survival techniques for the next communications revolution
This paper is intended for general information purposes only and should not be construed as legal advice or legal opinion with respect to specific facts or circumstances. Readers with specific legal questions should consult a lawyer concerning their own particular situation.
“We have now reached the stage when virtually anything we want to do in the field of communications is possible. The constraints are no longer technical, but economic,legal, or political”(Clarke 1983).
Western civilization was forever altered by the information revolution begun in 1450 when a Mainz silversmith, Johan Gutenberg, merged movable metal type with the wine press. In spite of his monumental achievements Gutenberg’s business failed, and he would later die in poverty. Today’s managers are also coping with extraordinary changes in the communications field and should heed the important lesson that technical expertise alone will not insure business solvency.
To keep pace with technological changes, it is necessary for manufacturers of communication equipment to partner with multiple companies in providing a complete technical solution. Project managers once accustomed to acting as the prime, are now required to work within a consortium of companies. This new role is unfamiliar to many who once enjoyed horizontal market expertise. The successful implementation of converged enterprise networks requires the proper management of these complex relationships. The efforts of the prime and sub-contractors, consultants, in-house resources as well as their various products and services must all be integrated to accomplish this goal.
This presentation will address the key areas necessary for communication systems integration project managers to successfully converge an enterprise network solution. Using one of the most celebrated information technology projects in history, the invention of the printing press, we will discuss how modern systems integrators can avoid a similar fate as Gutenberg’s.
Gutenberg: Systems Integrator
Few records exist of the precise details regarding the historic invention of the printing press. What is known is that around the year 1450 Johann Gutenberg, a businessman from Strasbourg, and eventually Mainz, Germany, revolutionized the printing process through the innovative combination of movable metal type and the wine press (Kapr 1967, 159). The basic design of his invention would go unchanged for nearly 350 years (Steinberg 1959, 198). Gutenberg is also credited with the development of new inks designed to adhere to the metal forms.
“Johann Gutenberg obtained financial assistance from Johann Fust, a citizen ofMainz,Germany, for which he mortgaged his printing plant in 1450. As the work on the famous 42-line Bible neared completion, this mortgage was foreclosed, giving Fust possession of most of the equipment and all of the printed work (International Association of Printing House Craftsmen, Inc).” Gutenberg argued unsuccessfully in court that the two men had originally agreed that Fust’s money was to be considered an investment in Gutenberg’s business, for which Fust would later be paid a portion of the profits.
Fust would not have been able to capitalize on his windfall were it not for the technical abilities of a Peter Schöffer. Little is known about Schöffer. It is speculated that he may have learned the craft of printing as an assistant to Gutenberg himself. Schöffer would later marry Fust’s daughter, and in 1457 the partnership of Fust and Schöffer was formed.
Defeated in court by his former partner, and unprepared to deal with the defection of his assistant, Gutenberg was denied realizing the benefits of his invention. As we will see, the business and legal challenges of managing converged communications technologies of today parallel in significance those experienced during the technological revolution of Gutenberg’s day.
Partnership agreements should be drafted with care to avoid misunderstandings, misinterpretations and unnecessary liabilities. Gutenberg’s major strategic mistake was not guarding his interests when forming his partnership with Fust. Management should conduct a thorough strategic risk analysis in order to reach a decision on the proper form a partnership should take. Although the project manager may not be involved in the preliminary contract negotiations, a strong understanding of the formative stages is advisable.
The customer’s procurement office engages vendors through either a sealed bid or through negotiation. The pool of vendors is normally determined from the customer’s objective ranking system based, in part, on the quantitative and/or qualitative requirements of the project. Regulatory requirements for vendor selection are also factored in, particularly for public contracts. Examples of solicitation documents may include, Request for Information (RFI), Request for Proposal (RFP), or Invitation for Bid (IFB).
The RFP is more detailed than the RFI primarily in that the RFP includes the Statement of Work (SOW) detailing the specific what, how and when the product or service will be delivered. Customers who do not have employees qualified to draft a SOW may engage a consultant, or even require the vendor provide such documentation. Solicitation documents also include the contractual terms and conditions, the format and timeframe in which the vendor must respond, and the evaluation criteria upon which the customer will base their selection. An IFB requires the vendor to include a quote in their response.
The selected vendor who signs a contract (the prime contract) with the customer is known as the General or Prime Contractor. “When a project is performed under contract, the signed contract will generally serve as the project charter for the seller” (PMBOK® Guide 1996, 50). A prime may not have all of the technical and/or human resources, market penetration or even the manufacturing capacity to handle the entire project. If the prime contracts with additional vendors to deliver certain parts of the project, these vendors are known as subcontractors.
A company choosing to seek outside resources to pursue a business opportunity has one of three options. It may purchase an outside company involved in the desired area of business, acquire an interest in such a company, or establish a separate “joint venture” entity with other companies seeking similar objectives (Hawthorne 2000, 278). Joint ventures are formed when one company seeks to partner with one or more companies in the delivery of a product or service.
Partnership agreements must not violate laws regarding monopolies, oligopolies, or collusion. Publicly traded companies must adhere to regulations governed by the United States Securities and Exchange Commission. Internal statements from potential partner companies must be reviewed and confirmed through third-party sources. An alternative to creating a jointly owned entity (which imposes greater fiduciary duties on partners) would be to create a joint venture through the use of licensing and/or contractual agreements.
The 1970s saw a proliferation of lawsuits brought by customers against vendors who had outsourced almost the entire project to subcontractors. As a result, it is customary for customers to require the prime to identify the actual “Who” of all work in advance (Asmar 2001). Details are provided by the prime in its response to the RFP as to who will be responsible for each part of the project.
This requires the prime to enter into partnership negotiations with subcontractors simultaneous to negotiations with the customer. Both prime and subcontractor may jointly sign a Memorandum of Understanding (MOU) agreeing to cooperate with each other in finalizing the proposal to be submitted to the customer. This agreement is normally referred to as a teaming agreement when the customer is the government. The MOU is signed with the understanding that the final details of the project have not yet been agreed to between the prime and the customer. This can be further complicated in situations where the customer insists on a contractual clause requiring customer approval of any subcontractor used on the project.
The prime and the subcontractor usually sign a separate confidentiality agreement to protect proprietary information. This is primarily used to dissuade a courted subcontractor from using confidential information in an attempt to take the business away from the prime.
Once the definitive prime contract has been formally adopted the identified project objectives may differ from what was initially agreed to with the subcontractor. When the final subcontract is negotiated the prime will seek to reconcile any differences between the earlier MOU (or the teaming agreement) and the later definitive prime contract.
Whereas an MOU is negotiated prior to the signing of a prime contract, they are not always binding on the parties (Brownell). It is for these reasons that confidentiality agreements are usually handled in separate documents. Parties should clearly state in the MOU whether or not they intend to be bound by the document. Both parties are required to negotiate in good faith to resolve any contract discrepancies. If such discrepancies cannot be resolved, the prime may be at liberty to negotiate with another vendor.
Legal Risk Analysis
Total risk avoidance precludes opportunities as well as negates risk. The very nature of doing business is to take reasonable risks. This fact is tempered with the reality that today’s business partner may be tomorrow’s courtroom adversary. Therefore, conducting business requires the management of risk not its total elimination.
For project teams composed of representatives from different companies, there is risk that one company in failing to meet their contractual obligations could cause default on the part of a partner company. In addition, independent companies will always look to their own business interests firsts. Although part of the project team, outside companies are still considered External Risk.
“Project Risk Management includes the process of…maximizing the results of positive events and minimizing the consequences of adverse events” (PMBOK® Guide 1996, 111). A balance is necessary in the drafting of a joint venture agreement containing both contractual protections of the interests of the signatory while at the same time avoiding instituting unmanageable contractual constraints (Beardsworth).
With the attorney’s guidance the project sponsor-stakeholder must decide the level of risk they are willing to assume with the agreement. “Counseling clients on how to avoid liability implies that the client first know what liability it needs to avoid …There is no excuse for any in-house counsel not to have some form of client education, review and implementation of procedures in place” (Hiaring 2000, 175). If the project sponsor-stakeholder’s risk tolerance is low, the project sponsor-stakeholder will require the attorney to negotiate improved terms to cover liabilities. Conversely, if risk tolerance is high, the project sponsor-stakeholder is willing to assume greater risk.
The project manager should use this initial risk assessment as a basis for ongoing risk analysis conducted throughout the life of the project (Kerzner 1998, 879). It is critical “that the project team be acutely aware of the legal implications of actions taken when administering the contract (PMBOK® Guide 1996, 131).” The greater the risk the greater the need for the project manager to have continued access to the attorney or contract manager to identify any negative legal factors that might either increase project liabilities or reduce the value of the project. Just as project managers populate their teams with technical experts with whom they turn to for input at appropriate stages of the project, corporate legal counsel should also be utilized when necessary.
The primary reason to conduct a risk assessment is to avoid unreasonable risk. In order to make more informed business decisions a project sponsor-stakeholder should also be aware of risks. Assumption of risk should be made based on an informed decision that the benefits to the company outweigh the probability of the risk occurrence and the potential liabilities. Assumption of risk should not be made out of negligent oversight.
One way in which risk can be classified is through the Business Risk versus Pure (Insurable) Risk distinction (Wideman 1992, III-1 and Kerzner 1998, 882). Risk associated with the possibility of either a profit or loss resulting from a business endeavor is known as Business Risk. Types of Business Risk include resource availability, economic and or market changes, competition, or as what is discussed in this particular topic, a joint venture effort. Management usually anticipates such risk and provides for a cost markup in the form of a Contingency Allowance (Humphreys 376).
The customer may require a vendor to obtain an insurance policy to cover losses attributed to Insurable Risk losses which include both direct and indirect property damage; personnel losses; and legal liabilities (Wideman 1992, III-1).
Contract Risk Management
Holes in a contract could create unintentional liability. After a contract manager or sales account representative has negotiated and drafted the proposed contract, it is the corporate legal counsel who must review, make modifications (when necessary), and then approve (when appropriate) the project contract before it is signed. This review requires the attorney to conduct both strategic as well as transactional due diligence with a degree of care, skill, and prudence possessed by lawyers within a similar field.
Strategic due diligence includes analysis of the legal soundness of the partnership agreement. The scope of due diligence analysis hinges on the particulars of the agreement. The extent of review is directly proportional to the potential liabilities to the reviewing company. Corporate attorneys generally follow a checklist of issues to review, including the financial and market position as well as any unresolved or potential legal entanglements of the potential partner. The attorney must make a well-informed and reasonable assessment of whether the vendor can meet their contractual obligations.
Transactional due diligence requires a risk assessment of liabilities arising out the contract document itself, or what attorneys refer to as the “four corners of the document.” The deliverables of the contract must be reasonable and attainable. “Executives must not arbitrarily set unrealistic milestones and then ‘force’ line managers to fulfill them” (Kerzner 1998, 558). This requires that the attorney confer with project team members possessing the technical and operational expertise to insure contractual obligations can be reasonably met. These contract deliverables are referred to as Minimum Acceptable Service Levels (MASL).
Types of Contract. Assumption of risk shifts with the type of contract selected. For instance, a price-based contract (fixed price) is an agreed set amount. Should costs exceed this, the vendor will bare the loss. A cost-based contract, however, shifts the assumption of risk to the customer who must pay for additional project costs over and above the target cost (Wideman 1992, IX-2 through IX-3).
Operational Authority. Hopefully responsibility for overall coordination of the project will be assigned to a member with the requisite operational experience. All strategic partners will be negatively impacted in the event the project is negligently supervised. Therefore, the prime should never totally relinquish its supervisory responsibilities. Progress reporting, administrative closeout and contract closeout are usually defined in the terms and conditions of the contract. In an effort to prevent alienation of any of the team members project procedures should be adopted that are fair to all parties.
Risk of Loss. This area determines who is financially liable for products in the event that they are damaged, destroyed, stolen or lost. If the parties do not define these responsibilities, then they will, most likely, be governed by Article 2 of the Uniform Commercial Code (U.C.C.). The risk of loss begins with the seller and at some point in the transaction is shifted to the buyer. The party identified with carrying the burden of risk may be contractually required to obtain appropriate insurance coverage. A C.I.F. contract means that the price includes the cost of goods, insurance, and freight.
Privity. Parties that have a direct contractual relationship are said to have privity of contract. While privity exists between the customer and the prime and between the prime and the subcontractor it does not exist between the customer and the subcontractor. Courts have traditionally limited remedies to parties in privity of contract should a business relationship sour. There is a trend extending remedies to Third Party Beneficiaries. For example, subcontractors who have not been paid by a contractor may sue the customer on the grounds that an implied-in-fact contract exists bestowing a legal interest on the subcontractor as a third-party beneficiary (Wallace 1998). Further, customers have used the same legal theory to sue the subcontractor. It should be noted that this shift, although significant, is not uniformly embraced by all legal jurisdictions.
There are other contractual issues too numerous to detail in this report. A few to mention include: contractual authority; indemnification; performance and payment bonds; force majeure; incentives and penalties.
Extensive studies reveal execution of information technology projects are consistently outperformed in cost and schedule adherence by comparable projects in other major industries such as manufacturing, pharmaceutical, petrochemical production, etc. One of the main reasons sited was the failure of information technology project managers to effectively integrate a diverse implementation team (Hartun 2001). It is the project manager’s responsibility to properly coordinate the consortium effort.
To illustrate this, let us skip ahead to the point of the project when both the contract and initial design have been completed. The project (or program) manager must now address issues relating to the technical and organizational integration of the project. In the third and final section of this paper, we address two critical path issues, interoperability of the various selected technologies and the gathering of network and station review information.
By this stage, design engineers from the various teaming companies have reviewed the existing network and have devised a theoretical topology of how the various platforms will interoperate. A test plan and schedule are then developed. The main challenge will be to initially test the interoperability of the hardware and software before the actual network is built. Considerations should be made for the assembly of a test facility. Cost and technical resource consideration must be addressed. Early procurement of some equipment may be required.
The contract should provide guidance as to the roles and responsibilities (including financial, technical, and human resource contributions) of each associate partner. Where a licensing or contractual relationship is established to facilitate joint development of a new technology, the relevant agreement document must clearly define the ownership and control of any resulting developments. One party may own the new technology, while another party will have certain defined license rights to use the technology (Hawthorne 2000, 278).
This team effort will require, among other things, the appropriate handling of the intellectual property in general and Trade Secrets in particular which are defined as, “… information that is used in a business or enterprise that affords an actual or potential economic advantage over others, provided that reasonable efforts are made to maintain the secrecy of their intellectual property” (Minsker 2000, 11). Failure to take reasonable precautions to protect trade secrets could result in permanently loosing patent protection. An audit of all company information considered to be proprietary should be conducted, and all such documents prominently labeled as confidential. A non-disclosure agreement will limit the use and distribution of confidential material by joint venture companies only to purposes furthering the business endeavor.
Integration of the various platforms will require access to higher levels of technical support. The testing parameters should also include coordinated testing of basic connectivity, feature interaction and load stress (for both data and voice), across the various platforms. In addition, any voice degradation should be eliminated.
Non-solicitation agreements requiring partner companies not actively recruit from the workforce of another joint venture partner are necessary particularly to prevent the defection of key employees possessing unique skills and/or knowledge vital to the project success. This is how Fust, through the acquisition of Schöffer’s services, was able to leverage the equipment and technologies won from Gutenberg.
The project manager must deal with both organizational as well as technical convergence (Reed 2000, 4-1). The customer may have designated a central representative who has the authority to legally bind their company contractually, but may lack real functional authority over the separate internal organizations. The customer organization might be composed of multiple departments (or more appropriately political fiefdoms) that have, until now, enjoyed relative autonomy. Organizational convergence involves the melding of these distinct entities under the coordination of a central IT office (CTO). Those who are reluctant to relinquish their independence may prove uncooperative in abiding by implementation processes and schedules that were forced upon them by their own CTO.
One of the most common sources of contention between joint venture partners relates to delay, particularly in the gathering of accurate station user and network information. The project manager must proceed as diplomatically as possible. The customer, however, must be made aware that their cooperation is expected in the gathering of necessary network and station review information. Further, it is the customer’s contractual obligation (either expressly or impliedly) to provide such data in a timely and accurate manner. Failure to do so will be considered a breach of contract. It can be reasonably assumed that the customer must provide the vendor with accurate data in a timely fashion. If the precise time interval is not expressly stated in the contract, then it can be implied. When not expressly stated, a court may look at such things as the standard practices within the industry or either past course of dealings or course of performance to determine what the reasonable time interval was meant to be.
The vendor’s position will be severely affected, if the customer is allowed to repeatedly submit information in an incomplete and tardy fashion. Tardy and inaccurate data submissions decrease the time necessary to confirm software programming integrity and sufficient carrier capacity, causes multiple redesignation of terminals, and increases the likelihood of station user dissatisfaction. However, a court might find that a party who accepts the breaching conduct by the other party to a contract waives their contractual right even if expressly stated in the contract.
Subcontractors may be forced to deal with a prime who fails to insist the customer meet its obligations. In such situations, the subcontractor lacks privity with the customer/prime contract, thus requiring a third-party beneficiary analysis to determine what legal rights the subcontractor has in enforcing the provisions of the contract between the customer and the prime. At the very least, the vendor should provide the breaching party with written notice that late acceptance of information is an exception only and does not wave the vendor’s right to receive future information by the previously agreed to scheduled dates.
Identification of legal rights does not necessarily mean that they will be exercised. For instance, the late acceptance of data can constitute a change in the overall scope of the project and subsequently increases risk to the prime or subcontractor, however, project managers may find themselves in the unenviable position where the project sponsor-stakeholder or even an associate company may, by ignoring their own contractual protections (or yours), attempt to appease the customer by conceding to an unreasonable customer demand. This process is known as Smoothing (Adams 1997, 178). The customer may experience temporary satisfaction, however, for high-risk issues such as data gathering the unresolved problem could place the total project in jeopardy of catastrophe. For these reasons it is considered a poor long-term solution. The customer should be accommodated unless the action will place an unreasonable burden on the vendor.
As said before, the goal is to provide the project sponsor-stakeholder detailed information required to make reasonable business decisions. The most effective sources of persuasive power that a project manager might use are defined as Expert and Referent Power (Adams 1996, 1901).
To explain Expert Power I like to use a quote from Harry Truman, “I never did give anybody hell. I just told the truth, and they thought it was hell.” Expert Power can be exercised by conducting a formal risk analysis detailing the financial and legal liabilities that will result should the sponsor-stakeholder fail to protect a contractual right. At the very least, the project sponsor-stakeholder should be informed of the potential liabilities that they assume for taking (or not) a particular course of action. Exerting Referent Power entails referencing a higher authority (including a higher corporate officer, governing corporate policies, the contract, or applicable laws or regulations).
The acquisition of a large communications project may lead to a false sense of financial security. “By the time that the [mega] project is finished, the total organization is overstaffed, many smaller customers have taken their business elsewhere, and the company finds itself in the position of needing another mega project in order to survive and support the existing staff” (Kezner 1998, 434). In addition, the International Telecommunication Union (ITU) predicts tighter future profits for the communication industry as a whole (Kelly 1995).For these reasons, it is just as important today as it was in Gutenberg’s day for project managers and their teams to understand the complexities involved with managing a converged implementation and to make decisions grounded in sound business, legal, and risk analysis.
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Proceedings of the Project Management Institute Annual Seminars & Symposium
November 1–10, 2001 • Nashville,Tenn., USA