ICT project management contracting
how do we handle it? The case of a large Italian ICT services company
According to Gartner (Magrassi, 2002), “in the global economy, increasing competition and more rapid change are making IT an increasingly necessary weapon. Most enterprises will find it difficult to survive without substantial IT knowledge and infrastructure. However, IT investments must be accompanied by an appropriate organizational transformation”. Nowadays, for Information and Communication Technology (ICT) departments, managing programs and projects has become a vital matter. How ICT departments prioritize their work, and how they staff for their workloads, is in transition. Some Chief Financial Officers (CFOs) consider the cost of core ICT personnel a luxury, as do some line of business managers. As a result, ICT often finds itself under constant pressure to defend its headcount. One way to deal with such pressure involves allocating dear ICT resources only to mission critical and/or revenue producing activities, and then to outsource the handling of non-mission-critical applications (Qinn, 2005). Project contracting is a facet of such a business need. As we will discuss later in this paper, often Project Dependent organizations commission the delivery of some projects or subprojects to Project Driven organizations. The PMBOK® Guide, namely, A Guide to the Project Management Body of Knowledge (Project Management Institute, 2004), particularly with reference to chapter 12 – Project Procurement Management, covers the knowledge implied by contracting a project. However, in our experience, the management of contracted projects by commercial Project Driven organizations requires specific issues which are sometimes not specifically addressed by the PMBOK® Guide. This paper aims at clarifying the difference between project management in Project Dependant vs. Project Driven organizations, presenting the case of a large Italian ITC services company. Lessons learnt will also be discussed.
Project Driven and Project Dependant Organizations
Looking at organizations from the perspective of Project Management importance for their core business, Archibald (Archibald, 2004) makes a distinction between Project Driven and Project Oriented organizations:
- ✓ “Project-Driven” organizations
- Project Management services is their core business.
- Growth strategies are reflected in the type, size, location and nature of the projects selected for bidding, as well as the choices made in how the required resources will be provided (in-house or out-sourced) to carry out the projects, if and when a contract is awarded or the project is otherwise approved for execution.
- ✓ “Project-Dependant” organizations
- Provide goods and services, and not primarily projects, as their core business.
- Projects within these organizations are primarily internally sponsored and funded.
The same logical separation for project management organizational types is given by Kerzner (Kerzner, 2001, pag. 24–26), who uses the terms: “Project driven” and “non-Project driven”.
Examples of Project Driven organizations include: architect/engineer/constructor, general contractor, specialty contractor firms; software development firms who sell their products or services on a contract basis; telecommunications systems suppliers consultants and other professional services firms; other organizations that bid for work on a project-by-project basis.
Examples of Project Dependent organizations include: Manufacturing (consumer products, pharmaceuticals, engineered products, etc.); banking and financial services; transportation; communications; governmental departments and agencies; computer hardware and software developers and suppliers; universities; hospitals; other institutions.
For Project Dependent organizations, Project Management is a “tool” needed in the context of “Enterprise Project Management” or “Management-by-Projects” approaches (Casanova, 2003), in order to assure Organizational Governance. The Project Management Institute (PMI®) is supporting such approaches with new standardization initiatives (PMI, 2006). For Project Driven organizations, Project Management is the business itself. Many Project Dependent organizations are important buyers of internally funded projects from Project Driven organizations. Often Project Driven organizations are part of a main Project Dependent one, or even are controlled by such an organization. On the other hand, often independent Project Driven organizations implement their strategy by means of internal projects or programs too. In this sense, a Project Driven organization can also be Project Dependant.
Project Management in Project Dependent Organizations
Even if not a fully consolidated practice yet, Project Dependent organizations often base their project management investments on a strategy supported by annual or bi-annual strategic plans, which are reviewed regularly, mostly every six months. In addition to obvious benefits, strategy visibility is an important factor for organizations, particularly when they are enlisted at the stock exchange.
The following exhibit shows a typical Enterprise Project Management cycle for Project Dependant organizations.
Exhibit 1. Enterprise Project Management in Project Dependant Organizations
Strategic planning sets the strategic objectives taking into account all perceived change drivers, such as global competition pressure, regulatory requirements, economic context, financial situation of the planning organization, innovation requirements. In addition, all strategic issues coming from current operational environment need be investigated. Without a systematic collection and management of past experience and related knowledge, this last point is difficult to apply. Strategic objectives are needed in order to analyze required investment and set-up both High Level Operations plans and Project Portfolio plans. Some new projects or programs can be originated by operations planning. Program and Project management deliver infrastructures and assets for on-going operations.
Project Management in Project Driven Organizations
Project Driven organizations start their market oriented Project Management initiatives on the base of commercial opportunities, rather than on strategic issues. The following exhibit shows a typical Project Management commercial cycle for Project Driven organizations.
Exhibit 2. Typical Commercial Project Management Lifecycle
Normally, each new commercial project management initiative needs be offered in response to a bid, request for proposal or other formal/informal means of solicitation by a Project Dependent Organization. Project Driven organizations use Prospects Management practices in the aim to stimulate and catch such solicitations. Not all prospects become offers. Not all offers become implemented initiatives. A contracted project management initiative is activated formally as soon as the contract is received, checked and accepted. In theory, outsourced Portfolio Management and Program Management contracts are possible, although, in practice, it is not frequent to see such kind of contracts. Indeed, it is more common contracting customer projects, subprojects or work packages.
A few characteristics can be observed for this cycle. It is not very clear where a contracted project starts and where it ends. As it will be explained later, it is conceptually acceptable that the bid/offer preparation be part of the project initiation phase. However, this is often not the case. Similarly, some national laws impose that a period of warranty be assured by the supplier, after a contracted project has been accepted. Therefore, from a conceptual point of view, in countries like Italy, where warranty is mandatory by law, a contracted project can be considered formally closed only after such period expires; not after client's sign-off.
Project Management Contracting
A large number of projects are carried-out under contractual arrangements. In this case, contractual agreements are set-up between a customer organization, who organizes project goals, scope and financing; and a contractor, who oversees the actual project delivery effort. The contractor, in turn, can work with sub-contractors, each of whom specializes in a particular delivery area of the project. Sub-contracting is regulated by national laws and often there are limitations to the amount of sub-contracting that is allowed. For large projects, it is not rare the case of joint ventures or temporary contractors organizations. In many developed countries the largest funder of project contracts is the (central and local) government. However, contracted projects are also common in the private sector, where big and small companies employ outside expertise to address special needs which they are not organized to handle internally in a cost effective way. During the corporate downsizing and reengineering efforts of the last decade, many private companies decided that much of their work could be carried-out by outsiders. Therefore, they started outsourcing such work to smaller external companies.
Currently, this is the case for ICT work too. As reported in the introduction of this paper, nowadays enterprise organizations realize the importance of ICT for their competition and strategic innovation. In 2006 much of the ICT budget in USA was devoted to ICT infrastructure, ERP, Business Intelligence and security (Kanakamedale and al., 2006). On the other hand, many non-mission-critical activities are being outsourced and even new forms of outsourcing services, such as “on-demand” software-as-a-service are being offered. Many analysts believe that delivering project and portfolio management (PPM) solutions through such technique will increasingly gain traction (Stang, 2006).
As for other forms of sales, contracted ICT Project Management is provided in response of an invitation for a competitive bid or as a result of direct negotiations. Exhibit 3 shows the kind of market relationship which is established during a project management cycle for a contracted project.
Exhibit 3. Market relation in contracted project management
Once a contract for project delivery has been negotiated and won, the project implementation is a continuous negotiation between the seller's project manager and the buyer's one, in order to stay inside the contract's clauses. Conceptually, negotiations can be related to the execution of programs, whole projects, subprojects and work packages. In our experience, however, contracting entire programs is very rare. On the contrary, work packages contracting is fairly common. In theory, a work package is to be considered a technical component of a main project and, therefore, proper project management, other than technical leadership of the performing team, should not be required by the selling organization. In practice, however, in all cases when the selling organization is contractually responsible for the work package implementation performance, this becomes a proper project delivery task, even if very small and requiring very simplified management. Particularly in this case, but also in the other ones, there is a trend by the buyer to apply a hierarchical relationship, and negotiations in exhibit 3, are replaced with orders. Here it is important the experience and professionalism of both project managers in order to set the relation right and avoid conflicts.
If subcontracting is applied by the seller, then he also holds similar buyer/seller relationships with the subcontractors, where he becomes the buyer and the subcontractors are the sellers. Normally, there are national laws that regulate the use of subcontracting. For example, in Italy, subcontracting of public contracts is limited to one level, for a maximum of 30% of the contracted value, and approval by the main contracting public organization is needed.
Normally, a project negotiation starts after the client's statement of work (SOW) has been analyzed by the seller and a proposal has been supplied to the buyer. When the contract is issued, it refers to both the SOW and the agreed proposal documentation, which, among other things, expands the SOW and proposes actual durations and costs. Producing reliable proposals needs good understanding of many aspects, such as: the customer requirements and assets; type of contract; risks involved; technologies to be used; external conditioning, e.g., the availability of products to be integrated; and so forth. But, first of all, experience and knowledge at various levels are needed: contractual, managerial and technical. Not always such experience is available for all aspects of the proposal preparation, even if present somewhere in the selling organization or can be found outside. Pricing the proposed project is always a very critical matter due to the often very demanding constraints for the proposal preparation: very short time, vague requirements, not enough information on specific assumptions (e.g., acceptance cycle and related assumptions), lack of specific experience or experience documentation, and so on. Sometimes the price is set by the buyer and this can often represent an important risk for the performing organization. Maintaining a historical base of previous offers and using expert people can greatly help. For large or public bids, the proposal preparation is always very demanding and often requires special agreements with other partners or subcontractors. In this case it makes sense to organize the proposal preparation as a proper project, where the offer manager is the project sponsor. If possible, the project manager of the proposal preparation should become the project manager of the contracted project, if the bid is won.
PMBOK on Project Management Contracting
A Guide to the Project Management Body of Knowledge (PMBOK® Guide) defines a project as “a temporary endeavor undertaken to create a unique product, service or result”. (PMI, 2004, p) Therefore, any contract where the buyer asks the seller to produce, under the seller's organizational responsibility, a unique product, service or result, is a project contract and the related work needs to be dealt as a project, even when its complexity and risks are not particularly demanding ones and its duration is very short. PMBOK® Guide is explicit in chapter 12 - Project Procurement Management (PMI, 2004, p 271), where it states: “the seller will typically manage the work as a project if the acquisition is not just for materiel, goods or common products”. We would add that this is also not the case for the acquisition of temporary external professional resources to carry out project management activities under the client's responsibility. This kind of agreement would actually not be a project management contract, even in the case when a project manager is hired by the client to manage a client's project.
PMBOK® Guide (p 277) presents a number of contracts possible for project management contracting. Our impression is that such a list is restrictive in number, from one side, and that, to our knowledge, it contains types of contract never used in Italian ITC project contracting, from the other side. In our opinion, if this can be justified by the multi-industry, multi-cultural characteristic of the guide, it is confusing. In our Italian experience, commercial ITC project management contracting can be limited to the following cases:
• firm fixed price: time, cost and performance are all precisely specified within the contract, and all
• the contractor's responsibility;
• time & material: at agreed times during the project lifetime (normally this is phased with milestone deliveries), the performing organization bills the client for the number of labour hours at the agreed-on daily rates and for the cost of material, parts and other applicable non-labour expenses, such as travelling costs.
• cost sharing: not all costs incurred by the seller are reimbursed by the buyer.
This is the case of a seller investing with a plan to get other benefits from the project implementation, as it is often the case of some Italian and EEC government funded projects.
We can exclude cost sharing projects, since they are a kind of investment projects, not proper commercial projects. Therefore, it is clear that the only reasons for which Italian project driven organizations authorize a contracted project, is the business related to a customer request, not certainly the aim to achieve the organizational strategy of the performing organization. All reasons supplied in PMBOK® Guide (p 7) apply to cost sharing projects and other investment projects, only. Contracted projects selection cannot be achieved on the base of organizational strategies, as for other kind of projects. Rather, contracted project selection is based on organizational competence, knowledge, capacity, business objectives and competitiveness. Project driven organizational strategy is first of all devoted to the optimization of such factors. PMBOK® Guide (p 83) does not seem to underline this aspect.
PMBOK® Guide attempts abstracting many processes in a way that they can be applied to both project dependant and project driven organizations. Although this is simple enough and straightforward in many cases, in our experience, some processes are different or specific for each case. For example, in the case of contracted projects, normally a preliminary scope statement, often called “technical attachment”, is already available as part of the proposal documentation. Therefore we feel that, at project initiation time, there is no need to produce one more specification document. Rather, the scope statement should be simply reviewed and baselined. This is true, unless the offer/bid preparation activities are considered part of the project initiation phase. As already mentioned earlier in this paper, from a conceptual point of view, the offer/bid preparation process can be considered part of the project initiating process group. We can see many similarity between this phase in the project driven organization's project selling processes and the preliminary analysis phases (feasibility study, concept development,…) in the project dependent organization processes. Moreover, just as for such preliminary phases, in case of large project bids, the offer/bid preparation activities can be dealt as a separate project. Our experience suggests that a project manager should be heavily involved in the preparation, even when this is not achieved with a proper project. When possible, it is a good rule assuring continuity to the process, by appointing the same project manager since the offer/bid preparation phase. Assuming that a project/bid preparation activity for a contracted project can be considered part of the initiating process group, we think that PMBOK® Guide should cope with a “prepare seller responses” process, to define actions, knowledge, input and outputs required for such a preparation. For commercial projects, the project charter could be issued after the offer/bid phase has been positively concluded. This is conceptually consistent with what PMBOK® Guide states on page 81: “in some organizations, a project is not formally chartered and initiated until completion of needs assessments, feasibility study, preliminary plan, or some other equivalent form of analysis that was separately initiated”. Similarly we believe that a warranty delivery process should be part of the project closing process group.
Project Management Contracting in Exprivia SpA
Exprivia SpA is a large Italian ICT services organization, enlisted at the Milan MTAX stock exchange. With about 700 staff and offices all over Italy. It is one of the fastest growing Italian ITC services company.
Exhibit 4 Project Management Cycle in Exprivia
The company is very active in software design, development and integration for the finance, telecommunication, and media, healthcare, transportation and public administration markets. Among other things, Exprivia is very specialized in the implementation of contracted projects for important multinational and national project-dependent clients. In addition, a number of both internal and R&D projects are also managed every year. Project management maturity is under control by a central project office, which also supports commercial and internal projects on request. Exprivia's commercial project management cycle is as shown in exhibit 4.
Contracted projects can have various size, duration and complexity, whilst, internal and R&D projects are mostly quite demanding and risky initiatives. Because of this variety of project characteristics, it was soon realized that it was not possible handling all projects with the same level of management. Particularly in the case of small work-packages to be integrated in a major client's project, the basic project management methodology was inadequate. You cannot fire a fly using a gun! Therefore, after analyzing our past experience, we decided to use three different project profiles and adapt the basic project management methodology to each profile, keeping consistency with the PMBOK® Guide model. The profiles are as follows.
1. micro projects: elapsed time < 3 months
2. small projects: elapsed time between 3 and 6 months; maximum effort = 12 person-months
3. medium-large projects: elapsed time > 6 months or effort > 12 person-months
Micro and small projects are mostly implemented by a single productive area using a functional project organization, whilst medium-large projects, when more productive areas are involved, are carried out using a balanced matrix organization. Each project is governed by a board (steering committee) who represents different project interests: the business interests, the client and users' interests; the interests of the organizations that implements the project. For medium-large contracted projects the project board is made by Account Manager (client and users' interests); Project Office Manager (representing the production director and looking after implementation interests); principal functional area manager involved in the project (business interests). In this case the functional area manager is the Project Sponsor. In case of medium-large internal projects the business interests are looked after by the Production Director, who is the Project Sponsor. For small contracted projects, both business and implementation interests are looked after by the relevant functional area manager, who is the Project Sponsor. For micro projects, all interests are represented by the relevant functional area manager, who is the Project Sponsor. The project board is responsible for end phase authorization and takes part in regular project progress meetings. The board is then activated by exception only, in order to take decisions for which the project manager has no authority, for important risk decisions and for change management authorization.
Projects follow the phases shown in the following exhibit.
Exhibit 5 Project Management Phases and Gate Reviews in Exprivia
For medium-large projects, at the end of each phase a gate review is run in order to authorize the next phase. For micro projects, project initiation is implicit. The only formal gate review that applies is the execution-end review. For small projects, the only formal gate reviews are the kick-off review and the project-end review. In the other cases, phase-end documentation is supplied to the project board and the next phase can be initiated, while waiting for possible requests by the board.
The phase flow in exhibit 5 is a simplified one. Actually, project planning happens continuously during the execution monitoring and control phase, too. The planning phase, however, sets the project planning baseline. New planning baselines can be defined following a proper change request. The execution, monitoring and control phase is the real heart of the project, where the project deliverables are produced. It is conducted by applying product processes and life cycles which depend on the nature of the deliverable to be implemented. So, inside such a phase, evolutionary and other similar product implementation phases are applied. For innovation projects, often we apply a rolling-wave approach, combined with an iterative one.
Projects are planned using an incremental technique which, starting from projects objectives and contractual deliverables, produces a Work Breakdown Structure and, afterwards, all required integrated plans: project quality, organization, schedule, resources, communication, procurement, risk mitigation and budget. The nature of such sub-plans depends on the project category. For medium-large projects, the sub-plans are proper sections inside a main project plan document. For practical sake, the project plan document has been split into two parts: a fixed part and a variable (operational) part. If the latter part has no impacts on the other one, it can be modified freely. This is often the case of slight schedule modifications which have no important contractual impacts. Risk mitigation planning is quite accurate. Risk identification is supported by a checklist of typical ITC risks factors based on previous experience and literature. The risk identification process, however, does not rely on this technique alone. Risk analysis is based on some simple qualitative risk analysis tool. We believe that quantitative risk analysis is difficult to apply since risk impact and probability are very hard to determine in most cases.
For micro and small projects, the planning process is very simplified and produces a small plan sheet together with a Gantt chart. Risk mitigation planning is conducted in the same way as for medium-large projects, but risk identification uses more simplified methods, such as discussions with main stakeholder.
Lessons Learned and conclusions
Project driven organizations have some specific requirements for contracted project management. This paper has shown how Exprivia handles contracted projects. Our experience suggests that the PMBOK® Guide processes can often be applied to both project driven and project dependant organizations. However, it is not always very simple understanding how such processes apply to each context. Moreover, we think that some extra processes are needed in the case of contracted project management: a process to prepare seller's responses, as part of the initiating project group; and a process for warranty delivery, as part of the closing process group.
Contracted projects, can be of various nature, complexity and risk. They need to be handled in a particularly efficient way in order to keep competitiveness and return of investment. Therefore, as explained earlier, Exprivia has defined three different project classes, with important management simplification where needed. In practice, a requirement exists to manage projects accordingly to their complexity and risk. We feel that it could be a good idea to propose different profiles of the PMBOK® Guide, depending on the project complexity. This approach could lend itself to have different levels of PMP certification.
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© 2007, Pietro Casanova
Originally published as a part of 2007 PMI Global Congress Proceedings – Budapest, Hungary