All That Matters

Outside Consultants
and a Results-Based Model

in association with:
Contents
Survey Focus and Methodology.......................................................................... 2

Key Findings................................................................................................................ 3

Results-Based Versus Efforts-Based Consulting..........................................4

The Learning Curve................................................................................................. 10

The Challenges of Consulting Relationships...................................................11

Building Stronger Relationships Through Outcome-Based Contracts...13

Organized for Success............................................................................................14

Where Are Companies Most Likely to Use Consultants?..........................15

What Contracts Are Most Effective?................................................................17

The Innovation Correlation....................................................................................19

Conclusion...................................................................................................................21
 Overview
It is an understatement to say that many companies are relying increasingly on outside consul-
tants to cut costs, improve efficiency and achieve greater results. Most of these companies still
rely on traditional agreements that pay such outside vendors on an hourly or monthly basis. Yet a
results-based model that works off a set fee is far more effective and spurs innovation, and many
companies are making the move to this approach or will be.

SURVEY FOCUS AND METHODOLOGY

Forbes Insights surveyed 303 senior executives who were largely based in North America.
More than one in 10 (12%) were CEOs, while another 15% held other C-level positions and 33%
were executive vice president level. The rest were director level and above. Forty-four per-
cent worked in finance or IT. The companies split roughly evenly between companies with
revenues of more than $10 billion (48%) and those with $1 billion to $9.9 billion in revenues.
One-third (34%) had revenues of more than $20 billion. Thirty-one percent of companies
came from the banking and financial services industry. Most of the remaining firms fell into
three industries: insurance and healthcare (24%), manufacturing (16%) and technology/
software (17%).

The survey considered two distinct consulting models:
efforts- and results-based. The efforts-based model is
the more traditional and common approach. This way
of engaging a subcontractor pays on an hourly basis and
typically requires a high level of involvement on the cli-
ents part. (Although in theory the results-based model
might seem to require less client involvement in the
course of a project, this seems not to be the case in prac-
tice. See What Contracts Are Most Effective?, page 17.)
Its advantage is in allowing a company to address twists
and turns in the project that may extend beyond the
original proposal. In the results-based model, the client
sets precise objectives and pays the vendor only when
they have been achieved. This is typically a flat fee agreed
to at the outset of a project. This method of consultant
engagement is typically seen as a way to keep costs in
check. Proponents of the results-based approach also see
it as a way to spur innovation because the vendor must
deliver results within a highly specific timeframe. Yet
it also requires that the vendor possess a high level of
expertise in its chosen area. This enables it to predict the
time and cost of a project with great exactness.

2 | All That Matters: Outside Consultants and a Results-Based Model

Key Findings
Efforts-based consulting relationships still dominate the market, with most vendors working on monthly retainers.
A much smaller number of consultants work on an hourly basis. Fewer than two in five vendors work on a results basis,
in which they receive a flat fee, provided they achieve clearly defined goals.

The results-based relationship is considered more effective. This was particularly true among executives who
work in IT, including those who hold the chief technology or chief information officer role. Only about two in five of
individuals in the IT role said that efforts-based relationships were more effective.

There is strong evidence that the results-based model is gaining momentum. Nearly one in two respondents in the
survey said that their companies had changed to this approach. That is nearly double the number who said that they
were using a monthly retainer, which is the most popular type of efforts-based model.

Companies have to do a better job of detailing a projects objectives to outside consultants. This is somewhat
counterintuitive: Setting clear goals would seem to be the guiding principle of any projectefforts or results-based. Yet
one in four companies in the survey do not define results. Even IT managers could do a better job of outlining goals.

Results-based models improve efficiency, but the next most significant benefits are not what might be expected
logically. Nearly seven in 10 respondents said that a results-based model led to the more efficient execution of projects.
But less than half of the respondents said that this approach enabled them to complete projects faster, and even more
surprisingly, fewer than four in 10 said that it kept projects from going over budget. This was a smaller number than groups
of respondents who said that results-based models led to better products and services and increased profitability.

Efforts-based models had more weaknesses than results-based approaches. They were more likely to flounder
because companies were overly involved in the process and lacked leadership. Indeed, this suggests that executives
from companies that rely on these relationships are more wrapped up in details than setting the broad guidelines and
tone for a project.

Companies are most likely to use outside consultants on IT projects. This may be because these projects increasingly
require a variety of specific skills that their own employees do not possess, and it may not be cost-effective to hire for
these skills on a full-time basis.

The results-based approach may have a particularly positive impact on growth. More than one in two survey re-
spondents said that it benefited their companies growth strategies. An only slightly smaller percentage said that the
results-based model helped their companies implement new technologies or achieve a reorganization or restructuring.

Organizations that use a results-based model are more innovative than those that use an efforts-based model. This
approach seems to require vendors to find new ways of achieving objectives.

Copyright 2013 Forbes Insights | 3

 RESULTS-BASED VERSUS
EFFORTS-BASED CONSULTING
It is no secret that companies are relying increasingly on outside resources. This trend stems
from a need to save money, improve efficiency and even develop innovations that are beyond
the capabilities of their staff.

Now the relationships with so-called subcontractors have
evolved. Companies are reevaluating what the best, most effec-
tive and cost-effective ways are to work with them. Which
approach comes closest to guaranteeing the shortest amount
of time for completing a project? Which method is the likeli-
est to spur innovation? Which one provides the truest value?
Currently, the majority of consulting arrangements are
efforts-based. These are based on fees in time increments
usually hourly, weekly or monthly. More than half (54%)
of the Forbes Insights survey respondents said that their
organizations used monthly retainer fees, while 43% paid
consultants on an hourly basis. Only 37% said that their
companies used results-based contracts that pay consultants
when specif ic goals have been achieved. (This question
allowed respondents to choose more than one option.) The
vendor takes a bigger risk but also has the potential to reap
a larger benefit.
However, respondents considered results-based con-
tracts more effective than efforts-based contracts, and the
trend is toward embracing the results-based model. Almost
half of respondents (49%) said that results-based contracts
were most effective, compared with just 27% who said a
monthly retainer agreement was most effective, or 21% who
said an hourly agreement was best (Figure 1).

Figure 1: Which type of contract have you found most effective?

Total responses CIO/CTO IT Role

n 21% Retained on an hourly basis n 14% Retained on an hourly basis n 16% Retained on an hourly basis
n 27% Retained with a monthly n 29% Retained with a monthly n 27% Retained with a monthly
retainer fee retainer fee retainer fee
n 49% Results basis n 57% Results basis n 53% Results basis
n 3% Other n 0% Other n 3% Other

*Note: May not add to 100% due to rounding.

4 | All That Matters: Outside Consultants and a Results-Based Model

 Survey respondents who identified themselves as work-
ing in an IT role were even likelier to tout the effectiveness
of results-based approaches. A full 53% of the executives in
this group said that this type of relationship was most effec-
tive. Nearly two in three of the individuals who held a chief
information or chief technology role said that this approach
was most effective. Just 43% of the individuals in the IT role
said that an efforts-oriented approach was most effective.
At the end of the day, buyers will tend to buy more
benefit-sharing types of engagements because it helps them
to reduce their risk, says Thomas Mendel, senior vice
president IT Services at HFS Research. It will take time,
because they are not used to it in terms of budgeting and the
way corporate decision making works. But at the end of the
day, its to their benefit, and thats why they will start look-
ing at that and deciding on that.
He adds: I think thats the model of the future.
The executives surveyed by Forbes Insights indicated
that their companies favor results- over efforts-based consul-
tants. More than half (54%) strongly or somewhat strongly
agreed that they looked for results-oriented consultants. Just
9% indicated that they were strongly interested in efforts-
based vendors.
Indeed, 49% of the respondents said that their f irms
had changed more to a results-based approach. Just 26%
of respondents said that their companies had moved more
toward a monthly retainer model, 17% toward an hourly
model (Figure 2).
Basking Ridge, N.J.-based technology services pro-
vider Avaya is among those companies that have seen a shift
toward results-based models. That trend, for our f iscal
year, fiscal 2012 into fiscal 2013, we are absolutely seeing
that dialogue now start to dominate in the service space,
says Sandy Devine, Avayas vice president for Professional
Services. There are plenty of organizations still out there
that are not there yet, but that part of the market is really
starting to dominate.
Moreover, the trend is expected to continue, perhaps
because of the growing track records of results-based con-
tracts. Nearly two in three executives (65%) said that their
companies would be moving more to a results-oriented
approach in the next two yearsmore than three times the
percentage who said their firms would move toward con-
tracts based on hourly or monthly fees.
It is not surprising that nearly all companies consider
themselves results-oriented; that is, they understand that
business success ultimately stems from strong results. Indeed,
88% of respondents said that they were results-oriented. A

Figure 2: How has this approach changed over the last two years?

Total responses CIO/CTO IT Role

n 17% Moved more toward an n 5% Moved more toward an n 18% Moved more toward an
hourly fee model hourly fee model hourly fee model
n 26% Moved more toward a n 38% Moved more toward a n 24% Moved more toward a
monthly retainer model monthly retainer model monthly retainer model
n 49% Moved more toward a n 52% Moved more toward a n 55% Moved more toward a
results model results model results model
n 8% Other n 5% Other n 3% Other

*Note: May not add to 100% due to rounding.

Copyright 2013 Forbes Insights | 5

 full 94% of individuals serving in an IT role said that they
were results-based. Roughly the same number said that
they clearly defined expected results for the projects their
employees worked onsuggesting their results-oriented
approach was more practice than simply theory. An only
slightly smaller percentage said that their companies based
their pay and reviews on results.
However, there remains
a slight disconnect between
the compan ies bel iefs and
The more you move from the facts on the ground: these
time-based to fixed price, results-or iented companies
are signif icantly less likely to
you start to see the treat outside consultants or
change in the risk profile vendors with the same rigor.
from customer to partner. Indeed, on ly three-four ths
of respondents said that their
DAVID KRUZNER compa n ies clea rly def i ned
EVP, iGate expected results for their ven-
dors projects (Figure 3). Just
six in 10 respondents said that
their organizations based ven-
dor reviews on results, while only slightly more than half
(53%) said that they based their vendors pay on results.
This may be because the companies are used to paying con-
sultants on an hourly or retainer basis. They have grown
comfortable with traditional methods of compensation and
work evaluation. It may also stem from the greater control
that companies have or believe they can exhibit over their
employees.
Yet iGate EVP and Head of Global Consulting and
Solutions David Kruzner says that companies are also
increasingly looking for relationships in which the vendor
is sharing risk. Results-based relationships are more likely to
provide that benefit. The more you move from time-based
to fixed price, or to output-based pricing, says Kruzner,
you start to see the change in the risk profile from cus-
tomer to partner. In some cases this could end up a 50/50
balance. But you also start to see more investment coming
in from the vendor or the partner versus just the capital out-
lay that was typically required by the customer.
Kruzner also says that the results-based model brings
the client and vendor closer to a true partnership than is
possible via more traditional approaches. In a true efforts-
based model, Im not sure you can ever really be much more
than a vendor, Kruzner says. As you move again right
down the spectrum towards output or outcome space, you
immediately start to endear yourself to the customer. I have,
as a partner and a provider in an outcome-based model, a
need to understand your strategy more. I need to under-
stand directionally the things youre trying to accomplish or
operationalize. I need to understand what your capabilities
6 | All That Matters: Outside Consultants and a Results-Based Model
are and what your capabilities arent.
Most companies see significantly greater overall ben-
ef its to a results- rather than an efforts-based approach,
although the survey found some surprising twists. In a ques-
tion that allowed for multiple responses, nearly seven in 10
respondents (68%)the highest percentage selecting any
of 13 possible answerssaid that a results-based approach
spurred higher efficiency (Figure 4). Another 57% said that
this approach led to better products and services. About the
same percentage (55%) said that a results-oriented model
increased prof itability. Somewhat higher percentages of
executives from the IT group connected the results-based
approach to higher efficiency and increased profitability.
Yet surprisingly, less than half of the respondents (47%)
said the results-based model led to faster completion of
projects or cost savings, which are benefits typically associ-
ated with this approach. Just four in 10 respondents said the
results model prevented projects from going over budget
(38%) or out of scope (35%), while only one-third said that
it created better customer service.
These findings may not so much suggest that the results-
based method is not effective in making these improvements
Figure 3: Current focus on results
Expected results are clearly defined for most
of the projects our employees work on
87%
Expected results are clearly defined for most
of the projects our vendors/ consultants work on
75%
Our employee reviews are based on results of their work
83%
Our employee pay is based at least partly
on the results of their work
81%
Our vendors/consultants reviews are based
on results of their work
61%
Our vendors/consultants pay based
on results of their work
53%
*Note: Executives could select multiple responses.
but that companies have become better at applying an
efforts-based approach. At a time when companies are
scrutinizing costs to unprecedented levels and operating on
tighter production schedules, they are better at forecasting
costs and ensuring that projects evolve on schedule. They
are also more cognizant of customer service, lest they lose
consumers to rivals. These criteria have become crucial
regardless of the outsourcing or consultant management
system a company uses.
A higher percentage of individuals from the IT group
said that the results-based model led to faster completion of
projects. This underscores the higher value that technology
professionals place on this approach.
Efforts-based models also led to benefits, although in
different areas and at significantly lower rates than results-
based models (Figure 5). Of 10 benefits listed in the survey,
not one drew more than a 50% responsethat is, fewer than
half of respondents said that the efforts-based model led to
any one improvement. In fact, just one benefitincreased
internal collaboration, at 46%received a response of
higher than three in 10. (Among the IT group, only 25%
said that better internal collaboration was a benefit, while
a full 50% said this model results in increased collabora-
tion across business practices.) All this may suggest certain

Figure 4: What are the benefits of taking a results-driven approach to business practices
rather than an efforts-driven approachfor your organization?

n Total responses n IT Role

Increased efficiency Fewer projects going out of scope

68% 35%
71% 31%

Improved products and services More innovative results and solutions

57% 34%
62% 34%

Increased profitability Improved customer service

55% 33%
57% 34%

Faster completion of projects Increased capacity for managing multiple

projects or programs simultaneously
47%
55% 28%
31%
Cost savings
Improved recruiting/quality of workforce
45%
45% 17%
22%
Top line growth
Other
39%
40% 1%
2%
Fewer projects going over budget
38%
33%

*Note: Executives could select multiple responses.

Copyright 2013 Forbes Insights | 7

 inherent advantages in a results-based model that allows the Figure 5: What are the benefits of taking
client to control the process more tightly via pre-set criteria. an efforts-driven approach to business
At the same time, interviewees said that such relation- practicesrather than a results-driven
ships can flourish on an ongoing basis only when they are approachfor your organization?
closely monitored and both client and vendor are flexible
about changing the terms to address changing conditions. n Total responses n IT Role
Sandy Devine of technology provider Avaya says that her
company is constantly evaluating its contracts with vendors
Increased collaboration internally
to ensure that they are accounting for potential increases
in risk exposure and responsibility, not to mention fluc- 46%
tuationsgood and badin a vendors performance. 25%
Changing conditions may require adjustments in compen-
Identification of new issues or priorities
sation and goals. Well go back and well negotiate the
for future projects
financial arrangements, says Devine, and the shared objec-
tive, how we go to market together, things of that nature. 32%
So we actively maintain those 25%
relationships the same way
Increased collaboration across business
that we maintain customer practices/capabilities
From my point of view, relationships.
29%
[pleading lack of talent or A separate survey ques-
tion underscored that 50%
operational skills is] an
companies are now receptive Fewer projects going out of scope
excuse for not being willing to using a results-based sys-
29%
to make the changes that tem, perhaps more than ever.
Asked what challenges they 25%
are necessary politically in
faced in using this approach, Fewer projects going over budget
organizations. just 32% respondents said
21%
that inertia was a problem
THOMAS MENDEL 25%
that is, they werent willing
SVP, HFS Research
to dislodge themselves from Increased opportunities for training,
their usual approach (Figure developing new talent
6). Slightly less than a third 21%
(29%) said that management lacked the foresight to employ
25%
this model. Other challenges had more to do with human
capital: 18% (but 50% in an IT role) said that their com- Improved recruiting/quality of workforce
panies lacked the talent or operational skills to use a 18%
results-oriented approach. 25%
This finding may reflect more a reluctance to adopt new
ways than an actual shortage of talent, says HFSs Mendel. Improved customer service
From my point of view, thats an excuse for not being will- 18%
ing to make the changes that are necessary politically in 0%
organizations, he says. I really dont think that you need
particularly intelligent or well-educated people to make that More innovative processes
shift. I heard some of the vendors talk about some difficul- 14%
ties attracting talent, but they didnt seem to be particularly 0%
bothered about it yet. Five years from now this may be dif-
ferent, but right now, I dont see that yet. Other
Indeed, only 25% of the respondents who serve in IT 7%
jobs said that finding talent was a challenge, and twice that 0%
number said that a lack of operational skills was an obstacle.
Forty percent of the individuals who identified themselves
as CIOs or CTOs identified either reason as a challenge. *Note: Executives could select multiple responses.

8 | All That Matters: Outside Consultants and a Results-Based Model

Clearly, those who are most closely involved in the hiring
and management of consultants do not see a dearth of tal-
ent or skills.
Yet the survey found that despite its seemingly more sig-
nificant benefits, the adoption of a results-based model still
has some distance to go. A full 14% of the respondents said
that they were not planning to transition to a results-ori-
ented focus. (These individuals said that their organizations
currently used the efforts-based approach.) Interviewees
said that this may stem from unfamiliarity or discomfort in
making dramatic changes in their relationships with con-
sultants. Most customers have been trained to buy the
efforts-based model, says Kruzner.
One-third of these respondents from efforts-based
companies said that inertia was a barrier to transitioning to a
results-oriented focus. Twenty-nine percent of these execu-
tives said that their management lacked foresight, while the
same percentage indicated that tying pay to performance
would cause disruption or hurt morale. In-depth interviews
for this paper indicated that many companies are looking for
proof that changing the terms of a relationship or engaging a
vendor on a results-based contract will generate positive results.
To be sure, quality service is at the root of any success-
ful client-vendor relationship. Indeed, Informaticas senior
vice president of Worldwide Professional Services, Brian
Hodges, says that a company and service provider may
transition to a results-based model based on consistently
well-executed projects. This occurs as the two sides gain

Figure 6: What are the barriers for you to transition to a results-oriented focus?
n Total responses n CIO/CTO n IT Role

Inertia. Our industry/region is based on hourly pay and its Not planning to transition
hard to change the status quo
14%
32% 0%
20% 0%
25%
Tying pay to performance is not feasible in our industry
Tying pay to performance would cause disruption
11%
and low morale
20%
29%
25%
0%
25% Tying pay to performance is not necessary in our
company/industry
Management lacks the foresight to tie pay to performance 7%
29% 0%
20% 0%
25%
Other
Hard to find talent for results-oriented work due to social 4%
expectations of the employees/vendors/consultants
0%
25%
0%
40%
25%

Lack of operational skills to institute the change

18%
40%
50% *Note: Executives could select multiple responses.

Copyright 2013 Forbes Insights | 9

 confidence in each other and look to cement the terms of some point. When they do something really well and then
their partnership. This may also reflect a heightened ability more customers want it, they get very focused on mak-
to predict projects future scope and complexity. The cli- ing sure that its packaged up in such a way that it can be
ent and vendor can set objectives and a price that are fair to repeated, and then each innovation gets better and better.
both. I think they understand that down the road, Hodges
says, whatever deliverable they have developed or what-
ever outcome that theyre focused on for this engagement,
ultimately well likely end up in a fixed-fee arrangement at

The Learning Curve

The outcome-based relationship is a learning experience. Informatica recently began working with one of its fre-
quent vendorsa business-to-business IT firmon an outcome basis. The vendor provides niche skills for highly
specific processes that precede implementation of new technology.

But in its first few outcome-based assignments for Informatica, the vendor underestimated the scope of the work.
Such miscalculations can take a bite out of a companys financial results and even sour a relationship if the problems
become chronic. Experts on outsourcing arrangements say that this may be part of a learning curve and that smart
companies determine how to avoid repeat mistakes. Moreover, they improve their ability to forecast a projects
requirements and duration.

Informaticas Brian Hodges, senior vice president Worldwide Professional Services, says that its vendor continued
with the work and delivered the outcome, even though it wasnt as financially viable for them as they had hoped. The
end game for them is, they have gotten much better at it and now have this collection of pre-billed assets that they
are able to use and be effective with.

10 | All That Matters: Outside Consultants and a Results-Based Model

Every Company is Different
Mike Dreyer,
Chief Information Officer, Visa

Mike Dreyer has been Visas Chief Information Officer for eight years. During his tenure, Dreyer has overseen the continued
growth of the companys already massive technology infrastructure. Visa regularly outsources work to technology vendors.
Dreyer says his company uses both outcome- and efforts-based contracts on a case-by-case basis.

Forbes Insights: Whats the right balance between the use of outside consultants and internal staff?
Dreyer: First, you start out with the premise that in some form or fashion youre going to outsource. It could be that youre
building a large project and you want to have the ability to bring on 25 programmers of a specific skill set. So you start with
the premise that its strategic to how you do business. Then it becomes a tactical implementation of that.

FI: When Visa outsources, does it favor an outcome-based or efforts-based model?

Dreyer: I think that people are going more toward a managed service right now in an outcome. It depends on the type of
project that youre doing. A maintenance agreement or a support agreementyou may want to build in some efficiency for
the partner, because you know what youre looking at for a project, whether its outcome-based or time- and materials-based.
It really depends on how you negotiate with your partner. Every company is different.

FI: What do you see as the advantages of the outcome- and efforts-based models respectively?
Dreyer: On the outcome-based model, what youre doing is you have a known deliverable. The other side has a good view of
what they want. They have people on their bench and they can bring those valuable personnel to bear. Everyone is getting
what they need out of it. Time and material, it depends on whether you know what you are looking for and whats comfortable.
Someone may feel that they dont know exactly whats out there. Its a little bit of a negotiation.

FI: Which has been generally speaking more efficient and cost-effective for Visa?
Dreyer: Its a case-by-case basis. Some may lend themselves to different [projects] than others.

FI: How do you see your use of outside consultants in the near future? Is it an ongoing process?
Dreyer: It is. I think that one of the benefits of having a partner network is that you can bring skill sets that you cant afford
to keep on your staff or want to keep on your staff at all times. It provides stability for your company, when youre looking to
bring products and services to market. What you want to be able to do is apply the right amount of technology at the right
time to bring the right products to market.

FI: Its a different terrain in terms of where youre finding your skills?
Dreyer: A lot of things have changed even over the past two years. The pace of change has accelerated, if anything. Its always
good to make sure that you have a different set of eyes, as well.

Copyright 2013 Forbes Insights | 11

 THE CHALLENGES OF
CONSULTING RELATIONSHIPS
The survey underlined how difficult it can be for companies to forge productive, successful relation-
ships with outside experts. Poor communication, organization, employee and resource management,
and leadership have long bedeviled the client-consultant relationship. Indeed, when asked about the
challenges their organizations faced in partnering with an external expert, 37% of survey respon-
dents said that there was a lack of accountability, and 36% indicated such project relationships
required too much internal effort or went beyond project scope.

In some areas, the challenges in creating efforts-based part-
nerships are somewhat larger than for results-oriented models
(Figure 7):
Twenty-nine percent of the efforts-based group said that
too much communication with consultants created the
biggest hindrance to partnering with an external expert,
while just 12% of the results-oriented group said that this
was the case. This was the largest disparity in how the
separate clusters perceived this issue.
A full 18% of the efforts-based group identified the lack
of an internal leader as a challenge, compared with just
13% of the results-oriented group.
Forty-three percent of the efforts-based group said that
a lack of accountability was a challenge, compared with
36% of the results-oriented group.
There was a similar gap between the efforts-based group
(32%) who said that results didnt match the goals, and
the results-oriented group (27%) who said the same.
But the results-oriented model contains its own apparent
weaknesses.
One in four respondents from the results-oriented group
said that a lack of clear articulation of mission hindered
projects, compared with just 18% of the efforts-based
group who complained about this issue.
A slightly higher percentage (36%) of the results-oriented
model said that project creep was a challenge compared
with the efforts-based cluster (32%).
These findings suggest that the greater f luidity in the
results-oriented model may not always translate neatly into
productive action. By their nature, efforts-based models may
require more ongoing communication to ensure that there
are not cost and resource overruns. These dialogues may also
sap energy from the project compared with a results-oriented
model that sets highly specific goals at the outset. Separately,
the efforts-based approach may be struggling with less lead-
ership and accountability.

12 | All That Matters: Outside Consultants and a Results-Based Model

Figure 7: What are some of the challenges your organization faces
in partnering with an external expert or consultant?
n Total responses n Results-oriented n Efforts-oriented

Lack of accountability for project outcomes Deadlines or key project milestones often not met on time
37% 22%
36% 22%
43% 25%

Too much internal management/effort needed to ensure Lack of communication with consultants during course
project results meet expectations of the project
36% 20%
36% 21%
39% 25%

Project creeps beyond initial scope Inability to align on a common goal

36% 17%
36% 17%
32% 14%

Results/deliverables do not match Lack of designated project leader internally

with goals established out the outset 14%
27% 13%
27% 18%
32%
Too much communication with consultants
Too much focus on the effort, and not enough during course of the project
focus on the project results 13%
24% 12%
24% 29%
29%
Other
Lack of clear articulation of the projects mission or goals 3%
24% 3%
25% 4%
18%

*Note: Executives could select multiple responses.

Copyright 2013 Forbes Insights | 13

 Building Stronger Relationships
Through Outcome-Based Contracts

Some companies now consider results-based contracts more likely to spur closer relationships with
vendors. This comes as companies have cut internal staff and are seeking to replace their expertise
via outside consultants. These contractors become far more than the hired help, immersing them-
selves in an organization at a level comparable to an employee. They may shape a project, raising
issues that the client had not considered before tackling its execution.

Vendors who work on the clock may be sensitive to adding
time and cost unnecessarily. Those who adopt an outcome-
oriented model do not face this pressure. When you pay per
hour, you are commoditizing the value of the vendor, says
David Miller, the chief security officer for Covisint, a consul-
tancy that serves major auto manufacturers. Theres no way
to get around thinking of that vendor as a commodity. When
you are paying for an outcome, you are creating a partner-
ship, you are saying, I am trusting you to do the right thing
on my behalf, to provide the product that you are [engaging]
to provide me.
Miller says that the client-vendor relationship grows
stronger over time as the vendor becomes ever more familiar
with a companys processesand culture. This may ulti-
mately save money, not only because the vendor is able to
execute a task faster and more efficiently, but also because it
reduces the costs that repeated engagement of new vendors
creates. When you end up working again and again with
these vendors, you see the same actual people, Miller says.
One example: a midwestern subcontractor that looks for
weaknesses in Covisints IT security has cut its price by half
from when it started nearly four years ago. Before contracting
with the company on a results basis, Covisint had repeatedly
opted for vendors offering the best price. But these vendors
would need time to familiarize themselves with Covisints
systems and often diagnosed problems that didnt exist.
What wed get was lots of false positives on the vulner-
ability testing, Miller says. Then wed have to tell them that
because of the way our architecture was set up, these werent
really problems, and then theyd say, Oh, I understand now.
Next time wed go through these, wed pick a different ven-
dor and go through the same process again. What we realized
is that we were spending 20 percent of our time getting the
vendor up to speed on our unique implementation architec-
ture, which was totally wasted time.
Whats happened thats been very worthwhile, he adds,
is that because weve worked with them for a longer period
of time, they understand what our business processes are,
they understand the complexities of our internal architecture.
Theyre more efficient at diagnosing what are vulnerabilities
and what arent.
Miller says that the midwestern vendor now understands
exactly whats going on. We went through the orientation
the first time, and then we havent gone through it again,
Miller says. The initial pricing has gone down almost by
half and theyre still making money. They have gotten really
good at doing us.
Similarly, the company has relied on an outcome-based
contract with Deloitte & Touche, the company that con-
ducts a comprehensive, annual diagnosis of its IT security.
In the first year, Deloitte needed two months to figure out
Covisints processes and policies, Miller says. Now the same
group of consultants work on the account. Theyve become
experts in our policies, so we can make faster, better deci-
sions. If it takes longer than they expected, then they lose
money. If it takes them less, then they make more money.
Its in their best interest to find ways to be as efficient as pos-
sible. And when an auditor is more efficient, then that means
hes speaking with my people less. And anything that means
an auditor talking to my people less is good for menot just
less money spent, but less pain and hassle to have to be sitting
down and talking to auditors. So it is a symbiotic relationship.
The less they interact, [the more] their costs go down and the
less of a pain it is for me.

14 | All That Matters: Outside Consultants and a Results-Based Model

ORGANIZED FOR SUCCESS
Still, the study offers evidence that results-based arrangements result in better mapping out the
scope and goals of the project. More than seven in 10 respondents (71%) in the results-oriented
cluster said that their companies always or frequently (more than 50% of the time) ensure
common goal alignment from the beginning compared with just 28% of the efforts-based group.

Companies using the results-oriented model appear more
organized in other areas that are essential to successful use of
outside vendors. To wit:
Thirty-four percent of the results-oriented group always
established checkpoints for ensuring appropriate progress
compared with just 7% of the efforts-oriented group.
Thirty-seven percent of the results-oriented group always
designated a team leader to manage the project compared
with just 14% of the efforts-based cluster.
Forty-six percent of the results-oriented group always or
frequently linked results to efficiency, compared with just
11% of the efforts-based group. A full 40% of the efforts-
based group rarely if ever linked results to efficiency.
Fifty-seven percent of the results-oriented group always
or frequently had internal talent work alongside outside
consultants to gain knowledge and skills, compared with
just 25% of the efforts-based group.
Intriguingly, only 22% of the results-oriented executives
said that their companies always hold consultants accountable
for results (Figure 8). This far exceeds the 4% of the efforts-
based group who said the same, but given the nature of the
results-oriented relationship, it would have been logical to
assume that all the executives of the results-oriented group
would have held consultants accountable all of or at least most
of the time. Separately, just 7% of the efforts-based group said
that their firms always held consultants accountable for the pro-
cess. Perhaps they are not paying as strict attention to process as
the efforts-based model would seem to require.

Figure 8: When it comes to partnering with an external expert or consultant,

how often do you hold consultants responsible for the outcome?

Total responses Results-oriented Efforts-oriented

n 20% Always (100%) n 22% Always (100%) n 4% Always (100%)

n 30% Frequently (50%-99%) n 31% Frequently (50%-99%) n 25% Frequently (50%-99%)
n 27% Sometimes (25%-49%) n 27% Sometimes (25%-49%) n 25% Sometimes (25%-49%)
n 16% Rarely (<25%) n 13% Rarely (<25%) n 43% Rarely (<25%)
n 6% Never n 6% Never n 4% Never
*Note: May not add to 100% due to rounding.

Copyright 2013 Forbes Insights | 15

 WHERE ARE COMPANIES MOST
LIKELY TO USE CONSULTANTS?
It is not surprising that companies most frequently work with outside consultants in IT and
business processesrelated projects. These areas require a particular nimbleness because tech-
nology changes so quickly. Outside sources may be better equipped to keep pace with changes.
Fifty-nine percent of executives said that their firms worked with consultants on IT projects, 44%
on process-related work. But 39% said that their companies worked with outside consultants on
strategic planning, while about one in four said that they used outsiders in human resources (24%)
or marketing/communications (25%) (Figure 9). Mendel adds that telecoms, financial services and
media companies are leading the way when it comes to using these results-based models.

Figure 9: In which of the following areas of your organization have

you worked with external consultants on projects of strategic importance?

Information technology New product development

59% 17%

Business processes Research and development

44% 16%

Strategic planning Transportation and logistics

39% 11%

Marketing and communications Engineering

25% 8%

Human resources Plant and development

24% 4%

Finance, accounting Other

19% 2%

Customer service
19% *Note: Executives could select multiple responses.

16 | All That Matters: Outside Consultants and a Results-Based Model

 Those companies that use consultants for IT proj- In which areas is the results-based approach most
ects say that a results-based approach is most effective. This beneficial?
suggests that the projects can be precisely defined and that The results-based approach is roughly equally beneficial
companies are looking for ways to increase efficiency and in a range of areas. About 54% said that it was beneficial or
maximize profitability. Survey participants whose compa- extremely beneficial in their companys growth strategy, 49%
nies used consultants for business processes and customer rated this approach similarly in adoptions or migrations of
service were also more likely new technologies, and 47% said as much regarding organiza-
to report that the results-based tional restructuring or reorganization.
approach was more effective in
Some 54% of executives these areas. A separate ques-
said the results-based tion found that the functions
where using a results-oriented
approach was beneficial approach was most beneficial
or extremely beneficial were almost all the same as
in their companys those where companies most
employed consultants (Figure
growth strategy. 10). That is, 53% of the sur-
vey participants said that the
results-based approach was
most beneficial in IT, while 38% said it was beneficial in busi-
ness processes. It was only in strategic planning where the
results-based approach was seen as less beneficial.

Figure 10: In which of the following business units

do you find a results-based approach to be most beneficial?

Information technology Transportation and logistics

53% 16%

Business processes Research and development

38% 16%

Customer service Human resources

27% 14%

Strategic planning Engineering

24% 13%

New product development Plant and development

24% 10%

Finance, accounting Other

23% 2%

Marketing and communications

19% *Note: Executives could select multiple responses.

Copyright 2013 Forbes Insights | 17

 WHAT CONTRACTS
ARE MOST EFFECTIVE?
Is adhering to a budget or achieving results more important? Both are clearly pressing issues in the
present economic climate. The survey suggests that results are somewhat more important, but com-
panies are struggling to balance the two. A full 21% said that their companies strongly or somewhat
strongly preferred sticking to a budget, with results as a secondary priority, while 37% said that the
result was the priority, with budget as a subsequent consideration. More than two in five respon-
dents (42%) considered the two roughly equal. The results-based model may offer both, although
there are subtleties for companies to ponder in each contract, says Steven Tadelis, an associate
professor at the University of California Berkeley Haas School of Business. A top vendor contacted
at a busy time may command a higher price for services than at other times.

Companies may have to also consider whether a vendor that with the vendorremain closely involved, and may even
fulfills the requirements of the project is offering as much have incentives built into their own compensation based on
value as one that exceeds expectations and perhaps finds a projects successful completion. We, as vendors, obviously
improvements that the company hadnt considered. A more have a lot of skin in the game, says Hodges. But the real
restrictive contract may not offer a client such opportunities. successful fixed-fee engagements are the ones that have equal
Of course, the success of any contract may ultimately stem either financial or other incentives internally for the customer
from the built-in incentives and the types of innovations that across the board, not just the
may be possible. In some instances, a company might be will- project people but the exec-
ing to pay extra for services that lead to greater results. utives as well. Its easy to see
The survey offered a surprising turn when it comes to almost out of the gate when a The results-based
companies involvement in their consultants work. The customer has put those incen- approach works best
results-oriented group was far likelier to say that they pre- tives in place and when it has when managers remain
fer to remain very involved in the consulting process than not, because there is a clear
the efforts-based cluster. Thirty-eight percent of executives and focused effort and a will- closely involved, and
from the results-based group said that remaining involved ingness to support the project may even have incentives
described their approach very well, compared with just across the enterprise that you based on successful
14% of the efforts-based group who said the same. This sug- dont see. And when you dont
gests that while the results are the most important priority for see that willingness, my con- completion of the project.
results-oriented groups, they understand that to achieve the sultants will quickly raise their
best results, they have to remain involved in the project. The hand and say, I think this is
results-based model does not mean relinquishing all or most going to be one of those interesting cases where we do end
contact with a project. Moreover, the survey found that the up spending a lot of time chasing resources down internally,
majority of both the results- and efforts-based groups do not reminding stakeholders of the outcome-based incentives that
believe in fully handing off a project to an external consultant we have, and thats never a lot of fun.
or expert and then re-engaging for the final deliverables. Just He adds: The larger the project, the larger the invest-
18% of the results-based group said that this described their ment, the more critical it is to have that internal incentive.
companys approach well or very well and only 25% of the Yet surprisingly, the results-based group was not more
efforts-based group indicated the same attitude. concerned about results than the efforts-based group. Nearly
Informaticas Hodges says that the results-based approach half the efforts-based group was most concerned about results.
works most effectively when managersin near lock-step This underscores that no matter which approach a company

18 | All That Matters: Outside Consultants and a Results-Based Model

favors, results are ultimately the measure of success. Indeed,
nearly two-thirds of respondents (64%) agreed or strongly
agreed with the statement results matter more than efforts.
One nuance: 23% of the results-oriented group said this state-
ment described their companys approach very well, versus
just 7% of the efforts-based group who said so.
At the same time, results-oriented executives were not
oblivious to the importance of business process. Thirty-eight
percent of this group said that they agreed or strongly agreed
that the consultants effort and business process is as integral to
the organization as project results. This was only slightly lower
than the 43% of the efforts-based group who indicated as much.
The survey reflected some surprising uncertainties about
the nature of project work and the use of consultants, none
more pronounced than attitudes toward alignment and
accountability. Just over half the results-oriented executives
(53%) said that they agreed with or strongly agreed that their
organizations emphasized alignment at the outset of a project
and held consultants accountable for maintaining it. As we
get into more sophisticated business outcomes, we have to
look at the business model of the subcontractor that youre
working with, says Avayas Devine. If were doing a deal
together, were going to make sure that were aligned.
Yet just 43% of the efforts-oriented executives held the
same view. With companies under more pressure than ever
to deliver results on schedule, it would have been logical to
assume a greater concern on this issue.
At the same time, clearly companies must address each
project separately. Wanda Lopuch of the Global Sourcing
Council, a nonprofit association of outsourcing professionals
that promotes socially responsible global sourcing, says that
the decision in favor of one model over another may depend
on the duration of the contract, a stage of organizational
development of service providers, as well as the buyer of out-
sourcing services, type of process, expected outcomes.
Copyright 2013 Forbes Insights | 19
 Finding the Right Blend
Colin Boyd,
Chief Information Officer, Johnson Controls
Its often difficult to decide between the outcome- and ef-
forts-based models. Yet in some instances, it may be pos-
sible to use both. Johnson Controls CIO Colin Boyd calls this
a blended approach. This strategy matches the outcome or
efforts models to different phases of one project.
Boyd says that the outcome model, in which vendors re-
ceive a fixed fee, may be most practical when a projects
goals are unlikely to change and companies can confidently
predict the costs. The decision to use an outcome-based ap-
proach may also partly depend on the vendors experience
and expertise. Supposing you had a vendor who had an SAP
practice thats been there for 20 years, and theyd done 300
SAP manufacturing implementations, Boyd says. They are
going to have a very high degree of competence. They know
everything thats involved.
However, Boyd says, if you were doing something vague
like we want to introduce a new front office sales system
across Eurasia to enable third-party channel expansion, and
we want to build a B-to-B capability, [but] were really not
sure how yet, the fixed price is dangerous. In that one, you
would definitely do time and materials, and see how we go.
He says that with a fixed-price model, You need to de-
fine very clearly up front precisely what it is that the vendor
has to deliver.
Milwaukee-based Johnson Controls is a leading supplier
of battery and energy-efficiency products for the automo-
Outcome-Based Models and Innovation
Theres no way to ignore the importance of cost savings in
companies decisions to opt for one type of outsourcing
model over another. This has led to the increasing preva-
lence of outcome-based contracts, which fix prices for the
achievement of specific goals. Cost is always one of the
items on the top of the list, says David Rutchik, a partner
at Pace Harmon, which provides IT advisory services to a
variety of industries, including automotive.
But Rutchik says that the outcome-based relationship
can also become the primary source of innovation, based on
20 | All That Matters: Outside Consultants and a Results-Based Model
tive industry, as well as other sectors. In recent years, it has
relied increasingly on outside IT vendorslargely managed-
service providersas part of its efforts to keep expenses
in check. It regularly employs both outcome- and efforts-
based models with its vendors.
But for some particularly long, complex projects, it has
also combined the two approaches. For example, in 2011,
Johnson Controls launched a five-year SAP project in which
it would rely on outside vendors. The company opted for
a fixed-price contract for the design phase, which lasted
roughly two years. But it switched to an efforts-based ap-
proach for the implementation, which was more likely to in-
clude unforeseen changes.
Boyd notes that the ability to mix the two relies partly on
the strength of the relationship between company and ven-
dor. When they have a good understanding, they are more
likely to be flexible about using different options within one
project. Its going to be kind of like a marriage, Boyd says.
There has to be a bit of give and take in it.
So far, the five-year SAP project has gone well and on
schedule. Yet Boyd says that it is still too early to say wheth-
er the blended approach best fit the project. Give me an-
other two years and Ill give you a definitive answer, Boyd
says. The best I can say is, I think so.
necessity. According to Rutchik, outside organizations work-
ing in this type of arrangement often have a greater incen-
tive to introduce new, more efficient ways of accomplishing
specific goals than in-house staff, who are often not mea-
sured on efficiency or margins produced. If you have a well-
constructed agreement with a third party, then over time,
theyre forced to do more for the same cost or the same
amount of service for less, says Rutchik. Thats what really
drives innovation.
 THE INNOVATION
CORRELATION
Most executives consider themselves innovative, although a surprising number were less enam-
ored with their companys performance in this regard. Only 42% rated their firms successful
when it comes to innovation, and an additional one in 10 rated their firms very successful. Nearly
six in 10 respondents who serve in IT roles said that their firms were successful or very success-
ful in being innovative.

Are companies looking for more innovation when they turn with some innovative ways of scripting work, of creating
to results-based models? Nearly half of results-based execu- repeat deliverables and things that help accelerate the pro-
tives (48%) said that innovation was very important to their cess and give them a little additional breathing room. From
organizations success, while just 32% of efforts-based man- my teams perspective, Im certainly seeing that push for
agers said the same. reuse in creating accelerators that will ensure that theyre
Innovation is likely to play an ever greater role for able to get through the project on the timeline that theyre
companies. Fifty-four per- tasked with.
cent of executives said that it Perhaps more significant, nearly seven in 10 executives
would be very important for (69%) said that innovation was most important for growth
As we took on more their organizations success strategies (Figure 11). The percentage was even higher
fixed-fee work, my three years from now. The for the results-based group (72%) but much lower for the
percentage was somewhat efforts-based cluster (54%). At least one in three executives
consultants understood higher for the results-ori- said that it is important in five other categories, including
the ramifications. Late ented group (56%) but lower IT, workforce management and allocation of resources.
hours, long weekends. for the efforts-based group Are companies set up adequately for innovation? A
(46%). This may suggest that number of companies seem to be making the right effort.
So they came up with companies using results-based About a third of respondents (34%) said that they have a for-
some innovative ways of methods are seeking greater mal budget line item and management position overseeing
scripting work that help innovation in their various innovation. Another 28% said that they are less structured
processes and activities. In a internally but encourage individual creativity. Results-
accelerate the process, separate question nearly nine based companies are significantly more likely to have these
to ensure that they can in 10 respondents (86%) said structures in place than efforts-based ones.
get through the project that results-oriented organi- Interestingly, not one company from the efforts-based
zations are more innovative, group said that it was extremely well prepared for innova-
on the timeline. compared with just 14% who tion, while only 21% of the efforts-based group said that
said efforts-based companies their firms were well prepared. Nearly half (48%) of the
BRIAN HODGES
were so. I think that we are results-based group said that their organizations were well
SVP, Informatica
seeing innovation from some prepared or extremely well prepared.
of the fixed-fee projects, says In a benefits-based model, the chances of getting inno-
Informaticas Hodges. As we vation is, on paper, higher, says HFSs Mendel. Weve not
began taking on more of the fixed-fee work, my consul- got enough experience because its a relatively new model
tants understood the ramifications of not being able to get that not many vendors have yet adopted. But in theory, that
these implementations completed on the timeline that we would be the ideal modelwhere you could combine the
suggested. It meant late hours for them. It meant working benefits for the vendors and the benefits for the buyers.
long weekends and things like that to make sure that we But the survey found a weaker link between innovation
would get through. So the folks really started coming up and a results-based approach than between innovation and

Copyright 2013 Forbes Insights | 21

 other factors. Just 18% of respondents completely agreed that
innovation depends totally on a results-based culture and
incentives. That was roughly half the percentage of respon-
dents who said that innovation depended on the attitudes
of leadership (39%) or the company culture (36%). Just 15%
completely agreed that innovation depends on a focus on
results rather than efforts.
That said, there are signs of a future, stronger tie
between innovation and results-based models. About two
in f ive executives completely or somewhat agreed that
innovation depends on creating a results-based culture and
incentives (60%18% completely and 42% somewhat) or a
focus on results (52%15% completely and 37% somewhat).
Respondents also found common ground in their perspec-
tives on how innovation connects with internal and external
resources. More than half (51%) completely or somewhat
agreed that innovation stemmed from the combination of
the two. It is safe to say that effective change ultimately
stems from having the right climate, systems and leaders
in place.
Yet Avayas Devine points out one additional pitfall.
On a few occasions, she has seen companies satisfied with
results-based projects ask about restructuring contracts. I
had situations with customers where the upside was achieved
in such a manner that they wanted to come back and rene-
gotiate, Devine says. So, its the be careful what you ask
for scenario. Youve got to have equivalent risk sharing and
a bit more potential upside than downside.

Figure 11: In what areas of your organization is the development

of innovative approaches/business practices currently most important?
n Total responses n Results-oriented n Efforts-oriented

Growth strategies Customer service

69% 34%
72% 33%
54% 46%

IT Workforce management
42% 34%
42% 32%
32% 43%

Research and product development Other

39% 2%
40% 1%
32% 4%

Allocation of resources
38%
39%
32% *Note: Executives could select multiple responses.

22 | All That Matters: Outside Consultants and a Results-Based Model

CONCLUSION
Although efforts-based consulting relationships still dominate the market, momentum seems to
be growing for adoption of a results-based model, which executives perceive as more effective.
This is especially the case in IT.

While a results-based approach lessens the odds that the client company will become enmeshed in a myriad of project details,
it does not free the company from the need to periodically revisit a project as it evolves, and possibly renegotiate terms with
the consultant. It also makes the need to precisely define results and align goals at the outset even more imperative. The key
steps companies must take to maximize the benefit from their consultant relationships include improving communication
with outside consultants and management of outsourced projects, as well as instilling a culture of accountability.
Executives believe the results-based model is more effective and efficient than the efforts-based approach. Surprisingly,
it seems to be no better at completing projects faster or within budget, but it does show a positive correlation to innovation
and, quite possibly, to growth.

Copyright 2013 Forbes Insights | 23

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