Project Management Institute

Successful management of vendors in IT projects

by Tom Chaudhuri, PMP, and Leigh Hardy

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Sharing risks and benefits with vendors has potential rewards that can be effectively leveraged by the project manager.

How do you manage a project when an external vendor or consultant undertakes a significant portion of the work? Is it the same as managing a work package within a project? Increasingly, project managers have to answer these questions.

Rapid advances of computer and communication technologies and, in particular, the growth of the Internet, are dramatically changing many industries. The late twentieth century saw these technologies move from just providing tools and automation of processes to driving business strategy. This increased focus on technology has resulted in many changes to commerce and the world of project management. In particular, the following changes are significant:

img An expanded presence and influence of the technology vendors. Vendors unheard of one or two decades ago are now some of the largest and most influential international companies.

img Increased technical complexity due to rapid change and the variety of products available.

img Growth of specialists to support the new technology. The growth of technology has spawned specialist skill providers and partnerships between technology vendors and consulting groups. Major vendors and consulting groups have seen the synergy between their skills and have entered into partnerships for their mutual benefit.

img Business demand for rapid development. Traditional businesses and new entrants have been quick to use the new technologies. This has required ever-faster development efforts to apply the new technology and be quick to market.

The impact of these changes on project management in the information technology area is profound. Building IT solutions from scratch is becoming rare. Buying a solution and fitting it into an organization rather than building it is becoming prevalent. This is seen as cheaper, faster, and less risky. Consequently, the project manager's role is changing from designing and building solutions to installing and customizing developed products.

 

Tom Chaudhuri, PMP, is a project director with the Canadian Imperial Bank of Commerce, a leading financial services company in Canada. He has extensive experience in business process reengineering and information technology project management, including the design and implementation of large-scale applications in retail, oil, pharmaceutical, and banking industries.

Leigh Hardy heads up a project management group at the ANZ, an international banking and financial services organization based in Australia. He has extensive experience in managing projects, programs, and project offices.

Variety of Vendor and Consultant Involvement

Vendor/consultant roles and typical project involvement are indicated across the continuum of increasing involvement

Exhibit 1. Vendor/consultant roles and typical project involvement are indicated across the continuum of increasing involvement.

Specialization is becoming common. The variety, complexity, and rapidly changing nature of the technology means that it is often difficult for a project manager to source internally the skills and knowledge required for a project. Frequently it becomes much easier to source these skills directly from the vendor of the product, a vendor consulting partner, or a specialist consulting group.

The impatience of business to use the technology and launch new technology-enabled products and services is demanding faster project life cycles, which means that IT projects that take several years to complete are increasingly rare. Many companies are subscribing to the 60/90-day lifecycle for project delivery, and IT project managers must respond by planning and implementing within these short time frames while maintaining quality. Rapid turnaround is the name of the game!

Successfully managing projects in which external resources play a significant role commences as soon as it is decided to engage the external resources.

The net result is that managing vendors and consultants is becoming a major part of a project manager's responsibilities, and successful management of these elements is becoming critical to the successful delivery of projects.

Let's talk about the special considerations and strategies that are required in successfully managing vendors.

Types of Vendor Support

Before discussing the special features of vendor management, it is important to discuss briefly different types of vendor support, which can take many forms. The support can be provided as a free service with the product purchased, and can range from ad hoc provision of advice to on-site personnel completing significant work. Vendor support, at a higher level, can be an add-on service, where a vendor may provide a range of consulting services to support its product. For example, the purchase of a product such as Enterprise Resource Planning software may receive comprehensive support by services provided by a vendor or a vendor's consulting partner.

From a project manager's perspective, these variations range from informal support, to provision of a resource to assist a work package, to provision of a work package within a project, to provision of almost the entire project plan. Vendor support can extend as far as provision of the project management, although most organizations maintain overall project management responsibility. Exhibit 1 shows the continuum of vendor support. This continuum is important to the project manager. Different management approaches are required as external resource involvement increases.

Special Considerations in Managing Vendors and Consultants

In projects where vendors play a significant role, a project manager has to become aware of a new set of factors. Understanding these factors is critical to successfully managing these projects.

Multiple Vendors and Consultants. In some projects there may be a number of external participants in a project. Managing these groups is similar to managing different work packages; however, there may be added complexities due to the independence of external providers as well as existing relationships between the parties external to the project.

Vendor Relationships Within an Organization. Many vendors and consulting groups have multiple relationships within an organization. This presents additional challenges to a project manager. To the initial surprise of many internal managers, it is not uncommon for external vendors and consultants to have a wide awareness of an organization's strategies and projects because of their involvement over time with many company departments and personnel. As a result of this exposure, these groups can have multiple relationships, often at a senior level, across an organization. Although these relationships can be of assistance to a project they can also add complexity and additional risks that a project manager must manage.

Types of Risk and Benefit Sharing

Disincentives and incentives for the vendors are indicated in this risk/benefit-sharing model

Exhibit 2. Disincentives and incentives for the vendors are indicated in this risk/benefit-sharing model.

Vendor Ownership of Product. In the IT world, it is common for vendors to own a software product being supplied to a project. In these cases the vendor typically maintains control of the computer code and any changes made to it. A project that requires software changes may be subject to the standards, resource constraints, priorities, and schedules of the vendor. This provides additional challenges to the project manager.

Power Imbalance. In projects where a vendor is supplying a product and a comprehensive range of support services, the project manager may find that there is an imbalance—the vendor supplies the product, the expertise, the methodologies being used, and the resources being used. Cases such as these create serious challenges for the project manager trying to prioritize and retain control.

Strategies for Managing Vendor- or Consultant-Dominated Projects

Successfully managing projects in which external resources play a significant role commences as soon as it is decided to engage the external resources. It is therefore important that selecting and contracting external resources follow a series of structured steps, such as those outlined in the PMBOK® Guide: (1) Plan for procuring the resources. (2) Plan for the solicitation of the resources. (3) Provide the solicitation for obtaining bids and proposals for the resources. (4) Select the resources.

Once a project with significant external resources has commenced, the standard disciplines of project management continue to apply. Scope and cost control and regular status reporting are critical to help a project manager stay in control of a project; however, these may not be sufficient to meet the special characteristics of vendor- and consultant-dominated projects.

An additional set of tools is available to the project manager to help manage these projects: risk and benefit sharing. As the involvement of vendors and consultants becomes greater, they become more of a partner with the business rather than just a provider of services or products, and the relationship changes to one in which both the vendor and the client share in the risks and benefits of project delivery.

Strategies for Risk and Benefit Sharing

Many a successful vendor has built its reputation and business on the successful delivery of a project. Similarly, many reputations have been lost by unsuccessful projects. Therefore, an element of risk and benefit sharing is inherent in any vendor/client relationship. However, it is possible for a project manager to go beyond the inherent risk/benefit sharing that is part of the relationship and introduce specific and negotiated risk/benefit factors into a project. In these cases, the criteria for successful or unsuccessful progress or delivery are explicitly stated and agreed upon. These criteria can include timelines of delivery, quality of deliverables, customer satisfaction, and achievement of benefits, and may be at the end of the project or at specified milestones. A variety of tools and strategies, outlined below, are available to the project manager to assist in setting these factors in place.

Fee Discounting. Fee discounting may be part of the business negotiation process or it may be introduced as an explicit way of spreading the risks. To share the project risks, the vendor may agree to reduce or remove fees. Alternatively, the fee discounting or removal may be conditional upon some success criteria. For example, it may be agreed to discount fees at project commencement but to remove the discounting when certain criteria are met. Another example is to remove the discounting in a second phase pending successful delivery of the first phase, or make discounting conditional upon successful delivery and reengagement of the vendor for additional work.

Gain Sharing. This is limited profit sharing. The client targets the benefits expected—for example, cost reduction or revenue gain—and shares a portion of the gain with the vendor. The challenge in establishing this mechanism is in agreeing on the baseline and targets. Most areas of business have multiple determinants of revenues and costs and it is difficult to isolate the impact of a single determinant, such as successful project delivery. For example, although a project may successfully implement the changes expected, it may not be easy to see the impacts by looking at costs because of compounding impacts of other market forces such as changed volumes of work, changed rates, or impacts of other projects. If gain sharing is a significant component of the vendor payment, both the client and vendor will have a close interest in the outcome and the accuracy of the measurement. To successfully implement gain sharing, a project manager may need to introduce additional effort into the project plan to establish baselines, and then measure against these baselines.

Benefits Delivery. This is the sharing of benefits with the vendor—the philosophy being that when the client wins, the vendor wins too. As with gain sharing, an appropriate mechanism or formula is required. Considerations and project management action is similar to that discussed for gain sharing, although benefits delivery is at a higher level.

Venturing. Venturing is the most explicit means of risk and benefit sharing. In this case, the vendor becomes an equity partner with the client. Various forms of venturing are possible. A separate joint venture may be established between the parties focussing on the successful delivery of a project, the implementation of the project, and the business benefit it delivers. There may be a swap of equity for effort where, for example, a vendor may supply services for the successful delivery of a project in exchange for equity in the venture of the client. Specialized assistance is needed when venturing is introduced to a project, and the project manager will require the expertise of lawyers and corporate advisory staff. The venturing approach may be appropriate for large, mission-critical initiatives that have high risk and span multiple years.

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Combination of the Above. It is possible to establish a risk/benefit sharing arrangement where several alternative mechanisms are combined. For example, it may be agreed to discount fees, or even pay no fees, but instead to introduce some form of gain or benefit sharing.

Risk/benefit sharing provides greater leverage to the project manager and provides the opportunity for increased benefits to both the client and the vendor and reduced risk to the client.

For a client:

img The vendor becomes more of a partner with a shared motivation for successful project delivery—share the pain, share the gain.

img Risks are more effectively managed by aligning vendor motivation to the client's motivation and improving the motivation of the vendor.

img The upfront cost of a project can be reduced or, in an extreme case, removed.

img It avoids the project team's perception that the vendor has different motivations than the client.

For a vendor:

img The vendor becomes more of a partner with the client.

img The expected outcome is explicitly stated.

img The potential financial reward may be greater than fee-based services.

Exhibit 2 shows an example of a vendor's potential incentives and disincentives for the various forms of risk/benefit sharing.

SIGNIFICANT VENDOR OR consultant involvement in projects is becoming more common. This involvement potentially changes the power relationships within projects and significantly changes the role of the project manager. The traditional skills of project management continue to be required; however, these may not always be sufficient. Project managers therefore need to be aware of special considerations in managing these projects, such as benefit sharing and venturing. Introduction of these elements into projects requires additional management skills and generally additional project tasks. However, the potential benefits of closer partnerships, aligned motivations, and greater vendor motivation provide effective leverage to the project manager. ■

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

PM Network June 2001

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