From SCDigest's On-Target E-Magazine
- Jan. 17, 2013 -
Logistics News: Is a "Blended Rate" for WMS Consulting Services Good for Customers?
What Looks Simple from a Rate Perspective May Give Cost Advantage to the Vendor or Consultant
By Mark Fralick, SCDigest Contributing Editor
Many are familiar with the notion of a "blended rate" in the consulting services and software implementation business. Consultants are smart, and the term "blended" itself was a good choice, as it connotes something smooth and easily digestible.
SCDigest Says: |
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| How to get the best for your money? Frankly, whenever possible do not use blended rates |
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What Do You Say?
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In any case, recently someone asked me my opinion of the rate that they were getting on implementation resources from an ERP provider. They felt good because they believed the blended rate they had negotiated was attractive. Should they be happy?
A blended rate is the way an increasing number of consultants and implementers quote out their resources. On almost all projects, there are resources of different levels and skills, with different internal costs and standard billing rates for their time. Rather than bill each of these resources individually at their respective rates, the consultant creates something that looks like average hourly rate for that pool of resources - the blended rate. Each hour worked is billed at that blended rate, regardless of the actual rate or experience of the resource.
Blended rates are therefore an easy and convenient way for consultants to come up with a single, simple number to present to the clients in pitching the business and in subsequent billings for the project. Customers tend to like this too since it is simpler than the alternative, and they believe they can do more of an apple-to-apples comparison of numbers that way.
A more specific example would be something like this: assume the project team is made up seven team members. A team this size will usually have a senior consultant, one or two second in commands, and the rest implementers, or "doers." Whether or not you are paying more for anyone else on this project, like a higher level partner or even "project manager" with part-time attention to the effort, the senior consultant is the most important resource to you. Then there are the "seconds". These resources will become the senior consultants sometime in the near future. These are the next most important resources on the project.
So here is how this might be pitched: "Look," they say, "normally we bill out the senior consultant for $215 per hour, these two others for $205, and the rest at $185. Let's just do a blended rate of $195." This all seems pretty fair, right? Actually, here is what's happening. You are getting a great rate on the senior consultant and the seconds. The senior consultant is probably producing $300 per hour of real value on this job, and the seconds may not be far behind - let's say $225-250 per hour of real value.
But what about the doers? Well, there's the rub. The skill level, and cost, of these resources varies wildly. It is very conceivable that you could be looking at a person right out of college making $50K or less per year, or a foreign national making a lot less than that. The true project value-add for these resources may be somewhat under $100 per hour - perhaps as low as $75 per hour for these, often, highly commoditized resources. Using $100 per hour for the doers and using my potentially controversial theory that the senior resources true value to the project is greater than their published rate, the math becomes:
• $300 per hour for the senior consultant
• $250 per hour for the two seconds
• $100 per hour for the four "doers"
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But more importantly to the vendor, because the senior resource is one of the primary leverage points they have, they tend to be a considerable driver of revenue. By selling one of them into a job, they can leverage X more, less expensive resources. Unfortunately, due to the relative rarity of real talent at this level, they cannot always be placed exclusively on one project. This creates another, potentially more pressing, incentive to minimize the senior consultant's involvement.
