The ‘share of savings’ cost model from procurement consultants is designed to enable the buyer to pay no upfront costs but instead pay a percentage of the savings that are achieved. Crescent Purchasing Consortium explores this model to help you determine if it best fits your school
We will explore the share of savings cost model in this second article in the Insider Insight into Procurement Consultancy series, to help you determine the best model for your institution.
This series has been designed to help you get the most out of your budget when using a procurement consultancy and has been written by professional procurement consultants who are employed by a registered charity which operates a Public Sector Buying Organisation (PSBO). The articles offer unbiased opinion and are designed to help you seek the best procurement solution for your individual institution.
Cost Model 2: A share of savings
The model is designed to enable the buyer to pay no upfront costs but instead choose to pay the procurement consultant a percentage of savings that are achieved upon the completion of the procurement process. Percentage figures of up to 50 per cent of the achieved savings are charged by procurement consultants within the education sector.
It is important to agree with the consultant prior to the project commencing, how your savings will be calculated.
There are several methods to calculate a saving: budget versus tender cost; existing service cost versus tender cost; chosen tender versus nearest comparison; and cost avoidance.
You will need to agree your preferred method to generate the most accurate savings figure by considering the following points. How was this budget calculated? How confident are you that the budget is a realistic figure for the goods/service you require?
Are there any significant changes within the new specification that will add or reduce cost from your existing service cost i.e. increased staffing or fewer buildings to service? Will you be able to compare ‘apples with apples’?
A tender comparison meanwhile would compare the chosen tender to the next best tender. This is usually an option taken where there is no benchmark or where the buyer is unsure if their budget is realistic. Are the two tenders comparable in all aspects?
Finally, consider if the avoided cost can be evidenced.
Calculating the value using the share of savings model is impossible until the procurement process is completed and final costs are established.
What happens if a saving is not achieved? A buyer needs to agree in advance of appointing a procurement consultant how they will get paid if a saving cannot be evidenced.
Some consultants will offer ‘no win, no fee’ payment terms. The payment method can sound attractive, but the risk carried by the consultant is offset by the inflated percentage of savings figure, which means that a win will usually attract a high return of 25-50 per cent fees. This margin provides extra income for instances when no savings return is generated and the consultant receives no fee for their work. Consultants only offer ‘no win no fee’ offer where they are confident a win will occur.
A tender exercise could be considered a success if price increases are avoided such as when buying energy (gas and electricity). This volatile marketplace offers fixed pricing for set periods of time providing cost certainty to the buyer for this period. When the buyer retenders, the pricing in the marketplace may have increased (or decreased). Maintaining a contract price may be classed as a victory when alternative offers would result in a price increase. The share of savings model usually requires the buyer to pay the fee directly to the procurement consultant.
Advantages and disadvantages
This model allows the buyer to only pay a fixed percentage of savings achieved avoiding consultancy costs if no savings are achieved, subject to appointment terms and conditions.
The disadvantage is that the actual cost to the buyer is unknown at the time of agreeing to the model as the supplier’s tenders have yet to be submitted. Would you write a personal blank cheque?
Another disadvantage is the risk carried by the supplier is usually reflected in the fixed percentage payable upon a saving being evidenced. Charges of 25-50 per cent of your savings are commonplace.
This illustration shows how fees are calculated: Existing service contract value = £300,000 (based on 3-year contract) 10% saving achieved on existing contract value = £30,000 50% share of saving agreement = £15,000 + VAT fee payable to Consultant
Questions to ask consultants about this model
Is the percentage fee negotiable?
When the buyer is appointing a procurement consultant, it is the former’s responsibility to negotiate the price in the same way as you would expect the consultant to negotiate the best deal for the buyer.
What saving methodology will be used to calculate if a saving has been achieved?
It is imperative that the buyer agrees this in advance of the procurement process commencing. Failing to do so would enable a consultant to choose a methodology that maximises their income.
Additional to the income you are receiving from the buyer, are you receiving any other income by completing this assignment? Best practice would be for the consultant to put in writing the income they are receiving for the assignment and provide a record of the suppliers who have received business from the projects managed by the consultant. This would provide transparency of the consultants income and the supplier(s) the consultant has been awarding business to.
Who are the main providers of the goods/service to education?
Network in the education sector to seek guidance on this question so that you have something to benchmark the consultant’s answer against. PSBO deals will have vetted suppliers allocated and the PSBO will provide advice. Note, not all service providers will be comfortable bidding for this model.
What steps will you take to engage with the marketplace to ensure the number of responses to the tender is acceptable?
Pro-active consultants will undertake essential pre-market engagement to prepare the marketplace for your tender opportunity. Through this engagement your consultant will advise on the best route to market that will ensure the best response.
Can you provide references of five similar organisations that you have worked with under this model in the past 12 months?
Contacting referees will enable you to understand the consultant’s suitability for working with you and your organisation. It will also enable you to ask if past customers were happy with the outcome of the procurement process and whether the share of savings model was considered a fair and transparent model for them.
It should be noted that suppliers will not openly offer a reference site for a project that didn’t go well. Use your network groups and contacts to gain referrals for consultants, then use the knowledge gained from this series to pick the one that is right for you.
Crescent Purchasing Consortium
CPC is a not-for-profit organisation and is owned and run by the education sector. CPC provides trustworthy deals designed for educational establishments covering a wide variety of products and services. The Department for Education recommends 13 of CPC’s deals. Tenet Education Services are part of the CPC Group and provides procurement consultancy support. CPC membership is free of charge to all educational establishments.