CTRM IMPLEMENTATION
job. Additionally, the service provider will be tempted to pad the team with inexperienced resources. Time and materials makes most sense where there
is a solid basis of trust between the service provider and client or on projects where there is high structural uncertainty (i.e. we’re trying to do something new here). A ‘Fixed price’ puts the service provider at risk for
the delivery. So the client has no incentive to control the scope or provide any assistance to the service provider. After all, it’s their problem. It turns out that effort estimation is hard and uncertain. So the service provider must include a contingency in the price. Fixed price can be attractive to the client because the
cost is certain. It makes the most sense when the job is well understood by both the service provider and client.
Disclaimer: Both models have been presented here as caricatures designed to highlight their flaws. The real world introduces higher order complexities like the fact that both the client and service providers have reputations to protect.
Innovators Innovative firms have introduced a number of
strategies to address the shortcomings of fixed price and time and materials models. In his 1984 book The Evolution of Cooperation, Robert
Axelrod showed that if the same players face the prisoners’ dilemma repeatedly altruistic strategies do the best. This has been borne out in human trials where players tend to behave super-rationally and cooperate.
Bite Size Chunks One strategy for reducing risk is to break a contract
down from a single deliverable to a series of milestones. The risk of individual deliveries is lower and every delivery is a powerful ‘stand up’ signal. A high risk transaction is transformed into a series of low risk transactions – better known as a relationship. Chris Ducanes, VP of administration and general counsel (the contracts guy) at Allegro Development expresses this idea as “breaking the implementation into smaller chunks and then immediately delivering that quick win as proof. Promised. Delivered.” In business for 27 years, Allegro is a global leader in agile E/CTRM solutions worldwide. Navita, with its flagship system
Pomax, is a premier provider of technology solutions for commodity trading. According to Head of Sales Anette Nordskog, the company is moving in the same direction. “Big Bang is out. A phased approach is in.” So cooperation in the past signals an
intent to cooperate in the future. That signal can be intensified by the quality of deliverables which can be stipulated in the contract as acceptance criteria. To this end, Navita has adopted a
longer blueprinting period to better understand the client’s business. “We have found that spending more time with business analysts and technical resources leads to better implementations and the delivery itself is actually shorter. A philosophy recognizable to carpenters as; measure twice, cut once,” saysNordskog.
Another way to signal cooperation to your counterpart is to literally share in their outcomes
It seems to be working. The company has over 100
installations and was bought last month by Brady plc, a leading supplier of trading and risk management solutions for energy, metals and soft commodities.
Walk a Mile in My Shoes Another way to signal cooperation to your counterpart
is to literally share in their outcomes. Energy and financial services consultancy Baringa has been a pioneer in this regard. Since 2002, they have used a ‘fees at risk’ model. Typically, 25% of fees are set aside. The client then reviews Baringa’s performance against agreed upon metrics (called a balanced scorecard) and determines what fraction of the withheld fees will be paid. Baringa’s ‘skin in the game’ model is currently used at 60 – 70% of engagements.
A deal that amounts to a single
transaction – perhaps an exchange of ransom for a hostage – can be risky
Baringa partner Dan Look explains; “The bottom line
is client satisfaction. We try to keep the client as happy as possible and sharing risk is a means to that end. We want to be seen walking the walk ...” Over the past decade the company has gone from 30
to 241 employees. Correlation or causation? – you be the judge. Navita also reports that things work best when both
parties are at risk. At one time, Navita would fund pilot projects as part of the sales process. Since shifting to a shared cost model, Nordskog reports that, “Clients provide better input and higher quality data. And the pilot builds a foundation of trust that ensables subsequent upgrades, change requests and additional markets”.
Incentives Ducanes says positive incentives
effectively foster collaboration. As an example, he cites a discretionary bonus pool that was targeted at both vendor and customer employees. Even a modest bonus amount focuses attention on the
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