How NOT to Select Your Service Provider: The High Cost of Low Price

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Have you ever gotten bids from three contractors or auto mechanics and presumed that they are all equally qualified and capable so you selected the lowest bid?

How did that work out for you?

We all know someone who has been burned by selecting the low-cost provider ("LCP"). If you've experienced it once, you probably won't seriously entertain the low bid again. You now understand that there are reasons behind that low price, like less-qualified workers, sub-standard materials or inexperience with the task at hand.

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In the world of professional services where accountants, lawyers, valuation experts and others are usually recommended in a group of three, the buyers of professional services make the same assumptions about capabilities and often suffer the same result as the person who chooses to work with the "cheapo" electrician.

The LCP exists in every industry and for certain items, the LCP is a perfectly reasonable solution. However, the LCP is particularly challenging in the professional services space because it is difficult to immediately identify how or where the LCP is lacking.

History shows, however, that buyers of LCP services are not receiving the same quality of service, and those buyers usually come to understand that fact at the worst possible time - when the LCP needs to be relied upon most.

I've heard that story many times from folks who believed that they were getting a great deal on professional services only to wind up spending multiples of the perceived savings cleaning up the mess left behind by the LCP.

So, how does the LCP operate?

Some use certain services as loss leaders for other services. So, if they are really interested in selling you the other service, just how committed are they to providing what you actually need?

Some will service your matter with inexpensive (read: inexperienced) staff. A classic example of "you get what you pay for."

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Some are simply buying your business. For whatever reasons, they aren't particularly busy and the pipeline needs to be filled. You have to wonder why they weren't busy in the first place, right?

Some are learning on your dime. They aren't regularly involved in a particular area of the market or niche but want to develop the expertise, so they price the engagement to "buy" the experience. (and then bill you for the "extra" time it took to complete the endeavor)

Some are operating as sole-practioners while in they are transition. Working from their kitchen tables and happy to pick up any work they can get, their cost structure is essentially zero. These are the lowest-cost providers. But because they aren't with a firm, they don't have access to data bases and research capabilities, and that will compromise the veracity of their work. And remember that while they're working on an assignment that is critical to you, their primary objective is to find a job.

So when you need these folks, will they be responsive, or will they be at an interview? And when they do land that new job, can you be certain that they'll be there for you to answer questions or help with updates and revisions?

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The cost of selecting a professional based on price can be very high - like when deliverables that were believed to be nothing more than "file stuffers" suddenly need to be pulled from the desk drawer only to be exposed as deficient for the purpose it was prepared. Or delays in completing transactions, filings and audits. These all result in more time and money spent then if it was just done right the first time.

The LCP model is not sustainable. When everyone competes on price, it becomes a race to the bottom and the LCPs are usually the first ones there, so there is a good chance that they won't be around when issues arise.

Can you imagine selecting your doctor on the basis of price? Don't make that mistake when you need other professional services because you rationalize that it "isn't really that important" or "it's just a formality" or "they're all the same." Dig a little deeper.

If you receive a fee estimate that appears too good to be true, it usually is... and remember that there's a reason why you don't buy everything at a dollar-store.

What has the LCP cost you?

This article originally was originally published on LinkedIn Pulse.

About the Author:

Dave Bookbinder is a Director of Valuation Services at GBQ Consulting where he helps his clients with the valuation of businesses, intellectual property, and complex financial instruments. More than a valuation expert, Dave is a proactive problem solver who consults with companies of all sizes, both privately held and publicly-traded. Dave strives to lend his business experiences to help people with a variety of matters. For more about Dave, visit his LinkedIn profile.

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