It's time to take control

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But Johns says he doesn't believe consultants can ever successfully drive change in a client's company, even if they're given the mandate to do so. Johns learned this lesson the hard way. In 1997, less than a year into its SAP project, Owens Corning renegotiated the contract with Deloitte Consulting to take back control of the project. Owens Corning employees didn't want to listen to Deloitte. They wanted their bosses to tell them what to do, Johns says. So the new contract stated that project responsibility remained with Owens Corning and specified the roles and responsibilities of all consultants on the job and what they would be paid. Instead of paying them on a pure time-and-materials basis, the new contract stipulated that the consultants would get their hourly fees only after they delivered specific pieces of the project by certain dates. "The time payments got everyone's attention," says Johns.

The issues of cost and pricing create the most distrust between consultants and their clients. Wayne Hall, CIO at The Nautilus Group Inc., the Vancouver, Wash.-based manufacturer of Bowflex, Nautilus, Schwinn and Stairmaster health and fitness products, sent out a detailed request for proposal (RFP) for his ERP project and hired all five consultancies that responded, asking them each to do small projects that would feed the eventual ERP project. Despite spending months at Nautilus getting to know the company and its processes, all five came in with bids of $3 million to $5 million, less than half of what Hall expected.

So Hall sent the RFP back to one company, Emerald Solutions, along with more information and detailed specifications. Emerald revised its bid to about $5 million. Then, after he hired Emerald, the estimate ballooned to $15 million. Hall believes the consultants purposely lowballed the initial estimates to get the job.

His CEO took one look at Emerald's bid, Hall says, canceled the contract and turned to Hall and said, "Wayne, you do it." Hall had to rebuild his IT department to staff the ERP project. He hired Deloitte (which also submitted a $3 million initial bid) to work on specific slices of the project.

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 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% more of the time than those that didn't.

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 can't 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% 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 upfront, 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 percent of Gartner's consulting customer respondents said they would consider some form of shared-risk-and-reward model, but just 4% 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 at 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 who 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.

E-mail your solutions for the consulting crisis to CIO executive editor Christopher Koch at koch@cio.com.

This story, "It's time to take control" was originally published by CIO.

Copyright © 2002 IDG Communications, Inc.

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