Let your supplier take the risk

Project management is a risky business and IT history is littered with supplier/customer relationships that have abruptly ended...

Project management is a risky business and IT history is littered with supplier/customer relationships that have abruptly ended on the back of disastrous project implementations. The good news is that as suppliers scramble for business, customers no longer have to shoulder all the risk.

Regular CW360.com readers will not be surprised to hear that the majority of projects run over budget, miss deadlines or do not deliver the expected levels of performance or functionality. Project managers face a continual juggling act that makes the management of the financial risks attached a science in its own right.

Luckily for customers, the current buyer's market provides unprecedented opportunities to shift a greater portion of financial risk on to their supplier. The result is a move away from the traditional payment models of time-and-materials and fixed-price or, latterly, the shared profits of the dotcom era. CW360.com has found examples of users persuading suppliers to put not only profits but also costs on the line if critical success criteria are not met.

Penalty shoot-out
Scott Ewings, director of consulting at business technology specialist Business Systems Group (BSG), explains that the value pricing model that his company operates is coming into play with the market currently so cynical: "We analyse the cost and scope of a project and then make the pitch that we will put 30% of our costs as risk. If we do not do what we say we will do on the tin, then we do not get that 30%. That is a massive penalty clause."

In the good old days of no-questions-asked IT investment, the supplier might have used the 30% formula to leverage a hefty "upside" bonus, admits Ewings. But given the current climate of suspicion, especially with the recent poor track record of failed customer relationship management systems integration, the 30% is more of a penalty clause.

BSG used the model to win a contract with an Internet bank at the tail end of the dotcom boom. Instead of sharing risk to play for a share of new online business profits generated, BSG bet 30% of the cost of the project that it could deliver to win future business as a trusted partner. The online bank benefited too because full payment of the project was contingent on customer satisfaction being increased by 80%.

"We wanted to go for a 75% customer rating but the bank insisted on 80%. In fact 90% of customers rated the online experience as improved," says Ewings.

However, there are a bunch of caveats to using such dramatic customer-focused metrics to decide financial payment. Most suppliers will only agree to this if they are involved in the project very early on and may not want to work alongside other third parties. They also require significant influence over internal marketing decisions and access to commercially sensitive data in order to ensure that agreed metrics are implemented and measured correctly.

See-through solutions
Steve Morgan, head of strategic development at systems integrator Logica, confirms that many blue chips excited by the prospect of new revenues from an IT project back off when they realise the degree of transparency required. "If you are sharing a risk, you have to share the governance of that risk too," he says.

Morgan cites the example of when Logica was hired by a telco to launch a content-hosting service. The investment ran into tens of millions of pounds and the deal began on the understanding that Logica would risk up to 50% of the costs of the project in return for a stake of future business revenues.

"Once the telco became aware of the obligations that shared governance would impose, they got cold feet," recalls Morgan. Making costs and revenues of business streams transparent is always a tough call, especially as systems integrators may want to have joint influence over marketing campaigns. Eventually the contract was whittled down to a 10% bonus upon delivery of business-related metrics.

However small the percentage payment that is linked to savings delivered or revenues generated, there are always major problems of attribution, points out Morgan: "How to decide which saving can be attributed to which IT project is always messy and there has to be cast-iron agreement," he says.

A bit on the small side
Because of the degree of trust and openness necessary to make risk and reward sharing work, this model can work best for small and medium-sized companies. Richard Savory, operations director of Herefordshire and Worcestershire Chamber of Commerce and Business Link, testifies to the benefits of this approach but confirms that total openness and commitment are required.

When the DTI demerged Training and Enterprise Councils from the Chambers of Commerce, the latter effectively lost a subsidy and had to become financially more independent. Savory realised it was not possible to maintain a team of 15 IT staff and wanted a radical new approach to business processes such as customer relationship management (CRM), knowledge management and billing.

"We knew this was a complex project and I'm a great believer in working partnerships," he explains. "I didn't want every change to be subject to a change control sign-off accompanied by a £25,000 bill." Savory bumped into integrator and reseller iRevolution at a show and had a meeting of minds with Frank Fischer, business development manager.

The two parties decided to implement an all-in-one CRM, knowledge management and billing system that would be delivered using the ASP model. IRevolution put up two thirds of the development costs, while Hereford and Worcester staked its intellectual property - in the shape of its knowledge of the operations and IT needs of Chambers of Commerce - for which the parties agreed a value of £250,000. The intention is now to resell the product to other Chambers of Commerce and Business Links. Hereford and Worcester is to act as an "endorsement site" and will receive a percentage of new sales made by iRevolution.

"This approach works well in the SME marketplace where what you see is what you get," says Fischer. "Talking to a larger, faceless organisation it might be harder to gauge what's going on in the background."

Finding a shortcut
If you work for one of those larger, faceless organisations, do not despair because there are a number of deals on the table right now, according to Mike Lucas, technology manager of business IT solutions group Compuware: "Clients are looking for value within a short time frame and might say: 'Here's a pot of money, what can you deliver in six months?'."

Compuware says that increasingly it is implementing projects on a deferred payment basis where clients do not pay a penny until completion. "A client would not pay any upfront costs in terms of hardware of software but would have to make human resources available to enable the implementation," explains Lucas.

If the main burden of risk is deemed to be technology that may not work or could rapidly become obsolete, customers can often get good deals by beta testing vendor software. Users benefit by getting early access to technology for free or at a reduced cost, while vendors are able to prove it works.

But the most clear cut way of transferring risk, particularly where technology is complicated or there are doubts about securing the necessary skills in-house, is to outsource. Mobile communications provider mm02 has just outsourced the development of a leading edge CRM system to IBM Global services. Spanning a ten-year period, the contract not only involves integrating 42 different software packages relating to 2G, 2.5G and 3G operations, but is flexible enough to enable parties to renegotiate targets according to changing business goals.

Don't forget the big three
Whichever way you cut the risk, both parties have to set achievable goals and meticulously measure success, or failure. Budget, deadline and functionality will remain the three key parameters that become more or less critical depending on the objectives of a project and the motivations of people involved.

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