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Six IT Decisions Your IT People Shouldn’t Make

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November 2002 Issue

The Idea in Brief

Gnashing your teeth because your firm’s hefty IT investments generate weak returns? Most companies are in the same boat. Worse, some suffer disastrous losses owing to mismanaged IT decisions. (Witness companies that sank millions into CRM software—then discovered they didn’t need it.)

Why these fiascoes? Many non-IT executives leave key information-technology decisions to IT executives because they don’t feel comfortable enough with technology to manage it in detail. Result? IT executives make choices that inadvertently clash with corporate strategy.

IT executives should choose information-technology standards, design operations centers, etc. But non-IT executives must ensure that IT choices align with company strategy—by making six crucial strategy and execution decisions.

The Idea in Practice

Strategy Decisions

1. How much should we spend on IT? Define crystal-clear IT goals. A vague vision (e.g., “providing information to anyone, anytime, anywhere”) can mean millions wasted on chasing elusive benefits. Then set IT funding to achieve those goals.

2. Which business processes should receive our IT dollars? Decide which IT initiatives will further your strategy—and fund only those. You’ll avoid burying your IT department in irrelevant projects. Example:

Delta Air Lines overhauled its IT investment approach when its business units’ disparate IT systems began hindering employees’ ability to serve customers. A single question (“At what gate will my plane arrive?)” could generate 17 different answers. Delta’s response? A new, unified technology platform providing all employees with current flight and customer information. Simultaneously, Delta shelved a revenue-planning system—competition for additional IT resources would have threatened the new platform’s success.

3. Which IT capabilities should be firmwide? Centralizing IT capabilities can save money—but limit business units’ flexibility. Yet excess flexibility is expensive and can dilute units’ synergies. Weigh these tradeoffs. Example:

After a century of operating as 200 decentralized units worldwide, Johnson & Johnson had to rethink its response to a new breed of customer with scant patience for multiple salespersons, invoices, and shipments. It introduced a centralized global desktop that provided “a single view of the customer” (e.g., standardized account numbers) and enabled cross-unit electronic communication—but maintained individualization at regional levels.

Execution Decisions

4. How good do our IT services need to be? Obviously, an IT system that doesn’t work is useless. But don’t let IT executives push for “Cadillac” service when a “Buick” will do. Determine how much reliability, responsiveness, and data accessibility you must have—and don’t waste money on the rest. For Dow Corning, a brief downtime—though inconvenient—wouldn’t halt production. So the company built a back-up site for use only if its system crashed for several hours.

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5. What security and privacy risks will we accept? Weigh tradeoffs between privacy versus convenience. When Yale University let applicants access their admissions decision online, Princeton officials—competing for those students—accessed the site, too.

6. Whom do we blame if an IT initiative fails? The IT department is responsible for delivering systems on time and within budget. Your job? To make organizational changes that generate business value from those systems. Designate “sponsors” to assign resources to IT initiatives, establish success metrics, and oversee implementation.

For several years now, we have observed the frustration—sometimes even exasperation—that many business executives feel toward information technology and their IT departments. Our center runs a seminar called “IT for the Non-IT Executive,” and the refrain among the more than 1,000 senior managers who have taken the course runs something like this: “What can I do? I don’t understand IT well enough to manage it in detail. And my IT people—although they work hard—don’t seem to understand the very real business problems I face.”

Perhaps the complaint we hear most frequently from the executives—most of them CEOs, COOs, CFOs, or other high-ranking officers—is that they haven’t realized much business value from the high-priced technology they have installed. Meanwhile, the list of seemingly necessary IT capabilities continues to grow, and IT spending continues to consume an increasing percentage of their budgets. Where’s the payback?

Indeed, our research into IT management practices at hundreds of companies around the world has shown that most organizations are not generating the value from IT investments that they could be. The companies that manage their IT investments most successfully generate returns that are as much as 40% higher than those of their competitors.

While a number of factors distinguish these top-performing companies, the most important is that senior managers take a leadership role in a handful of key IT decisions. By contrast, when senior managers abdicate responsibility for those decisions to IT executives, disaster often ensues: Recall the high-profile instances of botched adoptions of large-scale customer-relationship-management and enterprise-resource-planning systems. It would be reasonable to assume that the CRM and ERP fiascoes were the result of technological snafus in getting the complex systems up and running. But in fact the problems generally occurred because senior executives failed to realize that adopting the systems posed a business—not just a technological—challenge. Consequently, they didn’t take responsibility for the organizational and business process changes the systems required.

Such unfortunate scenarios are likely to be replayed as companies face the next rounds of IT innovations: the increased use of Web services, the adoption of handheld devices by employees and customers, and the integration of multiple electronic sales and service channels such as Web sites, call centers, ATMs, and wireless phones.

Don’t get us wrong. IT executives are the right people to make numerous decisions about IT management—the choice of technology standards, the design of the IT operations center, the technical expertise the organization will need, the standard methodology for implementing new systems. But an IT department should not be left to make, often by default, the choices that determine the impact of IT on a company’s business strategy.

To help senior managers avoid IT disasters—and, more important, to help them generate real value from their IT investments—we offer a list of six decisions for which they would be wise to take leadership responsibility. The first three have to do with strategy; the second three relate to execution. Each is a decision that IT people shouldn’t be making—because, in the end, that’s not their job.

1. How much should we spend on IT?

Given the uncertain returns on IT spending, many executives wonder whether they are spending too much—or perhaps even too little. If we can just get the dollar amount right, the thinking goes, the other IT issues will take care of themselves. So they look to industry benchmarks as a way of determining appropriate spending levels.

But in the successful companies we have studied, senior managers approach the question very differently. First they determine the strategic role that IT will play in the organization, and only then do they establish a companywide funding level that will enable technology to fulfill that objective.

IT goals vary considerably across organizations. They may be relatively modest: for example, eliminating inaccuracies and inefficiencies in administrative processes. Or they may be central to a company’s strategy: for example, supporting a seamless global supply chain, flawless customer service, or leading-edge research and development. Clearly, these different objectives require different levels of spending. And if you have determined that technology should play a central strategic role, the nature of that role will affect the required level of spending.

Take arch rivals United Parcel Service and FedEx. Both companies report spending around $1 billion on IT each year, but FedEx, which has annual revenues of about $20 billion, is just two-thirds the size of UPS. Does that mean IT plays a more important role at FedEx? No, simply a different one. UPS’s IT strategy, which evolved from its industrial engineering roots, has focused on introducing efficiencies to a business that demands consistency and reliability. The company’s centralized, standardized IT environment allows for dependable customer service at a relatively low cost. FedEx, on the other hand, has focused on achieving flexibility to meet the needs of its various customer segments. The higher costs of this decentralized approach to IT management are offset by the benefits of localized innovation and a heightened ability to respond to customers’ needs.

Of course, UPS also uses technology to meet the needs of individual customers, and FedEx uses technology to provide consistent service across customer segments. But the thrusts of the two companies’ IT and business strategies are different. Both are successful because they have matched their spending levels to those strategies—not to industry benchmarks.

In most companies, senior management has not defined IT’s role so clearly, in effect abdicating that responsibility to IT people. In those organizations, the IT department can deliver on individual projects but can’t build a “strategic platform,” one that not only responds to immediate needs but also provides escalating benefits over the long term.

What Happens When Senior Managers Ignore Their IT Responsibilities?

UPS’s experience illustrates the benefits of a broad strategic platform. The company began investing heavily in IT in the late 1980s, at a time when FedEx was touting its package-tracking capability. But instead of simply creating a tracking system, UPS’s senior management decided to build a comprehensive package database that had the potential to become a platform for numerous applications. To gather information for the database, UPS developed the Delivery Information Acquisition Device, a handheld computer used by drivers to collect customers’ signatures and other information electronically. The device saved drivers 30 minutes a day by reducing the manual input of delivery information. But these electronic tracking capabilities were only an initial benefit. The electronic data provided a more accurate record of deliveries, enabling UPS to collect hundreds of millions of dollars in revenues that had been lost when customers self-reported deliveries, which UPS couldn’t easily verify. In subsequent years, the database allowed UPS to introduce new products, such as guaranteed delivery, and new processes, including on-line package tracking by customers. Recent enhancements will optimize the scheduling of routes and help UPS’s business customers get paid faster once their goods are delivered.

Those benefits grew out of UPS’s decision to make significant and consistent investments in a system that, before long, outgrew its original purpose. UPS’s CEO, Mike Eskew, calls the new applications, each of which furthers the strategy of providing consistent and reliable customer service, “happy surprises.” Such unforeseen benefits lead to a total return on IT investment that exceeds the sum of the ROIs of individual projects—a return far greater than many companies can imagine.

IT spending can be designed to meet immediate needs and allow for an array of future benefits only if IT and business goals are clearly defined. Some management teams offer only a vague vision—for example, “providing information to anyone, anytime, anywhere.” IT units respond to such ill-defined goals by trying to build platforms capable of responding to any business need. Not surprisingly, the typical outcome of such large, undirected projects is millions of dollars spent chasing elusive benefits.

2. Which business processes should receive our IT dollars?

As most executives know, IT initiatives can multiply quickly. We have seen companies of a few hundred people that have a few hundred IT projects under way. Clearly, not all of them are equally important. But we find that senior managers are often reluctant to step in and choose between the projects that will have a significant impact on the company’s success and those that provide some benefits but aren’t essential.

Leaving such decisions in the hands of the IT department means that IT executives set the priorities for what are in fact important business issues—or, just as troubling, they try to deliver on every project a business manager claims is important. Presented with a list of approved and funded projects, most IT units will do their best to carry them out. But this typically leads to a backlog of delayed initiatives and an overwhelmed and demoralized IT department.

The failure of senior managers to choose a manageable set of IT priorities can also lead to disaster. One need only remember Hershey Foods’ infamous decision in 1999 to implement several major systems simultaneously, including CRM, ERP, and supply chain management, which ultimately resulted in the company’s inability to deliver candy to important customers during the Halloween season.

Contrast this with Delta Air Lines’ disciplined approach to IT investment in recent years. In 1997, the company was facing a technology crisis. Several years before, the airline had outsourced its corporate IT function, which prompted individual business units, unhappy with the service they were receiving, to create their own IT capabilities. (For a discussion of outsourcing, see the sidebar “Why Not Just Outsource IT?”) Running disparate systems across the units made it difficult for employees to provide timely, accurate customer service. One question—for example, “At what gate will my plane arrive?”—could conceivably generate 17 different answers, depending on which system an employee checked. In addition, many of the systems were based on older technologies that might not perform properly with the arrival of the year 2000.

Why Not Just Outsource IT?

Given the potential headaches of managing IT, it is tempting to hand the job over to someone else. Indeed, outsourcing once appeared to be a simple solution to management frustrations, and senior management teams at many companies negotiated contracts with large service providers to run their entire IT functions. At a minimum, these providers were often able to provide IT capabilities for a lower cost and with fewer hassles than the companies had been able to themselves.

But many of these outsourcing arrangements resulted in dissatisfaction, particularly as a company’s business needs changed. Service providers, with their standard offerings and detailed contracts, provided IT capabilities that weren’t flexible enough to meet changing requirements, and they often seemed slow to respond to problems. Furthermore, a relationship with a supplier often required substantial investments of money and time, which entrenched that supplier in the company’s strategic planning and business processes. The company then became particularly vulnerable if the supplier failed to meet its contractual obligations.

Not surprisingly, other problems arose because senior managers, in choosing to outsource the IT function, were also outsourcing responsibility for one or more of the crucial decisions they should have been making themselves. Indeed, companies often hired outside providers because they were dissatisfied with the performance of their own IT departments—but that dissatisfaction was primarily the result of their own lack of involvement.

In light of this track record, most bigger companies, at least, are deciding to keep their main IT capabilities in-house. But many engage in selective outsourcing. Good candidates for this are commodity services—such as telecommunications, in which there are several competing suppliers and specifications are easy to set—and services involving technologies with which the company lacks expertise.

Unlike decisions to outsource the entire IT function, selective outsourcing decisions are usually best left to the IT unit—assuming that senior management has taken responsibility for the six key decisions. For example, once the acceptable level of security and privacy risk is determined, IT executives can research competitive offerings and conduct the cost-benefit analysis for completing these projects internally versus externally.

In a move as farsighted as UPS’s decision to create a package database, Delta’s senior managers opted to use the Y2K threat to build a powerful technology platform, dubbed the Delta Nervous System (DNS), to provide real-time information for flight operations and customer service. The three-year, $1 billion project would provide every employee with constant updates on the status of any flight or customer. As the managers defined the vision for this system, they made another critical decision: They would not invest simultaneously in a new revenue-planning system. Such systems help airlines make complex decisions concerning scheduling, pricing, equipment configuration, and routing that directly affect profitability. But Delta knew it couldn’t address all of its technology needs at once. Given the limitations of the company’s IT and business resources, additional projects would have threatened the success of the DNS. So the company put a new revenue-planning system, also key to Delta’s strategy, on hold until 2002, when the DNS was in place.

3. Which IT capabilities need to be companywide?

Increasingly, executives are recognizing the significant cost savings and strategic benefits that come from centralizing IT capabilities and standardizing IT infrastructure across an organization. This approach leverages technology expertise across the company, permits large and cost-effective contracts with software suppliers, and facilitates global business processes. At the same time, though, standards can restrict the flexibility of individual business units, limit the company’s responsiveness to differentiated customer segments, and generate strong resistance from business unit managers.

When IT executives are left to make decisions about what will and will not be centralized and standardized, they typically take one of two approaches. Depending on the company’s culture, either they insist on standardizing everything to keep costs low or, recognizing the importance of business unit autonomy, they grant exceptions to corporate standards to any business unit manager who raises a stink. The former approach restricts the flexibility of business units; the latter is expensive and limits business synergies. In some instances, systems using different standards can actually work against one another, resulting in a corporate IT infrastructure whose total value may be less than the sum of its parts. Consequently, senior managers should play the lead role in weighing these crucial trade-offs.

The experience of Johnson & Johnson, the global consumer and health care company, illustrates the challenges of achieving the right balance when trying to impose companywide standards. For almost 100 years, J&J enjoyed success as a decentralized organization. By the early 1990s, though, it had encountered a powerful new breed of customer with no patience for the multiple salespersons, invoices, and shipments that resulted from doing business with more than one of the company’s roughly 200 operating units. J&J’s management had to decide how to reconcile the growing need to act as a unified company with its historical preference for business unit autonomy. IT would be central to the resolution.

A key IT decision involved data standards. Senior managers quickly realized that global data definitions, which would facilitate information sharing among business units, would be difficult to implement. Over the years, data items such as product codes, product costs, and customer accounts had been defined locally to meet the needs of operating units in different countries. Accordingly, the company’s senior managers formed a team to define the limited set of standard data definitions needed to provide a single view of the customer. The remainder could be determined at the regional or business unit level. Achieving a single view of the customer also required a single technology base, one that allowed electronic communication across units. So J&J broke with tradition and instituted corporate, rather than business unit, funding for the implementation of a standardized workstation with a standardized interface to J&J corporate systems and data. Over time, J&J has continued to shift IT capabilities from the business units to centralized systems. It has moved cautiously, though, recognizing that a sudden shift to a more standardized environment could be disruptive.

Management teams in every company, whether centralized or decentralized, must constantly assess the balance between companywide and business-unit IT capabilities. Traditionally centralized organizations like UPS find that their shared infrastructures sometimes do not meet the needs of new, smaller businesses. Thus, they have gradually introduced some localized capabilities in the same way that the traditionally diversified J&J has introduced centralized ones.

4. How good do our IT services really need to be?

An IT system that doesn’t work is useless. But that doesn’t mean every system must be wrapped in gold-plated functionality. Characteristics such as reliability, responsiveness, and data accessibility come at a cost. It is up to senior managers to decide how much they are willing to spend for various features and services.

For some companies, top-of-the-line service is not negotiable. Investment banks do not debate how much data they can afford to lose if a trading system crashes; 100% recovery is a requirement. Similarly, Gtech Corporation, the company that runs the majority of the world’s government-sponsored lotteries, cannot compromise on response time. Most of its contracts in the United States specify that customers will receive their lottery tickets within five seconds—and it takes three seconds just to print the ticket. Nor can Gtech afford any downtime: State governments specify penalties as high as $10,000 per minute if the system is unavailable. This is a fairly compelling justification for ensuring that computers will continue to run despite floods, tornadoes, power outages, and telecommunications breakdowns, regardless of the cost.

But not every company is a Gtech or a Merrill Lynch. Most can tolerate limited downtime or occasionally slow response times, and they must weigh the problems these create against the cost of preventing them. Consider Dow Corning. The nature of the company’s operations means that a brief downtime of its ERP system would be an inconvenience but would not stop production or result in lost customer orders. Although senior managers wanted to prevent all downtime, the cost was prohibitive. So in 1999, when they decided to build a backup, or “hot,” site, they opted for one that would be used only if the system went down for several hours. The company periodically reviews its backup capability and in the past few years has been able to reduce its risk even more as technologies become more affordable.

Decisions concerning the appropriate levels of IT service need to be made by senior business managers. Left to their own devices, IT units are likely to opt for the highest levels—providing Cadillac service when a Buick will do—because the IT unit will be judged on such things as how often the system goes down. Typically, the cost of higher levels of service is built into the price of IT systems and is neither broken out nor discussed separately. IT people should provide a menu of service options and prices to help managers understand what they are paying for. Business managers should then, in consultation with IT managers, determine the appropriate level of service at a price they can afford.

This kind of analysis can have an impact not only on onetime IT investments but also on annual operating costs, a contentious issue at many companies. In many cases, fixed costs can be significantly reduced if managers establish, during system development, lower expectations for requirements such as reliability and response time. Conversely, the analysis might reveal that the company is underestimating its risk of downtime and has not sufficiently protected itself against it.

5. What security and privacy risks will we accept?

Security, like reliability and responsiveness, is a feature of IT systems that requires companies to weigh the level of protection they want against the amount they are willing to spend. In this case, though, there is another trade-off: Increasing security involves not only higher costs but also greater inconvenience.

Take our own organization, MIT. Because the institute is a particularly attractive target for hackers keen to show off their skills, MIT has developed a state-of-the-art security system that successfully repels a continuous stream of attacks. It features a firewall different from the type most organizations use to limit external access to their internal systems. But although it provides greater protection, MIT’s nonstandard approach means that the institute cannot install most commercial software packages for applications such as course registration and student accounting. MIT sees these limitations as a cost of doing business, but many private companies would likely find such extraordinary security efforts to be too costly and onerous.

As global privacy protections increasingly become mandated by government, security takes on new importance: Well-designed privacy protections can be compromised by inadequate system security. Yale University’s decision to allow applicants access to their admissions decision by providing their dates of birth and Social Security numbers, while convenient for users, allowed an official at Princeton University, which was competing for the same students, to access the site with ease. Financial services firms face similar threats when they design systems that give customers quick and easy electronic access to their accounts. Telephone companies that allow on-line payment of bills render vulnerable the records of customers’ telephone calls. In every case, these organizations are—consciously or not—making the trade-offs between customers’ convenience and privacy.

It is up to senior managers to assess those trade-offs. Many IT units will adopt a philosophy that absolute security is its responsibility and will simply deny access anytime it cannot be provided safely. But try running that idea by a bank’s marketing executives, who are counting on simplified on-line transactions to attract new customers.

6. Whom do we blame if an IT initiative fails?

The recurring concern we hear from executives in our courses—that IT efforts fail to generate the intended business benefits—is often accompanied by some finger-pointing: There must be something wrong with the IT function in our company. We have found, however, that the problem more often reveals that something is wrong with the way non-IT executives are managing IT-enabled change in the organization.

Look at those well-publicized examples of ERP and CRM initiatives that never generated measurable value. Invariably, the failures resulted from assumptions that IT units or consultants could implement the systems while business managers went about their daily tasks. In fact, new systems alone have no value; value derives from new or redesigned business processes. We recall the experience of a midsize manufacturing company that had installed an expensive ERP system with no apparent impact. A new CEO came on board and, impressed by the system’s potential and the fact that no one was using it, reorganized the company’s business processes to take advantage of its capabilities. He attributed the company’s ability to turn a profit for the first time in five years to this reorganization. Think of the benefits that might have been realized if the system had been designed to serve specific processes in the first place.

To avoid disasters, senior managers need to assign business executives to take responsibility for realizing the business benefits of an IT initiative. These “sponsors” need authority to assign resources to projects and time to oversee the creation and implementation of those projects. They should meet regularly with IT personnel, arrange training for users, and work with the IT department to establish clear metrics for determining the initiative’s success. Such sponsors can ensure that new IT systems deliver real business value; blaming the IT department reflects a misunderstanding about what that group can deliver.

IT success may also require a sustained commitment on the part of the managers who will use and benefit from the technology. Take the case of the Longitudinal Medical Record system, introduced in 1998 at Partners HealthCare, a Boston-based umbrella organization of major hospitals and local clinics. From the beginning, the managers—in this case, a cadre of practicing physicians in management roles—took full responsibility for extracting value from the LMR’s new technology. For every patient they see, the physicians are supposed to enter electronically, in a standard format, all diagnosis and treatment information so that the system can highlight key facts for physicians examining the patient in the future. Deploying the LMR posed significant technological challenges, but the greater challenges were organizational: The system required physicians to spend precious time on data entry using a tool that was far from perfect in its early versions.

The physicians participating in the initiative have continued to play a role in the development of this IT system, a role that goes far beyond helping to define requirements. They must use the system (even though the technology sometimes breaks down), provide constant feedback on its features (so the IT unit can make continual improvements), and encourage colleagues to sign on to the project (because its value is limited until its use becomes widespread).

Unless managers take responsibility for the success—and failure—of IT systems, they will end up with systems that, while perhaps technically elegant, will have no impact on the business. The IT department should be held responsible for delivering systems that are on time and on budget and that have the potential to be both useful and used. But only business executives can be held responsible for making the organizational changes needed to generate business value from a new system. Until they accept this responsibility, companies cannot hope to eliminate complaints about having spent too much money for too little value. • • •

While we firmly believe that senior business executives err when they abdicate responsibility for these six IT decisions, we aren’t advocating that any of the decisions be made unilaterally in the executive suite. Clearly, such complex issues can’t be dealt with in a single senior management meeting at which executives lay down mandates for IT spending, management, and use. Although senior managers need to ensure that IT spending and initiatives are aligned with and further the company’s strategy and goals, such decisions are best made with input from both business unit and IT executives.

Instead of approaching IT decision making in an ad hoc manner, companies increasingly are establishing formal IT governance structures that specify how IT decisions are made, carried out, reinforced, and even challenged. Such structures apply principles similar to those of financial governance—for example, who is authorized to commit the company to a contract or how cash flow is managed across the enterprise.

A company can choose from a variety of fundamentally different governance approaches depending on its culture, strategy, and structure. But good IT governance identifies who should be responsible and accountable for critical IT decisions. For example, decisions about IT investment are often made as part of the companywide budgeting process approved by senior management. Decisions about IT architectures and the associated standards are often made by committees with both technical and business membership. In all cases, though, effective governance ensures that IT-related decisions embody uniform principles about the role IT plays in the organization.

IT has long been a key to the success of State Street Corporation, a leading global financial-services firm. But although nearly one-quarter of its operating expense budget typically has been devoted to technology, until recently there was no companywide IT budget, and almost all spending decisions were made by the individual business units. To ensure that IT decisions supported the company’s new strategy of presenting a single face to customers across business units, State Street recently established an Information Technology Executive Committee. The committee, whose members include the COO, the CIO, and the heads of the business units, meets every two months. It is responsible for setting IT direction within the context of State Street’s strategy and then balancing companywide and business unit needs to create a single IT budget for the company.

Under State Street’s IT governance structure, the CIO plays an active role in setting the company’s IT strategy and facilitating the effective use of IT. At the same time, however, note the level of commitment shown by the company’s business leaders, including the COO. In that sense, State Street is an illustration of the proposition that there are key IT decisions your IT people shouldn’t make—on their own.

IT Outsourcing Pricing Models: How They Differ and What’s Their Use

You know, there is hardly any possibility to have a full control over the operating process when you are engaged into cooperation with a remote development team. The most important thing is to discuss all the conditions of a software development contract before the project is launched. You should be clear what things you are going to pay for and which price rates are to be applied.

Mind that you don’t have to reinvent the wheel and think through all the details of the payment system. There are many types of IT contracts. Your task is to sign the most suitable one.

Which Type of Outsourcing Contacts is the Most Suitable for Your Business?

Which Software Development Outsourcing Contract is the Most Suitable for Your Business?

So, it’s time to find out the special features and use cases of each contract for outsourcing services.

Fixed price

Let’s start with the most popular and the most efficient software development agreement. From the title, you might have guessed that it implies paying a fixed amount of money for a particular scope of work.

This is a perfect solution for short-term projects lasting not more than a few months. It is necessary that the team receives a detailed specification describing each part of the future product. You should also be clear about the options to be implemented because such contract type does not imply changing the tenor of development.

For all that, it does not mean that you are not allowed to incorporate revisions into an ongoing project. If such a need arises, you can create an additional agreement and reestimate the final price in order to effect the desired result.

Fixed Price strategy is a silver bullet for those ones who are interested in the off-the-peg product and do not care of means used for creating it. This type of IT outsourcing models assumes no active client’s involvement in the workflow. The process is entirely controlled by the project manager hired by the outsourcing company.

When to choose a Fixed price model

If you are not sure whether the fixed bid is suitable for your project look at the questions below. In case you can answer ‘Yes’ to most of them, this is exactly what you need.

  • Is it possible to fully describe the functionality of your product and the stages of its implementation?
  • Does the development process suppose to take not more than few months?
  • Can you entrust the project management functions to the representative of the development team?
  • Is it possible to agree on the terms of the workflow review?
  • Is it unlikely that you make any significant changes to the final version of the product?

Fixed Price summary

Pros and cons

Before taking a final decision, consider Fixed Price contract advantages and disadvantages. You are going to benefit for the following reasons:

  • No overpayments. The entire amount is agreed before signing the custom software development agreement.
  • No supervision. Coordination of the development process is carried out by the project manager. If desired, the client may also participate.
  • No turn-ups. You have a signed statement which describes the terms when a certain portion of the functionality should be implemented.
  • No distrust. There is no need to worry whether the working hours are used efficiently. The contractor is highly motivated to deliver the quality product in the shortest terms.
  • Low risk. All in all, you play it safe. If the product does not meet the requirements you still have the right not to pay for it.

Do you know everything about a Fixed Price contract? Check out an exhaustive article about the things you should know before accepting the model.

In any business there are downsides.

  • Time for preparations. Be ready to spend a few days up to 2-3 weeks documenting all the requirements and deadlines.
  • Minor control over the process. Of course, you can make your adjustments, however, management is mainly executed by the team member.
  • Lack of communication. This model does not involve frequent interaction between the client and team. Nevertheless, it does not mean that you will be excluded from this outsourcing contract management.

Time and Material

All the above sounds cool but what to do if you intend to launch a long-lasting project which is impossible to itemize and estimate in advance? Keep your head! At Cleveroad, we have been dealing with such products many times and know how to handle the situation. Specially for this purpose we make a heavy use of T&M model.

Unlike the fixed bid project, it does not require an advanced calculation of all the details. You pay for the hours spent on the development of pre-specified functional. Also, the client reimburses material costs (e.g., hardware) and ancillary charges (e.g., business trips).

Time and material IT outsourcing agreement is very flexible and is ideal for the long-term cooperation. At the regular meetings, the representatives of the team substantiate the hours spent on the implementation of each function and explain the specifics of the development.

As a rule, the final stage implies the delivery of a finished product in the form described by the customer. However, the exact timing of the execution is not possible to stipulate in advance due to the nature and specific of the software.

When to choose a Time and Material model

To be sure that you make a right choice by signing the T&M contract, try to answer the following questions. If affirmative answers prevail, this is a sound decision.

  • Is the project concept rather raw to estimate all the details precisely?
  • Do you need a great flexibility during the process of development?
  • Is your idea connected with the new technologies and not completely built up markets?
  • Are you intended to provide a direct control over the project and supply your team with the specific materials?

Time and Materials summary

Pros and cons

Weigh the benefits and drawbacks before making a final decision on what kind of outsourcing services agreement to choose. The T&M project upsides are going to be as follows:

  • Flexible budget. You can negotiate with the team on the question of the relevance of particular features and ways of their implementation taking into account your budget possibilities.
  • Part-payment opportunity. The total amount will be split for you to pay it step by step for each completed piece of work.
  • Easy start. There is no need to sound the final requirements so you can directly proceed to the development process.
  • No costs for preparations. There is no need to make any pre-arrangements. All the discussions will be considered as a part of the workflow.
  • Agile. Outsourcing contracts that follow T&M model perfectly cohere with the Scrum methodology, in particular, such elements as a sprint, daily and retrospective meetings, etc.

Speaking of the disadvantages, pay attention to the following items:

  • No deadlines. In fact, you are not exactly aware of the time when a finished product will be delivered. The timeframes are quite blurry.
  • Low budget control. Even though each segment of work is discussed you do not have a full imagination of the final sum you are going to pay.
  • Time for participation. Since you will be directly involved in the management of the project, be prepared to allocate time for it.

Dedicated Team

Working under this custom software development contract, you get a team that is only concerned with your project and not engaged in any other tasks. It knows the main idea which it seeks to achieve and performs intermediate tasks on behalf of it.

In this kind of outsourcing pricing models, it is hard to describe the closing stage of collaboration since it may vary depending on the specific of the project. The remote developers become full members of the client’s team, follow its corporate culture working for the benefit of the company. Therefore, the customer may eventually change the direction and entrust new responsibilities while not ceasing cooperation with the outsourcing company.

It should be noted that the role of the latter is reduced to a minimum after the team is formed. The client manages the process and makes decisions on the project development by its own. An outsourcing company can only assist in certain organizational moments.

When to choose a Dedicated Team model

If you hesitate whether DT software development contract agreement will serve you, take a look at the questions below. The affirmative responses should dispel the doubts.

  • Are you going to develop a complex product rather than a simple tool?
  • Do you want to manage the development process personally?
  • Are you thinking of extending the business in future?
  • Do you need a team working solely on your project?

Dedicated Team summary

Pros and cons

And now it’s time to get a full picture and summarize all the pros and cons you are going to face in case of choosing Dedicated Team model.

Let’s start with the good sides, they include:

  • Straightforward communication. You will be constantly in touch with the performers to agree all the aspects of work.
  • Catch-all control. You will monitor and coordinate the work process by your own.
  • Reliable team. You are going to work with a team that becomes a part of your regular personnel and, thus, being interested in a long and productive collaboration.
  • Tasks flexibility. Since you don’t have to specify the slightest details in advance, you can easily change certain goals and terms depending on the situation.
  • High effectiveness. Working with the same product on a continuing basis, the team members learn it on the expert level and, thus, increase their productivities.

The limitations of the Dedicated Team model are as follows:

  • Expensiveness. Compared to other types of IT outsourcing models (FP and T&M), you are going to pay more. However, this is a relative ratio since Dedicated Team scheme is usually deployed for more complex products that are more expensive no matter which pricing policy is applied.
  • Time expenditure. Be ready to spend some time to hire the staff of the appropriate qualification.
  • Costs for management. You will be responsible for controlling processes and growth policy, so, be prepared to spend money in this direction.

Check out the use case of a Dedicated Team model with a detailed explanation of all the subtleties.

So, what software outsourcing contract to choose?

As you can see, all the types of outsourcing contracts have their risks and opportunities. But which is the best one? Even with all things considered, I recommend always choose fixed pricing strategy over T&M and DT unless you have a good reason not to. The point is that such collaboration carries the least risk for the client and passes it to the team of IT experts. Entrusting your product to a remote command, naturally, you want to get maximum security.

Also, your choice should be largely justified by the type of project you are going to launch. For the short-term development with a clear description of functionality and the concept of a finished product, Fixed Price method will serve the best way. For the long-term cooperation and in case you are going to change the activity vector, choose the last two models. A brief outsource contract review is provided on the picture below:

Types of IT contracts in comparison

At Cleveroad, we successfully deploy all of them and deliver the dream products to orderers. Communicating with the potential clients, our specialists give a reasonable guidance on which software development outsourcing agreement is the most suitable for business development. Of course, the final choice is up to you, however, you can not worry about the validity of a given direction.

If you want to fill the ranks of happy customers, do not hesitate to take the first step. Contact our managers and open a new page in the history of your business.

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