Académique Documents
Professionnel Documents
Culture Documents
Javeed Ahmed
2008
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TABLE OF CONTENTS
1. Preamble ................................................................................................................................................................ 7 1.1 2. 3. Scope of the document ................................................................................................................................... 7
Introduction ........................................................................................................................................................... 8 Project Stages and Risk Management .................................................................................................................. 9 Table 1 : Project Stages and Risk management ...................................................................................................... 9
4.
Pre-Proposal Stage: Bid or No- Bid Decision ..................................................................................................... 10 4.1 4.2 4.3 4.4 Bid/No- Bid decision ...................................................................................................................................... 10 Consequences of delaying taking bid/no bid decision .................................................................................. 10 Critical Issues to consider for the bid/no bid decision .................................................................................. 11 Recommendations for the bid/no bid decision ............................................................................................ 13
5.
5.1.1 Draft Contract Document................................................................................................................................. 13 5.1.2 Scope of Work .................................................................................................................................................. 13 Example 1: Example of unclear requirements ...................................................................................................... 14 5.2 Strategies for preparing a winning bid .......................................................................................................... 14
5.2.1 Looking at risks from the Customers perspective ........................................................................................... 14 5.2.2 Need Statement ............................................................................................................................................... 16 Example 3: Addressing Customers Special Needs................................................................................................ 16 5.2.3 Project Vision ................................................................................................................................................... 20 Example 4: Project Vision for an Enterprise data warehousing and Business Intelligence Solution .................... 20 5.2.4 Project Objectives ............................................................................................................................................ 21 Example 5: Project Objectives for an Enterprise data warehousing and Business Intelligence Solution ............. 21 For Internal Circulation only Page 2
5.3.1 Dependency Risks............................................................................................................................................. 26 Interfaces............................................................................................................................................................... 27 5.3.2 Commercially Available Off the Shelf Solution (COTS).............................................................................. 27
5.3.5 Hardware Sizing: .............................................................................................................................................. 32 Sizing Parameters .................................................................................................................................................. 32 Sizing Process ........................................................................................................................................................ 32 Risk Transference .................................................................................................................................................. 33 5.3.6 Timelines .......................................................................................................................................................... 33 Example 8 Negotiating timelines........................................................................................................................ 33 5.4 Options at the proposal stage to deal with identified risks .......................................................................... 35
Example 9: Options to deal with identified risks .................................................................................................. 35 Example 10: Seeking modification of proposed clause during negotiation: ........................................................ 36 5.5 Pricing for risks .............................................................................................................................................. 37
Pricing of Program Risks ........................................................................................................................................ 39 Pricing of Risk for Hardware sizing ........................................................................................................................ 39 Pricing of Risks on account of effort variation in fixed price contract .................................................................. 40 Pricing of Maintenance contracts ......................................................................................................................... 42 Maintenance Contracts Negotiating under difficult Economic and Business Conditions.................................. 44 For Internal Circulation only Page 3
6.1.1 Time and Material Contracts........................................................................................................................ 48 6.1.2 Fixed Price Contracts .................................................................................................................................... 48 6.1.3 Time and Material Contracts with a cap ...................................................................................................... 49 6.2 Important considerations for Negotiation .................................................................................................... 50
Main items for Negotiation ................................................................................................................................... 51 6.3 6.4 Letter of Intent .............................................................................................................................................. 51 The Contract Document ................................................................................................................................ 52
6.4.1 Scope and Delivery related clauses .............................................................................................................. 52 6.4.1.1 Solution Ownership ................................................................................................................................... 52 Example 11: Solution Ownership .......................................................................................................................... 52 6.4.1.2 Project Commencement Date ................................................................................................................... 53 6.4.1.3 Simplifying Scope....................................................................................................................................... 53 Example 12: Simplifying Scope .............................................................................................................................. 54 6.4.1.4 Clauses to cover dependency risk .............................................................................................................. 55 Example 13: Dependency Risk .............................................................................................................................. 56 Example 14- Customers Obligations included in a contract: ............................................................................... 58 6.4.1.5 Change Control .......................................................................................................................................... 63 6.4.1.6 Maintenance Contracts - Service Level Agreement ................................................................................... 64 Example 15: Negotiating for Service Level (SL) ..................................................................................................... 64 Generally Accepted Service Level Principles ......................................................................................................... 67 6.4.1.7 Back to Back SLA with partner .................................................................................................................. 68 For Internal Circulation only Page 4
Example 16: Maintenance Contract Benchmarking and related clauses........................................................... 72 6.4.1.13 Maintenance Contracts Term of the Agreement............................................................................ 73
6.4.2 Legal Clauses ................................................................................................................................................ 74 6.4.2.1 Complete Agreement and Complete Offer Clause .................................................................................... 74 Table 2 List of Contract Documents ...................................................................................................................... 74 6.4.2.2 Termination Clause.................................................................................................................................... 75 6.4.2.3 General Damages ...................................................................................................................................... 76 Limiting Applicability of General Damages in a Contract based on competitive bidding ..................................... 77 6.4.2.4 Exclusions in the General Damages definition .......................................................................................... 77 6.4.2.5 Affiliates .................................................................................................................................................... 78 6.4.2.6 Indemnities ................................................................................................................................................ 78 Example 17: Representations and Warranties ..................................................................................................... 79 6.4.3 Commercial .................................................................................................................................................. 79 6.4.3.1 Payment Terms.......................................................................................................................................... 79 6.4.3.2 Bank Guarantee for Performance ............................................................................................................. 80 6.4.3.3 Project Funding ......................................................................................................................................... 80 6.4.3.4 Pricing Granting of Most Favored Customer Status ............................................................................... 81 6.4.3.5 Audit ......................................................................................................................................................... 83 6.4.3.6 Liquidated Damages ................................................................................................................................. 84 Example 18 - Liquidated Damages ........................................................................................................................ 84 For Internal Circulation only Page 5
8.1.1 Mandatory Review of Proposals: ................................................................................................................. 89 8.1.2 Providing Guidance: ..................................................................................................................................... 90 8.1.3 Review of Contract Documents: .................................................................................................................. 90 8.1.4 Transition to Delivery: .................................................................................................................................. 90 8.2 8.3 8.4 9 What Delivery needs to know about the Contract ....................................................................................... 91 Structural Issues ............................................................................................................................................ 93 Risky Projects ................................................................................................................................................ 94
Conclusion ............................................................................................................................................................ 95
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1. Preamble
This document has been written from the perspective of Supplier of IT services. The term Supplier, System Integrator (SI), Prime or Prime Contractor, or Bidder have been used in this document as appropriate based on the context and signify the same entity. The context of this document is competitive bidding based on a Request for Proposal from a Customer.
1.1
The document covers the Bid Management and Contract negotiation process as well as the process for transition to delivery to ensure a successful and safe bid and contract. The coverage of risks arising from the contract and the risks that can be prevented or mitigated through appropriate measures during the bidding and contract process is a special feature of this document. The body of knowledge available on this subject is meager. As we move from simple Time and Material contracts to fixed bid contracts and now to ever more complex multi Vendor System Integration contracts, there is a need to build the required competency and establish best practices. This document is an attempt in that direction.
Intended Audience
The intended audience of this document is the Suppliers bid management and negotiating teams as well as the Program and Project Managers. It is hoped that the document will provide fresh insights on the subject to the practitioner. This document is not meant to be a textbook on the subject.
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2. Introduction
The goal of project management is completion of Project on time, to specification and within budget. In the case of maintenance and support projects, the goal is to achieve service levels on a consistent basis, within budget and with higher efficiencies year on year. The objectives of risk management are to ensure that this happens. A large System Integration Project involves bringing together multiple products and services from multiple parties into an overall integrated Solution architected and lead by the System Integrator who is also usually the prime contractor. The activities of these multiple parties have to be coordinated, the interdependencies have to be identified and managed, the progress of all parties have to be meticulously tracked to ensure that the efforts converge in delivering the final integrated solution. The negotiations and drawing up of the contract needs to be managed to ensure that the prime contractor does not end up carrying risks that are transferable. Proper risk identification and risk transference are therefore key activities during the proposal and contract stages for a prime contractor. The contract document creates a structure of roles and responsibilities, rewards and penalties, communication, escalation and dispute resolution mechanisms, change control procedures, acceptance criteria etc. These are the enablers as well as constraints and govern behavior of the parties during contract performance. In a System Integration Project the structure is complex owing to the involvement of multiple parties in the delivery process. The sub contract must be aligned with the Prime contract to facilitate rather than frustrate the delivery process. This document lists the issues and shows a way to deal with the complexity.
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Risk Management STAGES Pre Proposal (Predict and Prevent Risks) Proposal preparation (Predict and Prevent Risks)
Critical Issues
Bid/No Bid decision. What are the benefits of doing the project and what are the associated risks? Are the benefits commensurate with the risks? If yes, how to improve the chances of submitting the winning proposal with acceptable level of risks? What are the risks over which Supplier has control? What are the risks over which the Customer has control? What are the risks over which partners have control? Can the responsibility for risk management be transferred to the party which has control? How to make each party responsible for managing the risks over which they have control? What are the possible consequences of failing to manage the risks well? How can each party be made to take responsibility for the consequences of risks that are not managed well? What specific clauses need to be negotiated and incorporated in the contract? How to negotiate and secure a safe deal?
A formal document may be prepared for taking the bid/no bid decision
The proposal could cover Suppliers expectations from the Customer in managing the risks under their control. Supplier could also propose at this stage, specific clauses in the contract that they would like to be included in case this is considered safe. A document may be prepared on the subject for the legal/commercial teams to secure a `safe deal.
Contract negotiation (Mitigate risks) Contract performance (Pro act and manage risks)
The negotiating team may be provided with full details of the risks and the riders that need to be added to the proposed clauses. Agreement with various parties on the reporting, communication and escalation plans, and templates to use.
How to manage the risks? What data needs to be collected to detect emergence of risk, what reporting mechanisms need to be in place, what is the escalation plan based on severity of issues? Should risks emerge, is there a plan for managing them and a mechanism for monitoring the success of the measures until the risks are contained?
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Bidding for a contract involves the following risks: Risk of not winning. Winning but not being able to execute it.
The objective is therefore to: Go all out to win and secure a safe deal when execution is considered possible. Avoid a contract that is difficult or impossible to complete within budget and within the given time.
The bid/no bid decision is therefore of considerable importance and must be taken early for the following reasons: A clear decision to bid empowers the bid manager to employ all necessary resources to submit a winning proposal and to think, act and behave as if the deal is already won. This frame of mind helps in adopting a comprehensive approach to Risk Management without which, certain aspects are ignored since `we may not win anyway! In Risk management, this is the stage where risks can be prevented. In later stages, only mitigation is possible. The Project Manager can be identified once a decision to bid is taken who can then be associated with the bid process. His/her experience coupled with the delivery responsibility, create the right environment for ensuring that no key risk is missed. Identification of the PM is a clear signal to all parties regarding the seriousness of intent which goes a long way in ensuring a successful bid.
4.2
Quite often there is no explicit bid/no bid decision taken. The consequences are: The bid process once begun quickly acquires momentum and is very difficult to halt midway. Also there are other considerations such as loss of face internally, with partners, Customer etc all of which make decision making difficult. A late decision of no bid is often diluted into a decision of bid to lose. This may be worse than deciding to withdraw. The bid team is demoralized more by such a decision rather than with a clear decision to withdraw. Also, if this happens too often, partners begin to lose trust. There is also the risk of winning an unwanted contract inspite of bidding to lose. The fact that there is no explicit decision taken to bid also takes away the certainty of Organizational support for the bid all the way through which is crucial to submitting a winning proposal. Key activities that require considerable effort such as completing all subcontract arrangements before the proposal is submitted are often ignored. Page 10
4.3
Analysis of the Customer: Would we like to do business with the Customer? What is the reputation of the customer for fair play, reasonableness and meeting commitments What is the Project budget? Is the budget adequate for meeting all critical requirements of the customer?
Competition Analysis: Who are the competitors? What standing/influence do they have with the customer? Are they already working with the customer? If already working with the Customer, then how is their delivery performance? What are the relative strengths and weaknesses of the competitors What is the likely strategy of the competitors and what are their strengths and weaknesses? What alignments exist between competitors and Solution Vendors? What is the strategy for overcoming the competition? What is the confidence level in overcoming the competition?
The Requirement: Are the requirements detailed enough to make a good estimate of effort? What further details are required? Is there an opportunity for getting further details as part of the pre-bid process? What is the familiarity with the domain and the technology? What processes are required to execute the project? Are all the processes suited to the activities necessary to accomplish the project goals defined and documented? What is the process maturity or what projects have been executed using the processes? Is it possible to come up with accurate effort estimates with a high level of confidence? What are the grey areas and the associated risks? What are the dependencies on the customer and other third parties?
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Partners and Sub Contractors: Is there need for partners and/or Sub contractors? Have the partners/sub contractors been identified? Is there prior experience of working with the partner/subcontractor? If yes, any pointers to what may be expected? Has responsibility been assigned for executing necessary teaming agreements with clear deadlines for execution? Has the scope of work been defined for the partners and the terms and conditions in the teaming agreement defined with traceability to the prime contract draft? Is there choice of more than one partner/sub contractor for the same purpose before/after the proposal is submitted? For all the high value items of project cost, have we identified partners who can be depended upon to cooperate with us in submitting a winning bid?
Project Budget: What is the budget for the project? Can we submit a proposal within the budget while meeting all critical requirements of the customer?
Prime contract: What risks does the draft contain? What risks can be shed or transferred? What is the plan to manage the risks that cannot be shed or transferred?
Strategic Benefits Are there any strategic benefits in executing this project such as: building capability in an area where the Supplier would like to grow, build a reference able customer, or expectation of other downstream projects etc?
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Managing IT Services Project Risks at Proposal and Contract stage 4.4 Recommendations for the bid/no bid decision
Reasoned recommendations for the go/no go decision to be formally put up to a high level Decision making authority based on assessment as above jointly by Proposal Owner and Relationship Owner.
5. Proposal
5.1
A COTS (Commercial off the shelf) solution was offered that had Government pensions as one of the modules. During implementation, it was discovered that the COTS solution catered to Central Government Pensions only. The Customers requirements covered Defense Pensions and Pensions of the Punjab State Government also which the COTS solution was incapable of handling and required considerable development.
5.2
The RFP document sometimes contains an explicit procedure and criteria for evaluation of a proposal. In such a situation, the task is clearly cut out. Sometimes, the criteria are not spelt out. A risk document from the customers perspective can be prepared in such a situation. This would help prepare a proper response covering in detail areas that are apparently critical from the customers perspective. For Internal Circulation only Page 14
If this Custom Application is to be reengineered with vastly enhanced functionality, and be ready to be implemented and integrated with the new generation Core system in time then, The risk to the customer if the Application for ancillary business is not ready in time is to suffer considerable loss of ancillary business with possible impact on the main business itself. Time and quality are therefore of the essence. The Customer would therefore try to de-risk the situation by: Ensuring that the supplier has experience in implementing a system for other airlines of similar complexity and size. Lack of this would imply the following risks: o Inaccurate effort estimates o More defects due to lack of understanding of domain requiring longer time to fix problems and more iterations o Delay in delivering the project o Quality and Support issues
Assessing the suppliers capability and familiarity with projects of this nature from the project plan which should contain : o Granular level tasks, o key milestones, timelines o resource plan (suppliers as well as customers business / IT personnel) o Clear definition of the roles and responsibilities of each party in each stage of the project implementation Assessing the Suppliers implementation approach and best practices for minimizing risks. Assessing the Suppliers software development quality assurance process to ensure that the quality is able to satisfy Customers requirements with minimal errors, defects and bugs on all code deliveries so that agreed functionality can be implemented on time. Assessing whether the Project Plan contains meaningful review checkpoints at periodic intervals to ensure that the project is on track. Assessing Suppliers cultural fit to minimize behavioral risks. Inability to get cooperation from the business user could seriously jeopardize quality and timelines. Assessing the Suppliers capability to identify the risks correctly and to come up with a workable plan to prevent/mitigate the risks. Assessing the Suppliers Technology competence for the Technology stack proposed for the Solution
A response that merits serious consideration would have to cover all of the above areas comprehensively. If the Supplier has not executed a similar project before, then the following
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To have a fair chance of winning such a bid, the response has to be reassuring to the Customer from their perspective of risk.
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The needs of Supplier are likely to be: Visibility into plans of Product Company so that effective resource planning is possible High loading factor of development resources
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A broad outline of the enhancement process that contains an assurance of fair pricing of enhancements to Product Company and also derisks the Supplier against possible miscalculation of effort at initial stage is described below: Step 1- Request for enhancement. Product Companys Customer comes up with a request for enhancement. At this stage, the requirement is at a high level in the language of the Business User. Step 2- Budgetary Estimate. Supplier submits a budgetary estimate based on the request Step 3 Go/No go decision. Customer communicates approval based on budgetary estimate or communicates lack of further interest. If the Customer does not approve the budgetary proposal, the enhancement is shelved and there are no payment obligations for the effort in submitting a budgetary proposal. If the Customer approves the proposal, the process is taken forward and the Customer becomes liable for all efforts if the final estimate is within budget. Step 4 User Requirements Document. If the go ahead is given, detailed requirements are collected and URD is prepared and submitted by Supplier. The effort estimate is reassessed based on detailed URD. The likely scenarios are: o Reassessed effort is within budgetary estimate and if Customer decides to go ahead then proceed to next step If Customer decides to drop the enhancement, bill for the effort in doing the URD and preparing the estimates
Reassessed effort is greater than budgetary estimate communicate to customer and get clearance for going further. If clearance does not come forth, the enhancement is dropped without any obligation to customer. If the customer decides to go ahead, then proceed to step 5. The budgetary estimate stands revised.
Step 5 Functional Specifications Document. Supplier prepares the Functional Specifications Document and the System Specifications Document. Effort is reassessed o Reassessed effort is within budgetary estimate and if o Customer decides to go ahead then proceed to step 6 If Customer decides to drop the enhancement, bill for the effort upto this stage
Reassessed effort is greater than budgetary estimate or revised estimate at previous stage communicate to customer and get clearance for going further. If clearance does not come forth, Page 18
The outlined process has the following advantages: The Customer has no obligation to proceed with the enhancement or pay for the Suppliers efforts unless the final proposal is within the approved budgetary price or the approved revised price at the end of previous stage. The Suppliers efforts are compensated when the final price is within the approved budget even if the Customer chooses to shelve the enhancement. The Supplier has the option to revise the price in any direction based on final detailed analysis of requirements, specifications and design. In case the Supplier revises the price upwards and the Customer chooses not to go ahead, then the only risk to the Supplier is of wasted effort upto the stage at which the price is revised upwards. The probability of occurrence of such an event is low since on most occasions, the budgetary estimate is likely to be higher than the final refined estimate. The process provides for continuous refinement of the estimate which benefits the customer on most occasions. It also derisks Supplier should the final estimate be significantly higher than the budgetary estimate. The process is transparent and fair to all parties. The customer gets the enhancement at least cost as it is based on the final estimate that is closest to actual effort with no buffers or cushions. The risk to Supplier is also minimized. The natural inclination to play safe by quoting a considerably higher price for budgetary purpose is checked by the fear of killing the opportunity early, if the Customer does not see value vis--vis the budgetary estimate. Norms can be evolved and stipulated as Key Performance index (KPI), if felt For Internal Circulation only Page 19
Billing rates for Development Under the best of circumstances, the loading factor for development activity will not exceed 80 -85%. If it exceeds 85% then it implies that many of the requests will have to wait in a queue before being addressed. If it is low, then the cost goes up. It is therefore fair to assume and maintain a loading factor of 80% in the long run. The billing rate for the Development resources can then be justifiably be higher by 25% when compared with an equivalent resource for the maintenance activity. If the loading factor exceeds 80%, then the Supplier could agree to share the benefit with Product Company. The approach as outlined above is likely to find favor as it meets the critical concerns of the Product Company. The other aspects of the process such as Quality Assurance etc are not touched upon since these pertain to standard practices of the Supplier.
Project Vision: To build a platform that would enable the Customer maintain its leadership position and transform into a lean, agile, responsive, customer focused, rapidly growing organization with increasing profitability and safety.
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Project Objectives: To architect an integrated, scalable, agile and intelligent Information system for the Enterprise. Organization of data from multiple source systems into unified information in an Enterprise Data warehouse (EDW). The EDW will be a source of a single version of truth and meet all requirements for reporting and analysis and the needs of existing as well as proposed downstream applications. Delivery of reliable and consistent information at reduced cost, in a timely manner, in an appropriate format and through convenient channels. Building an effective decision support system with subject area data marts and OLAP tools Building an Executive Information System comprising dashboards Effective control through actionable information, exceptions, and trends Improved Risk Management Achieving Customer delight and improved Customer Relationship Management Enable collaborative performance planning and review
Project Benefits: Besides meeting all of the Banks reporting requirements, the Solution will provide analytical insights for strategy formulation and decision making, and actionable information for execution, to meet the Banks financial and nonfinancial strategic objectives. Some of the relevant metrics to measure the benefits from the Project are: Increase in Market share Increase in business volume per employee Increase in profit per employee Business from New customers Reduction in attrition of profitable customers Increase in profit per customer Increase in stickiness of customer or accounts per customer Decrease in income leakage Reduction in costs Increase in usage of appropriate Channels and reduction in transaction costs Increase in fee income on non-fund based business Reduction in Non Performing Assets through better risk management Reduction in cycle time of transactions Reduction in Defect Density and customer complaints Better governance and Increase in span of control for a leaner and flatter organization
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Risk-Reward model for Executing BI and DW Projects for the Banking Industry
Scope of a BI and DW project can be divided into two parts as follows: Part 1. Addressing the customers pain points in the area of Compliance and Regulatory Reporting, Operational and MIS reports, financial consolidation and Reporting. Part 2. The remaining part of the scope covers implementation of Analytical and Point Solutions, the potential value of which is rarely quantified or understood although the customer may have some notion of the solution.
While the customer has clarity on what to expect for part 1 of the scope and can come up with detailed requirements and acceptance criteria and can control the quality of the deliverables, this is not the case for part 2 of the scope. If part 2 of the scope is managed poorly, the customer can incur the costs without realizing the full potential of the Solution. This is where appropriate deal structuring can make the difference between a poorly implemented solution that delivers little value and a well executed Solution that delivers great value. The Risk/Reward model of pricing part 2 of the scope is particularly suitable as the investment is discretionary and the value derived from the investment is highly dependent on the manner in which the project is conceived and implemented and not so much on the investment in money terms. Given below is an outline of the risk-reward model for the Banking Industry: Agreement on benefits, measures of benefits and monetary values: The EDW Solution is expected to provide three major measurable benefits as follows: 1. Decrease in head count for meeting the requirements for compliance reporting and operational reports 2. Increase in Business Volumes over and above the normal increase that can be attributed to the Solution 3. Improved profitability.
1. Meeting basic Reporting requirements: The part of the solution that provides this can be separately costed. The justification for the investment will
be in terms of reduction in head count enabled by the automated processes for data acquisition, integration and reporting. Once justified, the benefits are assumed since actual reduction in head count may not happen and the same head count may be deployed for other activities. Part 1 of scope of the project could therefore be executed on the basis of a firm price.
2. Increase in Business Volumes on account of better Customer Services: The solution provides analytical insights for strategy formulation and decision making, and actionable information to meet the Banks financial and non-financial strategic objectives. Some of the relevant metrics
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The benefit of the Solution would therefore be (increase in Business Volume Normal increase in business volume)* profit/business volume Only increase in volumes over and above the normal rate of increase will be considered. The normal rate of increase would be the historical growth rate for the Customer adjusted for common factors affecting the industry in that year or the average growth rate for the industry as compared to the previous year.
3. Improved profitability as a result of: Increase in business volume per employee (Employee empowerment through making available actionable information for instant decisions) Increase in profit per employee Reduction in attrition of profitable customers Increase in profit per customer Decrease in income leakage Reduction in costs Increase in usage of appropriate Channels and reduction in transaction costs Increase in fee income on non-fund based business Reduction in provisioning for Non Performing Assets through better risk management Better governance and Increase in span of control for a leaner and flatter organization
The benefit of the Solution would therefore be Business Volume * ((profit/business volume) now (profit/business volume) base) The base figure of profit/business volume is the prevailing figure at the start of the project and adjusted for common factors affecting the industry. The common factors affecting the industry are : Net Interest Income (Differential interest rate on loans and advances and interest rate on deposits). This is to some extent dependent on the business climate and actions of the Regulator. Growth in Non Performing Assets. There is a part that is attributable to the business climate and affects the industry as a whole.
Risk/Reward sharing The Project Cost comprises: Bought out items Page 24
These are roughly in the proportion 50:50 considering implementation and support services for a seven year period. The Customer pays for all the bought out items (shares 50% risk). The bought out items can be jointly sourced and negotiated. Budget will be prepared by Supplier for all bought out items. The Supplier is paid on a reward sharing basis (carries 50% risk on the project cost) Formula for Reward Sharing The rewards that we have considered are only those attributable to the Solution. These can be shared in the same proportion as risks are shared for a period of 5-7 years from the date of completion of the project. The reward for the Supplier can have a cap of say 3 times the fee based on hourly rates. The Project is for development/implementation and support for 5-7 years and the cost split is approximately 50:50. The support fee is expected to be realized from benefit sharing in a regular stream from start of the support period. The development/implementation cost alone is funded for an average period of 30 months. Considering a funding cost of 10% PA for the payments for development activity that may be pushed out by about 30 months on an average, this effectively translates to about 280% of the fee computed based on hourly rates. Advantages of the model Advantages that are common to the Customer and Supplier are: Prioritization based on ROI for delivering projects. Over investment on bought out items is against the interests of both the parties and therefore jointly avoided. Change Management is key to success and Supplier becomes an equally interested party in managing this process well True partnership as Supplier becomes a stakeholder in exploiting the full potential of the Solution to maximize the benefits. Joint creation of value by Customer and Supplier. Scope can therefore evolve over the course of the project. The project can be segmented into defined value chunks with a provision that the Customer or the Supplier can walk away at the end of any segment. This way, neither the Customer nor the Supplier has to commit to the whole project at once but can do so in smaller pieces. This way, series of value checkpoints are established to ensure that the project is on the right path. Part 1 of project scope can be executed on the fixed price model and can be the first check point. By the time this stage is completed, both the Customer and the Supplier are in a better position to assess the risk- reward aspects of the remaining scope.
Advantage to customer Cost of failure shared by Supplier and therefore Supplier becomes an interested party in ensuring success. Deal structured to make the Supplier a responsible party reducing overheads on monitoring and supervision. o Quicker delivery in the interests of the Supplier o Quicker and wider adoption of the Solution in the interests of Supplier Page 25
Advantage to Supplier Providing Solutions to customer in true partnership mode is the future of IT Services business. The faster the Supplier gets there, the better it is for its survival and growth. The rewards are commensurate with the risk and bigger than what can be expected otherwise. The revenue stream for scope in part 1 is similar to any fixed price project. For project scope in part2, it starts in about 6 months to one year time and continues until the end of the support period of 5-7 years. The revenues for the development/implementation effort are only pushed out by about 30 months. The project on the whole has regular revenue stream which is not delayed for the fixed price portion and the support portion. Easier to sell the services.
BI and DW projects offer the greatest opportunity for value creation and therefore are most suitable for this kind of deal structuring.
5.3
From a risk perspective, the main areas of focus in the proposal are discussed in this section
The risks are: Cost - The current supplier would expect to be compensated for services and perhaps for loss of profits as well if they stand to lose business by cooperating. Failure - The current supplier may not cooperate if they stand to lose existing business sooner by cooperating. This is perhaps the reason why the Customer is unwilling to take responsibility and is shifting the responsibility entirely to the Supplier. There are instances of projects that have been delayed by 6 months and more negotiating with existing suppliers for their help in extracting data from proprietary systems or systems where business metadata is undocumented.
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The Supplier may therefore carry out necessary due diligence and ascertain the risks before accepting the responsibility.
Interfaces
If the Application that is in scope for delivery is required to be interfaced or integrated with existing Applications, ensure that the following is included as Customers obligation: For integration of Application in scope with current applications in use and deployed on Customers legacy systems, the Customer shall procure services of the relevant application vendors as necessary to work with Supplier and its subcontractors for the integration.
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Impact analysis. A change to a part can impact other functions. Design. If the change is exactly the same as specified by the customer, then the change can render that part of the Solution obsolete and unusable very quickly. All changes have to be attempted from the perspective of making the change as generic as possible to take care of not only todays needs but needs that may arise in future or similar requirement of other customers. This requires involvement of high caliber domain specialists who are scarce and therefore unavailable for Customer specific enhancements. Each and every enhancement therefore introduces a rigidity that makes the Solution more and more painful in the long term while satisfying an immediate need. Example: A Bank applies interest on loan accounts every month whereas contractually, (purely for historical reasons) it should be applied every quarter. The requirement was therefore to use an adjusted rate (rate adjusted to give the same effect on monthly compounding as using the given rate and compounding quarterly). If this requirement is taken as given by the customer and every rate input by the user is converted to adjusted rates, then the change becomes a severe constraint if should tomorrow, the contractual terms are changed to mean monthly compounding. It is possible to provide a generic solution that can take care of all possibilities and future proof the change against any requirement that may arise. This however requires involvement of the right caliber of domain experts and a greater effort. Any change to the core system requires thorough regression testing and goes through several iterations before becoming stable. Too many requirements that require extensive development, is a sure recipe for failure or for extensive delays. As a thumb rule, any major enhancement to an existing Application that requires 1 month of coding requires 2 months for getting the requirements, 2 months for design and 2 months of testing and debugging.
Other reasons for deferring development Pushing all development to phase 2 assures that the Solution goes live in phase 1. Customers quickly adapt to the features of the new System and their perception of gaps that require new development changes dramatically bringing down the need for development to a bare minimum. Example: A Public Sector Bank had evaluated a core banking solution and come up with a list of changes that were required to take care of the Banks requirements. The cost of new development was 3 times the cost of the license fee. There was considerable delay in giving the requirements which had to go through several iterations. The Solution was in the mean-time implemented. It was quickly discovered that none of the enhancements were required. Changes to existing business processes made it possible to use the System `as it was without any `enhancement. Some of the `enhancements when delivered were never used as they had introduced some unanticipated rigidity or impacted some other function which made it unusable. The Bank implemented the Solution in 10,000 branches of the Bank without a single line of code being changed to the core system. Generally speaking, COTS vendors have little interest in Customer Specific enhancements and do not put their best people on the job. This is irrespective of the fees that may be paid. Their interest is only in undertaking Product enhancements that appeal to a number of customers. Customer specific enhancements create many versions of a standard product which is every product vendors nightmare Page 28
o o o
Implementation Milestones and Deliverables, definition of Defects of various severity, Acceptance Criteria: Precise back to back clauses are essential to avoid a situation where the subcontractor claims that a milestone is successful and the customer says that it is not, and both are right according to their contracts with the SI. Implementation methodology that would be followed must be agreed to. Liquidated Damages. Back to back arrangements must be made. Considerations that need to be weighed are: o o If delay is solely on account of the subcontractor, can all of the LD be passed onto the subcontractor? If delay is by multiple parties, in what manner the LD may be distributed.
Contract term: Maybe defined as a definite date or on sign off of a milestone or end of warranty period plus a safe period of say 3 months. Validity period of offer. This must match with the Prime Contract so that the subcontractor cannot vary the price while it is fixed for the SI. Warranty and warranty period: When does it begin? After the Solution goes live in production (Customers preferred option) or fixed period after the license agreement is signed (sub contractors preferred option). Unless care is exercised, a mismatch is highly likely. Termination for cause. The SI must be empowered to terminate the contract for cause without the prime contract being terminated. Back to back arrangement on termination for convenience is essential including the services that have to be rendered by sub contractor on termination. Indemnities, performance guarantee, liability for general damages, and limitation of liability: Arrangements should be made that are no less onerous than those in the prime contract. Date of commencement of maintenance contract: Is it at end of warranty period? Post implementation support. Precise definitions of L1, L2 and L3 support and who does what should be spelled out. Service Levels for performance. The terms and conditions agreed with subcontractors should be no less onerous that those in the prime contract. Page 30
There should also be a provision for further negotiations if the prime contract undergoes change based on negotiations with the customer. If agreement is not concluded with subcontractor by the time the proposal is submitted to the customer, the bargaining position of the contractor is strengthened, and it becomes extremely difficult to negotiate appropriate terms thereafter. The project could become financially unviable and also fail, if the Prime contractor cannot have back to back agreement on the Service Levels, scope of work, timelines, roles and responsibilities with the subcontractor.
5.3.3 Suppliers
In a SI Project, the prime contractor may be responsible for providing the complete solution covering:
All the items of purchase are not required immediately and just in time purchases will be desirable from the cost and cash flow point of view. For example the production environment in the data center can be ready a month before the production go live date. If the production go live date is 9 months from the start date of the project, then the hardware required for the production environment can arrive 6 months after the project start date. The plan to network all offices of the Customer (for example, 1000 branch offices of a Bank) may be spread over a 2 year period. If all the equipment required is purchased in one lot, then this does not only involve cash outflow and interest costs but also warehousing costs and insurance. The warranty period will run through while these equipments are still lying in the warehouse. The equipment is also subject to obsolescence and depreciation. Purchase agreements must therefore be explicitly made for staggered purchases with firm delivery lead times and severe penalties for delays. In the absence of an explicit and documented understanding, once the prime contract is signed with the customer, the Suppliers will insist that: The Orders are to be placed immediately for the price to be valid. Prices quoted are valid only if the entire requirement is purchased in one lot. Page 31
The solution proposed may not allow changing the specifications of the items and therefore may rule out sourcing material from alternate suppliers. Necessary care must therefore be exercised while entering into purchase agreements. Explore the possibility of having back to back terms traceable to the RFP if possible. For example, If payment is subject to acceptance by the customer then all software items may be purchased on the same terms. If payment for hardware is after installation and commissioning, then purchase can be on credit against Letter of Credit (if necessary) with a credit period long enough to allow installation and commissioning. While the risk for purchase is borne by the supplier, there is no negative cash flow from the project. If Bench Mark test is stipulated by customer then Purchase Order should be issued after successful completion of the Bench Mark test. In the meantime a Letter of Intent could be issued to give comfort to the hardware vendor that there is serious intent to purchase the hardware on successful completion of the Bench Mark.
Sizing Parameters
Ensure that data on all project parameters that affect sizing including expected growth in data/transactions is obtained from the customer and included in the contract. Additional hardware requirements necessitated by any factor exceeding the stated parameters should be to the account of the Customer.
Sizing Process
An iterative process involving the following steps gives good results First Cut sizing by tool or Application vendor. The Tool/Application vendors generally tend to size hardware on the higher side to ensure that the experience of the users with the Tool/Application is good and the hardware resources are not found wanting. Page 32
Risk Transference
In an SI deal, the hardware Vendor and the major Application Vendors are the partners. They stand to benefit immensely if Prime wins the bid and therefore have as much interest in ensuring success of the proposal. They would therefore appreciate the risk of over sizing and making the bid uncompetitive. This makes it possible for the Prime to involve them in the sizing exercise and transfer some or all of the risk. This expectation should be incorporated in the teaming agreement. All three parties viz. SI, Hardware Vendor and the Application vendor should jointly conduct the sizing exercise. The SI should ensure that the right people from the partners side come for the exercise with relevant benchmark and empirical data of similar projects together with their sizing methodologies. As far as transference of risk is concerned, it should be recognized that all risks are priced in. If the Application Vendor and the Hardware Vendor are asked to take the risks for under sizing, they would price in the risk. The price would depend on the perceived risk which is a function of their degree of comfort in sizing for the given situation and their willingness to take the risk. In theory therefore, the price of the risk is minimized, if the risk is taken by the party that is most confident on the sizing and willing to take the risk. The willingness to take risk is also a function of the strength of the relationship of the Prime with the partners, the number of projects done together, common future plans and maturity of the alliance management process and involvement of the right people at the right stage. The Prime could ask the partners to give their prices with/without under sizing risks and try to minimize the price of the risk through appropriate risk transference. Some degree of risk transference is desirable to ensure that all parties bring in the required degree of seriousness to the exercise and that there is no attempt to deliberately undersize to ensure a competitive bid without any risk to them.
5.3.6 Timelines
There may be opportunity for negotiating for more time for development without affecting the overall delivery schedule. Make use of such opportunities. Given below is a relevant example. Example 8 Negotiating timelines Consider the following schedule from a RFP:
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System Functional Testing & integration testing 31/3/2009 System Integration & Acceptance Pre-Production System Availability Production Go Live 1/6/2009 05/8/2009 20/4/2010
From the above, it can be seen that the time available for coding and Factory Testing is 2.5 months Some pointers for negotiations: Time for Application Development and Factory Testing 2.5 months Why should the System not be available by the time Factory Test is completed so that Functional Testing can begin immediately after the Factory Test? Time for System installation, configuration and training is 1.5 months. Consider curtailing this by 3 weeks and increasing time for development by the same period. Time for System Functional Testing and Integration Testing 1.5 months. Consider curtailing this by 0.5 months and increasing time for development by the same period. System Integration and acceptance 2 months. Consider reducing this to 6 weeks and increasing Development time by the same period.
Potentially, the development period can be increased by upto 1.5 months without affecting the overall schedule which will considerably derisk the project. The timelines show that the Customer has sufficient buffers for the tasks where their employees are involved and have squeezed the time available for development. Inadequate time for development could compromise quality at Factory Test stage which would mean more defects. In the interests of the Project therefore, timelines may be adjusted to provide adequate time for development.
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Ignoring the risk can be considered only if both the impact and probability of occurrence is low. If the Customer provides a structure for response to their RFP and the structure requires a response of `Will Comply or `Will Comply with Exceptions or `Will not comply, then a response of `Will Comply rules out the possibility of taking up the issue at the contract stage. However, a response of `Will comply at the proposal stage may still allow the scope for qualifying the clauses or to add riders. The risk of responding with `Will not comply is that the Customer may eliminate the proposal for non-compliance.
If the Supplier believes that it is not possible to complete the project on time as stipulated by the customer, then there are the following choices: No proposal. Propose an alternative schedule Propose to meet the completion date but hope to shift the date while negotiating the contract Propose to meet the completion date hoping that the risk can be `managed during the execution phase.
The appropriate choice depends upon the circumstances as well. There could be one of the following scenarios: a) The time is considered short for the bidder but not for the competitors because of certain relative disadvantages/advantages. The competition is therefore likely to accept the schedule. For Internal Circulation only Page 35
Benchmarking Price: The Bench marker will review Suppliers pricing, comparing Suppliers charges for such Services to the least costly deciles in the world for comparable services (the "Charges Target"). If a benchmarking reveals that Suppliers prices for Services are in excess of the Charges Target, Supplier will reduce the charges to match the Charges Target.
The supplier could in principle agree to the abovementioned clause at proposal stage but qualify the clauses during negotiation stage in the following manner: For Internal Circulation only Page 36
At the proposal stage, the entire contract document is not completely fleshed out. It is therefore justifiable to add necessary details later on to provide for situations that may arise. For example, the Supplier may not be in a position to achieve the benchmark or the price may not work out for them. There should then be agreement on a process to resolve the issue.
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Risks that have a very low probability of occurrence but high impact are to be considered for taking an insurance cover if available. There is no point in adding a small percentage to the price since, when the risk manifests, the damage is many times whatever percentage may be added. If there are risks with high probability that also have a high impact then such a project must be avoided. There is no point in adding a small percentage to the price and getting hit by a disaster that is certain or adding a large percentage and losing the bid. Risks with low probability and low impact may be ignored for the purpose of pricing. All estimates cover for normal contingencies which is sufficient to cover such risks. Any addition to the price will only make the bid uncompetitive. Risks with high probability and low impact are to be prevented, mitigated and managed within a small price that may be added to cover the risk (say 8 to 12% of the project cost representing residual risks after risk transference. It may be noted that this does not include uncertainty in effort estimate for the given scope as this is internal to the delivery units and partners and included in their price/estimates). Depending upon project complexity, the risk price, after risk transference wherever appropriate, may vary between 8 to 12% of the project cost in competitive bidding. If the risk price arrived at is substantially higher, then it implies one or more of the following: Lack of effective risk transference especially for dependency risks Uncertainty arising out of not tying up with partners and subcontractors with appropriate teaming agreements Making a proposal based on incomplete information
If the above mentioned conditions prevail, then any risk price arrived at is itself a guess estimate and unreliable. When there is no competition, a markup of upto 20% may be considered. The higher percentage is justified by the additional services rendered in creating the project from scratch and for avoiding the costs of floating an RFP by the Client. If the project is managed well without touching the risk provisions, then the risk provision is the additional gain over executing a risk free T&M contract.
Pricing of Risk for Hardware sizing For Internal Circulation only Page 39
Major Variation in Effort from the estimates has the following consequences: It affects the delivery schedule In a System Integration Project involving multiple Vendors, it can affect all parties The consequent effort required to get the project on track is both costly and time consuming Results in major customer dissatisfaction. Results in loss
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A lump sum price quoted in the proposal without a detailed description of what would be delivered will get no sympathy or cooperation from the Customer when things go awry. In the absence of clearly stated requirements or assumptions of the requirements, delivery cannot set appropriate expectations and manage them. An analysis of the Customers requirements will quite often reveal that it is possible to deliver 95% or more of value that the customer expects to derive from the Project within 70% of total effort and the remaining 5% of value takes a disproportionately larger effort of another 40%. So if, the actual scope turns out to be in excess of the clearly stated assumptions and, it can be shown that by dropping low value requirements, the timelines can be met or that meeting of all the requirements would cause a major delay
then, the Top Management of the Customer can be expected to cooperate since for them, it is important that that the project deadlines are met. This argument may not work directly with Business Users who will be less willing to compromise as they are more concerned with the exact requirements being met. The issue must therefore be taken up and resolved at the Top Management level. For the purpose of pricing, increase the effort estimated based on assumptions by about 15%. This buffer is required since the Customer may not be bound contractually by the assumptions and in case the actual effort exceeds the effort based on assumptions by say 50%, it then becomes possible to convince the Customer to drop less important requirements while showing that even after such dropping, the Supplier is still delivering 15% in excess of the effort budgeted. b) Estimate made by an inexperienced person: Use a good estimation tool to arrive at the first cut estimate. The estimation tools use empirical data from a large number of projects to arrive at the estimate. These estimates are generally found to be conservative. No further buffers are therefore required when effort has been made using a good tool.
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The factors to be considered for pricing of maintenance contracts are: 1. Likely Variability in the effort estimates and its financial impact. Use of a good estimation tool can eliminate this risk. If the same work was hitherto being done by another Supplier, and if historical data regarding year wise effort, record of Service Levels maintained over the period are made available, then the same can be used to estimate effort, and also to project productivity improvements. A new Support and Maintenance contract may be awarded in one of the following three situations: a) Following implementation of a new Application b) Transitioning from another provider on account of Service Levels not being met by the incumbent. c) Transitioning from another provider for cost considerations The maintenance and support effort for a newly implemented Application in year 1 is almost twice of the effort required for the same Application in year 3. This is on account of higher number of support calls, training needs and larger number of fixes in the initial years. Therefore while budgeting for higher effort in initial years; it is possible to show a 20% reduction Year on Year for the second and third year. By the end of third year, a steady state is reached and further reduction in the effort is slow and may actually increase on account of additional efforts to support enhancements to the Application. If statement b) above is true, then the reasons for SL not being met by incumbent Supplier need to be examined. If the incumbent Supplier is also the developer of the Application that is to be maintained, then it is unlikely that another Supplier would be able to better the SL achieved by the incumbent Supplier at least in the first year. If the incumbent Supplier is not the developer of the Application, then the SL achieved may have been low on account of less skilled resources employed. The Supplier will therefore have to meet higher SL than what was achieved by the incumbent Supplier and may have to employ better skilled resources in larger numbers. The price of service can then be expected to be higher than that of the incumbent Supplier. If the change is on account of cost considerations then clearly the SL achieved by incumbent supplier have to be matched at a lower cost. A lower cost does not imply lower effort. The effort in year 1 for the new Supplier is likely to be higher than what was achieved by the incumbent Supplier during their last 12 months on account of non-familiarity with the Applications to be maintained. Cost effectiveness will thus have to be achieved through lower billing rates of the new Supplier and not necessarily through lower efforts. For Internal Circulation only Page 42
As far as the Supplier is concerned, in case the price or terms turn out to be unfavorable to the Supplier, the Supplier does not have the option to either renegotiate the terms or the price. On the other hand, the Supplier may be compelled to extend the contract for further periods at the same price and terms based on the option given to the Customer for extending the term. Every option must therefore be carefully considered and appropriately priced. Any reduction in price as a result of negotiations should be accompanied by a corresponding dropping/curtailment of Options available to the Customer. An internal document containing the basis for pricing comes in very useful during the negotiation process. The option to extend the contract may not be as valuable to a Customer as say a 10% reduction in price (assuming that 10% was added for this option). This is so For Internal Circulation only Page 43
What this effectively means is that the Customer will extend the contract at the lower of the following two prices: Price that the Customer may negotiate at the time of extension. The Price fixed in the contract today for the extension
The Option to extend the contract in the future at a price that is fixed today is therefore valuable to the Customer and a risk to the Supplier and this must be reflected in the Price that is charged today for the services.
When negotiating maintenance contracts under difficult Economic and Business conditions, the risks are as follows: The Price will be low The Customer would like to take advantage of the conditions to negotiate for a longer term and with options for further extensions of the term at the same price.
The Supplier should aim at: Decreasing the term to one year and allowing for any number of annual extensions with a review of price. In case there is no agreement on price during the review and the Customer chooses not to extend the contract at a price acceptable to the Supplier, then the contract will be deemed to be extended for a period of 4 months at the same price to allow the Customer to make alternate arrangements. The Supplier may also agree to provide free Transition Assistance during the last one month of the 4 month period. Page 44
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Managing IT Services Project Risks at Proposal and Contract stage 5.7 Proposal Defense
When the Customer calls the Supplier to make a presentation and defend their proposal, the customer has already had a chance to go through the proposals of all the bidders. The Supplier may therefore expect probing questions in areas where their Solution differs from that of the competitors. The team making the presentation should prepare well and give clear answers to all the questions. Inability to come up with a quick and adequate response would indicate that the Supplier has not thought through all the requirements for the project or that the Solution has been prepared without care, or that the Supplier does not wish to be transparent. This is also an opportunity to convince the Customer on the appropriateness of the Solution proposed so that any variation in details vis--vis the competitors becomes a point in their favor and against the competitors. A representative set of questions that may be expected is given below: Effort estimates: Quantum of work assumed and justification for the same. Productivity norms and how do these compare with the competitors. Relationship between various activities. For example if testing effort is normally 15% of total effort and in the proposal it is 20% then why? Team size and Timelines: Why cannot the Supplier compress timelines by increasing team size? Are they employing optimal team size? What is an optimal team size and how has this been arrived at for any given activity? What is peak team size? What is the average team size? Average team size is easily calculated. It is Effort Estimate divided by Project Duration. Peak team size can be known only when a detailed plan with resources required is drawn up. If the peak team size is very much greater than average team size, this could be on account of massive parallelization of activities to achieve aggressive timelines. Peak team size can be brought closer to the average team size by serializing some of the activities. This however results in elongation of timelines. Please remember, that it may be impractical to vary team size significantly. The stress on management of resources is greater when team size fluctuates widely through the course of the project. The ideal scenario is when the team ramps up to reach its peak size and then gradually ramps down as the project comes to closure. Interactions with the Customer: What will be the Supplier team size and composition for gathering the requirements? What will be the duration? What team size and profile of team members is expected from the Customer. Offshore development: Feasibility, issues, connectivity required, and concern for data privacy. Hardware sizing: Assumptions, sizing methodology, template and exact formula used. Here the Supplier should be able to convince the customer that they have neither oversized nor undersized and that the sizing is optimal. Hardware sizing by different bidders is likely
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6 Contract Negotiations
6.1
Types of contract
The Planning and preparation that has to go in for negotiations depends upon the type and nature of contract. The main types of contracts are discussed below
The negotiating skills required for Fixed Price contracts are therefore of an order that is far higher than that required for T&M Contracts. MNC customers have their own in-house teams for negotiation. Smaller companies engage the services of Firms specializing in such contracts. These professional teams are skilled at probing and pushing until the Supplier can take no more. Going into such negotiations without planning and preparation and clarity on the position to take on every issue is therefore likely to end up in a weak contract that puts delivery at a tremendous disadvantage.
The risks are therefore as follows: No clear scope and therefore control with reference to requirements specified in contract is not possible Business user likely to take a long time giving the requirements. They are also likely to revise the requirements several times. The process is likely to be iterative. Page 49
Without proper safeguards in the contract, the Supplier is therefore at risk as far as effort, duration and cost of the project is concerned. The safeguards that may be built in such contracts to cover the above mentioned risks are as follows: Requirements gathering and analysis may be carried out on T&M basis with a separate cap. The understanding should be that the requirements would be frozen once the cap for the duration of the study is reached and no further requirements coming from the customer would be included in scope. Any requirements or changes in the requirements after the duration for the study is crossed shall be treated as a change request. Productivity norms for the build and deployment phase may be agreed upfront and the cap should be in terms of Size and complexity of the Application to be delivered besides cost. This implies that the Project may have to be trimmed to fit the cap.
6.2
It must be recognized that in a negotiation there are: a) Legitimate requirements of the Customer that need to be accommodated b) Needs of the Customers negotiating team to exceed the expectations of their management which may not be satisfied if this comes at a heavy cost to the Supplier. c) The negotiations can therefore break off if a) is not satisfied but cannot break off if b) is not satisfied. The Customers negotiating team cannot go to their management and report that the negotiations have broken off when the demands made are unreasonable. When the Suppliers negotiating team is in a position to clearly state their position on any clause with well articulated reasons, the Customers negotiating team quickly realizes that the Suppliers team has thought through the contract and is well prepared, and where the line is being drawn by them and stops pushing further. In T&M contracts, Customer appeasement is a strategy that works well. In the negotiations for a fixed price contract, if the same appeasement strategy is adopted, the Customer will correctly assume that the Supplier has little maturity for executing firm price contracts and this will make them uncomfortable. The Customer would then try to compensate their sense of unease by including onerous clauses to protect their interests. The interests of both the parties are therefore well served, if the negotiations are informed by enlightened self interest and in a spirit of trying to forge a long term relationship of partnership which requires appreciation and recognition of each others needs.
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6.3
Letter of Intent
Sometimes, pending drawing up of a formal contract, the Customer desires that the Supplier commence work based on a Letter of Intent. A letter of Intent is just a letter expressing the customers intention to award the contract. It does not create any obligations. Once the work commences, the customer has little incentive to conclude the contract early. The Supplier on the other hand, comes under pressure since without the contract no payment need/can be made by the customer for the efforts put in and for the expenses incurred on mobilizing the team. The longer it takes to conclude the negotiation, the stronger becomes the Customers position and the Supplier very soon gets into a desperate situation and is compelled to agree to terms of the customer that they would not otherwise have agreed to. A Purchase order based on a formal Proposal document or a Statement of Work containing scope, deliverables, timelines, price, and payment terms creates an enforceable contract. The negotiations on the For Internal Circulation only Page 51
6.4
The Contract document creates a structure. Structure is aptly defined by Robert Fritz, father of structural dynamics as the elements in relationship to each other that give rise to behavior. Does the underlying structure created by the contract support the desired behavior or is it likely to drive counterproductive behavior? Projects often fail because the structure is inadequate or defective. These forces are significantly underestimated as the cause of success or failure. Winston Churchill once said. First we shape our structures. Afterwards they shape us. The important clauses that form the structure and shape behavior during contract performance are discussed in this section. The position that the Suppliers negotiating team may take and rationale for it is given where relevant. Each point is made through an appropriate example.
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The constraints above pose an enormous challenge to delivery and must be addressed.
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In practice it may not be possible to get an ideal contract if the customer is adamant about not changing any clause in the draft Prime Contract. Under these circumstances, consider including the Project Plan and the Risk Plan included as an annexure with the tasks to be completed by the Customer clearly spelled out. If the customer insists on penalties for delay, then the principle of equity can be invoked to incorporate a clause for payment by customer for the consequences of delays caused by the customer. At the very least, there could be debits for delay by customer which can be set off against any credits for defaults by the supplier without involving any actual payment of money by the customer. An arrangement, which does not involve any liability for the customer for making actual payment for delay, is more readily accepted. Additionally, for the tasks which are under the control of the customer, the Supplier may not accept the responsibility for completion on time since they have little control over it.
Example A
If the total time for implementation is 9 months and the break-up is as follows: Requirement gathering, analysis and sign off 2 months, Development, testing and implementation - 7 months, then, the date of completion could be written in the contract as 7 months from the date the requirements are signed off. Then, if the customer takes longer to complete the requirements phase, the Supplier is not penalized.
Example B While accepting Liability for Liquidated Damages for delay, the following clause was added after negotiation to protect the Suppliers interests for delays caused by Customer: Suppliers failure to perform its obligations under this Agreement shall be excused if and only to the extent that Supplier can demonstrate that: the failure results from the Customer not complying with any Customer Obligation (the Relief Event); it has informed Customer:
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Example 14- Customers Obligations included in a contract: The following is an example of Customers Obligations included as a schedule in a contract and linked to a clause on the `Relief Event. SCHEDULE X CUSTOMERS OBLIGATIONS General: 1. Project sponsorship by CUSTOMERs Top Management (CEO); 2. To provide Top Management Commitment as required from time to time to facilitate successful completion of the Project as per Implementation Plan; 3. On time availability of the Operating Environment (including but not limited to Third Party Software) as per the Implementation Plan for providing Services under the Agreement; 4. Supply, installation and commissioning of hardware, storage and network device as required for the performance of Services under this Agreement; 5. CUSTOMER shall ensure continuous support of and supervision over hardware and software vendors, as required from time to time, for the duration of the Services; 6. To provide access to (physical/remote) to the Premises, and the designated hardware and software to enable Supplier to provide the Services; 7. Obligations of Customer under the Implementation Plan; 8. Availability of support resources upon reasonable request on an as-needed basis;. 9. Collaboration and cooperation of stakeholders during the transitioning to production and Go-Live;
Specific ID No 1 Responsibility A program director and project manager from CUSTOMER. Additionally a single point of contact for all communications with IT and business teams. Designated personnel from CUSTOMER will be empowered with appropriate authority to take timely decisions. Appoint a steering committee to review Project Deliverables and handle issues requiring escalation. Such steering committee to include at a minimum IT representative and one business representative. When Due Prior to start of the project Prior to start of the project
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Provide the required software (such as Outlook, Visio, MS Office/Project, tools (Project Tracking (if any), Defect Management, system change management tool etc.), hardware and networking for Supplier Development team required to perform the Services set forth herein. Customer shall hold valid contracts for the above. Provide a single point of contact for managing change control. Throughout Engagement
Formation prior to business analysis phase of the project and to be available for the duration of the services. Prior to build phase
Provide access to appropriate staff to attend meetings, workshops and discussions at a central location. It is the responsibility of Customer to identify the most appropriate staff to attend in order to achieve the objectives of the Work package. Customer will provide all necessary resources as and when required on a mutually agreed basis.
Throughout Engagement
Customer shall provide suitable meeting tools and office space, office supplies, furniture, telephone (with international dialing facility), Internet Access and other facilities at Customers office necessary for Supplier to fulfill its responsibilities and tasks set forth in this Operating Environment. Customer shall also provide such access outside normal office hours. Customer shall provide access to all relevant internal documentation and the documentation shall be in English. Customer shall ensure that all project related documentation which it prepares or provides will be in English.
Throughout Engagement
Throughout Engagement
Customer shall facilitate access to the Oracle Metalink for logging service requests concerning the Project.
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11
12
13
14
Provide format for the different reports and inputs for forms to be developed (if any)
15
Provide Test cases and test data for the various testing phases of the Project to validate the appropriateness of the solution being deployed.
16
17
Training would adopt the Train-the-Trainer approach and the Customer would provide necessary training infrastructure such as Training Rooms with related tools, desktops for the users and also ensure participation of the nominated business users who will then be responsible to train the end users. For integration of the Applications in scope with current Applications in use, procure services of the other Application Vendors as necessary to work with Supplier for the integration.
18
As necessary
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20
By commencement date
21
The Customer shall get a sign off from Supplier before releasing Purchase Order for hardware including Networking components to enable Supplier to verify that all details/specifications in the Purchase Order are in conformity with the Architecture, Sizing and Performance assumptions. Operating Environment Operating Environment particulars/details as specified below shall be required from the various stages as outlined below till the end of the Project. Stage Particulars/Details
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1. Project Office Infrastructure a. Seating Capacity for an average strength of 30+ Consultants (peak strength of 40) b. Seating for BMI core team (Key User Team) c. For each of the 40 seats, ready-for-use Work Stations (at least 1 GB RAM) + Network Connectivity + Internet Access + Telephone d. Color Printers + Copiers e. File and Print server f. Meeting Room with Projector & Screen g. Three (3) Training Rooms (with PCs) (the project team is to pre-advise Customer of the exact dates and times when these are required) 2. Software: All required standard desktop and project documentation (such as Outlook, Visio, MS Office/Project, tools including project tracking (if any), defect management etc.) should be licensed for use. 3. Hardware for the application environment: Development, Test and Training Instances/Environment with OS installed. 4. Establishment of Virtual Private Network (VPN) connectivity to allow access to the application environment
Solution Design Solution Build Entire Project
5. Virtual Private Network (VPN) connectivity to allow access to the application environment 6. Hardware: Production environment available and configured as per the solution architecture. 7. Any other requirements for the Operating Environment would be identified and agreed at the end of the project initiation phase.
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% of Invoice
65 99.50% 98.50%
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% of Invoice
1.00% 2.00% 1.00% 1.00% 2.00% 2.00% % of Invoice 4.00% 2.00% 2.00% 2.00% % of Invoice 4.00% % of
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Total The SL credit will be issued if: Performance is below minimum. Performance is below expected for any 3 months in previous 12 month period.
98%
Points to note: 1. End to End SLA for Application Availability includes time lost due to Infrastructure issues as well as due to Application. The Infrastructure and the Service desk may be handled by different Vendors. While from the customers perspective, end to end SLA makes sense, from the Suppliers point of view, they could be penalized even if Application is down in a month longer than the SL due to infrastructure issues alone. 2. Although the total SLA credit is capped at 15% of invoice value for month, the SLA credit weight ages assigned to individual line items add up to 98% of invoice value. The cap can be reached with as few as two line items out of twenty six in default. The financial impact even for normal variances from the SL will be high. 3. Examine the SL for Promoted into production within +- 3% of budget The minimum is 90% and expected 95%. Such high percentages make sense only when a large number of items (50 or more) are promoted into production in a month. This is a large number. If the number is say 9 then even if one is not within +- 3% of budget, then the achieved number is 88.88 percent which is below the minimum acceptable. In this situation, defining minimum as 90% is the same as 100% since, if even one enhancement does not meet the SL, the Supplier is in default. The same holds good for the next two SLs. 4. Examine the SL `promoted into production with zero defects. This depends upon the rigor followed in conducting the UAT which is Customers responsibility. 5. Customer Satisfaction Should this be an SLA for monthly monitoring or at half yearly intervals? Should the weight age be as high as 4% of invoice value? Should this be a SL or KPI? What are the objective parameters for measuring Customer Satisfaction? Are not the rest of the SLs the objective parameters that determine Customer Satisfaction and what are left out are the subjective parameters. Should subjective parameters be allowed as SL carrying a hefty 4% penalty? 6. Examine the SL `Reduction in number of code defects by 10% on a Year on Year basis. This pre supposes that there is scope for such improvement. If the number of defects is already low, then there may not be scope for reduction at the rate of 10% per year. It is better to define what is the For Internal Circulation only Page 66
The generally accepted principles about SL are: 1. Not designed to penalize the Supplier or reduce cost to Customer 2. Meant to maximize the Service Level 3. All parameters must be objective and measurable 4. Achievable If the principles are enunciated and agreed before the SLA is negotiated, they facilitate quick closure. The four principles are self evident and easy to agree with. Once the principles are agreed, then it becomes difficult to maintain a position that violates the accepted principles. In a particular engagement, intense negotiations were carried on over several sittings spread over 2 weeks without coming to closure. Finally, in one sitting, the Suppliers team started the meeting by enunciating the principles and getting the Customers agreement on them. That happened to be the last sitting and agreement was reached on all SLAs in a very large System Integration project within hours. If we look at the SL proposed in the example above, the total weight ages assigned is 98% of invoice value and this violates the first principle. The intention is clearly to get a 15% cut on the invoice value any which way (even if 2 out of 26 SLs are not met). There are no incentives for overachieving while there is heavy penalty for under achievement. This violates both principles 1&2. Any SL which is in the nature of double counting violates principle 1. Customer Satisfaction may be one such. The objective parameters for Customer Satisfaction are all the other SLs and what remains are the subjective parameters which cannot become a SL as they violate the third principle. If the cap is more than 10% of invoice value, then it violates principle 1 The Achievable principle has to be tested with past records. Necessary due diligence must be carried out to ensure that the SLs can be achieved consistently. Example B In a Support and Maintenance Contract, Service Level with SL credits at 10% of fee is proposed for meeting the SL relating to the Mean Time to Defect (MTTD). The Mean Time to Defect is defined as For Internal Circulation only Page 67
The causes of a low MTTD are therefore rarely attributable to the quality of Support and Maintenance Services being rendered by the Current Supplier.
In a SI project where a Networking Solution Provider was a partner, the SL that the partner committed upfront was 99.5% availability. How availability is defined by Networking Solution Provider and Customer will differ. For the customer, what is relevant is availability during the hours the Network is required. For the NW Solution provider, it is availability on a 24hrsx365 days basis. Let us see how this translates to the Customers definition. Availability of 99.5% implies downtime of <= 0.5% of 365*24 hours = 43.8 hours. Remember that the 43.8 hours of downtime can be during the Customers business hours. (Any downtime outside these hours will not be noticed and recorded. The partner can then justifiably claim that the SLA has been met). For the customer this translates to downtime of 43.8 hrs/(270 working days*12hours per day) =1.35 % Or Availability of 98.65% The SI or Prime contractor therefore concluded an SLA of 98.5% with the Customer. Had they concluded for anything more than that, they would not have been in a position to pass on all of the SL credits to partner. This example, underlines the need for careful definition of the SL.
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6.4.1.8 Availability SL
The availability of the IT Solution is affected should the primary site go down and the secondary (DR site) has to take over. Should the downtime required for switchover count for the availability SL? If the DR site is not in an Active/Active mode, then the answer can be a no. Rationale: If the DR site is in an Active/Passive mode, then the time required for it to takeover is considerable. The Supplier cannot be penalized if the Customer has opted for a cheaper technological Solution that takes more time for the switch over. The understanding as to what constitutes downtime for calculating the Availability SL should be clearly documented.
The maintenance and support effort for a newly implemented Application in year 1 is almost twice of the effort required for the same Application in year 3. This is on account of higher number of support calls, training needs and larger number of fixes in the initial years. Therefore budget for higher effort in initial years showing a 20% reduction Year on Year for the second and third year. By the end of third year, a steady state is reached and further reduction in the effort is slow and may actually increase on account of additional efforts to support enhancements to the Application. If statement b) above is true, then the reasons for SL not being met by incumbent Supplier need to be examined. If the incumbent Supplier is also the developer of the Application that is to be maintained, then it is unlikely that another Supplier would be able to better the SL achieved by the incumbent Supplier at least in the first year. If the incumbent Supplier is not the developer of the Application, then the SL achieved may have been low on account of less skilled resources employed. The Supplier will therefore have to meet higher SL than what was achieved by the incumbent Supplier and may have to employ better skilled resources in larger numbers. The price of service can then be expected to be higher than that of the incumbent Supplier. If the change is on account of cost considerations then clearly the SL achieved by incumbent supplier have to be matched at a lower cost. A lower cost does not imply lower effort. The effort in year 1 for the new Supplier is likely to be higher than what was achieved by the incumbent Supplier during their last 12 months on account of non-familiarity with the Applications to be maintained. Cost effectiveness will thus For Internal Circulation only Page 69
2.
Fixes: This effort can be split into time required to diagnose the problem, coding, testing, patch release. Time required to diagnose a problem will reduce with better documentation, learning gained over a period and skill of the consultant. There could a planned reduction in the effort for providing 1fixes by shortening the time to diagnose a problem. Page 70
5. Change Order: New developments will require additional effort for supporting and maintaining the enhancement. The contract should provide for increase in the price to cover for this additional effort. The basis for arriving at the additional effort and the charges for it may be made explicit in the contract. This could be based on number of Function Points delivered or based on any other reliable metric. The contract must therefore have clarity on: The sources of efficiency gains, extent of gain expected, dependency on customer (if any) to achieve the gain and any minimum commitment that may be made. Sources of increase in effort and the basis for additional billing on account of it.
The Contract, while providing for sharing of the gains of an increase in efficiency, should also provide for increase in cost on account of additional effort for supporting New Developments or Enhancements. An activity wise quarterly resource deployment plan may be drawn up before making any commitment on sharing of efficiency gains. Thereafter, the plan may be used to achieve the gains. In the absence of detailed planning, the Supplier may commit to gains based on a guess which may turn out to be unachievable.
The possible objections against providing for adjustments in price both ways or for allowing the Supplier to initiate the benchmarking exercise could be the specious argument that the Supplier is expected to be an expert and not make mistakes in their effort estimate: The possible response to the objection is: The need for the clause arises only on account of the possibility that there could be an error in the estimate and the error could be either way. The effort estimate can go wrong since it may be based upon imperfect information. Studies of projects executed worldwide show that the error in effort estimate is very common. Projects may get completed as per schedule but rarely as per efforts budgeted. If the contract is awarded as a result of a competitive bidding process, then the process rules out the possibility of a Supplier being selected who has estimated effort on the higher side. The Supplier selected as a result of the competitive bidding process is therefore likely to have underestimated the effort. The Supplier is therefore in greater need of the benchmarking clause than the customer. (As a matter of fact, a competitive bidding process is itself a process of benchmarking the selected Supplier for price and SL against all the available competition. The Customer therefore has little justification for insisting on a clause for benchmarking. The opportunity may therefore be utilized by the Supplier to get an even handed clause inserted which may prove to be beneficial) Principle of Equity requires equal protection to both parties from errors committed.
A right to divest without any constraint can be misused to develop a weak but low cost competitor to gradually take up all the work starting with the simplest work. Example 16: Maintenance Contract Benchmarking and related clauses : For Internal Circulation only Page 72
Implications: The Contract enables the Customer to find a low cost supplier at a future date and bench mark against their price. The Supplier can then either accept the `benchmark or transition to the low cost supplier over a period that could extend upto 12 months without charging any fee for the transitioning service. This can be done one SOW at a time providing ample flexibility to build alternate low cost suppliers. The portions inimical to the Suppliers interests requiring negotiation are: The Bench marker is not a mutually acceptable independent third party but the Customer who is very much an interested party. From the contract it is not clear what the benchmark is. For example, comparable services provided by Suppliers of similar standing could be the benchmark. Since no such detail is mentioned here, there is no benchmark to speak of but an arbitrary determination of price and SL by the customer. Any arbitrary determination of the `benchmark cannot become the `cause for termination of a SOW requiring the Supplier to provide free transitioning services for a period that could extend upto 12 months. Even in case of termination for genuine cause, the period for free transitioning of services may be no longer than the period taken by the Supplier when this was transitioned to them. For transitioning services required beyond this period, fee should be chargeable. Since the Customer can in any case terminate the SOW for convenience, there is no need for such an arbitrary and one sided clause for `benchmarking whose sole purpose appears to be to enable Customer to get free services for transitioning.
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Termination for convenience If there is also a Termination for convenience clause, it is all the more necessary to have line items for each deliverable so that payment on what is delivered is fully realized. A Termination for convenience provides for early termination of the contract by the Customer. A fixed bid contract price is based on the assumption that the contract will run its term. An early termination therefore has implications for the bottom line. This has to be considered and factored in. A fee to be paid if the contract is terminated for convenience may be added or the payment plan may be drawn up in a manner so that a larger proportion of the fee is realized early to compensate for potential loss for early termination. The Termination for convenience clause must provide for the payment of the following: o Lease breakage charges (including those paid to Suppliers employees) and the unrecovered elements of any unamortized capital investments Unamortized portion of the cost of mobilizing the team. For example, if the average cost of mobilizing one team member is $3000 and size of the team is 50 and the Project Term which was originally 36 months is terminated at the end of the 15th month, then the unamortized portion of this cost is $3000*50*((36-15)/36) = $87500. The assumption here is that this cost is recovered uniformly over the period of the contract. Charges relevant to Services performed upto the effective date of termination, including any Continuation Services. In the case of a Development activity, this may be pro-rated against the relevant Milestone payment. Termination Assistance charges on a time and materials basis, using the Day/Hour Rates of the resources used to provide the Termination Assistance. If the same resources are also providing continuation services, then the exact hours put in for Termination Assistance may be logged.
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The Customer understood and accepted the Suppliers position and agreed for the exclusions.
6.4.2.5 Affiliates
Some of the contracts also include a definition for Affiliates with the intention that should the company acquire Affiliates, the Solution can be extended to the Affiliates. Since this is for a future acquisition, the Supplier is entitled to negotiate a fee per Affiliate, if the Solution is extended to the Affiliate. This is over and above any implementation fee that the Supplier may charge for services for implementing the Solution for the Affiliate. A view may be taken that since there is no additional effort for every Affiliate, the Supplier can agree to allow the Solution to be extended without any fee. In such a case, damage to Affiliates may not be allowed in the General Damages clause. Extending a benefit for free to the Affiliate, and taking on the liability for damages to the Affiliate on account of the Solution does not stand to reason.
6.4.2.6 Indemnities
There are a host of indemnity clauses which are fairly standard including covering claims on the Customer by third parties for infringement of IP. Generally speaking, IT Service Provider provides only services and therefore there is little scope for third party claims for infringement of IP by the Supplier. Nevertheless, a contract document contains several `standard clauses which may do no harm even if these are not relevant. The Customer sometimes puts conditions that imply that the Customers products and processes are their IP and seek to protect their IP through onerous confidentiality clauses even where the Customer is in the services industry. If there is an element of IP in the products and processes, and in case there is a claim by a third party that the IP actually belongs to them, then is the Supplier exposed to a risk by virtue of delivering a Solution that covers the product or process? If the Supplier perceives such a risk then it can be covered by incorporating a suitable clause as follows: Customer shall fully indemnify and keep indemnified Supplier against all claims, demands, actions, costs, expenses (including, but not limited to, full legal costs and disbursements on a solicitor and client basis), losses and damages suffered by Supplier arising from or incurred by reason of any infringement or alleged infringement (including, but not limited to, the defense of such alleged infringement) of any Intellectual Property Right in the Service product or business process that is specified by Customer for delivery by the Supplier.
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Consider the following clause proposed by a Customer in the logistics business with business spread across the World. Supplier recognizes that CUSTOMER is not fully familiar with the laws, rules, orders, regulations, policies and customs of the Designated Countries and that CUSTOMER has entered into this Agreement on material reliance on Suppliers representation and warranty that this Agreement and the relationship created between CUSTOMER and Supplier does not violate any law, rule or regulation of the Designated Countries, including laws regulating elections. Supplier further represents and warrants that neither the receipt of fees under this Agreement nor performance of the Services under this Agreement is in any respect a violation of the laws, rules, orders, prohibitions, regulations or policies of the Designated Countries. It is more likely for the Customer to be familiar with the laws of the countries the Customer is operating in rather than for the Supplier. The Customer is trying to achieve the following through the above clause:
Disown any implied warranty from Customer to Supplier that the Agreement is in accordance with the laws of the designated countries. Push the burden of the warranty onto the Supplier
Consider rewording the Clause as follows: Supplier recognizes that Customer is not fully familiar with the laws, rules, orders, regulations, policies and customs of the Designated Countries. The Supplier may therefore make independent assessment that this Agreement and the relationship created between Customer and Supplier does not violate any law, rule or regulation of the Designated Countries, including laws regulating elections. Supplier may further determine that neither the receipt of fees under this Agreement nor performance of the Services under this Agreement is in any respect a violation of the laws, rules, orders, prohibitions, regulations or policies of the Designated Countries. The rewording is equitable where both parties are put on guard without any implied warranty from either party.
6.4.3 Commercial
6.4.3.1 Payment Terms
In a SI project, the Payment Terms can be a source of considerable risk for the following reasons: The Customer may link a considerably large proportion of payment to be made on delivery of the integrated Solution. Page 79
The payment plan may therefore be decoupled as much as possible where individual items of delivery have value to the Customer and are likely to be used by the Customer even though the fully integrated System may not have been delivered. The Payment plan if not drawn up with care, can significantly shift the balance of power in favor of the customer. This is not only a commercial issue but affects Customer behavior and therefore delivery. A payment plan that involves a single large payment at the end of Acceptance puts the Customer in a position to dictate terms for the final acceptance and make demands that exceed scope. The Supplier is left with little choice but to accommodate to get final acceptance and payment. The payment plan must therefore have: Advance payment (say 20% of Service Value) Monthly payments to cover at least expenses. If there are several interim milestones, then this could be linked to the milestones Payment covering the reamaning contract value leaving a residual of 5% to 10% Residual payment at end of warranty
The Customer may yet insist that the Supplier conform to the essence of the requirement on a good faith basis and certify to that effect on an annual basis. Further objections to having the most favored clause in any form are as follows: The price quoted for two different projects in a Fixed Price contract are rarely comparable on account of: Page 81
The Contracts may be concluded far apart in time under vastly different economic and business conditions. In a free market economy, (which incidentally is to the customers advantage), price is a function of the demand for services and the supply at that point in time and is therefore determined by the opportunity available at that point in time. Project profitability is known with reasonable certainty (the degree of certainty depends upon costing methodologies adopted) only at the end of the project. Even at this stage, it is difficult to say whether the price charged was reasonable or not since the reasonableness of the price charged cannot be decided based on the outcome but on the appropriateness of the methodology employed and perception of risks when the price was fixed.
The Supplier may `buy a small bid at a loss to penetrate into a large potential account. This then cannot become the benchmark for revising the price. In a contract that is awarded based on a competitive bidding process, there is little justification for such a clause.
There are other options available to the Customer if they feel at any point in time, that the price is significantly higher than what it should be. These are: Renegotiate the price If renegotiation fails, then terminate for convenience
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6.4.3.5 Audit
Customers sometimes like to include a clause as follows: Supplier will maintain and retain complete and accurate records for all transactions, financial and non-financial, which result from and/or are created in connection with this Agreement ("Supplier Records") in accordance with US GAAP. Customer is entitled to have Provider's accounts and books reviewed annually by a certified accountant of Customer's own choice strictly for the purposes stated below: (a) verify the accuracy and completeness of Suppliers invoices; and/or (b) verify that the Services are being provided in accordance with the Service Levels; and/or (c) verify that Supplier is in compliance with the Regulatory Requirements and Customers security guidelines and policies. (d) Customer will bear its own costs of any audit provided that, if the audit reveals an excess of Fees claimed: (i) Supplier will pay to Customer a sum equal to Customers own costs of the audit (ii) Supplier will immediately repay to Customer on demand a sum equal to the amount of that excess together with interest. (iii) If the audit reveals (a) any underpayment of Fees; and/or (b) Services provided for which Customer has not been invoiced; and/or (c) any other amounts and/or costs for which Supplier is entitled to be paid and/or reimbursed for which Customer has not been invoiced, Customer will pay Supplier in accordance with paragraph 8.4 the relevant amount due against receipt of an appropriate invoice from Supplier.
The changes that are required to the clause above and reasons for it are given below: Deliberate and willful over invoicing and such other acts are governed by other provisions in the contract. The clause above, therefore deals with a mistake. All invoices are raised by the Supplier in accordance with the contract and in good faith. These are verified by the customer before payment. The customer normally takes a month for payment and has ample opportunity to verify the correctness of the invoice. Any mistake is therefore a mistake on both sides. The payment terms are so formulated that all payments are at least a month after the service is delivered. In real terms therefore, there is very little chance of overpayment vis--vis the services delivered upto the point the payment is made. The formulation of the payment terms therefore, is in itself a protection against any overpayment in real terms.
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As stated earlier, deliberate and willful over invoicing would be a breach of trust and are covered by other provisions of the contract.
Comment: Liquidated Damages is unjustified for the following reasons: Delay in start of the services by New Supplier does not entitle New Supplier for payment of service fees for Page 84
7 Re-negotiating Contracts
It is not often that a contract gets amended without a change in scope. There are times when this becomes necessary since a structural problem cannot be resolved any other way. Quite often, resolution is delayed as the problem is not recognized early enough as a structural issue and various other options are first explored. The Suppliers negotiating position is also extremely weak for mid-course structural changes and the effort required is enormous. The example below brings out the pain in mid-course corrections and underlines the need for thinking through all aspects of delivery and drawing up contracts that are clear on scope and respective roles and responsibilities. Example 19: Re-negotiating Contracts - Networking
A large SI project involved providing the networking Solution which included primary connectivity with leased/RF lines and secondary connectivity with ISDN lines for 500 offices of the Customer spread over the country. It was assumed that the partner for the Connectivity Solution would take up responsibility for providing both the primary and secondary connectivity. (Pitfall of not having a teaming agreement which defines the scope of partner in place before submitting the proposal) When subcontracting was taken up with the partner after executing the prime contract with customer (another pitfall of not having back to back agreement in place before signing the prime contract), the partner to the Primes surprise, refused to take responsibility for providing ISDN connections pointing out that this was not in the portfolio of their services. The refusal was at the highest level in the Organization.
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An ISDN connection on the other hand is an on-demand dial-up service. The billing is linked to usage and the calls are metered at the local exchange. Application for connections, billing and payment of bills is local. The lines are in the name of the end user and cannot be in the name of SI or provider of the Connectivity Solution. TRAI rules specifically prohibit `reselling of bandwidth. The issue with the taking up of responsibility for ISDN therefore involves: Getting the Application signed by the Local Manger of Customer and submitting the form in local office with fee Follow up at local level for getting the connectivity Getting the bill from Local Manager Paying bills locally Follow up for maintenance of lines locally
Neither the SI nor the partner has an organization to carry out the above services at 500 branches spread over the country. The SI had reached a stage where 35 branches of the Customer Organization were provided with primary connectivity and none with secondary. Without secondary connectivity, the customer maintained that the Connectivity Solution was incomplete and refused to accept it. The Customer maintained that as per the contract, it was the SIs responsibility to provide the complete range of services. The SIs plea that the Customer was in the best position to handle ISDN connectivity directly and claim reimbursement for the expenses/bills was rejected. The Customer said that this involved an amendment to the contract which was unthinkable. The Customer was then taken through a discovery phase, where they learned from MTNL/BSNL directly the rules regarding ISDN. The customer was then asked to cite one instance where SI has taken the responsibility for ISDN connectivity. The Customer was provided contacts in other similar organizations for the Customer to check up whether any of these organizations had entrusted the responsibility for ISDN connectivity to the SI. The Customer made enquiries and confirmed that there was no instance where the SI had taken the responsibility for ISDN connectivity. Finally, when the Customer had fully understood the gravity of the situation and the problem was framed as either: Agree to amend the contract to deal with ISDN directly and save the Project or The Project fails
did the Customer fully realize the gravity of the situation and agreed. This took about three months since the SI was attempting several solutions in the mean-time and had not fully recognized it as a fundamental structural issue which could not be resolved satisfactorily any other way.
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This example is from a different context and has been included because it clearly brings out the crucial role played by a legal document in shaping a meaningful relationship between the parties (structure) that lead to the desired behavior for success The negotiator, in this example, clearly thought through all the required conditions for success and drew up the contract document accordingly.
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The District Collector who is the MDOs superior saw merit in the argument and cleared the way for signing of the Agreement. Although the MDO was initially reluctant to sign the agreement, he was extremely happy with the outcome. For one, the Bank sanctioned loan to every beneficiary sponsored by him. The usual experience is that the banks reject proposals on one pretext or another to limit their exposure to what the banks consider as risky loans. Secondly, he had the power and he used it when warranted, to ensure success of the scheme which brought laurels to him as the only MDO who made a great success of the Governments scheme to help economically and socially challenged persons to become successful transport operators.
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The responsibilities may include: Review of proposals. Mandatory review of all proposals above a threshold value based on nature of the engagement and size. Mandatory review of contract documents before these are finalized based on nature of contract and size of the contract Identify and codify best practices covering model contracts, estimation techniques, risk assessment and pricing for risks Promote excellence through education, seminars, workshops, competitions
Has carried out pre proposal due diligence and obtained clarity on all aspects by utilizing the opportunity available for seeking pre-bid clarifications. Has identified all the project risks and prepared a plan for risk transference and risk prevention/mitigation. Has quantified and priced in all residual risks. Has gone through a process for taking a bid/no bid decision Has executed teaming agreements with partners/subcontractors where required with all relevant terms and conditions with traceability to the RFP. Page 89
The RFP documents when these are received Clarifications sought and clarifications obtained Copy of recommendations put up internally for bid/no bid decision Draft teaming agreement before execution Table of Contents for the proposal and strategy for submitting a winning bid Plan for executing an ideal contract what terms need to be negotiated and rationale for it
Describe the nature, scope and timeframe of the prime contract; Identify the key terms and their meaning; Review the entire pre-contract risk analysis/ caveats register and explain how all the risks were dealt with; Summarize the progress of the negotiations with the client highlighting any sensitive areas to be avoided in future contracts; Identify key subcontractors, suppliers and partners and describe how dealings with them should be conducted; Launch the prime contract risk register based on mitigating all risks residing with the prime contractor; Identify the budget and cost allocations available for spending within the prime contract price. Discuss plans Project Plan, Procurement, Recruitment, Training, Project kick off with customer, Infrastructure requirements etc Draw up and agree upon action plans for all urgent and important requirements.
This should be followed by Management level meetings with all important partners/subcontractors to launch the project. The objective of the meetings is to: Establish contacts at the highest levels and build rapport at an early stage. Establish common understandings and emphasize shared objectives for successful execution of the project
o o o
Performance Evaluation: Is evaluation of delivery performance based on specific parameters of the project or with reference to organization standards? This should be based on the project or else it could be either too easy to achieve the Organizational benchmark or too difficult and the rewards are then either easily obtained or impossible to earn. There is little incentive in this scenario to make a difference through deliberate effort.
In conclusion, if the template that is used for reporting performance of a run of the mill project is also used for a risky project, then the measures may not be appropriate leading to faulty analysis and wrong conclusions and adoption of an inappropriate strategy. In such a situation, risky projects become riskier on account of an inappropriate evaluation framework.
9 Conclusion
A contract that takes into account all conditions that are required to succeed and creates the required structure of relationships, roles, responsibilities, obligations, processes, controls and incentives facilitates successful delivery of the project. A defective, dysfunctional or inadequate structure on the other hand often leads to confusion, disputes, stalemates, delays and loss and in extreme cases to failure, termination of contract and claims for damages. Any material change that a Supplier may seek in the contract during performance gets rejected or comes at a heavy price whereas, the same change can be achieved during the negotiation phase with relative ease. A troubled project, even if it is entirely on account of a defective contract, is a heavy burden on the Suppliers Organization and resources. The Suppliers maturity for executing complex projects comes into question and the Customer is unlikely to consider the Supplier for other complex projects. The damage is far beyond the loss on the project. It therefore pays, to exercise care and spend time on all details, and think through all conditions that are necessary to succeed, before finalizing the contract.
References for section 3, 4 and 5.4 Project Risk Management: The Commercial Dimension a Report by Tim Boyce
Published by Thorogood
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