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This chapter is from the book

This chapter is from the book

Preparation for Consultant: Fixed-Price Contracts

Some companies desire to pursue fixed-price contracts with a goal to minimize and control the expenditure. Now pursue some of the hidden negative side-effects that many clients have observed with a fixed-price contract.

A fixed-price contract creates an environment that reduces the common goals of a project team. Relatively speaking, the following two dynamics exist:

  • The primary goal of the consultant organization is to perform as little work as necessary to successfully call the job complete.

  • The primary goal of the client is to contribute as little effort as possible to the project because the consultants, not the client, have the responsibility to deliver.

Sure, everyone will give lip service that these two dynamics will not apply to her. Everyone can be a clever salesperson and say the right things before the project begins. People can genuinely convince themselves that this approach is the best idea. The bottom line is that the previously mentioned dynamics are human nature and affect the business tendencies of both clients and consultants alike.

The peer management implementation approach described earlier in this chapter becomes an unlikely solution with a fixed-price contract. The consulting organization needs to control scope and change management to keep costs low because the project cost (not price) remains fixed. A peer manager from the client is still a good idea for the project but has competing goals to the consulting project manager. The focus on implementation has moved away from implementing the most efficient long-term solutions. The focus is now on ensuring that a solution is achieved with minimal calendar time effort with the hopes that the solution will still be acceptable. Conversely, on a time and materials contract utilizing peer management and peer functional roles from all levels of the client, the client many times considers long-term solutions where reasonably possible. (As a side note, controlling scope creep with consultants is a different issue and can be solved in different ways.)

With fixed-price contracts, there is generally a sharp reduction in user involvement. The client does not have the ultimate responsibility for delivery in this case. The consultants do. Even when the client attempts to have its users involved in the data gathering and other related processes, problems arise. In any business, operational emergencies arise that require employees to address these issues. Time spent addressing these emergency issues takes time away from the implementation project. Because of the fixed-price contract, there is less incentive for the client's users to hurry back to the implementation project. If the consultants are working on a time and materials basis, the client will have a greater incentive to hurry back to the project because time away from the project costs money.

With fixed-price contracts, there is a tendency to staff with lesser-qualified consultants. The best consultants are usually staffed on a Time and Materials contract.

Philosophically, consider an example where you are a consulting firm with two projects, each requiring five consultants. One project is fixed-price, and one is time & materials (T&M). Now assume that you have six heavily experienced consultants and four junior consultants at your disposal. You will likely assign five of your best consultants to the T&M project, leaving the fixed-price project with one of your best consultants. Thus, the fixed-price project will contain four junior consultants.

If you were a T&M client who was selecting individual consultants through the interview process (see interview recommendations earlier in this chapter), you would select five of the six available experienced consultants. The T&M client will not accept the junior consultants because you share in the risk of the project implementation. The Fixed-Price client will desire five of the top consultants but will probably only receive one of them. This is because if you are paying a fixed price, you have agreed that the consulting organization is taking the risk. You have trusted that it will supply sufficient resources to complete the job. If it can't complete the job on time, it incurs the additional expense.

In this example, the reason the consulting organization will take the risk of overloading your fixed-price project with junior consultants is simple. The junior consultants are lower cost, plus they are harder to sell to other clients who will pay time and materials. If these lesser-experienced consultants are out of work and on the consulting firm's bench, these consultants will make the company zero dollars in revenue. Even if the junior consultants prolong the fixed-price project duration, they have still generated some revenue. Some revenue is better than the zero revenue of sitting on the bench. The fixed-price project has become a research and development project for the consulting organization. When the consultants have made enough mistakes at your long-term expense and gained a little experience, they are ready to work on a time and materials basis, and the process starts over. The consulting firm can now hire and train some new kids and provide them to the next fixed-price project.

Even if you disagree with the volume of junior consultants in the preceding example that are selected for a fixed-price project, you must accept the statistical likelihood that you will not have as many top-level consultants on your project. This likely fact will create the two greatest costs you will encounter:

  • Medium-term maintenance costs because many project solutions were not implemented correctly

  • Long-term opportunity cost because better, more powerful, and more efficient solutions were missed

The medium-term maintenance costs are hidden when you go live with your new system. These can prove to be enormous. For example, consider a new Oracle Payroll system that has been "correctly" producing paychecks. The client might have signed off on this implementation and not realized that there are employees who are currently being taxed in wrong tax jurisdictions or not even being taxed at all. Sure, detailed payroll testing should have identified these types of issues. However, if the consulting firm provided less-experienced consultants, the consultants might not have even recognized the problems.

The client cost is now more expensive than if they had implemented it correctly the first time. Not only do you now have to pay for the correction to ensure proper future calculations, you now need to perform tax balance adjustments to correct past incorrect calculations.

There is a long-term opportunity cost that is lost due to non-optimal, long-term project decisions. First, without knowledge of more efficient and more powerful solutions, the client will not recognize the better solutions that could have been chosen. If a better solution is truly more efficient, it involves a truly lower cost each time the solution is processed. Secondly, some project setup and configuration decisions are binding. If you observe a future fabulous idea that can save the company money but you find out that the system has been set up and configured without appropriate flexibility, you will now lose the opportunity of your new cost savings idea. Alternatively, you could re-implement the system at a huge cost to design in the system flexibility that will allow your "cost saving" idea to be implemented.

A few people might read this section and conclude that you can outsmart the system by purchasing a fixed-price implementation but demanding only the best consultants. Nothing is impossible. But buyer beware, you have probably outsmarted yourself. Of course, if a higher level of management does not give you a vote in this decision, do not lose your job! Just remember that the human nature of the consulting organization's staffing decisions is not a fictitious item. Besides, if it takes 6 or 12 months after the new system goes live to finally conclude that the implementation was a disaster, you will have plenty of time to find a new job!

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