In restructuring, corporations focus on their core business and assign non-core activities to others. Most of these “other” activities are service-related and the assignment often takes the form of “outsourcing” or similar arrangement. The assignment entails a project of transferring the activity from the corporation to the new entity, or “Contractor.”
This type of project has many characteristics in common with non-service or “traditional” projects, as found in the aerospace and engineering construction industries. But these projects also have unique features that are critical to success both for the client and the contractor.
A significant number of this type of service project stem from computer-related activities, where the rapid change in technology places a heavy demand on corporate resources just to stay current. As a corporation focuses on its core competencies, it makes sense to outsource networks, personal computers, servers and similar items, including physical assets and related support and maintenance services.
By doing this, the corporation expects to lower its operating costs and attain higher performance in the outsourced activities. The contractor expects to grow its business with appropriate profitability while meeting the corporation's performance expectations. Both sets of expectations are realizable. The realization occurs through the transition phase of the service project.
The physical transition may occur quickly in relation to the transition to the desired business states. This is in contrast to non-service projects where the completion is in physical terms (mechanical completion) and a formal acceptance. The physical transition can occur at the time the contract is signed and assets and personnel go from the corporation to the contractor. But it may take years to achieve operating conditions that are satisfactory to both parties.
The project management body of knowledge, as we know it in the PMBOK Guide, provides the foundation for these service projects, but these need to be augmented with the knowledge and tools associated with conventional business management. Here's a discussion of how each element of the PMBOK Guide relates to service projects, with consideration of additional elements or activities that are needed for a successful service project.
Scope. A clear Statement of Work is essential in service projects, just like any other type of project. Particular emphasis is needed in the definition of roles and responsibilities between the contractor and the client. Recall that the project objective is to move a defined set of operations from the client to the contractor. Much of the client's process and procedures will be poorly documented and buried in the culture. It should be expected that the client will have a continuing role and responsibility to examine the contractor's solutions and evaluate them in terms of prior practice and participate in assimilating the new processes. This may lead to changes in the contractor's standard service offerings.
Change control is a critical activity for these service projects. There are many unknowns and the client's practices and procedures may be poorly documented. Scope statements must be concise and clear and well linked to the WBS to provide the basis for definition of changes. Change control serves to protect the contractor from doing uncompensated work out of scope; but equally important, it serves the client as a vehicle to adjust the new processes to conform with the business practices of the organization.
Figure 1. Hypothetical Service Project
Schedule. Schedule performance is as critical on a service project as on any other project. However, in a ranking of project objectives, financial and quality objectives have a higher priority and the project manager may willingly trade off schedule to attain financial or quality objectives. Recall that the client's assets may pass to the contractor at the signing of the contract. The performance period of the project usually spans multiple years and includes a transition phase to implement the new practices and procedures. The metrics of “mechanical completion” and “acceptance test” are augmented by business metrics like response time and customer satisfaction for the client; and “cash flow,” “margin,” and “PBT” for the contractor. Until these quality and financial objectives are met, the project is incomplete, and it may make sense to extend the planned completion date of the transition phase.
Cost. Cost management should be substituted with financial management for service projects. The project manager is concerned with costs (planned vs. actual), but the project manager and the company must be equally concerned about business metrics like cash flow, margins, PBT, accounts receivable, and so on. The standard cost curves (planned vs. actual) should be augmented with similar revenue information, as shown in Figure 1.
In Figure 1, some of the business metrics (or indicators) become apparent:
- Planned Margin = PR – C
- Actual Margin = AC – BR
- Forecast Margin = ER – ETC
An indicator of accounts receivable or the aging of receivables can be obtained by comparing Billed Revenue against the Planned Revenue, and Billed Revenue to Received Revenue.
Figure 1 is, unfortunately, indicative of many service projects with respect to cash flow, where the indicator of cash flow is the cumulative difference between revenue and cost. The cash flow is negative for most of the transition phase. Clients often expect the contractor to initiate project activities at their own expense, which starts the project with negative cash flow. And this condition may persist for some time, acting as a negative motivator for the entire project team (client and contractor), which affects the quality of the services. This negative cash flow situation can be remedied by introducing a mobilization period with appropriate lump sum payment at the beginning of the project or major project phase. These are funds that the client will ultimately expend in any case and the early expenditure tends to alleviate a risk area for the client, since the ultimate responsibility for identification of risks and their subsequent treatment must rest with the owner or client.
Quality. In service projects, the client's quality measures are normally established as part of the contract. In desktop services projects, for example, the services typically include:
- Maintenance response time
- Mean time to repair
- Call handling response time
- Time for call resolution
- Percent satisfactory responses
- Mean time to install
- Customer satisfaction.
The contractor's primary quality issues are achievement of the contract requirements and the financial criteria in Figure 1. The project is best served if quality metrics, like those above, are maintained as control charts, including mean, variance, control limits and specification limits.
Risk. Service projects are a little deceptive with regard to risk. On one hand, the services seem to be well known to both the client and the contractor; on the other hand, there is often a semantics difference that can lead to disagreement during implementation. The magnitude of the impact of the change to the client when shifting from one set of practices and procedures to another is not generally well understood by either party. The client often takes a position to preserve “practices and procedures” and this may represent a change to the contractor's service offering. Many of the client's practices and procedures are not well documented and are simply buried in the way they do business. Some of these may be associated with critical competitive advantage, so there is no recourse but to change the service offering.
Changing (sometimes called tailoring) the service offering can have ruinous effects on the contractor's margin requirements if not well managed, since many of the services that are “outsourced” are already low-margin activities. As the contractor adjusts to accommodate these client-induced changes, the efficiency and productivity that comes with standard operations begin to fade. If not appropriately compensated for these changes to the standard offerings, the contractor is forced to reduce costs in other areas in an attempt to maintain margin requirements. This can lead to a general deterioration of service.
Risk management for service projects must take dealing with these types of unknowns into consideration. Client/contractor project reviews should include topics related to actual service delivery versus the client's expectations. Significant deviations would be subject to the change process. It may also be appropriate for the client to set up a management reserve for these instances.
Contracts. Service contracts tend to be multiyear agreements. The true “project” work is completed early in the total engagement, in the transition phase, during which the client transfers tasks either from in-house to a contractor or from one contractor to another. In most cases, the service delivery itself is fixed price, low margin, low risk, for a relatively repetitious activity. This is in contrast to the transition phase, which is non-repetitious, high risk, but usually compensated by the same fixed price consideration. This situation presents problems for both the client and the contractor.
If the contractor includes risk funds in the fixed price, the client may be overpaying for the service. If the contractor does not include risk funds in the price, margin erosion may have adverse effects on the quality of the service. A relatively simple solution is in the recognition of the distinct characteristics of these phases and that a different compensation scheme is appropriate for each.
The work in the transition phase may be compensated by “cost plus” contract terms, while service delivery is compensated by fixed price arrangements.
Human Resources. A number of human resource considerations require attention in service projects. Probably the most significant is that the project must migrate a user community from one set of working procedures to another. This could represent a severe disruption in operations if not handled carefully, especially if the migration is accompanied by downsizing. The human resources plan must be a collaborative effort between the client and contractor, based on thorough and documented understanding of this user transition and accompanied by a program of communication and support. The objective is to monitor and maintain productivity at a high level and also record the improvement in productivity as a result of the program.
In addition, the distinct difference between the transition and delivery phases of a service project tends to require different skill sets of the project manager. The transition phase requires a project manager who can deal with unique situations in a changing environment while controlling scope and driving the schedule. The delivery phase places emphasis on maintenance of stability and control. Most project managers do not have an equal abundance of skill sets required by the respective phases, and it often makes sense to plan a change of project manager at the end of the transition phase. This may be well understood by the contractor, but unless this is communicated and understood by the client it could be misunderstood and create a problem. And, usually, the better the project manager performs during transition phase, the more difficult it is for the client to accept a change of project manager.
Communications. Project communications is always a critical element and this is even more true with service projects. The primary reason is that the project directly affects the client's user community. Any problems that are felt by this community have a way of quickly escalating to major complaints. Changes that will have a beneficial outcome for the client are often met with complaint until they are understood and integrated into the normal work processes.
The communications plan needs to be jointly developed by the client and the project manager. It should anticipate the user reaction to the change and provide responses that allay user concerns. The client must play a key role, not only in the development of the communications plan, but especially in its delivery.
Service projects are a growing segment in the project management endeavor. This growth will continue as long as corporations continue to focus on their core competencies and look to others to provide essential related services.
The major differences between service projects and more “traditional” projects are:
- The continuing requirement to “manage the business”
- The continued maintenance of good client/contractor relations, including end users, while at the same time maintaining high-quality service levels at the agreed prices.
The PMBOK Guide provides the basic framework for managing service projects, with an emphasis shift in some areas. Focus must be shifted from cost management to financial management. Business objectives must be met and the project manager must manage change and be prepared to trade off schedule performance to meet financial objectives. The project manager must establish a change process with the client that can accommodate some alteration to the standard service products. This is often necessary to preserve client processes that involve unique competitive advantage.
The current wave of service projects is in response to corporate strategies to focus on their core competencies and contract with others to obtain necessary support services. This puts stress on those who were providing these services. Generally, they are obliged to change job functions, either within the corporation or, as is often the case, seek employment elsewhere. Those who remain with the corporation must adjust to a new service provider with new practices and procedures. Sensitivity to the pressures on the client's workforce is essential. The project manager, with the client management, must put communications vehicles in place to keep all aware of progress and attainment of performance standards. This is a difficult adjustment and transition.
This transition contains many unknowns, with accompanying risks. The risk in the transition phase is substantially greater than the phase after transition. This suggests contract arrangements where the risk is shared between the client and the contractor during the transition phase and fixed prices for the services after transition is complete.
Service projects, with their accompanying client/contractor alliance, are a major factor in the changing business environment. They represent win-win opportunities, and project management is the key to realizing these opportunities.
Max B. Smith, PMP, has over 25 years of PM experience in the aerospace, engineering/construction, and computer industries. He manages the Program Management Office for Digital Equipment Corp. Multivendor Customer Services for the South Central U.S.