ERP Consulting Fees
I am in the process of finalizing ERP consulting fees as part of a proposal to a client in the pharmaceutical sector to assist with a cost and benefit review of an ERP implementation that took place six years ago. The business operates predominantly in the Europe, Middle East and Africa regions.
My team will be comprised of myself plus four very experienced ERP consultants working through my ERP consulting company on a subcontract basis.
We have the option of submitting a proposal to either work on a daily rate or a fixed fee basis. Can you give some guidance on which might be the most profitable basis upon which to price the work?
You’ll need to model the numbers and include some sensitivity analysis comparing the two options.
Two aspects to consider: 1) winning the work 2) margin on the assignment. If you price of the work too high you may be uncompetitive relative to others and may lose out in a competitive bid. Conversely, price too low and you may win the work but there may be insufficient margin in the assignment relative to the risk and effort involved in delivering.
For the daily rate option, calculation of the total fee is straightforward - take the sum of the number of chargeable days multiplied by the daily rate the client will pay for each consultant. The total margin should be calculated in a similar way using the same mix of days across the team.
The fixed fee option could be attractive if you’re confident that deliverables are clearly defined, and, based on your experience will be achievable well within the target timeframe.
If you take the fixed price option you should also agreed to fixed prices and clearly defined deliverables with your subcontractors in order to manage that side of the risk.
Your margin will be the difference between the fixed price that the client will pay and the total fixed fees you will pay to your subcontractors.
An alternative would be to work on a shared risk / reward basis with the client. In this scenario the ERP consulting fees would be based on the savings or benefits that accrue to the client as a consequence of the assignment.
The advantage with the shared risk / reward model is that the ERP consulting fees can potentially be very high. The challenge with these types of arrangement is agreeing in advance the criteria against which performance, savings or benefits will be measured and then carrying out the measurement once the assignment is completed. Frequently there is disagreement between the client and the ERP consultant as to the extent and value of benefits delivered.
The key to success with a shared risk / reward consulting fee model is to invest time up front in agreeing with the client to a significant degree of detail the nature, scale and timing of expected benefits along with the basis of measurement. This information should be captured in a detailed contract with supporting schedules in order to remove ambiguity and reduce the probability of dispute once the work is completed.
Wishing you every success with the assignment.
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