Market & Sourcing
Best Practices 2: Day rates for consultants
by Karsten Tampier
Day rates for IT consultants have risen again after Corona. But companies can contain costs in a sensible way: for example, through T&M instead of lump sums, supplier consolidation and systematic skill prioritisation.
Daily rates for IT consultants are an intriguing topic - for the financial planning of clients as well as for the small talk of regular employees. In both cases, external consultants are generally considered too expensive. The unravelling of the project backlog after Corona and the shortage of skilled workers in some IT disciplines has reignited these discussions, and the costs for software developers and infrastructure experts have risen significantly.
Companies can ensure, however, that costs and services of consultants are kept in a healthy balance. There are several approaches to this - each one offers an individual savings potential, but also certain risks. The second article on this topic deals with time & material (T&M) vs. lump sums, supplier consolidation and the sensitive handling of skills in demand.
Effort calculation vs. lump sum: It is difficult to generalise about the savings potential of a lump sum agreement compared to effort-based billing according to time & material. Especially in complex software projects without firmly defined goals, lump-sum prices should be treated with caution. The big unknown here are moving targets - project goals that change subsequently. If the client opts for a lump sum, he must coordinate his requirements thoroughly and unambiguously with the provider at the beginning. This is a tricky business, not only in agile projects.
Scope expansions or changes of direction that occur again and again result in change requests, which increase the coordination effort and the costs of the project. Instead of paying attention to the coordination of software functions in advance, the service provider focuses on maximising the number of change requests. Therefore, lump sums only make sense for clearly defined project goals where hardly any changes and surprises are to be expected.
Supplier consolidation: Not only is the number of external employees increasing, but also the list of service providers. On the one hand, there are specialised areas that can only be served by a few companies, but on the other hand, there are also growing overlaps in the skills portfolio. Consolidation and thus concentration on a few preferred suppliers can reduce costs for consultants and experts by 10 to 20 percent. These suppliers are more involved in projects, and costs can be further contained via longer-term purchase quotas.
Dealing with dependency: In times of economic constraints, clients quickly tend to put the consultant's daily rates to the test. General statements on the savings potential are tricky, because it is not possible to generalise about all consultants. Renegotiations are relatively easy in the lower skill levels, which have no strategic significance for IT. However, some consultants have special skills and have also been working for a company for a long time. Because of their comprehensive know-how, it is risky to push down high daily rates, for example in times of crisis, by offensive renegotiations. Dependence on critical skills costs money - either directly for the consultant or indirectly through delays in implementation.
Special case: Costs for IT freelancers
This Best Practices on IT consultant costs primarily relate to Tier 1 and Tier 2 providers - in contrast to this, IT freelancers often have lower day rates because they do not have to bear the same overhead costs of a large provider. In addition, there are advantages such as specialised knowledge, flexible deployment and high customer orientation. On the other hand, the freelancer cannot fall back on a similarly formal network as the service provider if the thematic focus changes. Also, the success of the project is closely linked to one person, and unexpected failures cannot be easily compensated for. The client must provide a backup solution here - ideally an internal resource.
The first part of our Best Practices on IT consultant costs dealt with long-term agreements, fixed purchase quantities and on-the-job training.