Understanding and adopting best practices for should-cost SOW pricing
Tired of feeling like you’re flying blind when it comes to benchmarking your Big 4 SOW? You’re not alone. Buyers of enterprise services and consulting, regardless of industry, company size, or even line of business function, are having a hard time navigating when it comes to delivering on extended workforce solutions for the organization. Arguably, SOW buyers are struggling the most, especially in their efforts to effectively source services solutions from the largest suppliers.
Turbulence abounds - hit with Big 4 SOW headwinds where it hurts:
- In most large enterprises, more than 50% of workforce hours are now delivered by the extended workforce (non-employees)
- Unprecedented demand for IT resources, in particular, is keeping upward pressure on prices across essentially all industries.
- Big 4 suppliers employ a fixed-fee approach to structure nearly three-fourths (72%+) of their SOWs—and earn more as a result.
- Rate premiums of 50% or more are commonplace, and buyers have limited ability to identify or take action on the excess.
- No marketplace incentive exists to change supplier behavior away from being fixed-fee-led
Getting grounded before taking to flight:
In the absence of market incentives, fixing the fixed-fee problem has to be a buy-side solution. We wouldn’t buy a car or home, or for that matter a flight or hotel, without taking the time to understand the market first. Why wouldn’t we do the same as buyers of (by the way, multi-million dollar) services? Accepting fixed-fee offerings at face value makes it impossible, of course, to understand the detail necessary to make market comparisons. And so, the fix for fixed-fee services is to require that any fixed-fee SOW also have a T&M-based proposal as well.
Very specifically, our recommendation, to preserve fairness and healthy competition, is to set the expectation with all suppliers, not just Big 4, that SOW work must have these six levels of data ingredients
1. Resource roles
3. Experience in Skill at hand
4. Work Location (specifics, not just “Onshore” or “Offshore”)
5. Rate for each resource (i.e., hourly)
6. Work effort for each resource (i.e., # of hours by resource)
With this level of detail in hand, and a reliable source of market data for benchmarking (more on this shortly), companies can take more of a Kayak or Expedia approach to buying (at the risk of massively over-simplifying) and have far greater confidence that they are getting the right work from the right source at the right price. Suppliers already have and use these data points to price work they quote your organization in the first place, but for any change to SOW details and rate visibility to occur, buyers must insist on the new way of SOW procurement going forward.
Sanity check prior to take-off:
Before we proceed, here are questions that might be on a buyer’s mind:
Should we not be buying from the Big 4? The Big 4 are the Big 4 for a reason; their services are typically well tested and drive reliable outcomes. The question is simply under what circumstances they are most needed.
Is there anything nefarious implied in the use of fixed-fee SOWs? Not at all. It is a common commercial practice and happens to be more the standard than the exception when working with the Big Four. That said, without interrogation, it can also be a very expensive approach.
Should we be avoiding fixed-fee SOWs altogether? Absolutely not—doing so would be neither reasonable nor practical. There will always be suppliers we are familiar with and/or services that are straightforward enough that a simple one-price proposal makes sense, but those are not the multi-million dollar 5, 10, 50+ resource-intensive SOWs being bought fixed-fee more often than not.
Is the size of the fixed-fee SOW prize worth the effort to change? Absolutely. Companies can achieve as much as 50%+ price recapture by taking the time to push for greater detail and ensure all cost components are justified.
Owning the fix “This is your Captain speaking…”:
Question: Is this challenge best addressed by the CFO, CIO, or CPO? Answer: Yes. Regardless of who in the enterprise is responsible for the services procurement processes, the reality in most organizations is the same: buying is occurring everywhere and all the time. That doesn’t necessarily mean that contracts are being signed willy-nilly by unauthorized parties. But it does mean that front-line SOW owners—whose agenda foots to a department or project budget and who may not be tuned in to current best practice in services procurement—are the current de facto modern-day buyer. As a result, they are the ones interfacing with suppliers at the point of work design.
The problem, then, for most companies, is that the buy-side is not controlling the SOW conversation with Suppliers by asking for very common-sense details on resourcing upfront, before signature, and certainly before giving a nod to start work. Rather, time-starved and transformation-thirsty organizations are far more likely to execute the first SOW structure that is presented to them, usually always fixed-fee. The buyer has zero ability to determine market pricing in the absence of granularity. Solving this completely addressable problem requires the CXO team to convey a unified message to these largest suppliers as well as set a common-sense policy for internal stakeholders to follow in order to buy work on SOWs.
CXO team to Big 4: “We do not buy fixed-fee SOWs without first seeing the T&M details.”
TDX SOW Rate Intelligence
Asking for the right details on a SOW is essential in order to determine an objective and accurate, fair market value. When this expectation is set and supported by the C-level for the entire Enterprise to follow, this removes significant friction and pressure to sign an SOW fast. And prevents many buyers from being boxed into with the unintended consequence of wildly inflated SOW pricing and no ability to do anything about it.
Why now? 2022 talent war requires a shift from Buyer Beware to Buyer Be Aware:
Of course, this is a problem we should have been addressing years ago. So, why worry about it now? Simply put, nearly all organizations are struggling with double-digit labor market inflation. Even higher workforce turnover rates have buyers accept ingrates and terms for extended workforce solutions that are some bad mix of not grounded in market reality and/or harmful to the business in the long run. Particularly for the coveted Big 4 practice areas such as IT, M&A, and Strategy consulting, the challenge is that much more pronounced for buyers to action. Fixed-fee SOWs do not allow a buyer to understand how much of their SOW investment is going to the resources doing the work, as compared to padding already-gold-plated supplier gross margins. It’s up to the buy-side to make a small change to save the big dollars.
AI at Work | TDX SOW Rate Intelligence Case Study
Identifying $10.5M Savings on a $29M Fixed Fee Big 4 SOW in 24 hours
The ability to identify and realize significant and measurable SOW savings – fast – is not slideware; it’s software. That’s TDX. To highlight the power of incorporating TDX into their Enterprise SOW negotiation and procurement cycle, a Fortune 200-leveltechnology organization approached Brightfield in December 2021 about a nearly $30M Big 4 SOW slated for the final round of negotiation in two days. The customer had been working diligently to get the supplier to improve their rates, but with very nominal success as the Supplier felt this was a lay-up of a sale with no alternatives, an imminent start date, and strong support from the budget owner (IT) all of which left the accountable category manager with essentially no options and no tools in the tool chest other than “asking politely” for a rate reduction. The Supplier refused to break the Fixed Fee structure into a resource-level breakdown, and the Customer was left trying to take top-down swings on the cost to no avail.
Insert the power of TDX: From the point the customer shared the draft SOW with Brightfield, TDX was able to ingest, analyze, benchmark, and detail out a like-for-like SOW should cost structure, all in less than 24 hours from soup-to-nuts. The Customer was blown away with the insights and actionability that showed a market-centric, bottom’s-up SOW should cost approx. $19M that had been to that point an unmovable fixed-fee monument at over $29M. The result? The Customer was able to quickly formulate a data-led playbook for the final round of negotiations that ultimately resulted in a documented before-TDX and after-TDX hard savings of $7M on a like-for-like quality basis and still enabled the fixed-fee work structure that appropriately managed the risk of the program while not sacrificing price along the way.