Appendix 3
Watch Your Service Bills!

In December 2003 PriceWaterhouseCoopers settled charges that it had over-billed clients in the US amounting to hundreds of millions of dollars by not passing on rebates received from travel agencies. At the time of writing this book, class action suits related to invoicing were still pending against KPMG, Ernst & Young and legal firm Ogilvy & Mather. Companies and other organizations spend enormous sums on services. It is reckoned that the average company today spends 33% of total external expenditure on services, which encompasses process outsourcing, consultancy advice and legal services. But this figure can vary widely. For financial services firms it can be as high as 80% of external expenditure. Services spending continues to rise at an annual rate of 3.5%, according to CAPS research, a firm that monitors corporate purchasing.

For client organizations there are significant and relatively easy savings to be made by better monitoring and controlling service bills. Whilst outright fraud is quite rare, inadvertent overcharging is alarmingly common. There are four principle reasons:

• simple carelessness
• inadequate cost tracking systems within service-supplier organizations
• failure to understand the agreement
• client too busy to properly scrutinize bills.

Errors, whether intentional or not, can cost individual clients quite staggering sums. Stephen Broderick, chief operating officer at a London-based company that audits advertising-agency compliance with client contracts, cites a 2003 audit where a US advertising agent mistakenly invoiced a client $84 000 for 12 hours of secretarial work. In another example, cited by Judie Bronsther, president of US firm Accountability Services, a law firm's partners were found to be charging all their meals and transport costs to a client, regardless of the time actually spent on the work!

Companies in particular can fall foul of the scope-creep problem identified in Chapter 8. Some professional services firms want to extract as much follow-on business as they can from their clients, sometimes because these clients are a soft touch, and sometimes because as professionals they feel it appropriate to try to assist in ever greater ways. So, management consultants for example, having had privileged access to client organizations' senior managers and strategic plans, as well as their operating practices and plans, are well placed to identify new problems which, of course, they can then assist in resolving! Bear in mind that whilst a management consultant works in your organization, they may simultaneously be working on 'proposals' related to other opportunities they have identified. If they can present these opportunities as urgent and quickly present a proposed solution to the client, the client is then under considerable pressure to react (note the word react!) and probably will not test the market, out of a sense of gratitude to the consultant who has taken the time and trouble to identify other 'problems' as well as the perceived need to speedily deal with the 'urgent' problem.

One solution to this perennial difficulty is to draft and enforce a tight contract with the professional services supplier. Keep them focused on the problem in hand, and be cautious about the freedom they are given to wander around the client organization. Over-billing can be prevented in the first place by developing a detailed billing policy and spelling this out in the contract. Fixed, milestone-based payments are one method to control the problem. The author, when faced with this problem, devised a simple and effective approach to billing, by insisting that all invoices should routinely include the following:

Time and Materials-Type Work

1. Project/contract title
2. Contract number (where available)
3. Name of consultant(s) used
4. Grade of consultant(s) used
5. 'Rate card' rate - if applicable - per consultant
6. Hours worked - plain time - overtime (and overtime rates, if different)
7. Date services rendered - if split over different fee periods
8. Discount applied - where relevant
9. Expenses (if relevant) and receipts attached
10. Net total
11. VAT (or other relevant taxes)
12. Gross total
13. Precise payment address
14. Name of client organization controlling manager.

Fixed Stage Payments-Type Work

As above, 1,2, and 8-13. In addition

1. Stage/milestone delivered
2. Outline of deliverables supplied to client organization.

Where necessary such information can be included in attachments or continuation sheets, providing they are clearly referenced on the front page of the invoice. The contract clause covering invoicing should include precise details about the format of bills as suggested above.

Putting the heat on lawyers!

Companies are more willing today to challenge legal bills. Traditionally they paid bills without question because they thought they could not afford to harm the lawyer-client relationship. Today, managers recognize that legal fees should be managed as closely as any other cost centre. It is usually a mistake to expend effort haggling over fee rates, rates that could be the least important component of the ultimate cost build. Instead client organizations should look at other factors, such as how the legal firm staffs a project, how it manages the overall assignment (brief) and how the firm bills for expenses. Items to consider in a billing policy for legal eagles are suggested below:

• The firm should seek approval for research work that requires five or more billable hours.
• Do not pay for more than one lawyer to attend a routine hearing.
• Define what expenses you are willing to pay for. Clients should not pay for secretarial support or fax costs.
• Do not pay for the firm's overhead - heating, business rates or rent, for example. (Admittedly there may be a hidden - or even a disclosed - overhead rate that the client will pay, but the idea is to secure as much comparability between fee rates as possible, and avoid comparing some rates, that are all-inclusive, with others that exclude certain elements that will later be claimed separately.)
• Require the firm to maintain continuity of staffing for a project. A client should not have to pay the additional costs associated with bringing a new lawyer up to speed on a project.
• Require the firm to notify you in writing in advance of any increase in billing rates.
• Billing 'increment triggers' should be small: about every six minutes. Without this level of 'granularity' in billing, a client may find it is billed for 15 minutes of partner time for a two-minute phone call.
• Require 'most favoured nation' status, where you pay the lowest hourly rates charged to other clients of a similar size.

Hire service experts

This book has been about buying knowledge, an area acknowledged as being difficult to specify, and requiring a suitable amount of up-front definition and planning. Although this is not specifically a book about procurement, a number of the strategies and procedures recommended in the book will often in practice be carried out by the organization's procurement operation. But it is a basic philosophy of this book that organizations should apply the same rigour to buying services as to physical goods. It is hard to put a value on advice. It is hard to put a value on knowledge. We cannot simply specify a quantity and then shop around for a price. Because quality can vary widely from provider to provider, unit cost (such as hourly fee rates) is relatively unimportant.

It is also a fact that service contracts are often very complex. A project may require many component parts and intricate pricing, often including one or all of the following:

• milestone payments
• time and materials pricing
• financial reward mechanisms
• contingency costs.

These things can be difficult to capture in an e-procurement system, which means that high-value services often bypass the procurement process altogether.

There is also a question around how client organizations account for service costs. Money spent on materials used in manufacturing affects a businesses cost of sales directly. Saving 10% on these costs yields an obvious and immediate benefit to the bottom line. Services, by contrast, are often budgetary. If there is a £10 000 budget for brand and marketing, a marketing manager will probably spend the full amount, if not because of a direct need then because of fear of losing the budget allocation in the next financial year.

A useful counter to these problems is for the client organization's procurement department to hire its own services experts. For example a procurement professional who has specific legal services buying experience or a former consultant who knows how the market operates - even a former lawyer who knows in detail how much certain types of legal procedure should cost. By working closely with internal users of services, the procurement group should be able to identify key service areas and key external service suppliers, and then focus negotiations on these firms. To give the client organization an advantage in negotiations, a good procurement team will, certainly for a high-value project, prepare for negotiations by modelling the cost of the service for a supplier. The procurement negotiator will then present its assessment of what the supplier's costs should be, add in a reasonable profit and then tailor negotiations closely to this proposition.

Just as important as managing the supplier is keeping the client organization's own managers in check. A formalized demand challenge process is an extremely valuable way of reducing costs of proposed external projects. Refer again to Figure 8 on page 65. This formalized process should take place as close to inception of the proposed project as is possible. Test every assumption made. Always assume that ultimately the project may be unnecessary, or that the scope can be reduced.