“Give Us More Money” – Handling Professional Services Fee Demands

I was talking to a friend who is (very) close to the professional services market recently, and he told me some horror stories about suppliers demanding huge price increases in response to the inflationary environment. Proposed fee rises of 20% or even more are being proposed. In one case – a pretty unusual situation perhaps – the supplier was looking to more than double their rates!

So how do you respond in that sort of situation?

  1. If you have a contract in place, make sure you understand what that says. A contract that covers professional services input to a long-term project or programme might for example have included some price adjustment clauses. Make sure you know what they say before you get into negotiations!
  2. Remember that the opening proposal from any supplier is often a case of positioning or anchoring, as behavioural psychology guru Daniel Kahneman would put it. If a firm is suggesting a 30% fee increase, they may well be hoping that they end up achieving 10% – which a naive buyer might see as a success for them given the starting point. You might even get in first on the anchoring front and suggest a 10% fee reduction given the difficult economic times your organistion is facing…
  3. Suppliers will also stress the most extreme cost drivers when they justify their proposed increases. Even professional services firms will be moaning about the dramatic increases in energy costs. But that probably represents only a couple of percent of the cost base for most firms in that sector.
  4. Staff costs are of course the biggest single element of the total cost picture for firms in this sector. But inflation here is at least partly self-inflicted. If I was negotiating with PWC right now, I would be saying, “look, you chose to give your staff a 9%+ pay increase, that’s not my problem!”
  5. The other issue I would be introducing into the negotiation is the earnings of partners (or equivalent) in the firms. The proposed increases in reality are all about sustaining the income and the lifestyle of partners who are accustomed to making £700 – 900K a year (the big consulting / audit firms) and well over a million in the magic circle law firms and probably some of the top boutique / strategy consulting firms. That’s what we are paying for as customers.
  6. As in the case of any other spend category, the strength of your negotiation position depends on your options and alternatives. If you are in a position where “our CEO will only work with McKinsey and Linklaters”, then you have a problem. But this might be a suitable time to raise the issue with the CFO, and ask the question – “are we always going to be prepared to pay whatever these firms demand”?  If the answer is “yes” then you will simply get ripped off forever.

I know this isn’t easy – as a CPO I’ve been told politely to f*** off by a big firm consultancy partner when I tried to negotiate rates. “Your MD has already signed this, what makes you think you can change our agreement”?  

But you need to try and resist these inflationary demands. Remember, every extra pound, dollar or euro you give away is a reduction in your own organisation’s shareholder value, or less in the taxpayer’s pocket in the case of the public sector. And it is another step on the way to the next Ferrari, cottage in Tuscany or bottle of Latour 1945 for the professional services partners.

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