In order to win the deal under competitive conditions, suppliers are often tempted to accept very low or even negative margins for the initial deal while betting on up-scopes in later phases that are less competitive. Once contracted, suppliers try to find ways to push the deal over the breakeven point by charging for the additional effort introduced through project changes or ambiguous scope definitions. As a result, IT organisations respond by managing the supplier by the contract and focus on contract clauses rather than business results.
Example: A large Australia bank assigned a contract manager to lead a major system upgrade worth more than US$100 million. After four month, disputes with the supplier over the scope and milestones got the project to a standstill. Eventually the bank CEO got involved and cooperated closely with the CEO of the supplier. This intervention got the programme moving again after a five-month delay.
Managing a project by contract is very likely to fail. An IT programme of a common size is impossible to be pre-scripted into a contract schedule in every detail and changes can make large parts of the contract obsolete after a while. To avoid this it is recommended to view a contract as the basis for continuous negotiations throughout the programme. While some scope might be added to the programme, some other might not be required any longer and the managers from both sides have to handle this as a trade. It usually helps if the programme teams and the supplier teams have a trusted relationship as it makes negotiations easier. Unfavourable commercial contract terms and financials for the supplier make this on-going negotiation more difficult as suppliers will frequently attempt to up-sell rather then trading scope. Hence a fair and balanced commercial deal benefits the later cooperation -- which does not mean that there should not be any legal pre-caution after all. A reasonable budget for inevitable changes is also recommended -- as there might be changes to business requirements that cannot be covered through bargaining. Splitting the purchase order to the supplier according to milestones keeps up some leverage that can be used in negotiations as well.
The CEO can help your teams best if he builds a trusted relationship with his counterpart of the key suppliers involved in the transformation programme. This will help the teams to work in a trusted environment as well. It makes it easier to trade scope and resolve issues quickly if escalated. Strength of the relationship and trust can also be part of the supplier selection criteria. If the team suggests a supplier proposal that appears too cheap against objective criteria, the CEO should challenge the choice. He can ask suppliers to open their books and make their calculation transparent to check the soundness of the proposal. If there is a good level of trust between the parties the supplier will agree to this. A budget for un-planned changes to business requirements should be part of every transformation plan.
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