Project Management

Should you take on internal development projects for a fixed price?

Project management guru Tom Mochal fields a member's question about adopting a fixed-price approach to internal development projects. Is the idea inspired or just out there? Find out what Tom thinks.

Builder.com columnist Tom Mochal receives dozens of e-mails each week from members with questions about project management problems. He shares his tips on a host of project management issues in this Q&A format.

Question
Our company is looking for ways to run projects as efficiently as possible. One idea being discussed is to outsource some of the projects on a fixed-price basis. After the idea was discussed for a while, one of our clients asked why we could not do fixed-price projects using our internal staff. We weren’t sure if this idea was totally off the wall or whether this was an idea that could lead to a breakthrough in how we run development projects. Can a company successfully implement fixed-price project work for internal development?

Samuel (Sam) G.


Answer
Sam,

I think we’ve all heard complaints from our business clients about the cost of internal development projects. The complaints come in two flavors—either the clients think development costs are too high to begin with, or they’re dissatisfied with our ability to deliver within the estimated budget and timeline. It doesn’t matter if you charge the business units directly for your development work or if you have an indirect yearly allocation. They always think development costs are too high. Sometimes, what they’re really saying is they believe they could get the work done cheaper somewhere else.

The sad truth may be that they could. As a good steward of your company’s money, can you justify paying more for internal development than you would if the development were outsourced? Of course, there are many reasons for maintaining an internal development staff. But is your organization even open to the alternatives and options that outsourcing would bring?

Bring the discipline of fixed-price development to your organization
Opening up every development project to an outsourcing option is a pretty radical step. Fortunately, you have some less radical alternatives. You can start to simulate a competitive and fiscally accountable environment by setting up fixed-price contracts for your internal development.

Think about the advantages of fixed-price work and how it could transform your development function. Just as it does with third-party development shops, committing to fixed-price work provides the following incentives and motivations:
  • It forces you to do more detailed and thorough planning.
  • It forces you to break projects down into more manageable phases. For instance, you’d probably bid first on the requirements-gathering phase and then give a fixed bid on the remainder of the work.
  • It requires your developers to be better and more methodical estimators.
  • It forces you to manage scope changes more tightly.
  • It gives an internal development organization more of an entrepreneurial spirit.
  • It provides an incentive to reuse more, in terms of templates, documentation, processes, and code.
  • It encourages teams to think of better ways to do things and facilitates process improvements for the entire organization.

First, find the right business partner
A few years ago, I worked with a risk-taking business manager to implement fixed-price development work for a business unit in a large development organization. When we started, neither the client managers nor the IT developers fully understood what was going on. But the paradigms and mindsets changed over the course of a year. The team began estimating and executing work in smaller phases. Project managers took personal accountability for budgets. Everyone watched like hawks for scope creep.

When a project went over budget, we didn’t go back to the client for more money—we couldn’t. However, like an outside business, we tried to complete most projects for less than the amount we charged the client. Some projects went over budget, but the projects we delivered under budget more than made up for them.

One of the practical matters you’ll need to resolve is what it means to be over or under your fixed price. What incentives, such as bonuses, can you offer the teams that hit their numbers? Since you’re not actually a profit/loss center, there needs to be some accounting behind the scenes to account for the overall internal “profit” or “loss.” In our case, our incentive was that if we delivered our projects under budget, we were allowed extra funding for training and hardware purchases.

Take the challenge, then take on the marketplace
In our experiment, we delivered about 20 projects at a total savings of $200,000 out of a $3 million development budget. This savings didn’t mean we overcharged our internal clients. In our view, the savings represented our ability to deliver the projects for less money and less effort than our best initial estimates.

When implementing change of this nature, you want to start in a small pocket where you can introduce the concepts, work out organizational processes, and find early success. Then branch out into the rest of the organization over time (keeping in mind that, just like in the marketplace, not all work is a candidate for fixed-price bidding).

Later on, if you decide to open the development work to fixed-price bids from third-party developers (definitely a more radical step!), you’ll find that your development organization always wins the bidding. You’ll also find your business clients have a much better appreciation for the value they’re getting for their development dollars.

Conclusion
If your business customers think your development is too slow and too expensive, they may be right. By taking on internal projects at a fixed price, your development organization will have a powerful incentive to improve.

Once you can successfully execute fixed-price internal development, you can open the door to outside firms to bid against you. You should never lose a contract!

 

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