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How to prove savings from a fixed-fee arrangement

Here is a way to calculate and prove savings that are promised by a fixed-fee arrangement. Start with historical data for at least the past three years about spending in the area that will be handled for the fixed fee. With that data, it is easy to extrapolate expenditures for the period of time covered by the fixed fees. The difference between what would have been spent on an extrapolated basis and negotiated fixed payment represents the savings. For example, assume a law department spent in 2004 $1 million on some kind of legal representation, then in 2005 $2 million and in 2006 $3 million. On those amounts, the extrapolated spend for 2008 and 2009 would be $5 and $6 million, respectively, for a total of $11 million. If the winning firm’s proposal were to handle that representation for $10 million, the savings would be $1 million 9.1% of the otherwise expected expenditure.

To my mind, saving calculated this way is a much more provable and reliable figure than savings from discounts to hourly billing rates (See my post of Nov. 26, 2006 and 19 references cited on discounted billing rates.).