Fixed bid or Time & Material contract, which one to choose ?

The customer was known to be a tough negotiator; the partner knew it would be a long and tiring discussion going over each and every line item in the contract. They had spent almost 6 months discussing the scope, exclusions, inclusions and service level agreements. Now that the detail was out of the way, the last mountain to climb was deciding the commercial terms of engagement. Both were masters of the game and that made it an interesting setting for others to observe and learn from.

Starting point was the global RFP which had taken everyone by surprise with level of detail and articulation of expectations; none had seen such a comprehensive document clearly outlining the selection criteria and process towards the journey that would select first among equals. It was an important engagement for both customer as well as providers who had reached the penultimate stage towards closure; for the partner it was a long and hard fought battle to emerge as the better player amongst global competition.

Considering deals in the market, the contract value was not very large or the customer a big name to add as a logo; the deal was important in the goals and audacity of what it attempted to achieve. Thus interest from OEMs and partners was definitive with local and global teams from vendor organizations putting their best teams on the job to respond to the RFP and subsequent clarifications. Everyone commended the process, transparency and the professionalism shown by the team through the journey.

The solution architecture was complex yet simple in its design with integrated pieces that made up the whole. It had not been attempted before and that raised adrenalin levels akin to conquering an unscaled peak. With passing time the scope became clearer to everyone with vendors garnering global resources to stitch together the masterpiece. Tough filter criteria eliminated some of the contestants leaving behind a mix of large credible players who imbibed confidence with their brand and experience.

Between the remaining contestants two camps emerged which proposed to use Commercial-Off-the-shelf (COTS) solutions with minimal customization, or setting a foundation of COTS but with extensive customization to create comfort fit to existing processes. Both approaches created the solution demanded by the opportunity though with divergent approaches. Conventional wisdom dictated that minimal customization while a school of thought propagated adaptation to what business can use.

The two approaches demanded alternative commercial models with respective recommendations on why one is better over the other; these were fixed bid versus time and material, the first for COTS, the latter for customized solution; the company had used both approaches in the past though on smaller initiatives with mixed results, neither emerging as a preferred way of working. The current project much larger with budgets that were well-defined, thereby required a very different yardstick to arrive at any conclusion.

COTS fixed bid offered some level of certainty of outcomes, the number appeared large; it also created perception of limited flexibility by which business teams were discomforted. What if the solution delivered does not meet our requirements, what if people are unable to use it as expected, what if it did not deliver promised results ? There were many case studies on what did not work in large projects including for solutions proposed by the vendors; it thus required acceptance of associated risks.

Customized always gives the comfort with the syndrome that I know what I want and I will get it; it leads to extensible timelines and in many cases suboptimal process. Agreed that when completed it is used by everyone eventually; this methodology has been fast losing traction among savvy business and IT folks with the balance in favor of COTS and Cloud hosted for purpose apps. It may sound counterintuitive for someone attempting a project so large and complex, but there were proponents of bending the solution.

Coming back to the commercials, the customer finally decided to take the risk with a fixed bid hoping to pull it off with the bravado demonstrated by some of the team members, acknowledging that the world has moved on. They fought hard on every line item and then some wanting to create an open book costing which eventually prevailed in the interest of the marquee project. Both sides came out of the marathon negotiations feeling exhausted but with a win-win having listed out all possible risks to the project.

The project got off to a great start, did it deliver to promise ? Wait for the next year !

What do you do when post negotiation the offer is declined ?

Business teams wanted the solution badly as it gave them a capability that none of the competitors had. So they worked with the CIO to conduct a thorough analysis of the options available along with validation from an independent IT consultant who had no bias towards any solution provider. The final conclusion was no different from what the business had intuitively arrived at on their own. The excitement was palpable and everyone waited for the budgets to be defined and approved to get started with what would be a project of a lifetime.

The business head along worked along with the CIO to prepare a business case for implementation that was put forward for review by the Executive Management. Discussions turned into debate and ended with clarifications sought from the team on choice of technology and associated investment. Patiently the CIO, vendor, and the business head addressed all open issues to be given an approval of a much reduced budget to get started with. It was a stretch and a difficult ask; everyone knew that but decided to give it a shot.

The negotiation started in earnest with local vendor team who threw up their hands escalating to the regional office; the regional limit did not allow for the expectation from the customer. The local team did not give up as it was a high profile customer and the CIO had brought significant transformation; they knew if they won the business it would be a high visibility win. The defined scope was large and by virtue of this the order value even at a high discount would be worth the effort. So the negotiation was pushed to the global headquarters to manage.

Head of Global Sales arrived at the customer office to close the deal. He was hopeful that he should be able to close in a couple of days. Back and forth it went tugging from one end to the other each waiting for the other to bend, none willing to yield ground. He realized that the customer knew their position and were willing to wait it out to get what they wanted. In a typical world it was a huge discount which they had not done for a long time now. The war of wills had the business head pushing for closure citing business value loss with the delay.

With the Purchase head reporting to the CFO who was unwilling to come down from his high stance it appeared that there was no way out. The CIO was cognizant of the fact that there was business value to be captured which was well articulated and presented by the business head. He called the vendor CEO giving them an opening to break the deadlock and suggested the same to the CFO. The customer and vendor accepted the solution and everyone sighed with relief and shook hands bringing to an end the long drawn battle.

Everyone shook hands and the approval process was to complete in the next few weeks to get the Purchase Order released. Timelines were agreed to on the start of the project, resources were to be allotted from the global talent pool. Life unfortunately does not always play fair. With a twist in the story, in the elapsed time dynamics had changed; the Company had just finished the annual budgeting cycle and the project was about to spill over to the next year. The Executive Committee suggested a review of pending projects.

Left hand unaware of what right hand was doing ? Or did the project become a victim of circumstances ? Was it communication gap between the Executive Committee and the stakeholders ? The Business head was present in the meetings that discussed the company’s results and priorities. Or was it just a case of lackadaisical attitude from the Finance and Purchase team that left the Vendor, Business and IT high and dry ? Can Internal politics drive the investment agenda ? So what caused the project to be abandoned after the long drawn negotiation ?

The vendor did not know how to react to the situation which had taken huge time, effort and resources that now came to a naught. They received curt messages from the Company on the deferment; the vendor CEO reached out to his ally the business head and the CIO. Reality was indeed perplexing and to some extent juvenile with one person’s ego becoming larger than life. Vendors abandoned their quest for business from the company rather than be subject to similar treatment arbitrarily that lacked basic professionalism.

The company is slowly rolling back into the past !

Software for free ?

In the good old days IT organizations developed software; the development initially began with an army of developers working for the EDP/MIS/IT organizations and they did deliver customized solutions for each business unit or function though not always in the time that business wanted these solutions. But back then we did have the luxury of time. As momentum grew, it gave birth to software development and maintenance companies who will do it better, faster, cheaper.

Disruption arrived in the form of packaged Commercial-Off-The-Shelf (COTS) solutions with three letter acronyms (TLA) that took everyone by storm. ERP, CRM, SCM, BPM, ECM, the TLA multiplied creating frenzy amongst companies. Fed up with delays and the slow pace, most embraced the new wave; the investment was justified for speed and standardization. IT transformed itself to adapt to the new paradigm while consultants laughed all the way to the bank.

All software have list prices and ironically no one buys at that price; everyone depending on their leverage and volume negotiated discounts. These varied from the low 10% to in a few cases high 70-80% for global and large deals; more so in cost sensitive markets which could not digest Dollar or Euro pricing. And then the slowdown at the turn of the century and another one not too long ago coupled with a market that was drying up for new licence deals created interesting scenarios.

I have been hearing some interesting news from my CIO friends; it would appear that many solution providers are demonstrating desperation to sell to meet monthly, quarterly and annual targets. The discounts are getting bigger and especially so when any of the calendar milestones are close. CIOs know this and leverage this to their advantage. A vendor signed up an existing customer for an add-on solution at 98% discount just to ensure that a competing product does not make inroads.

In current times it is evident that every buy decision goes through higher rigor and diligence than it did in the good old days. Evaluation cycles are longer and purchase decisions deferred to align with vendor financial calendars. Even vendors play the game fully knowing that the CIO and/or the buying team will close the deal once they believe that the discount level is apt. I am not sure anymore if prices at current levels are artificial to give the mental satisfaction to the customer of getting a great deal.

A friendly CIO talked in hushed tones of a solution he got free ! No licence fee, no implementation cost, only support charges payable after go-live ! This was not a small solution provider, but a leader in the segment in which they operated. I probed further to find why would someone want to do that ? The only insight that I could gather was about creating new market segments and a case study. The project worked well and the CIO was a hero in his company albeit it created challenges for him for future purchases of any solution.

New delivery and service models coupled with cloud based delivery have created new operating principles for everyone. Pay as you use, scale up or down based on load and number of users, dynamic pricing linked to revenue or business benefit, are some examples. How do these impact purchases ? Does it take away the charade of negotiations ? Does this start leading to standard pricing ? So far, I think not, but the future may be different.

Consumers today are willing to pay whatever the marketplace asks as a price; the same individuals in a corporate setting expect a different reality. Maybe it is to do with micro-payments versus large cash outflows. Maybe it is to do with task specific applications on the mobile to general purpose solutions that require large implementation efforts. I think if enterprise application vendors started breaking down their apps in a way similar to consumer apps, the sum of parts would be larger than the whole.

But then we will not need large monolithic applications to run our business and that is something worth thinking about, and most applications would have free versions !

The list price conundrum

With the economy tightening again and uncertainty across geographies, enterprise spending is once again under focus; this is giving rise to some interesting discussions. Driven by the CFO, CEO, and CIO who are exploring deferred investments or the usual doing more with less, the discussions translate into unrealistic (as griped by vendors) expectations from suppliers, vendors and partners to provide goods and services at higher discounts.

Result is rounds of moaning and groaning from either side citing their versions of reality and pushing the limit beyond the last transaction. The promise of future and making up the deficit in the long term does bend most; few who do not oblige sometimes are rewarded and more often it is an opportunity lost. The resultant business creates suspicion if earlier everyone was enjoying higher margins than they should.

In the IT world, I never heard of anyone paying list price on anything that they bought. In normal times discount levels used to range from the nominal 10% to in many cases as high as 70%. It was a rare one time transaction that enjoyed higher numbers. The list price was a marker to decide whose need was higher and who had more patience. Month end, quarter end and year ends provide opportunities offering higher levels of business and discounts. Again almost everyone recognizes this and plays the game.

In the last slowdown or recession depending on which part of the world or which industry you belonged to, a few companies breached 90%. There are anecdotes about free solutions being provided to a few marquee customers either as an entry price or to sustain business. Free is a paradigm shift though the way some vendors are hiking their annual maintenance charges, free does not seem too unreasonable considering that in 3-5 years you have paid as much as the initial acquisition cost.

So why do vendors continue to print a list price which has irrational numbers and then offer a discount ? Maybe to acquiesce human nature which revels on a deal ? Purchase managers and CIOs work on reducing prices every year. Volume typically adds to the discount but is not the only determinant. Benchmarking across the geographies I find that the level of discount rises from west to the east and then again slides with India and China being the trough. Despite this trend, I haven’t seen a gold rush to shift license contracts from other countries to take advantage.

The current uncertainty has once again brought budgets into focus. Slowdown in customer spending is already impacting retail consumption and thereby every industry. Going into budget sessions, the expectation is to once again lower expenses and investments. We still have inflationary trends is many countries and wages are going up for some, while cost of living continues to go up. But the question that haunts me is if there is indeed so much of buffer that every time the challenge is thrown, people find a way of adjusting to new baselines, then how did the same people allow higher expenses in easier times?

As goes the proverb, “Mother is the necessity of invention”, I believe that with every challenge new opportunities are explored and leveraged on operational efficiency. Technology evolution with new disruptions contributes to improvements; return ratios are however reducing and we are reaching a point where the stretch will reach a break point. We will achieve the pit bottoms sooner than later; the list price will then have to change. Whether it will go up or down is another debate.

Squeezing the last drop

One of my CIO friends narrated an interesting anecdote about his meeting with a CEO of a mid-sized IT services company. They were talking about the extension of a contract that had run through 3 successful years. The CEO was relatively new to the company and not party to the original contract. He was berating the fact that they were losing money on the current deal and needed to turn around the business and the fact that the global HQ was fast losing patience.

The contract was signed in times when growth was good and business expectations were stratospheric across industries. The then CEO was exploring local expansion as well as captive services for global operations that would have given Indian entity a firm standing. The downturn took everything away including the CEO. Business growth did not revert despite the economy stabilizing. The pressure to turn around the business thus became paramount for this IT Company.

As the negotiations stretched over a few days, the CEO began demonstrating discomfort. In an open book costing he was justified in his pricing but unable to acknowledge that the company had built up higher running cost which could do with pruning. As the customer, my CIO friend was unwilling to pay a substantial increase to accommodate. The choice to the vendor was to cut costs in a hurry and acquire new customers, and to the CIO it was about continuity or moving to another vendor.

Companies set up specialist functions to negotiate deals, sometimes within Finance and at times as an independent charge or within the function equipped with experts who justify their existence with great sounding deals. Some of these may be win-win, but many end up with bickering over legal contract terms or lose-lose unless you are an 800 pound gorilla who nobody can ignore. So how does one define the limit for negotiation ? How do we know that the deal is great for both of us and not a win-lose or lose-win ?

Conventional way is to negotiate hard, drive a bargain that is best value for the customer. It does not matter if the supplier makes money or not; they can always recoup their margin in the next deal or with other customers. This belief has survived and done well for many. Suppliers recognize it and so do customers who play the game. The industry has adjusted prices accordingly so that nothing sells for full price anymore. Everything has percentage off going all the way to 90%. Can we get it free ?

There is a need to change some of these paradigms to bring the dance of the discount to a stop or at least reduce it to realistic levels may be linked to volume of business. CIOs too need to set fair expectations internally and externally to create win-win scenarios and work upon long-term relationship building. Rarely any deal now is tactical. It is also important to remember that people churn across companies. The spurned, scorned or bitter salesperson may turn up a few years later in another company which is critical to your business operations.

People buy from people, so don’t squeeze the lemon too hard, you may end up with a bitter taste.

P.S. my CIO friend concluded the contract with the vendor who did reduce his overhead costs.

Buying IT, a financial decision ?

IT procurement has always been an activity that provides the CIO and IT staff with substantial power —that of a customer who defines the requirement, negotiates, and sweats the poor sales person through each interaction. There are horror stories of negotiations beginning post midnight, as well as of joyous ones with a handshake happening across the table in less than an hour. In a few cases, this negotiation is the role of a specialist IT buyer or purchase department.

The recent past has seen a lot of rigor in this process, with expectations of better deals and discounts driven by tightening budgets. In many cases, Finance teams were thrust upon the CIO to validate or take over the negotiation. The underlying assumption is that Finance has better negotiation skills, and they will fiscally protect the enterprise’s interests. It is another matter that these individuals (with best of interest) had little knowledge of the overall value propositions on the IT solutions. Another angle discussed is of governance, elimination of temptation driven by large value transactions, and keeping everything above board.

In the early days of my career, one of the executives charged irregularities in IT purchases. I welcomed the conducted audit, which validated the IT departments’ innocence and above board dealings. This set into motion a change in process with the induction of another coworker from Finance during the buying process. While she was in the initial stages an observer more than a contributor, over a period of time, she was able to start adding value. The cast aspersions were no longer a talking point, but collaboration was considering the perceived transparency that it brought to the process.

There have been not so pleasant experiences too for some CIOs facing “interference” from other functions, as they do not understand (nor make an effort to). Thus the strained relationships between IT, vendors, and largely the finance/purchase team leads to a lose-lose proposition for the enterprise—with delays, inefficient negotiations, and missing line items in the overall project charter or Bill of Material. Everyone finds this an ordeal, but is unable to change the outcome, as the value propositions are not understood.

If your organization is functioning well without involvement from other functions in IT procurement, periodically review the perception of how you are seen doing that same. It would help you address issues before they become a talking point. On the other hand, if your organization does require purchase decisions to involve a larger group, get them into the discussion from day 1. Else you may face frustrating moments in the future. Their involvement and participation will be a function of whether they are measured on this. Make sure that KRAs are aligned; else they have no reason to devote time beyond what makes them win and look good.

I also had the privilege in a company to have senior finance personnel sit through tech vendor presentations nodding knowledgeably for a while. Then they would start making excuses not to participate, or get off the meeting as some important call took them away. After a few months, they rarely turned up !