CONTRACTING: TERMS OF REFERENCE

If I say to you that I am going to deliver a table to you next Monday, you would have a reasonable idea of what you're going to get. By contrast, if I say to you that I am coming to deliver some consultancy work for you next Monday, you will have far less idea of what you will be getting. Now, there are many kinds of table, so I could perhaps show you a picture of what I am going to deliver. In a similar way, terms of reference are a way of describing what is involved in a consultancy project.

Different consultants will interpret the phrase 'terms of reference' variously. The Shorter Oxford Dictionary defines terms of reference as 'the terms which define the scope of an inquiry', and this is a good starting point. Like Humpty Dumpty in Through the Looking Glass, however, in this chapter I shall define it to mean what I want it to mean. In my definition, as we shall see, this is enlarged to cover the how and why of the assignment, as well as the deliverables at its conclusion. Whereas terms of reference in this definition relate to the content of a project, terms of business will relate to the commercial context. Terms of business are dealt with in Chapter 7.

Both aspects are usually brought together in a proposal submitted to the client. The proposal is the basis of the contract between consultant and client; it provides the foundation for all that follows within a consultancy project. It lays out the expectations of the client and consultant of each other - an important aspect of managing the client relationship (see Chapter 9).

Terms of reference need to be established clearly for every assignment. Usually they should be written to avoid misunderstandings but, as with any contract, they can be oral as well as written.

Figure 8.2 shows the framework for developing terms of reference. It consists of a statement of:

• the client objectives;

• the assignment objectives;

• the assignment plan.

Figure 8.2: Terms of reference

These three relate together in a hierarchy of objectives: to go up the hierarchy you ask 'Why?'; thus:

Why are we carrying out this plan?

To achieve the assignment objectives.

Why are we aiming at these assignment objectives?

To help the client achieve his or her objectives.

To go down the hierarchy, you ask 'How?', so:

How are the client's objectives to be achieved?

Through achieving the assignment objectives.

How are the assignment objectives to be achieved?

By means of the plan.

It is worth noting that usually there is only one answer to the question 'Why?', whereas there may be several answers to the question 'How?'. What this means is that the consultancy assignment may be only one of several contributors to the client's objectives. The others, however, may not require consultancy support nor necessarily be in hand. In the following sections we consider each of these three elements comprising terms of reference.

The Client Objectives

Consultants have to remember that their work is only a means to an end from the client's point of view. A consultant is (rightly) means oriented whereas his or her client is ends oriented. A consultant sees an assignment as a series of tasks, whereas a typical client sees it as a series of deliverables. But you should never lose sight of the context in which you are carrying out the assignment. To this end, you must remain aware who the client is and what the client wants to happen. This can sometimes be difficult when you are engrossed in the minutiae of a complex assignment. (Or, as someone once put it, 'When you're up to your ass in crocodiles, it's hard to remember you came to drain the swamp!')

It is essential to know who the real client is. If we call the person who is dealing with the consultant 'the sponsor' of the assignment, it is important to know if the sponsor is the real client - or is there someone behind the sponsor who is pushing to carry out the project. In the case study on ICC shown in Chapter 6, for example, the sponsor for a consultancy project is the General Manager (GM). What we do not (yet) know is whether John Smith's visit is at the GM's initiative or whether the GM has been pushed into this by a superior. Were the latter true, then this might have a fundamental influence on the GM's attitude to the project. Would he, for example, be a reluctant client? If this were the case, John Smith might find the assignment more difficult - the GM might be unwilling to release resources, make his own time available, and so on. So, what the client wants can be considered at two levels - commercial and personal objectives.

Commercial Objectives

These will ultimately relate to:

• improving the performance of the existing business;

• improving its competitive position;

• developing new business.

Obviously the client's objectives for a particular assignment may not be phrased as these; nevertheless, it can be helpful to consultant and client alike to make explicit the causality between the commercial objective as framed and those stated above. This is easy to do in the case of ICC: the client wants to reduce production costs so the company's competitive position and profitability improve.

But what of assignments that are related less directly to commercial objectives - for example, carrying out a job evaluation assignment, helping with an office relocation or delivering a training course? In these cases tracking the client's objectives back to see how they relate to commercial objectives should help fashion the assignment so that it is more helpful to the client.

Personal Objectives

These are just as relevant. The assignment sponsor will like the assignment to help him or her to do the job better, to run a better, more efficient department or business, to reflect to his or her credit and so on. Similarly, the sponsor will want to be sure the assignment doesn't go wrong and is not seen as an expensive waste of time. For this latter reason, a key dimension of a consultant's early contact with a sponsor is confidence building.

So, there are general objectives that we can ascribe to the client at the start of an assignment. There may also be specific ones. The consultancy salesperson may have to probe to find these. 'What are the client's unwritten objectives?' should be an item on the checklist of points that the salesperson ought to cover in briefing the operating team. There may be other requirements in terms of the conduct of the assignment:

• The extent to which the sponsor is to be involved in the detail.

• Freedom of access to other parts of the organization (does everything have to be cleared through the sponsor?).

• His or her wish to be involved in helping you in the development of ideas (for example, does the sponsor want to be used as a sounding board, or receive considered views only?).

All this is about setting and understanding expectations, which affects the client relationship. You need to establish a sound modus operandi with the client, which means understanding them personally as well as in their business role.

The Assignment Objectives

In Figure 8.2, the assignment objectives are defined by scope and outputs: 1) the scope defines the areas of concern that are to be addressed; 2) the outputs are what the client is going to get in respect of each of these areas - the deliverables. Obviously these two together define the amount of work that an assignment might involve. The broader the scope, then the greater amount of work that eventually may be involved. Definition of the deliverables is equally important, particularly because they reflect the depth of analysis that is required to meet them. An in-depth study may need ten times the work of a 'quick and dirty' review.

It is essential that consultancy and client have the same view of these two items. A career-limiting factor in consultancy is to put yourself in a position where you have to do free consultancy because you have overrun your budget. This happens when a client has been promised a deliverable that the consultancy has not achieved within the given budget, or when there has been a misunderstanding over the scope of the assignment. For example, one consultancy agreed to do a study of the manufacturing facilities of a client, believing that there was only one factory site. In fact, there were three; additional resources were therefore required to complete the study.

If you find it difficult to define the scope of the assignment, then you are probably having to deal with a 'messy' problem. Some preliminary work may therefore be required in order for the scope to be defined. The assignment therefore has to be broken into phases, the output of each phase defining the scope for the next. This is exemplified in Figure 8.3, which shows the scope and deliverables for the different levels of intervention in a consultancy project. (The idea of 'levels of intervention' was introduced in Chapter 6.)

Level	Scope	Outputs
1	Sense of organizational malaise	Purposes defined
2	How to achieve the purposes	Main problems that impede their achievement
3	How to resolve defined problems	How they can be best resolved
4	Implementation	Solutions put in place

Figure 8.3: Scope and deliverables for each level of intervention

For example, in the case of ICC (the case study in Chapter 6), we assume that the objective of reducing high production costs has already been agreed, so there is no need to start at level 1. At level 2, John Smith has to verify what the causes of high production costs might be - based on the clues he has found during his initial tour. At the end of the work at this level he should have identified the issues causing high production costs; the level 3 intervention would be to decide how these might be best resolved.

At the start John Smith can only guess what solutions need to be implemented to reduce production costs. The terms of reference, therefore, cannot be comprehensive - he cannot prescribe (other than in the most general terms) what the outcome of the level 3 intervention will be, because the outputs of level 2 set the scope for level 3. He can therefore give firm terms of reference only for his work at level 2. The client may, however, require an estimate of fees for work from identifying the issues through to implementing the solutions. How to deal with this difficulty is dealt with in Chapter 7 under 'What do we tell the client?'

The second element of assignment objectives shown in Figure 8.2 is outputs. Outputs are the deliverables of the assignment. There are two rules for specifying outputs. Firstly, make sure that each item identified within the scope has an output associated with it. An item in the scope with no output raises the question, 'How are you going to address this for the client?' An output unrelated to the scope usually implies the output is related to part of the scope that has not been articulated, in which case the scope should be revised; and that the output is not required (for example, a consultant may produce an assignment report that is primarily for consumption within the consultancy practice instead of being a material means of advancing the performance of the client) in which case you should consider not producing the output.

Secondly, try to define outputs in terms that show how they relate to the client's objectives. 'So what?' analysis can be helpful here - ask 'So what?' of each output to see whether it relates to the client objective. (This is particularly useful when tempted to produce outputs consisting only of data feedback.)

Figure 8.4 shows the scope and outputs for ICC for interventions at level 2 and 3.

Level	Scope	Outputs
2	How can production costs be reduced?	The major issues resulting in high product costs identified
3	Wastage and rework rates Machine downtime Customer expectations of quality Suppliers' prices	Report on how to reduce them Recommend improved maintenance schedule Recommended changes to product specifications Recommendations on improved purchasing policies and procedures

Figure 8.4: Assignment objectives

At the start of his assignment, John Smith has accepted the purpose that production costs have to be reduced, but can only guess what areas need to be tackled to reduce them. At the end of the level 2 intervention, therefore, his output is a more focused view of the areas that might be investigated in more detail.

Suppose at the end of this intervention he has identified the items shown in Figure 8.4 as the problems causing high production costs. At the next level of intervention (level 3) the deliverables could be the reports and recommendations shown in the figure. If he were then to help the client with a level 4 intervention, he would support the implementation of his recommendations.

I used to be worried that the output that a consultant produces so often consists of reports and recommendations - hardly a direct intervention into the client environment. But given that a consultant rarely has executive authority within a client's firm, outputs for action or a decision are usually expressed in terms of recommendations. Of course, the skill of the consultant lies in not only making the recommendations, but also in getting them accepted. (See later in this chapter.)

Although consultants can forecast outputs (that is, immediate deliverables), they should be more conservative when forecasting outcomes or results. If the consultancy has total control of the factors influencing outcomes, then they can be more confident of predicting what the results of an assignment might be. Usually, however, a consultancy assignment is a joint activity between consultant and client, and so the results will depend on the cooperation and skill of the client staff, and the vagaries of the business environment. For these reasons, it is unusual for a consultancy to be able to guarantee the results of an assignment in terms of - say - decreased costs or increased performance. If it were rash enough to do so, and the expected results were not achieved, the client might reasonably claim some sort of redress.

What is most helpful under these circumstances is for the consultancy to indicate conditionally what the outcomes might be. 'Given the cooperation of your staff, we would expect costs to be reduced by 5–10 per cent.' Or, 'Based on our experience elsewhere, we would expect this programme to increase the department's performance by at least 5 per cent.' These statements do not guarantee the results will be achieved; even so, some consultancies would prefer to use phrasing that is more non-committal. They may also have a disclaimer in their terms of business such as that reproduced below:

Forecasts, etc by the Consultant

The time taken to complete the work and the measure of its success depend in part on factors outside the control of the Consultant. These include the degree of cooperation given by the Client's staff and promptness in agreeing and implementing recommendations. Any forecast or estimate made by the consultant of the time required for the assignment and the results attainable is given in good faith having regard to the information made available by the Client and represents the Consultant's interpretations of the Client's instructions. Any such estimates and any confirmation or variation of them in subsequent reports and correspondence shall not be deemed in any circumstances to be undertakings, warranties or contractual conditions. (Source: Institute of Management Consultancy)

Assignment plan

The items shown in the box 'Assignment plan' in Figure 8.2 can themselves be related in a hierarchy of objectives thus:

How are we going to implement this approach?

By carrying out this programme of work.

How are we going to carry out this programme of work?

By utilizing these resources.

The hierarchy can again be ascended by asking the question 'Why?' Resources may be drawn from both client and consultant. It is essential that the client recognizes the resources they must provide, both in the conduct of the assignment and its management (see below). And, of course, the consultancy will be providing resources for a price. This price, with the other aspects relating to the commercial context of the business, will be embodied in the terms of business - see Chapter 7.

Deciding the Method of Approach

The approach to be used relies on an appraisal of how the consultancy team and client are respectively to contribute to the achievement of the assignment objectives. From this appraisal all the work on the assignment is predicated. As a consultant, you must be clear about what you are bringing to the party. This will determine what your role is, and it has to be complementary to that of the client. At one extreme you can be highly interventionist and take much of the project onto your own shoulders. At the other extreme, the role of the consultant is facilitative, enabling the clients to address the problem for themselves. Between these two extremes is a spectrum of consultancy roles, and you must decide which is appropriate.

In some cases, the client hands over a project to the consultant and there is no further contact until the work is complete. Such assignments are often research oriented. For example, a client might ask a consultant to identify the size of market and buying criteria for a product in Zambia. The consultant would carry out the research and then report to the client.

For the most part, however, assignments are cooperative efforts between consultant and client. Even in a research oriented assignment a consultant will probably have some reviews with the client between beginning and end. For instance, in the ICC case study, the GM will probably arrange for John Smith to have access to records, people, equipment and other resources, to enable him to diagnose the key problems (the level 2 intervention). John Smith will engage in data collection and report back with his conclusions.

In the next phase, he will need to decide how the problems he has identified should be addressed, which may entail the active involvement of some of ICC's staff. They might, for example, engage in data collection, contribute their ideas, or plan operational improvements. Different modes of client and consultant working together can therefore be involved even in a simple assignment.

The next consideration in deciding the method of approach concerns the perception of the nature of the predicament. A client may see the issues to be dealt with in more simple terms than the consultant and would therefore not be in favour of an approach that treated it as complicated. In the example of ICC, the GM might see the problems of production cost being entirely due to poor quality production. He may even have employed John Smith to come up with the conclusion that high production costs are entirely the result of poor equipment performance, and to use this as a lever for getting capital investment out of his head office.

No consultant will retain the goodwill of a client by speaking against the client's favourite ideas on day one. Remember the dictum, 'Sell the client what they need in terms of what they want'; the consultant has to educate the client into the true nature of the issues that have to be addressed. The client's perception of these may therefore develop throughout the course of an assignment. This does not mean active opposition. If you set up an 'either/or' situation (either your view prevails, or mine) then you will lose - certainly in the long term. You should establish a 'both/and' view, that is, 'We will investigate both your ideas and others, which from the evidence and our experience, we believe will help to achieve your objective.' The client can be brought round to the consultant's view - if appropriate - later in the project.

A further point you must consider when deciding the method of approach occurs when a client is embarking on a project that represents a significant change to the business. You need to know whether the problem solving processes available within the client's organization are appropriate for dealing with this problem. For example, there are some organizations in which most of the transactions are oral and face to face - little is written down. One such was a business in which the founder and owner was a 'dealer' - an entrepreneur who had built the business on his skills in striking good deals. The method of problem solving in the business derived from this process: problems were resolved at a round table discussion culminating with a 'deal' - who was going to do what. While this approach was effective for many operational problems in the business, it was less effective in coping with more complex problems of a strategic nature. The consultant had to educate the client in other methods of problem solving, by setting up a working party to study the issues and helping the client use a multi-stage approach to dealing with them.

In summary, therefore, in deciding the method of approach, the consultant has to consider the following:

• What are the skills and resources consultant and client can respectively bring to solving this problem?

• What is the client's expectation of the consultant's role and how appropriate is this?

• What is the client's view of the problem (and how does it differ from that of the consultant)?

• What is the nature of the predominant problem solving procedures within the client's firm?

• What are the skills and resources the client can bring to solving this problem?

Programme of Work

Once the method of approach has been established, the programme of work explains what is going to happen and when. This is in effect the assignment plan. Sometimes clients find it difficult to visualize how the consultancy will accomplish the assignment objectives. The assignment plan helps by showing how the transition is to be made from the present situation to the new one. It is therefore a good way of building a client's confidence in the project.

Project Planning

There is often a reluctance to plan, but planning is vital if projects are to be delivered on time, good client relationships are to be preserved and budgeted time and resources are not to be exceeded. One reason for this reluctance is that planning can be difficult in complex situations, or at the start of a project when there are a lot of unknowns. In such circumstances, it is sensible to break a project into a number of stages, each dependent on the findings of the former. The use of explicit planning assumptions can also be helpful in dealing with this. As the project progresses, the validity of these assumptions can be tested and the plan modified in the light of any revised assumptions.

Project planning should start during the bidding process for a project, when it will be necessary to estimate the time and other resources required to carry out the project. The elements of a project plan will consist of:

• a breakdown of the deliverables to be produced by the project, derived from the project objectives;

• a breakdown of the project into the tasks or work packages required to produce these deliverables;

• a logic diagram showing the sequence and dependencies of these tasks;

• the resources required for each task.

When the start date for the project has been confirmed, two other elements have to be added:

• a list of the specific individuals (from whatever source) who will work on the project, with exact details of their availability both in terms of the number of hours a week they will be working, and the dates when they will be unavailable;

• a timetable showing when each activity will be done, and who will do it.

If the project consists of a number of phases, a plan will need to be prepared for each phase. In addition to other elements involved, every project plan should include:

• Milestones at which the progress of a project can be assessed.

• Formal progress reviews attended by the project manager, the account manager and the client. (Informal progress reviews may take place more frequently.) These should coincide at least with milestones, and may be held more frequently.

• Schedule of deliverables. When deliverables (for example, reports) are to be produced for the client.

• Invoicing schedule. When the client is to be invoiced for the project.

With projects of any complexity (involving a number of consultants), time should be allowed in the project plan for project administration, such as briefing and review meetings with consultants.

Resources Required

The programme of work will specify the tasks needed to be carried out by the consultant team, and hence the resources the consultancy has to provide. The fees that are charged to the client will be related to the cost of the assignment. This in turn will be based on an estimate of the time required from each consultant multiplied by his or her fee rate. The accuracy of the estimate of the time required is thus central to the profitability (or otherwise) of a consultancy project. If there are a number of people engaged in a project, a 'Time and responsibilities schedule' should be issued on a regular basis showing:

• the tasks to be accomplished;

• who is responsible for each task;

• the resources (time, other) to be devoted to the task;

• when the task has to be completed.

A schedule may cover only those tasks in the immediate future; further schedules can be issued as a project progresses.

It is worth making explicit the resources you will need from a client to carry out an assignment. Sometimes these are clear - for example, when a member of client staff is to be assigned to the project team - but there are other workload implications for a client embarking on a consultancy assignment. For example, the client resources a consultant might need are accommodation, access to a telephone, use of secretarial support (for example, for fixing meetings) and other office services. The consultant will also need time from the sponsor to carry out progress reviews. There may be more active involvement of client staff - responding to interviews and questionnaires, or communicating aspects of the project to staff within the organization.

How the Project is to be Managed

All projects require some input from clients, if only to act as a reporting link. More is usually required, for example, to take decisions. Not all clients are accustomed to using consultants and it may be necessary to advise a client on the appropriate organization to manage the project internally. A question that consultant and client need to debate is, 'Can this project be managed within the ordinary processes of management, or does it require extraordinary arrangements for its management?' In the latter case (which happens more often than not) special arrangements need to be made.

Managerial and other resources required from a client should be made clear at a project's inception. The consultant should also comment on the organization structure that the client should establish for dealing with the project. The simplest structure applies when a consultant reports simply to the sponsor of the project. At the other extreme is a major project being run by an organization, in which the consultancy firm is making a subcontractor's contribution within an established organization structure.

Between these two extremes lies the project steering group. This can consist of the consultancy project manager and the client sponsor, plus other members. The selection of other members is significant. If senior members of departments affected by the project are co-opted onto the steering committee, they should provide helpful counsel, and their participation should help to get better acceptance of any changes proposed. A steering committee also gets a broader exposure for the consultancy firm, and reduces its vulnerability to reliance on a single sponsor. Obviously there are many variations on this theme such as a project steering group that reports to a more senior committee, or subgroups that are responsible for particular aspects of the project.

Consultancy practices will have had more experience of dealing with consultancy projects than their clients, and therefore should always consider what is the most appropriate form of client organization. In some circumstances this may mean challenging the project organization that the client may have in place already.