Before you open your checkbook on a system implementation, let me ask you a question: “How many supply chain system implementations sub-perform?”

While I can’t cite any specific statistics, I have read articles stating that more than 60% of ERP implementations fail.

Failure can imply a wide range of outcomes, but I think a common factor among companies that have fallen victim to this statistic is that their ERP implementation ran significantly over budget. I also believe that many large-scale supply chain systems deployments end up exceeding their budgets. This may actually be the norm for top-tier WMS implementations rather than the exception.

Time and materials are the favorite contract terms for most top-tier supply chain suite vendors. It is very comfortable ground for vendors, especially when significant complexity and process re-engineering is involved.

Unfortunately, it can produce some very painful results for supply chain executives and managers who must explain major cost overruns on implementation projects.

It’s no wonder why more companies are pursing fixed-fee or not-to-exceed terms on their implementation projects. Implementing a supply chain execution package can involve considerable uncertainty, which can result in more time and effort to complete the project than was originally budgeted.

A time and materials contract implies that the customer covers any potential budget overrun for vendor services, while fixed fee or not-to-exceed terms mean the vendor is responsible.

So, fixed fee or not-to-exceed terms definitely appear to be the way to go.

By using them you eliminate the risk of vendor cost overruns and get rid of the hassle of managing vendor hours. Unfortunately, it doesn’t always work out this way, and you may end up paying more than you need to control this risk.

Vendors tend to incorporate a contingency factor into their bids when providing fixed or not-to-exceed terms. The amount of contingency that a vendor incorporates into the bid is generally directly proportional to the knowledge available on the customer’s true requirements. The more the vendor knows, the less contingency the vendor must incorporate into its bid to cover uncertainty.

Many software selection processes do not do a very thorough job specifying requirements. Because of this, significant knowledge gaps may still exist even when the customer feels it has developed a solid set of requirements.

There may be a gap between what the customer initially believes it requires and what it truly needs. There certainly can be gaps in understanding what customer-developed requirements mean between the customer and vendor.

If these gaps are too great, you may end up paying more for vendor services under a fixed fee or not-to-exceed contract.

Few contracts under these terms end up costing less than the vendor originally quoted even if the level of effort needed turns out to be less than entailed in the dollars quoted.

While you may think that the risk of vendor cost overrun has been adverted, without detailed requirements that truly meet needs and measurable performance milestones, a not-to-exceed contract can also be an invitation to a slew of change orders and endless haggling.

Avoiding an open checkbook project is a goal that every supply chain systems implementation should reach.

It’s important to know that simply executing a not-to-exceed contract with the vendor may not be enough to truly cap final expenditures and deliver on the benefits that originally prompted the project.

Not-to-exceed and fixed-fee terms require clear and concise requirements to deliver the intended value. Furthermore, they do not eliminate the need to effectively manage vendor performance. They are merely a tool that must be properly applied in order to produce the desired results.

In certain situations they may not even be the right tool. However, when applied and managed correctly, they can prevent many implementation projects from blowing out their budgets.

What has been your experience?

-- Tom

More Resources

Supply Chain Information Technology: Creating Shareholder Value

Top 11 Priorities for Supply Chain IT in 2011

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Tags: supply chain, implementation