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Advisory Firms: Time for a dose of discipline

January 24, 2011

Recently I was party to yet another tirade about the effect of third-part advisers on the quality and outcome of business relationships. On this occasion, the participants in the conversation came from both Procurement and Sales contracting, yet they were united in their criticism.

“When we see that the client has a weak procurement team and is relying instead on the advisory firm, we generally do not bid,” commented the General Counsel of one major outsourcing and managed services company. “It’s the micro-management that is so destructive’” observed a Chief Procurement Officer. “They really do not seem to understand the importance of a relationship in the performance of a long-term deal.”

The next day, their concerns were echoed in this year’s EquaTerra ‘Legal Pulse’ survey, showing that deals are becoming more complex, more contentious and more frequently making use of third-party law firms.

It is of course easy to make scapegoats in any complex business environment. And in the end, advisory firms are the servant of their client; it is not their fault if the client fails to give proper direction or maintain adequate control. Yet the advisory firm is selling its services based on its supposed expertise – and that means it should be subject to the same disciplines as any other service provider.

So what exactly do advisory firms sell? Of course they say that their experience across multiple deals has resulted in unique insights – and that is certainly true. But insights to what? It would seem often that a key value proposition is that they are better at extracting supplier concessions than the customer’s own staff would be. Those concessions are generally related to price (so they claim to save money) and to the allocation of risk (‘we will cause the supplier greater pain when they fail’). They may also claim to have superior insights to the metrics and scorecards needed to measure and monitor performance – and they highlight how important this is, given the frequency of failure or disappointment (and then of course may offer on-going services to deal with the complexity of the scorecards they advocate).

But do these attributes actually result in better deals? For example, what the advisers do not tell us is precisely what percentage of the opportunities they manage result in superior outcomes. And this, after all, is what the client should be looking for. Achieving lower charges for poor service or higher payouts for failure should not be the goal of their procurement.

So if advisory firms truly are ‘experts’, should they not be guaranteeing the quality of their services by committing to – and being rewarded on – the outcome? Where are the KPIs and scorecards for their activity? If these are the methods required to secure good performance from other suppliers, why do they not also apply to the outsourced advisory services?

There is plenty of data to suggest that most complex services deals fail to live up to expectations. Indeed, it is this that often lies at the heart of the advisers’ and analysts’ marketing. Yet since they now capture such a large slice of the market, might it not be that the levels of failure are in some ways directly related to the nature of the services they provide? Are we in a vicious circle here, where the higher the rate of failure, the more the advisers grow, and the more the advisers grow, the higher the rate of failure?

Third party intermediaries can bring tremendous value to any relationship, so long as their role is clear, its scope is defined, and it is mutually understood by all parties. Of particular importance, however, is that the client is clear about the goals, that the service is monitored and its success is measured and rewarded in a way that is consistent with the desired outcomes of the project or activity. That is the piece that seems to be missing – and as a result, we are in a world where the more the failures, the higher the rewards.

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