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The ROI of Consultants

A fast-growing company finds itself relying on temporary workers to handle increased volume to its call center, but that strategy pushes up costs, lengthens call times, and provides customers with inconsistent answers. The company's CIO wants to put customer relationship management software in place to provide call center agents with correct information at their fingertips. But the CIO's staff doesn't have the expertise to implement the software. The company's CEO, meanwhile, wants to resolve the problem as quickly and cheaply as possible.

What should the CIO do?

In the past, many CIOs would usually turn to an outside information technology consultant to help develop the right software, provide the experts, and cut the installation time significantly. These days, CIOs often bring in IT consultants when a specialized skill is lacking on staff, when a project needs to be fast-tracked, or when a task requires short-term expertise. Given the growing assortment of pressures on IT -- security, compliance, availability, and belt-tightening -- the hiring of consultants is often necessary. But in this era of cost containment, the CIO is facing the increased burden to measure the return on investment of consultants and counter complaints from other executives that the firm is "spending too much on IT."

DM Review magazine's 2004 Annual Readership survey of IT executives and managers found that the average annual spending for IT consulting services was $5.1 million, according to the Gantry Group, a Concord, Mass. management consulting firm that conducted the survey. The share of IT budgets devoted to consulting has been growing over the past few years, given the increasing complexity of enterprise IT systems and hiring restraints, and now stands at nearly 25 percent, the survey found.

In a perfect world, there would be a specific and logical way to measure the ROI of a consultant in dollars and cents or in organizational terms that other business leaders in the company could understand. Instead, it has been left to technology research companies and management-consulting firms to develop formulas, strategies, and metrics for establishing the ROI on consultants. These groups argue that the work on calculating ROI should start before the IT consultant is even hired, run the course of the project, and include the aftermath. The bottom line: The consultant will add costs to a project upfront, but should still be hired if he or she can provide key benefits that outweigh the investment -- benefits such as reducing time to implementation, lowering costs of testing or deployment, and steering the company away from unnecessary and costly customization.

Another factor to consider is whether the IT consultant can infuse the CIO's staff with enough knowledge to run the project after the contract is completed. "The shorthand for that is to ask yourself, 'Am I smarter after this aspect of the project than before?'" said Christine Ferrusi Ross, a principle analyst at Forrester Research. "Did you get a one-time infusion of something you needed? But what happens the next time? If it breaks, can you fix it?"

Before a consultant is hired, a CIO needs to understand the company's baseline systems, problems, and expectations in order to have quantitative outcomes by which to measure the consultant's performance. Only with this knowledge can a CIO determine whether improvements are being made. "Your ROI should equal the net incremental benefits minus the investment," said Dawna Paton, managing partner with the Gantry Group. "The incremental benefits are new incremental revenues or that you have avoided costs completely, such as maintenance of older processes. There is cost reduction because the process is more efficient."

Experts recommend the following ways to establish ROI for an IT consultant:

Time is money The consultant should be able to help the company reduce the time involved in implementing a project, compared to what the company's IT staff could do on their own. A company with a compliance deadline doesn't have wiggle room, for example, so if cost savings can be achieved by implementing a project more quickly, a consultant is often worth every penny. If the consultant isn't likely to contribute significant benefits, however, don't hire the firm. "If you can do it faster, you can also do it cheaper," said Paton.

  • Transfer the expertise A company often turns to an IT consultant because it doesn't have the intellectual property, the experience with new technology, or the staff to throw at a problem. In this situation, the company needs guidance from experts in order to save it from unnecessary (and costly) customization, gain a flawless implementation, and transfer knowledge to the IT staff so that they can solve problems once the consultant's contract is completed.
  • Set milestones during the project Forrester's Ferrusi Ross suggests establishing milestones by dividing the project into several phases. During the initial phase, ask whether the consultant has added insight or perspective or suggested solutions that go beyond the initial request. During early implementation, make sure milestones are being met and that the consultant is billing accurately. During the final stage, ask whether the consultant has been benchmarking outcomes against the base case and whether processes are already improving.
  • Conduct an ongoing post-mortem At the end of the project and up to 12 months after, measure the results against what was promised initially -- this includes the ROI, the cost savings, and process cycle time improvements, Ferrusi Ross recommends. Perform these measurements after the first month and every three months thereafter for a year to determine whether full benefits were actually achieved. This can help a CIO decide whether to hire the consultant again in the future.

Consultants are a common expense throughout various business departments. CIOs who can measure the impact of consultants are better able to explain those benefits to C-level peers, maintain the health of the IT organization, and help the company meet business goals.

Elizabeth Wasserman has written about technology and business for Inc., CIO Insight, and the San Jose Mercury News. She is a freelance writer based in Fairfax, Virginia.

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