Reduce Project Portfolio Risk
Part 1: Choose the Right Vendor Engagement Model
If you use vendors to deliver any portion of your project portfolio, you are confronted with numerous risks that can negatively impact your organization. This is the first part of a series where we will discuss the risks associated with sourcing projects to vendors and ways to minimize those risks. In Part 1, we discuss how to choose the correct vendor engagement model and what risks come along with choosing a model that does not match your specific needs.
Vendor relationships are inherently challenging. You are partnering with a company who may have (should have) domain knowledge but not specific knowledge of your culture, processes and systems. They carry a different culture, perhaps in a different part of the world. This cultural barrier can also be met with time zone and language barriers. We assimilate vendors into our businesses with high expectations of performance. After all, they must perform exceptionally because they are helping us deliver systems that are critical to our business and customers.
If you use vendors to deliver any portion of your project portfolio, you are confronted with numerous risks that can negatively impact your organization.
What types of risk are we dealing with? If a vendor relationship breaks down it can introduce financial, operational and legal risk. There is a high cost of a failed vendor relationship or a failed project, regardless of how much consideration was spent nailing down a perfect master services agreement. Financially, large amounts of money are invested which could be difficult to recover. And if a vendor is helping deliver systems tied to products, services or critical business process, it can jeopardize your organization’s ability to operate or meet customer expectations, which can result in a loss of revenue or reduced customer satisfaction.
There are several considerations that can be taken to help reduce this risk. In this article, we cover the best way to select a vendor engagement model. We discuss 3 engagement models below and when to choose them. We cap it off by defining risks that are associated with each model.
1. Time and Material
Time and material (T&M) is a vendor engagement model where allocated resources are paid for on an agreed upon hourly or daily rate. This engagement model is generally desired when resources are used for multiple projects or for projects where scope is not clearly defined.
T&M is typically the preferred engagement model because it offers the most flexibility with changing requirements. Scope can be changed and implemented with little friction. You also have full visibility into resource deliverables and time since the resources are generally managed by a project manager or other team member from your organization.
While dealing with scope changes is a perceived benefit, it can also introduce risk. Continually changing scope can result in spiraling costs and schedule delays. Also, with T&M, it is time consuming to source and onboard new resources, making it difficult to change the size of your team based on project demand.
In summary, choose T&M when:
• Project requirements are not clearly defined.
• Resources are used across several projects or on a dedicated agile team.
• You manage the resources and require a high amount of visibility.
• Your resource demand is fairly consistent.
Risks to consider:
• Scope creep, spiraling costs, project delays. Make sure you have strong change management processes or operate in an iterative fashion.
• Growing or unpredictable project demand. It can be time consuming to grow or difficult to reduce your T&M team size. Consider augmenting with other engagement models such as fixed price or dedicated teams.
2. Fixed Price
Fixed price is an engagement model where the vendor bids on predefined work with set deliverables and a set timeline. This engagement model is only successful when the project requirements and budget are well defined. The outcome of the engagement is predicated on how well the project was planned and defined before the vendor engagement begins. Fixed price engagements help augment your team without worrying about resource demand which can be a flexible way to deliver projects.
Fixed price engagements carry a higher amount of risk. This is due in part to the inflexibility of dealing with project scope changes. If the project requirements are not well defined, any scope change will result in a change request from the vendor. This will be accompanied by an amendment, typically to the Statement of Work (SOW) which could require a purchase order amendment. The change request process can be both time consuming causing schedule delays and require you to seek out more budget for the project.
It is also more difficult to recover from a failed project in a fixed price model. If the vendor is unable to meet the defined deliverables or the deliverables are not well defined, it can result in financial, legal and operational risk – especially if the project is tied to your organization’s products, services or critical business process.
In summary, choose Fixed Price when:
• Project scope is clearly defined and is unlikely to change.
• You require flexible resource demand, possibly with a specialized skill set.
• Project scope is clearly defined and is unlikely to change. (Yes we listed this twice)
Risks to consider:
• Change in scope. Mitigate by ensuring project scope is well defined. Do not let change catch you off guard. Clearly define and streamline the change request process so that there is less impact on project schedules.
• Failure to deliver. Again, ensure that project scope is well defined. Choose a vendor that has the domain knowledge and resource capacity to accommodate your needs. Collaborate with your vendor and remain highly engaged. And last, do not always choose a vendor that has the lowest bid. Focus on capabilities.
3. Dedicated Team
A dedicated team is useful when you have a defined set of deliverables or a fairly consistent workload. In many cases they are a managed services team such as QA. A dedicated team can also be useful for iterative/agile development. The pricing can be structured by either T&M or Fixed Price. A dedicated team is beneficial when you need to augment your team with a special function or skillset where there is predictable workload.
Depending on the cost structure, the dedicated team carries similar risks to T&M and fixed price. It only works well when the workload is consistent because reducing or expanding the team size may not mesh well with your original services agreement. If you do not consume all of the services, you are burning through money that you aren’t using. If you require more resources, they need to be procured and the vendor services contract amended.
In summary, choose a Dedicated Team when:
• You have a predefined set of deliverables. Examples are a T&M agile team, or a fixed price sprint.
• The workload is consistent. This is seen in shared services and managed services groups such as DB, QA, maintenance and support operations.
Risks to consider:
• Consider risks based on cost structure – T&M or Fixed Price.
• Inconsistent workload. If the work stream is not steady, this is not the engagement model to choose. It can cause an unnecessary excess in spending or an inability to meet expected deliverables.
Choosing the correct vendor engagement model is a starting point for successful outcomes and reduced risk. In general, using a combination of T&M, Fixed Price and Dedicated Team is the best approach when applied properly and according to the needs of your organization.