Lifting the lid on fee models

There has been a lot of talk within the public sector around outsourcing vs in-house. It’s fair to say, outsourcing still has a big role and it works for many institutions – including schools. Many review their catering in the new year (January-April), with a view to getting a new supply arrangement in place for September. Therefore, over the coming months, many education establishments will potentially re-tender currently outsourced services, or tender them out for the first time.

If a school does choose to go down an outsourced route, and they work with a consultancy to help deliver a new partnership then of course, there’s a fee involved. Interestingly, we’ve found that there is a lack of clarity and transparency around fee models associated with outsourcing. More specifically, and worryingly, there have been reports from schools that consultants aren’t transparent in how they are earning their fee and how much schools are being charged diu terminus.  In other cases, some consultancies can be seen to market their services for free – which simply isn’t the case. There is no such thing as a free tender management service.

There are many different fee models and a wide variety of school budgetary set-ups – those that operate under local authority catering contracts, individual schools where the head has opted to take the catering budget under control, individual academies that operate under slightly different business criteria, multi-academy trusts and so on. Each setting will suit a different fee model and it’s certainly not a ‘one size fits all’.

Fundamental to any successful relationship is honesty, and this is no different to the relationship between a school and a consultant. If there is a lack of transparency around fees and therefore what costs the school has to meet – the relationship is unlikely to be a long and fruitful one.

For any consultant to suggest that a school won’t have to pay for their service is simply misleading; there is no such thing as a ‘free lunch’. The payment may not be a simple transaction directly from the school to the consultant; it may be built into the overall catering budget, it may be a percentage of the winning contractor’s submission – it doesn’t necessarily matter. However, what does matter is that everyone knows what they are paying for and aren’t being sold a package where the total fees are not known and/or are disguised in the catering accounts.

The level of fee is often determined by what support the school requires. This often depends on the school’s set-up. Is it a 200-child primary school with a simple menu cycle, or is it a larger secondary school with four service points, a sixth form centre, two kiosks outside and a staffing profile that requires close management. Equally, does the school need a lot of steering and support or want to be able to reach someone at the end of a phone throughout the duration of the contract?

Once a school has chosen a consultant they’d like to work with, it’s important they then understand the various fee models and which is the best fit for them.

One of the most common fee models is the ‘upfront percentage’ – or the ‘fixed fee’ model. This is quite straightforward and involves the consultant being paid a fixed amount. This can be paid in various ways – 50% upfront and 50% upon completion or 75% / 25%. The benefit of this model is that the funding is agreed by all parties before the work commences and the school can set the money aside; however, this has the highest impact on the school’s capital outlay.

If capital outlay is an issue, then a fixed fee approach can be taken but applied to a ’12 month spread’ or a ‘contract lifetime’ model. With the 12 month spread the fee is divided into 12 monthly installments whereas the contract lifetime model takes that approach one step further and spreads the fee across the lifetime of the contract in monthly installments; usually 36 or 60 months.

In recent times, some consultancies are recommending a ‘contractor pays’ option. In this situation the contractor is asked to include the consultant’s fee within their bid.  Whilst this can work, contractors do not always favour the option because including the consultant’s fee will falsely inflate the true cost of what they are offering.

One way to help address this is for the school to insist that the cost of the consultant’s fees are clearly and transparently itemised as a line within the contractor’s financial bid, so everyone can see what the costs are. Where this is a percentage of the expected level of spend, the real costs, which can be very high with such a model, aren’t being masked under some spurious heading on the P&L reports.

A more interesting model that is gaining popularity – and one that is a bit more revolutionary in approach – is the ‘client agent’ model. This is where the consultant doesn’t just simply deliver the tender, they then continue to provide post-sale support through the lifetime of the contract. This approach promotes longevity in the school/consultant relationship because contract awards usually range from three to five years in duration.

This fee model is appealing for various reasons – one being the long-term relationship that is cultivated between both parties, bringing consultancy knowledge and expertise to the school that they are unlikely to have in-house. This also allows the bursar, business manager or head teacher – or whoever was involved in the tender process – to then focus on their day job once the contractor is appointed, and allow the consultant to manage that relationship.

Post-sale support could include monitoring over-the-counter quality, consumer insight programmes, support with further service negotiations and so on. These services would be in addition to the consultant managing the provider day-to-day and checking invoice accuracy plus, when the contract comes to an end, assisting the school to prepare for a re-tender.

Of course, this level of support would carry a higher fee and therefore have a bigger impact on the school’s capital funds. However, the financial and operational efficiencies that this will bring should outweigh the investment in the consultant’s fees. It’s exactly that – it’s an investment – which will bring reward.

The ‘mutual reward’ model is another interesting funding mechanism which doesn’t result in paying a set fee to the consultant. Instead, the consultant undertakes the project in return for a share in the annual cost savings achieved. Essentially, the fee is self-funded by the savings the consultant delivers.

With this model, the consultant should be very confident that significant savings can be realised, as without this they don’t receive financial compensation for their work. The benefits to the school are obvious – there is no ‘outlay’ on a consultant as such and so no impact on the school’s capital funds. The downside is that the share paid to the consultant will likely be higher over the duration of the contract, as opposed to a one-off fee being paid. This is particularly true if the school has previously outsourced poorly and therefore savings will be significant once the correct structure is in place.

Finally – and this is true for all schools no matter what the set-up – spending wisely on a consultancy that will bring new levels of insight, knowledge and expertise will pay dividends in the long-run. Whichever fee model is chosen, the rewards should far outweigh the cost outlay of the consultant’s fees, and allow school’s to reap long-term benefits.

To speak to us about fee models, or to arrange a free online meeting to discuss your requiremnets, then please click or tap here.

 

The Litmus Team