On Prisoners & Projects Aligning Interests in a Complex Relationship
The contract between the E/CTRM service provider and the client spells out the obligations of each party. As such, it is the primary tool for aligning or misaligning interests. Innovative firms have introduced a number of strategies to address the shortcomings of the ‘fixed price’ and ‘time and materials’ models in looking for a Goldilocks Allocation ... where it’s just right.
By Larry Hickey, FRM
IT WASN’T SUPPOSED to go down like this. You and your buddy just got busted. But the cops know they don’t have enough evidence for a conviction. So they separate the two of you and offer each man the same deal. If one rats out the other, the rat will walk and the other guy will do a year. If you both rat each other out, you each do 3 months. If you both remain silent, you will each remain in jail until the charges are dropped in a month. What to do? There’s a problem here. As a team,
the men do better by remaining silent. But as individuals, each does better by betraying the other. If this situation plays out once, you can expect betrayal and a suboptimal outcome. If it plays out over and over, there is hope for a cooperative (i.e. rat-free) optimal outcome.
Buddy is a Stand Up Guy You’re a Stand Up Guy You’re a Rat
Now what could this prisoner’s dilemma have to do with the rarified world of multimillion pound E/CTRM implementations? Plenty, I will argue.
1 month each
You walk – Buddy does a year
Buddy is a Rat
Buddy walks – You do a year
3 months each
The Deal The contract between the service provider and the client spells
Does your implementation team look like a few adults surrounded by an army of kids?
28 March 2012
out the obligations of each party. As such, it is the primary tool for aligning – or misaligning – interests. Let’s consider a fundamental element. Is the job to be done on a ‘time and materials’ or ‘fixed price’ basis? Each extreme presents its own risks (or rat opportunities). ‘Time and materials’ will buy
the client time and materials, but possibly little else. The client bears the delivery risk and the service provider has limited incentive to control the scope or complete the
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84