Fixed price quotes can lead to greater costs on enterprise IT projects
Who doesn’t like some certainty in their lives?! It’s human nature to crave it. So, when we are lining up to spend up big on a large IT project, a fixed price arrangement seems to make everyone happy and comfortable. But is this really the best way to go? Are all projects suited to this approach? And could the risks involved outweigh the benefits?
From our experience working with enterprises, we can share some insights about the type of projects that may be suited to this approach – and the potential risks involved if you insist on fixed pricing with all projects.
The best quote may not be the lowest
When we think about it, most people don’t want the lowest price, what they want is the lowest realistic price for a capability and quality delivered in an acceptable timeframe. If you’re buying a phone for example and you’ve already decided it is going to be the new LG model, then getting it 5% cheaper by going to a store a little further away may be quite acceptable if it will be available in a similar time frame. If you’ve only got as far as saying Android with a 5.7inch screen – are you sure you’d be happy with the lowest price?
Delivering IT Solutions is no different – what you really want is a combination of capability (scope), quality, timeframe and cost. When it comes right down to it, there’s no point cutting corners upfront only to incur unexpected costs down the track. Even the most seemingly watertight fixed price arrangements must provide provisions for where it is fair and reasonable to add (or reduce) cost. What happens if scope changes? What happens if 3rd party costs increase unexpectedly?
As a general rule:
A fixed price quotation is probably best when there are self-contained, clear requirements. For example, when hardware comprises the main part of the budget or project.
For projects where significant integration is required – increasingly the norm as more and more systems need to work seamlessly together – a fixed price arrangement can be risky and lead to cost blow outs.
So how do you get as accurate a quote as possible when integration is a key component of the project?
You need to begin by understanding your requirements at a detailed level. It’s only by taking time to do this, that you will be able to realistically measure the success of the various integrations.
If you don’t have a detailed understanding of your project, any gaps you leave will be replaced by supplier assumptions. Then if these prove to be wrong, you could see your fixed price arrangement quickly escalate with extra costs.
Getting clear on project price parameters
In theory, fixed price arrangements are the way to go. They should mean better budget management and planning, less risk, and make for happy stakeholders – particularly finance. However, trying to apply this approach to every project is inherently risky.
As indicated above, a good candidate for a Fixed Price quotation is where requirements are well defined and easily measurable, or if physical hardware comprises a significant portion of the project; for example, if you have requirements for a 1/4 rack/ 1/2 rack/ full rack of equipment. Where things start to get more complex is when requirements involve multiple systems and measuring becomes less clear-cut. It’s one thing to list out all the requirements, but this is not the same as being able to quantify those requirements.
An example of database integration will illustrate this point. Migrating a database may seem like a relatively simple project where a fixed price quotation would be appropriate. However, it’s more than likely that the database needs to be integrated with multiple systems across the business, affecting potentially thousands of individuals. Have you determined what metrics you’re using to measure the success of each of those integrations?
Increasingly it is the quality of integrations that will determine the success of the project. If you are looking to achieve a fixed price quotation on integrations, you will need to define exactly what systems are involved. Unless you can be prescriptive about your integrations you can’t expect to receive an accurate quote. We’ve seen problems arise where the requirements are not well defined, forcing the supplier to have to make a series of assumptions. Often in corporations, if the budget exceeds a certain number, say $100k, the customer will simply default to requesting a fixed price quotation. Unfortunately, such an approach may be a shot in the foot – as it compels suppliers to focus on winning your business rather than calculating an accurate, reliable quote.
Be aware that some large implementation partners may be prepared to “loss-lead” on a project to win your business – but their loss doesn’t necessarily mean your win! Even if the work costs twice as much and takes twice as long, vendors know that the risk of incorrect assumptions may not be reported upwards to executive management during the tender process where Fixed Price quotes are laid out on the table. As a result, project risk is not properly considered and a decision ends up being made on price alone. Of course, it’s no surprise when things fall apart and end up costing more than expected in fixes, patches and amendments.
Lessons to be learnt
Don’t risk going with the largest supplier just because they may be quick to give you the number you want. These vendors can take a face-value loss lead as they know they can make up the difference down the track when issues emerge and amendments are required. Check out our blogs on Choosing an Implementation Partner and signs that you’re working with a generalist for more on this.
It’s far better to look at the quality and experience of the company doing the quote. Ask questions about their relative experience and place greater value on their ability to provide a realistic quote, rather than the lowest one. Ultimately, if you get it wrong, as the Program Manager, you are responsible. Don’t be too quick to dismiss smaller, specialist suppliers – they are more likely to take time to get to know your processes and workflows and give you an accurate, realistic quote. Enterprise level businesses need specialists and if a Fixed Price quote from a large vendor seems to be too good to be true, it most probably is.
Comparing like with like is a good rule
Fixed price quotations sound great in theory but can present a minefield for customers as well as suppliers. Although suppliers will always try to make you happy by providing a fixed price, you may end up comparing apples and oranges – therefore incentivising suppliers to give you a low headline price. Fusion Professionals can help you navigate this minefield by working with you to help map out your requirements before engaging suppliers, so that when the quotes do come in, they are more realistic and accurate.