A primer for IT managers
IT relies heavily on consultants. As a result, consultants play a pivotal role in building and maintaining today's highly complex technological assets. But the question "Are they really worth it?" has always loomed large for IT managers. Unfortunately, no easy answer exists because so many variables—relative to the work, the organization, and the consultant—come into play when an organization hires a consultant. Too often, the value a consultant provides in relation to the cost of his or her services doesn't yield an optimal return. But you can take steps to ensure that your organization realizes a solid return from IT consultants with whom you contract. Practicing six habits when hiring and retaining IT consultants will put you in command of the value these professionals provide your organization.
Habit 1: Talk with a Consultant's Previous Clients
Two questions come to my mind whenever I need to hire a consultant: First, "Is this person qualified to do the work I need?" and second, "Can he or she deliver the level of quality I require?" The worst time to discover the answers to these questions is when a project is failing. Do your work up front: Get contact information from prospective consultants for clients they've recently worked with and follow up with those references. Ask the references three questions. First, after briefly describing the work you have for the consultant, ask the references whether they would hire the consultant for that work and why. Then, ask whether the references feel the work the consultant did for them matched their expectations, considering the final cost.
Most organizations will talk about their experiences with outside consultants—particularly if their experience was either really good or really bad. Avoid consultants who cannot provide references or for whom you receive noncommittal or negative references.
Habit 2: Submit Contracts for Competitive Bidding
This habit is one of my ironclad rules for hiring or retaining consultants. As much as you might be tempted to call someone with whom you've previously worked or who comes highly recommended, put all contracts out for competitive bid in the form of a Request for Proposal (RFP). The RFP process lets you analyze the costs and benefits that consultants with a wide range of skills and experience offer. Keep in mind that the lowest bid might not be the least expensive in the long run if the consultant can't deliver the required work. At the same time, the highest bids might not deliver enough relative value. When you solicit bids for a contract, you'll receive bids that are as much as two to three times as high as the lowest bids. The question you need to ask yourself in these cases is, beyond meeting the requirements of the work, do the higher-priced consultants really offer value that's two to three times as high as that of lower-priced consultants?
Habit 3: Precisely Define Deliverables
One sure way to bring the value of a consultant into question is to allow deliverables to be ambiguous. In a Statement of Work (SOW), define the work you expect the consultant to deliver and the required level of quality, the timeline for completion, and the exit criteria. For example, if your project requires the consultant to deliver documentation, in addition to providing a list of mandatory objectives, cite existing examples of documents that fulfill the requirements. For the exit criteria, define the exact steps necessary to achieve sign-off on the deliverables. The less you leave open for interpretation, the better you'll be able to measure the value of the work a consultant provides.
Habit 4: Build Financial Rewards for Desired Results
In general, consultants bill either on an hourly or daily rate or establish a fixed fee. Each of these methods has benefits and drawbacks. Regardless of which method you settle on, when you negotiate the contract, build in financial incentives to help achieve the results you desire. For example, some common contract clauses include a bonus for work completed prior to a certain date or a fine for work completed late, a bonus for delivering a project on or under budget, or a bonus for meeting quality metrics as judged by a trusted third party. The basic idea behind such incentives is to connect the most important objectives of your project to the consultant's financial reward.
Habit 5: Watch Out for the Bait and Switch
If you've worked in IT for very long, you almost certainly have seen or experienced the following. A consulting company sends you the resumes of highly qualified and experienced consultants, but then either different and more junior consultants appear for work on the first day of the project or the highly qualified consultant quickly rotates off the project in favor of a less-qualified replacement. What adds salt to the wound in these cases is that you often still pay the billable rate of the highly qualified consultant. Protect yourself from this kind of tactic by using language in the contract that specifies consultants can't be substituted without written permission and potential adjustments in the billable rate. Also consider levying a fine for all such substitutions.
Habit 6: Use Caution when Retaining Consultants
Consultants are particularly useful on projects for which specific expertise is required beyond what you can develop internally, when you need highly trained resources quickly, and when you need bodies to fulfill short-term needs. Consultants can become expensive when they turn into what I call "perma-contractors," considering that they are usually compensated at rates far above what your organization pays employees. To provide some guidance, I developed the Rule of 3 for retaining long-term (i.e., anything longer than 1 year but shorter than 3 years) consultants. The Rule of 3 dictates, first, that a long-term consultant shouldn't cost more than three times as much as an equivalent employee would cost, and second, that you never retain a consultant for longer than 3 years.
The Rule of 3 formula is:
\[ (Annual Salary + Benefits) / 2000 hours \] × 3 = Maximum Hourly Rate
Here's an example of how to use the formula. If you'd typically pay an employee $75,000 for a particular job, assume a benefit rate of 30 percent of that annual salary. To employ a long-term consultant to do the same job, you shouldn't pay more than $146.25 per hour:
\[ ($75,000 + $22,500) / 2000 \] × 3 = 146.25
If you're paying more than the Rule of 3 allows or have retained a consultant or multiple consultants in a single role for longer than 3 years, you're much better off hiring someone for the job. Table 1 offers some quick conversions according to the Rule of 3