Breaking the Consultant Habit

How can CIOs survive the enterprise software party without bad hangovers? Some major trends are emerging. It's clear that IT departments must build up their own project management capabilities. A strong internal project management capability acts as a check against the natural tendencies of the consultancies to grow projects and add new ones. In the Robbins-Gioia survey of companies that had installed ERP systems, those who had created in-house project management offices were successful 15 per cent more of the time than those that did not.

Good internal project management is even more important in the current economy, when companies are scaling back their software projects and splitting them into smaller pieces. If the consultants work on small pieces of the project, the CIO must make sure the pieces all fit into an overall business strategy.

For CIOs who cannot afford to build an IT department to run an enterprise software project, pricing schemes provide the leverage that can keep their consultants in line, on time and under budget. Devices such as fixed-fee, revenue sharing and not-to-exceed limits act like invisible project managers.

In fixed-fee engagements, consultants are paid a specific fee negotiated before the project begins. A recent Gartner survey reports that 62 per cent of consulting customers called this their preferred strategy. But consultants don't like fixed-fee projects and will want to place rigid controls on project scope to make sure they can still make a profit.

Such fixed-price contracts can work if CIOs clearly define the project up front, with a tightly fixed scope and set of deliverables. On big, unpredictable enterprise software projects, that is next to impossible to do. Big fixed-fee projects can easily dissolve into endless bickering over " change orders" , time delays and scope changes. Consultants will also be tempted to cut corners if they're falling behind. Fixed price works best on small projects or on big projects that are broken up into small, clearly defined chunks.

Consultants, of course, much prefer time and materials, saying it lets customers change scope or goals when necessary without rewriting the contract. However, customer backlash has driven consultancies to come up with new pricing models to share risks and rewards with clients. One is agreeing to a lower hourly fee in return for sharing a piece of the cost savings it delivers to customers. Twenty-five per cent of Gartner's consulting customer respondents said they would consider some form of shared risk and reward model, but just 4 per cent of those surveyed said it was their preferred strategy.

To keep project costs from spinning out of control and yet maintain enough flexibility to achieve business process changes, a mix of time and materials and fixed cost makes the most sense. Time and materials with a not-to-exceed cap or time and materials with a contractual schedule for delivery of benefits are two popular options. For example, when Joseph Wolfgram, former CIO for the Bill and Melinda Gates Foundation in Seattle, hired a consultancy to help upgrade the Foundation to Windows 2000, he agreed to time and materials, but inserted performance milestones in the contract that specified the number of users that would be up and running by a particular date. If the consultants missed that date, they agreed to a reduced hourly rate until they got it done.

With the era of huge, open-ended enterprise software projects at an end, the Big Five will need to develop ways to make money on smaller projects while delivering the ROI their customers expect from enterprise software. It is a tall order. They have to deal with a legacy of mistrust from the first wave of big enterprise software projects, and a flat economy is making their customers more cautious and demanding than ever. If the Big Five can't develop new pricing and delivery models to drive the next phase of the enterprise software revolution - supply chain collaboration with customers and suppliers - they may not survive.