In a recent article “Five sure fire ways to keep your Software Implementation on Budget” by Dave Manzer. http://blog.sageerpsolutions.com/five-sure-fire-ways-to-keep-your-software-implementation-on-budget/
One of Dave’s key factors (point 2) is negotiating a fixed fee vs billable hour ERP implementation. I agree with all of Dave’s points but thought this point was worth more examination. I started to wonder if a fixed fee implemenation is an option why would anyone choose the billable hours option. Perhaps the reason is the billable hour has existed since the turn of the century and it is difficult for organizations and people to move to a new pricing methodology. I hope this article will clearly remove any notions that the billable hour is a better option.
1) Inherent risk in an Billable Hour implementation
As per Dave Manzers article “There is an inherent risk involved in the billable hour approach which could come back to haunt you. Since the software vendor is not contractually tied to the estimated project total, there is no incentive to finish the project at or below that number. Don’t get me wrong. I’m not suggesting that software vendors are out to get the extra pound of flesh from you, at least not intentionally. What could happen is that software vendors may be less inclined to study your exact project requirements on the front-end and instead rely upon broader estimates, which might then give you the wrong impression of the total cost of the project. A fixed fee approach locks both sides – you and the software vendor – into a fixed project fee that must be adhered to unless both sides agree to alter it during the project. It also ensures you won’t go over budget unless there is a very real business reason requiring the overage, in which case you’re aware of it and can decide whether to okay the additional work or not.”
2) Price is determined after completion
The billable hour implementation even with an estimate implies that price for services will be determined at some future date that neither the customer or the software vendro are sure of. The number of hours accumulated from the start of the project to the end of the project multiplied by an arbitrary rate will be the price of the implementation. It seems natural to know the price of something (not just an estimate) before agreeing to commence. Would you purchase a hamburger without knowing the price before it was cooked and served to you? Why is an ERP implementation so different?
3) Length of time does not correlate to value provided
The billable hour implementation implies that the longer a project takes the more expensive it is therefor the more valuable it is. This notion is incredibly flawed as it would indicate that a slow, lazy, incompetent, inexperienced or poorly trained implementation consultant is worth more than a fast, industrious, competent, experienced, well trained counterpart. The latter will typically take less time and therefore charge less than the former. The organization pays more for what could be sub standard work. Some firms deal with this by charging different rates for different staff or different rates for different work but there is no way to account for every difference between people or the type of work. You are still left with an arbitrary rate multiplied by the number of hours.
4) Don’t pay for time pay for results or knowledge
In a fixed fee implementation the measure of success is results in a billable hour implementation there is a measure of success that is derived from how much or little time was spent. As an organization what is most important is that we get the results we asked for. In a fixed fee job the provider is focused on providing results not on how much time a consultant has spent on the job. Would you really want to pay a brain surgeon by the hour to remove a tumour? I want him in and out of my head as quickly as possible and if he can remove the tumor I am going to pay him an appropriate sum even if it only take a few minutes. I am paying him for the result , his experience, his education, his time, not the amount of time my brain is exposed to bacteria, possible infections and surgical mistakes.
5) Hourly billing is inherently unethical
I am not sure if anyone intends to be unethical but over time behaviours become the norm. The client’s best interests are served by a quick resolution but the software vendor’s best interests are served by a lengthy encampment. That isn’t what I’d call a “partnership.” There’s a disincentive to be efficient since you get paid more if you take longer to finish a project.
I am writing this article as my firm finally moves to a total and complete fixed fee pricing methodology. We have moved in phases. First were Telephone Support contracts, 2nd were ERP Upgrade Implementation projects, 3rd were new client ERP Implementation projects, the final phase will be on site contracts and all other projects for new and existing clients . We have had a great deal of success in terms of customer satisfaction with the first 3 phases and are looking for the same as we totally submerge into the fixed price ocean.
Please comment on your experiences positive or negative with hourly or fixed fee implementations…