The CFO’s dilemma to purchasing professional services
Imagine that you woke up one morning, did your morning routine, got into your car and headed off to work. As you drive, you notice that your car is sluggish even when you floor it. Your car needs a serious tune-up. You now have to choose which auto-car-shop to go to. You immediately think of two distinct options: A boutique workshop you’ve gone to before – you remember them as super professionals - they finished the work within just a couple of hours, and your car was zooming and taking corners like it’s on rails. It definitely brought a big smile to your face, but the service was at a higher cost. The other shop you think of, is the big one, where you have to wait a few days until your car is attended to and once you get it back – it runs ok, but not with any bells and whistles. Which auto-shop would you choose to service your car at?
Consulting and PS (professional services) firms hire experts with different skill sets to give a well-rounded solution to their customers. As with many things in life, these professionals have different backgrounds, different experiences and different skill levels. Every head of R&D or software team-leader knows that some of the teammates are “stronger” than others. A “stronger” professional would usually finish most given tasks faster and at a higher quality than its “weaker” counterpart.
Consulting and PS firms often charge by the hour. This hourly rate usually is derived from several factors. I call them - The three “how much” factors:
How much the consultant is paid (salary).
How much the consulting firm invests in its staff in terms of time, effort and money.
How much profit the consulting firm is making from an hour of service.
A CFO might enquire price quotes for the same service from different firms and compare them. Often, the prices will vary between offers and even between specific consultants within the same offer. Many CFOs would choose to go with the cheapest offer. Highly likely they think this dilemma is similar to the example above depicting a car that needs a tune-up; The low-cost service is good enough and they are interested to pay as little as possible.
I argue this assumption is inherently wrong and that this decision causes the customer to ultimately spend more money for inferior results, and this is why:
Take software engineers for example; You give the same task to a senior and a beginner and I bet that nine times out of ten – the senior will finish the task ten times faster and it will be ten times better – The code will be more readable, the test runs will cover more cases and the execution will be faster. It is the same for DBAs; For example, a senior DBA would design a data model that could last longer, be more flexible and a higher performant than a beginner would. I can certainly say: what took me days to complete in the beginning of my career as a DBA now takes hours, sometimes minutes.
Let’s try to put it in a formula:
S$h – Senior hourly rate (example = 100$)
N$h – Non senior hourly rate (example = 50$)
Sth – Senior hours to complete a task (example 2 hours)
Nth – Non senior hours to complete a task (example 20 hours)
SC – Senior cost = S$h x Sth = 100$ x 2 = 200$
NC – Non senior cost = N$h x Sth = 50$ x 20 = 1000$
This example shows that a non-senior would cost five times as much as a senior to complete the task.
A question immediately arises – If it is so much more cost effective to hire a senior consultant, why not just hire seniors?
My answer can be summed up into two bullets:
(1) Senior consultants are rare;
(2) Senior consultants are motivated by challenges and would rather not work on tedious tasks.
So, when do I think a CFO should actually prefer a cheaper consultant?
I think that letting the CFO be in the driver’s seat to decide is actually wrong, as the answer is derived from the task at hand. When customers ask me whether they should hire a senior or non-senior consultant, I answer:
1. What should I do?
2. Is it possible?
3. How do I do it?
If you cannot google the answers within 30 minutes - you need a senior consultant.
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