Hadley Baldwin, partner at management consultancy The Berkeley Partnership, argues that engaging suppliers on outcome-based contracts can help keep large IT projects on track and deliver better results
Delivering large IT projects on time and on budget, and achieving the results and benefits originally envisaged, is one of the hardest things for a CIO to bring off. Indeed, a study of 5,400 large scale (>$15 million) IT projects carried out by Oxford University in 2012 found that on average large IT projects run 45 percent over budget, seven percent over time, and deliver 56 percent less value than predicted. I doubt that very much has changed since.
There are many reasons for this, not least that IT projects are, by their very nature, complex – and the degree of complexity is often underestimated at the outset.
But what can the CIO actually do about it?
In my view, one important aspect that is often overlooked is the nature of the supplier contracts that are entered into. There are two ways to work with suppliers: the most common structure, which is on a time and materials (T&M) basis - or to pay by outcomes.
There are many reasons why the business may want to get the project started with an input-based T&M supplier arrangement:
- The business might want to move quickly which is easier with T&M, at least to begin with
- The project team may not want to face the reality that there are gaps in their understanding of the outcome or requirements
- Procurement may find T&M easier to understand, negotiate and benchmark
- For the supplier, T&M is lower risk
Under such arrangements, as the client pays for the supplier team’s time and expenses as they go, the costs are not fixed and the potential for them to spiral is relatively high. For the supplier there is a low risk as the cost and budget overruns described above are on the client’s dime. A delay will likely make the supplier more money! This is a common scenario where clients are over eager to move forward and hence do so before having fully defined the desired outcome.
In short, under T&M contracts there is plenty of scope for a project to drift and costs to rise.
Outcome based contracts
That is why I believe more consideration should be given to outcome-based contracts – where the supplier is remunerated according to their meeting specific, pre-defined and agreed outcomes.
After all, if most of the project budget will be spent on suppliers, having a clear approach to maximising supplier performance will be key to success.
Getting a supplier involved from the outset is a good approach for a number of reasons. They often have:
- Worked with competitors doing similar projects and programs
- Been through the process before, albeit from a supplier perspective
- Gathered insight that's useful, which they are willing to share because they're hoping to win the contract
By outlining an outcome with the supplier and agreeing an overall cost from the start, the risk is shifted to them. If the work takes up more resources than expected it affects their margins rather than the company’s. Another advantage of this is that it forces the IT function to be very clear about exactly what it wants and gives them valuable insight on how to get it.
However, the overall objective here is not to simply move the project risk from client to supplier. It is to reduce the overall level of risk and ensure the risk that remains sits with the party that takes effective action to manage it.
What’s more, paying a supplier by outcome is likely to drive two important behaviours, which will increase the chances of successful delivery:
- The supplier will drive the organisation to provide much more clarity and answer key questions on scope and requirements that might otherwise go unchallenged. This additional clarity increases the chances of success for all involved.
- The supplier will likely have a mixture of input and output based work across their portfolio and is likely to focus their best efforts and people on the projects where the most commercial risk lies: outcome based contracts.
Fair and equitable
It's important to set up supplier relationships that are fair and equitable. The client has got to expect suppliers to be able to make a profit. The bigger prize is efficiency and setting the supplier up to be able to work in a way where they do what the client wants and get it right first time. Because the worst case scenario is that there's lots of waste, the supplier loses their profit margin, and the client loses its ability to hit budgets.
The win-win scenario is that the supplier executes right first time, the client gets what it needs and hits its budget parameters, and the supplier makes a sensible profit.
An ideal outcome.
Hadley Baldwin (pictured) is a partner at The Berkeley Partnership