Market & Sourcing

Best Practices: Day rates for consultants

by Karsten Tampier

Day rates for IT consultants have risen again after Covid-19. But how can companies contain costs in a meaningful way? Best practices are long-term agreements, fixed purchase quantities and on-the-job training.

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. My first article on the topic deals with long-term agreements, fixed purchase quantities and on-the-job training.

Long-term agreements: For projects that predictably require a large amount of external support, the client should enter into a long-term agreement with the IT provider. In this scenario, a client can negotiate the consultant's fee downwards by an average of between 15 and 25 per cent. However, the higher the skill level and the more important the consultant's experience is for the success of the project, the lower the potential savings. In any case, the client secures critical resources for the project through long-term agreements and avoids delays caused by personnel changes as far as possible. On the other hand, he must take into account the probability that his needs will change within the longer term, while payment obligations continue.

Fixed purchase quotas: For upcoming projects, for example the migration to S/4HANA or the introduction of new AI methods, the customer can agree on a fixed purchase quota, such as a certain number of hours, with the IT service provider. Here, experience shows that the savings potential amounts to up to 25 per cent of the official day rates. The risk: once capacities have been booked, they may have to be purchased, even if the start of projects is delayed - which is quite a realistic scenario in IT.

On-the-job training: External employees who are newly introduced to a client's IT organisation must first get to know the tasks and requirements. They can usually be charged at a discounted day rate. The savings potential is between 10 and 30 per cent. If a client trains "his" consultants, he pays no fee for the first few weeks, for example, and then only a reduced daily rate for a certain period of time. Ideally, this binds an external employee to the client in the long term, which reduces the cost of training on the bottom line. However, on-the-job training is no guarantee that the junior employee will actually stay after the training.

Special case: IT freelancers

Our best practices 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 second article on our best practices for IT consultant costs deals with time & material vs. lump sums, supplier consolidation and the sensitive handling of sought-after skills.

Karsten Tampier

Karsten Tampier

For over 25 years in benchmarking, Karsten Tampier knows what a fair comparison looks like. With his team, he is responsible for data analytics at Metrics and thus for the data lake and methodological data consistency in customer projects.