Client Demands: “Show Me the Money”

Today, more clients are requesting additional evaluation data, up to and including measuring the ROI. It is common for clients to ask for value at the beginning of most consulting projects, with comments such as “Show me the money,” “What is the ROI?,” and “Will this be a good return on my investment?” Although this issue has always been there, it has never been present at the level that exists today.

Figure 6.1 illustrates how the “Show me” request has evolved. Two decades ago, clients wanted to see data, resulting in a “Show me data!” request. They wanted to see how well a consulting project was connected to the business. This request evolved into “Show me the money,” perhaps even a decade ago. Here, executives recognize that a project is costing money, so they ask “Show me the money I'm getting out of the project.” This request evolved into “Show me the real money (only that part that's connected to the project).” This particular request recognizes that many factors can influence a business measure. This issue hasn't been addressed very often, as it is needed to satisfy an executive's request for a credible connection to the business. Finally, particularly since the global recession, executives are asking, “Show me the money and make me believe it's a good investment.” Here, the cost of the project must be compared to the monetary benefits derived from it, to present the ultimate evaluation, the financial ROI. Also, it means that it must be a credible process, following conservative standards. This last request is the best way to meet the executive's demands. For consultants, this means that they must focus on the monetary value and return on investment for the project.

When the client suggests, asks for, or requires ROI, it must be explored and implemented, and the process must be credible enough for the client to believe the results. Client questions must be addressed in a simple, rational way. Avoiding the issue will erode the relationship between the client and consultant and ultimately may cause the loss of the project.

Competitive Advantage

Perhaps one of the most important reasons to pursue a more comprehensive measurement and evaluation, including ROI, is to meet or beat the competition. Many progressive consulting teams are beginning to develop the ROI for consulting projects to stay competitive or perhaps stay ahead of others who are developing similar processes. These teams address the issue in a proactive manner with a comprehensive approach to ROI. It just may be the best way to position the consulting team ahead of much of the competition. A database of ROI studies for consulting projects using a credible, undisputed evaluation process can be a crucial advantage and a persuasive selling point.

Increased Revenues and Profits for the Practice

When a consulting team can show the actual contribution of the consulting engagement in monetary terms, an excellent case can be made for additional fees—or at least additional projects. Some teams are taking the process to the level of using it to drive additional bonuses (e.g., discounting regular fees in a consulting project and placing the rest of the compensation at risk with a payoff linked to a target ROI). The payment can be a set amount or savings beyond the target. This approach provides an excellent way to increase revenues and build profits while generating client satisfaction and loyalty. This can work for internal and external consultants.

Satisfaction and Engagement of the Team

Individuals engaged in professional work want to know that their efforts make a difference. Consultants need to see that they are making a contribution in terms that clients and managers respect and appreciate. Showing the ROI on a project may be one of the most satisfying parts of a consulting project. Not only do things go well in terms of schedule, budget, and client feedback, but the value added in monetary terms with an impressive ROI adds the final touch to a major project. This provides additional evidence that what we do does make a difference.

Consulting Failures

Let's face it—many consulting projects have not lived up to their promises or expectations. Experienced consultants can identify an uncomfortable number of projects that have not delivered the results that the client and the consulting team expected—at least not in the terms that management understands, primarily bottom-line contributions. As more consulting projects are undertaken, consuming precious resources in an organization, the results have simply not materialized for many projects. And when the results are reported, there is often skepticism and concern about the credibility of the data, objectivity of data, and the thoroughness of the analysis. This has caused many clients to rethink the role of consulting as well as the accountability of consulting and to place more restraints and demands on consultants.

Economic Pressures

As consultants strive to be successful in a global economy, there are tremendous pressures on costs and efficiency. Companies must squeeze all the savings possible out of every process, activity, and resource. They must account for every expenditure and every project. For some, survival is an issue. This competition for resources has caused organizations to examine the payoff of consulting to make sure they are getting the most out of their consulting expenditures.

The pressures to show the value of projects are not just present in an economic slump but instead evolve and grow over time. Prior to the recession, pressures already existed to show the value of all types of projects and programs because of the global, competitive environment and fierce pricing competition in most industries. Organizations have to be efficient and effective in almost everything they do, including consulting projects.

After the recession, there is more pressure to show the value than ever before, up to, and including the forecast of ROI. Some teams are already experiencing this request to show the value before projects are initiated. It's not unusual to see the ROI requirement working its way into the RFP (request for proposal) process.

Budget Growth

With the increased use of consultants comes increased spending for consulting activities. In 2008, when the most recent recession began, external consulting was a big business with $305 billion spent annually, according to Kennedy Consulting Research and Advisory.¹ The recession caused a dip of 5.5 percent. By 2012, consulting had reached $315 billion. Because of this, consulting fees and charges become a target for critics inside the client's organization. It is one thing to spend $50,000 on a consulting project, but it is another to spend $1 million and still have nothing to show for it. Consulting has secured a greater percentage of many teams' operating budgets. They see the percentage of expenditures dedicated to consulting growing significantly, not only in magnitude but also as a percentage of operating costs. This growth makes consulting a likely target for increased accountability—if nothing else—to satisfy critics of the process.

Balanced Measures

For years, there has been debate over what should or should not be measured and how. Some prefer soft data directly from the client or customers. Others prefer hard data focused on key issues of output, quality, cost, and time. Still others have argued for a balance of measures, including financial results. The later camp seems to be winning. Data from a variety of groups at different time frames and for different purposes are collected representing qualitative and quantitative, tangible and intangible, and financial and nonfinancial categories. This mixture of data, often referred to as a balanced approach, is driving the need for the process described in this book and is an important part of consulting accountability.

Executive Interest

ROI for noncapital investments is now enjoying increased interest from the executive suite. Consulting is usually a noncapital expenditure. Top executives who have watched their consulting budgets grow without the appropriate accountability measures have become frustrated and, in an attempt to respond to the situation, have demanded a return on investment for consulting. The payoff of consulting is becoming a conversation topic in executive publications. The Wall Street Journal, the Financial Times, the Economist, Fortune, Businessweek, and Forbes regularly feature articles about consulting and the need for increased accountability. They describe the frustration of senior executives as they search for results from major consulting projects. They describe failures in detail examining complaints, consults, and government regulation.

Fad Surfing in the Boardroom

Finally, ROI applications have increased because of the growing interest in a variety of organizational improvement and change interventions offered by consulting teams, particularly in North America. Organizations have embraced almost any trend that appears on the horizon. Unfortunately, many of these change efforts have not worked and have turned out to be nothing more than passing fads, however well intentioned. Unfortunately, the ROI methodology was not used to measure the accountability of these projects.

The consultants are often caught in the middle of this activity, either by supporting the potential fad with a project or actually coordinating the new fad in these organizations. A process is needed to prevent the implementation of an unnecessary fad. The implementation of the ROI methodology requires a thorough assessment of business needs and significant planning before the ROI is attempted. If these two elements are in place, unnecessary passing fads doomed for failure will be avoided. With the ROI process in place, a new change project that does not connect to business needs will be exposed. Management will be fully aware of it early so that adjustments can quickly be made.

Planning the Evaluation

The first two parts of the ROI process model focus on two critical planning issues. The first step is to develop appropriate objectives for the consulting project. These are often referred to as the “objectives of the solution” when a consulting project involves the implementation of a solution. Project objectives range from developing objectives for reaction to developing an objective for the ROI and are defined in more detail in the next chapter.

With the objectives in hand, the next step is to develop a detailed evaluation plan. This involves two important documents. A data collection plan indicates the type of data collected, the method for data collection, data sources, the timing of collection, and the various responsibilities. The next document, the ROI analysis plan, details how the effects of the consulting project are isolated from other influences, how data are converted to monetary values, the appropriate cost categories, the expected intangible measures, and the anticipated target audience for communication. These planning documents are necessary for the process to be implemented appropriately. Additional information on planning is presented in Chapter 9.

Collecting Data

Data collected during the early stages of the project measure reaction (Level 1) and learning (Level 2). Collecting data during the project ensures that adjustments are made and the process is altered as necessary to make sure the project is on track. Reaction and learning data are critical for immediate feedback and are necessary to make the project successful.

Data collection is central to the calculation of the ROI. Post-project data are collected and compared to pre-project situations and expectations. Both hard data (representing output, quality, cost, and time) and soft data (including work habits, work climate, and attitudes) are collected. Data are collected using a variety of methods, such as the following:

• Follow-up surveys to measure reaction and learning from stakeholders.
• Tests and assessments are used to measure the extent of learning (knowledge gained or skills enhanced).
• Follow-up questionnaires uncover specific application issues with consulting projects.
• On-the-job observation captures actual application and use.
• Interviews determine the extent to which the consulting project has been implemented.
• Focus groups determine the degree of application of the consulting project.
• Action plans show progress with implementation on the job and the impact achieved.
• Performance contracts detail specific outcomes expected or obtained from the consulting project.
• Business performance monitoring shows improvement in various performance records and operational data.

The important challenge in data collection is selecting the method or methods appropriate for the setting and the specific intervention, within the time and budget constraints. Data collection methods are covered in more detail in Chapters 10 and 11.

Isolating the Effects of Consulting

An often-overlooked issue in most evaluations is the process of isolating the effects of a consulting project. In this step of the process, specific strategies are explored, which determine the amount of performance improvement directly related to the intervention. This step is essential because there are many factors that will influence performance data after a consulting intervention. The specific strategies in this step will pinpoint the amount of improvement directly related to the intervention. The result is increased accuracy and credibility of the ROI calculation. These strategies have been utilized by organizations to tackle this important issue:

• A pilot group with the consulting initiative is compared to a control group without consulting to isolate the consulting impact.
• Trend lines are used to project business impact measures, and the trend is compared to the actual data after a consulting project is implemented.
• A forecasting model is used to isolate the effects of a consulting project when mathematical relationships between input and output variables are known.
• Participants/stakeholders estimate the amount of improvement related to a consulting project.
• Supervisors and managers estimate the impact of a consulting project on the output measures.
• External studies provide input on the impact of a consulting project.
• Independent experts provide estimates of the impact of a consulting project on the performance variable.
• When feasible, other influencing factors are identified and the impact is estimated or calculated, leaving the remaining unexplained improvement attributable to the consulting project.
• Customers provide input on the extent to which the consulting project has influenced their decision to use a product or service.

Collectively, these strategies provide a comprehensive set of tools to tackle the important and critical issue of isolating the effects of consulting. Chapter 12 provides more information on this important process.

Converting Data to Monetary Values

To calculate the return on investment, business impact data are converted to monetary values and are compared to intervention costs. This requires a value to be placed on each unit of data connected to the consulting project. Here are the key techniques that are available to convert data to monetary values:

• Output data are converted to profit contribution or cost savings using a standards value.
• The cost of a quality measure, such as a reject, is reported as a standard value.
• Employee time saved is converted to wages and benefits for the time saved.
• Historical costs of a measure are calculated using existing records.
• Internal and/or external experts estimate the value of data item.
• External databases are searched for an approximate value or cost of a data item.
• A hard-to-value measure is linked to other measures where the value is easily developed.
• Participants estimate the cost or value of the data item.
• Supervisors or managers provide estimates of costs or value of the data item.
• The consultant estimates a value of a data item.

The specific strategy selected usually depends on the type of data and the situation.

This step in the ROI model is very important and is absolutely necessary for determining the monetary benefits for the ROI calculation. The process is challenging, particularly with soft data, but can be methodically accomplished using one or more of these strategies. Because of its importance, most of Chapter 13 covers this issue.

Identifying Intangible Benefits

In addition to tangible, monetary benefits, most consulting projects will drive intangible, nonmonetary benefits. During data analysis, every attempt is made to convert all data to monetary values. All hard data such as output, quality, and time are converted to monetary values. The conversion of soft data is attempted for each data item. However, if the process used for conversion is too subjective or inaccurate, and the resulting values lose credibility in the process, then the data are listed as intangible benefits with the appropriate explanation. Intangible benefits include items such as the following:

• Corporate social responsibility
• Brand awareness
• Job satisfaction
• Reputation
• Organizational commitment
• Employee engagement
• Technology leadership
• Stress
• Teamwork
• Culture
• Image

For some consulting projects, intangible, nonmonetary benefits are extremely valuable, often commanding as much influence as the hard data items. Chapter 13 provides more detail on intangible benefits.

Capturing the Cost of the Consulting

The other part of the equation in a benefit-cost analysis is the consulting cost. Capturing the cost involves monitoring or developing all the costs related to the consulting project. A fully loaded approach is recommended where all direct and indirect costs are captured. Here are the cost components that should be included:

• The cost of initial analysis and assessment connected to the consulting project
• The cost to develop consulting solutions, if appropriate
• The cost to acquire technology, equipment, and external services
• The cost of materials and supplies used in the project
• The cost for the use of facilities and support expenses, if appropriate
• The cost for the time of all stakeholders involved in the project
• The cost of application and implementation of the project
• The cost of maintenance and monitoring
• The costs of administration and overhead for the consulting project allocated in some convenient way
• The cost of evaluation and reporting

For internal consulting projects, all these costs are included. For external consulting projects, many of the costs items are included in the consulting fee. Still, the client absorbs other costs. Both groups should be included to develop the ROI from the client perspective. The conservative approach is to include all of these costs so that the total is fully loaded. Chapter 14 provides more detail on this issue.

Calculating the Return on Investment

The return on investment is calculated using benefits and costs of the consulting project. This comparison is made using the benefit/cost ratio (BCR) or the percentage of the return on investment (ROI). The BCR is the monetary benefit of the consulting project divided by the cost of the consulting project. In formula form it is:

The ROI uses the net monetary benefits divided by consulting costs. The net benefits are the monetary benefits minus the costs, multiplied by 100 to convert the quotient to a percentage. In formula form, the ROI becomes:

This is the same basic formula used in evaluating capital investments where the ROI is traditionally reported as earnings divided by investment. The BCR and the ROI present the same general information, but with a slightly different perspective. An example will illustrate the use of these formulas. A wellness and fitness project yielded monetary benefits of $752,000 based on reduced medical expenses, absenteeism, and accidents. The fully loaded costs are $549,000. The BCR is this:

As this calculation shows, for every $1 invested, $1.37 in benefits is returned. In this example, net benefits are $752,000 – $549,000 = $203,000. Thus, the ROI is this:

This means that for each $1 invested in the consulting project, there is a return of $0.37 in net benefits, after costs are covered. The benefits are usually expressed as annual benefits for short-term consulting projects, representing the amount saved or gained for a complete year after the consulting project has been implemented and the business impact has occurred. While the benefits may continue after the first year, the impact usually diminishes and is omitted from calculations in short-term situations. For long-term projects, the benefits are spread over several years. The number of years is determined at the beginning of the project, with a view of being conservative. This conservative approach is used throughout the application of the ROI process described in this book. Chapter 14 provides more detail on the BCR and ROI calculations.

Reporting Results

A final operational step of the ROI process model is to generate an impact study to document the results achieved by the consulting project and communicate results to various target audiences. The impact study presents the process used to generate the six measures of outcome data. The methodology, assumptions, key concepts, and guiding principles are all outlined before the results are presented. Next, the six categories of data, beginning with reaction and moving through to ROI and intangible measures, are presented in a rational, logical process, showing the building blocks to measure the success of the study. This becomes the official document of the complete assessment of success of the consulting project. Its length ranges from 20 to 30 pages for a small project to 200 to 300 pages for a substantial, long-term consulting impact study. A variety of methods are used to communicate results to several target audiences. Chapter 15 is devoted to communicating results.