLAs, terms and pricing than companies with a less favorable negotiating position.  Advantage: (Customer)

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