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Chapter 12: Procuring Goods and Services 257 Understanding how contracts and risk management coexist All contracts come with some built-in risk. If you because the vendor gets paid the same amount want less risk you have to pay for it. Risk is just whether or not he has to spend more time on like any other commodity in a contract that you the project. To compensate for this risk, you are pay for. If you engage in a fixed fee contract, for expected to pay more for that type of contract. instance, the vendor assumes most of the risk, were mentioned in the section called Solving problems and compromising, later in this chapter. The terms and conditions don t so much cover what you are buying (that information is spelled out in the purchase agreement), but address the issues surrounding your purchase, such as how and when payment will occur, where delivery is considered to occur, how long the warranty and any extensions will be, and who is responsible for any extraneous work and materials outside the basic package being bought by you, the fearless project manager. While some of these items seem like no-brainers, you would be surprised at the impact they can have on your transaction. For instance: Free On Board (FOB) point: Otherwise known as the place where delivery is considered to occur. We have no idea where the term originated or what that means, exactly. What we do know is that FOB origin means that the title to the product transfers to the buyer at the point the product is manufactured and shipped, and FOB destination means that the title transfers at the buyer s location. So what? you ask. Well here s what. If the title transfers at the point of manufacture and shipping (FOB origin), then technically the buyer owns the product at that point and is responsible for its transportation, insurance, and so on immediately upon its release from the sellers location. If the truck carrying the product is snatched by space creatures, you re still responsible for the product, even though the space creatures are enjoying your software. Hey, you can t control the space creatures! Negotiate the best FOB clause you can get. If the seller insists that the FOB be origin, agree to it if he agrees to insure and deliver the product. Often, the seller wants the FOB to be origin for bookkeeping reasons the vendor can claim revenue for the product after the title transfers, which looks good at the end of a fiscal quarter. The person you talk to may be very accommodating in that situation.
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256 Part III: Executing Your Software Project Plan Selecting the contract type Some of the most basic contract types are listed in Table 12-2. Just keep in mind that this is not an exhaustive list, but it s enough to whet your appetite. Table 12-2 Contract Types Defined Contract Type Definition Who Bears the Risk? Fixed price contracts You pay the vendor an The vendor bears the risk (contracts with a single agreed upon price for here because he s getting fee) the work paid the same amount whether he has to spend more time on the project than expected or the project goes as planned. Reimbursed costs The vendor is reim-The buyer bears more of contracts bursed for all costs the risk here because if incurred prices increase after signing the contract, the buyer still has to reimburse for the higher costs even though the buyer doesn t get extra goods or services for the increased price. Time and materials The vendor is reim-The buyer bears more of contracts bursed for the time the risk because if it takes and materials during the vendor longer to comcompletion of the plete the project, the project buyer has to pay for that extra time. Also, if the price of the materials increases, the buyer pays more for those materials. Writing the terms and conditions Terms and conditions are the details of a contract that define every aspect of its implementation and how its requirements on all parties are performed. Some of the items usually covered in the terms and conditions of a contract
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Chapter 12: Procuring Goods and Services 255 All of these costs come out of someone s budget, and if you don t specify that they are coming out of the vendor s budget, they re coming out of yours. Make sure there s something in writing that gives you an out if something doesn t work as specified. You must be able to control the quality of the product you are producing, and therefore you must also be able to rely on the quality of the software application you are buying. Be sure that it works as advertised; call the vendor s user references and be sure you receive a working demonstration of the system before you buy. Verify that the software package you see demonstrated is the one you will be buying. Don t get caught buying a new version of the application software that hasn t been tested and debugged. Unless you are really adventurous, you don t want to be fixing the vendor s software at the same time you re attempting to fix your own. Avoid beta versions of an application or bleeding edge releases of software. Let somebody with a higher risk tolerance be a guinea pig. You don t need the headaches, the poor press in your employer s office, and the possibility of slowing down or ruining your project. Administering Contracts If your company has a legal department, be sure to have one of its representatives review the contract first and alert you of any potential problems and help you negotiate the terms if necessary. Now you re ready to administer the contract. But first you must consider which type of contract is best for you. The type of contract you negotiate determines whether you bear most of the risk or whether the vendor bears most of the risk. Ideally, you want the vendor to shoulder most of the risk; of course, the vendor wants you to bear the bulk of the risk in any agreement. The truth is, you ll meet somewhere in the middle. In unusual circumstances, for instance, when an application you purchase is a new version or is otherwise untested (and we told you not to buy that), the risk in a transaction is shared between the parties. Extenuating circumstances can shift a larger portion of the risk to one of the parties of the contract, but in general, because both parties have a vested interest in the success of the product and its use, risk is usually split on a more or less equal basis. Of course, part of negotiating the contract is an effort to shift some of that risk away from yourself and your sponsor, and with a little luck and a lot of skill, you can accomplish that task.
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254 Part III: Executing Your Software Project Plan can afford to drop the price of the software and not take as much of a loss as if time is added to the warranty or support hours are extended. Negotiate! That s an order! You can get a better deal than the original proposal, and you can be assured that the vendor expects to have to negotiate the price. Ample margin was built into the pricing to give you a discount on the price and still hit his profit targets. Pretend this software is a brand-new car, and that the vendor is a cheesy salesperson at the dealership. Considering time, cost, and quality issues When negotiating your contract, don t focus solely on pricing. You have to consider the rest of the Iron Triangle. You have targets to meet for your main project, and whatever application solutions you choose must be able to fit in with your project timelines, budget, and quality requirements. Your chosen vendor must be able to provide a timely installation of the contracted, properly working application when you need it. For example, if you use a vendor to create your testing application, and the time comes when you re ready to test your software, but oops the testing application isn t ready, you might as well not have any testing ability at all. You ve paid for something that isn t available, and the delay in testing your product will cost money in lost time and lost productivity for your development team. If the timeline slips significantly, it may also cost you your career. Here s what you need to negotiate as far as the Iron Triangle is concerned: Be sure that your agreement with the software vendor includes timelines and benchmarks that are realistic regarding your needs. Include penalties for not meeting targets. Don t jeopardize your project by allowing the vendor to provide a product at a time that is clearly out of touch with your reality. Factor in all the costs when purchasing your application. Be sure you know what is covered under your warranty and what services you might be paying for in areas where the warranty doesn t apply. Spell out how much support in manpower and equipment you need to assure a smooth implementation. Make sure that other resources with costs are accounted for in writing, including such items as room space for testing, extra computer servers, additional power capabilities, and cabling for the testing equipment.
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Chapter 12: Procuring Goods and Services 253 If your selection of a vendor is based solely on a weighting system, then the testing system garnering the highest numeric rating would be the automatic selection. But that isn t usually the case. Sometimes other factors play into a selection, but using a weighted screening system can provide valuable input into the ability of the system being evaluated to do what you need it to do. Negotiating for the Best Solution You ve considered the market conditions, used an elaborate or not screening system that incorporated a well thought out weighting system, and selected a winner from all the vendors who came begging for your attention and business. That s the end of it, right? Not hardly. Now you have to negotiate the final contract and get the ball rolling on the actual implementation of the system. What? You thought that after the evaluation process was done, and the vendor was selected, that you could just sign the contracts and move on? Well, think again. You can t just take the vendor s offer at face value, unless you want to risk leaving money on the table and setting yourself up for some substantial heartache when the fine print in the vendor contract kicks in. Now is when the real negotiation begins, starting with the price of the system. Everything else remember everything is negotiable comes later. Starting with price When you requested a proposal from vendors, you may have specified that you wanted their best and final price for the products they were offering. And, of course, when the proposals came in, vendors said that the offer was the vendor s best and final price. Yeah, right. That might have happened once, but nobody in the history of the planet remembers it. As you know, because you develop software, there s a substantial profit margin in software after it s released and matures. That best and final price you were offered is so heavy on profit that it wouldn t float if it was loaded on a supertanker. You always have room to negotiate pricing for a software product. Also know that every component offered in the vendor s bid has a monetary value attached to it. Even if the vendor won t budge on the actual price, you can negotiate extended warranties, additional services, or other items that add value to the deal. The big margin is in the actual software, and a vendor
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252 Part III: Executing Your Software Project Plan Implementing a weighting system Any screening and evaluation system you use should incorporate a weighting system. A weighting system looks at all the criteria. Some features of an application may be considered absolutely essential for your use, while others may not be as necessary. Those features deemed essential should have greater weight than other functions so that as you investigate and rank the vendor proposals, the essential functions play a larger role in determining the outcome of your selection process than the less important functions. In systems using a weighting function, the various requirements of the system are assigned numeric values indicating how each evaluator sees the system meeting the particular feature. That number is then multiplied by a weighted factor to arrive at the true value of that feature in relationship to the other features in the system. The weighting factor is generally a percentage of 1, so that if a weight is .4, that value is seen as more important to the overall value of the system than a feature that is weighted as .2. In theory, all the features should be assigned a numeric value related to how well the evaluator perceived the feature to fulfill its function. The numbers would be multiplied by their weighting factor; then those outcomes would be totaled to provide a single numeric rating for the software testing system. See Table 12-1 for an example of what you may see in a weighting system that you might use during vendor demonstrations. Table 12-1 Weighting System Vendor: Testy McTesty Demonstration Item Weight (0 0.5) Your Score (0 5) Total Ease of use 0.5 5 2.5 System security 0.4 5 2.0 User configuration 0.4 4 1.6 On-site support 0.5 3 1.5 Vendor experience 0.2 5 1.0 Documentation 0.3 3 0.9 Interfaces 0.4 4 1.6 TOTAL 11.1
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Chapter 12: Procuring Goods and Services 251 Even in the best of times, be sure to thoroughly read the contracts before committing to anything. Sometimes, and not usually intentionally, the terms agreed to in writing don t match what was discussed and agreed to orally. The written terms almost always win in any contract dispute. Everything in life is negotiable, and in slow times for the suppliers, negotiations can be favorable for you. If you are offered a good deal, or you just plain negotiated the deal of a lifetime, get it in writing as fast as you can and get the job done. You ll look good for negotiating a good contract, look better when your project is running like a precision clock, and look great when you bring the project in on time and under budget. That is the plan, isn t it? Using a screening system Remember the devil the one hiding in the details? Start to get rid of it by using a screening system to sort through all the ins and outs of the proposals before you. A screening system can be something as simple as making a plus/ minus (or pros and cons) list on a legal pad. Or, you may use a database with artificial intelligence for filtering all the offerings. Any screening system should, in the end, give you a clear idea of the advantages and disadvantages of each vendor. Sometimes, one vendor shows a clear advantage over the others and makes the selection simple; unfortunately that doesn t often happen. In any system, be sure that you can tally and evaluate the minutiae of the contracts, as well as the major items. Know how tech support functions and where it is supplied. Technical support must be available when you need it, not when it s convenient for the vendor. Using the help of others It s also beneficial to ensure that your system involves other people. Though the final decision is yours, you might as well have more than one set of eyes looking into all the facets of a proposal. Team members may see something you missed, or may verify a pertinent detail you weren t sure of. An evaluation committee using a screening tool such as a product comparison spreadsheet can provide essential input and insights as you approach decision time. A properly used screening system can greatly diminish the chances of signing up to a less than desirable stipulation in a purchase contract.
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250 Part III: Executing Your Software Project Plan In a perfect world (and we know there is one out there somewhere), what suppliers propose to sell and what they have discussed prior to the actual offer will be exactly the same. That s the perfect world, and it s out there, but we aren t living in it. Evaluate all proposals carefully, because the second you accept one, any terms and stipulations included in the proposal may be included in the purchase contract and may override any terms and conditions you may have negotiated outside the vendor s boilerplate purchase quotation form. Selecting the Vendor After you get some proposals, get out your magnifying glass and detective hat and get ready to investigate all the offerings to arrive at a vendor selection. The devil is in the details. As you read through the proposals you ve received from the vendors clamoring for your business, you can clearly see that all of the offerings handle the big stuff the main items that you want to purchase pretty much the same. Only the details differ, and these details (and the differences) can make or break the proposal. What happens if you select a supplier to provide an application, but in the small print of the contract is a disclaimer stating that all support for the application will be provided through the crew of a pirate ship anchored off the coast of Sumatra? Well, the first time you need support, you ll discover that you would like to be the captain of that ship, because when the application doesn t perform and your project falls behind schedule and encounters cost overruns, you ll be swimming for your professional life. There s got to be a better way. Well, we can give you some tips for evaluating the proposals for applications you commission. Read on. Considering market conditions Market conditions may influence the desirability of your contract to purchase. If there is a booming market for software development, the software vendors may have all the business they can handle. If that is the case, you re dealing with a seller s market and probably won t get the terms and concessions you would expect in other times. If, however, business is slow for the vendors, you can realistically expect to get some good deals on performance guarantees and payment terms.
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Chapter 12: Procuring Goods and Services 249 you must make an opening statement that outlines your agenda and highlights specific areas that you would like the vendors to address concerning their product or service. Members of your team and other stakeholders you have invited should also express any specific interests or concerns that they would like the vendors solutions to address. The software vendors may have questions for you to clarify your requirements and wishes. By the time the vendors are with you, you can determine the commonalities in their offerings and address specific differences in each supplier s capabilities. Often, when a vendor provides an explanation to one of your questions, one of his competitors may jump in to challenge or one-up the explanation. This is where the process can get interesting, and also where you must exert your control. Ideally, a bidders conference is the mechanism to discover in greater detail each provider s true abilities, as well as any new developments in his offering since the RFI was returned. Keep your exaggeration detector well tuned; in the heat of competition, many of the vendors offerings suddenly gain greater powers, as when Mr. Gadget yells, Go, go, gadget! and all manner of fantastic gizmos and abilities suddenly manifest in his arms and legs. Finally, give the vendors the opportunity to make a final statement as to their capabilities and continued interest in working on your project. At the close of the meeting, present each of the interested and eligible parties a Request for Proposal (RFP) package and give them an overview of the logistics for the presentation of all proposals, including due date and any unique requirements you are placing on the bid process. At this point, you can sit back and wait for the real information to come in. Setting up criteria for RFPs A Request for Proposals (RFP) is your request for various vendors to provide the down-and-dirty, cut-to-the-chase offer to sell you their products or services. In the RFP, you specify exactly what you want vendors to supply. You also provide the logistical and service requirements that must be provided to accomplish your objective. Logistical requirements are the delivery and installation timelines for any equipment and products; service requirements are contracts concerning warranties, maintenance, and upgrades after any warranties expire. Because the offerings in the proposal become incorporated in the contract for the purchase, what the vendors offer are what they truly believe they can provide, and they may vary significantly from their RFIs. They re likely to differ from any statements made at the bidders conference.
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248 Part III: Executing Your Software Project Plan Hosting a bidders conference Remember when you were in high school and you had those parties in your parents basement? All your friends came and tried to impress each other. Ah, those were the days. Well, a bidders conference is similar to those basement bashes, but now they have a fancier name and no Spin the Bottle. In high school, each party was different and had its own tone: You had after- game parties, parents-are-out-of-town-for-the-weekend parties, and post-prom parties. Well, the same is true for bidders conferences each one is its own adventure. In your own practice, you may run into different types of bidders conferences, and just like those high school festivities, each one can have its own advantages and disadvantages. There is more than one correct way to host a bidders conference. The bidders conference is the second-best opportunity for vendors to impress you; the best opportunity, obviously, is a knock-you-out-cold proposal that you can t turn down but that comes later. You can set up a bidders conference as an informal meeting, where you sit around a conference table and have a discussion with a couple of vendors, or you can set up a formal round-table forum with several suitors vying to outdo each other. In any meeting, however, it is imperative that you maintain control all vendors think that they have the best solution to every development issue and they will take every opportunity to gain control of the meeting and convince you that they are the best. If vendors take over, you ll end up hearing sales pitch after sales pitch. That s okay, but you need to have control so that you can ask the hard questions. You get the picture. You know who you consider to be viable vendor candidates, and you can control the conference by controlling who you invite. Whether you send formal, written requests for vendors to attend, or simply invite the vendors by e-mail or phone, control of the meeting begins with who you invite. Occasionally, a vendor may hear of your project through the grapevine, contact you, and ask to attend. The decision is yours, but know what the vendor offers before you extend an invitation. If the vendor doesn t understand your process, it is unwise to bring him in at the last minute. A day in the life of a bidders conference The bidders conference is the place for all parties to ask questions regarding your project and the various offerings. As the person hosting the conference,
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