ICT systems form the beating heart of many organisations today. From hospitals to transport companies, and from consultancy firms to financial institutions: a single bug, vulnerability or outage in a critical ICT system can disrupt business processes or cause significant financial damage. Sound contractual arrangements are therefore essential. In this blog series we reflect on common mistakes made when negotiating and concluding an ICT contract, with the aim of protecting both customers and suppliers from excessive risks.
Selecting the right supplier
In this first blog in the series, we focus on the period before the contract is even being discussed: the selection phase. It may seem obvious, but a stable and future-proof collaboration starts with finding the right supplier. If the contracting parties are not a good match, this can rarely be fixed through contractual arrangements. Just as personal relationship problems cannot be resolved through prenuptial agreements. Choosing the right supplier is therefore at least as important as the content of the agreement itself, or probably even more important.
Numerous studies have been conducted into why ICT projects or collaborations fail. These studies show that things often go wrong at an early stage. Before focusing on the contents of the agreement itself, we therefore first dive into the precontractual phase. This brings us to the first pitfall: a customer filling the shoes of its supplier.
From in-house ICT systems to outsourcing
Whereas in the past companies often ran large parts of their ICT systems on-premises and managed them themselves, today companies tend to outsource their ICT systems to a third-party vendor. Outsourcing offers several advantages. It allows the customer to focus on what truly matters to its business, such as transporting shipping containers, providing healthcare or offering insurance products. Specialised external ICT suppliers ensure that the required automation solutions are up and running and remain so. This is often faster, results in better quality and/or is more cost-effective than keeping everything in-house.
The consequence of this new reality is that customers must be able and willing to trust the expertise of their supplier. That supplier has likely implemented the same solution many times before, knows what the most important risks are and understands which factors contribute to success. A sensible customer therefore gives the supplier the freedom to deploy its knowledge and experience as effectively as possible.
In practice, customers sometimes find it difficult to grant their supplier such freedoms and want to keep control themselves. This can result, for example, in a detailed set of requirements that fully dictates to the supplier how services must be delivered. This over-specification of the desired solution entails several risks and problems.
1. The best suppliers struggle to distinguish themselves
Business ICT projects can be large and complex. A true expert is able to oversee interests, priorities and risks, both technical and operational, and to propose an effective and efficient solution from a helicopter view. The more detailed the specifications, the more inclined the supplier will be to simply follow the customer’s instructions. By challenging the customer or offering something other than what is requested, the supplier risks losing the assignment, for example because the customer does not recognise itself in the proposal. This also makes it difficult to distinguish the best suppliers from mediocre suppliers based on the quotations.
2. Inexperienced suppliers also compete for the assignment
An additional problem of over-specification is that it enables inexperienced suppliers to compete for an assignment for which they are not suitable at all. A supplier that lacks knowledge of the relevant market or has limited experience with certain technologies would, with more open specifications, likely struggle to develop a proposal. But if the customer has fully spelled out how the assignment should be performed, preparing a quotation suddenly becomes much easier. That does not mean however that the supplier is actually capable of delivering on time and within budget. The supplier may be held legally liable if its performance falls short, but that will not save the project or collaboration.
3. Excessive focus on time and cost
If a customer has prescribed the desired solution with too much detail, the suppliers’ proposals will inevitably start to look alike. All suppliers will offer more or less what is asked for, even if they know that their proposal will not actually fulfil the customer’s needs. As a result, the selection process will quickly focus on which supplier can deliver the requested solution the fastest and at the lowest price. That is unfortunate, because if the suppliers were given more flexibility, they might have proposed a more cost-effective or suitable solution.
4. Additional work and delays
When initiating an ICT project, it is often difficult to fully anticipate what the final solution should look like. There are usually multiple stakeholders, each with their own interests and priorities. In addition, there are often integrations with, and dependencies on, third-party systems. Furthermore, even with the best intentions, it can be quite a challenge to put requirements down on paper in an unambiguous way. For example: a requirement demanding that “a customer must be able to enter address details via an online order form” may seem clear at first glance. But if the website serves an international audience, this might be significantly more complex than if it only targets users in one specific country. Addresses in other countries are structured differently, and additional integrations with external databases may be required to verify whether an address actually exists.
Even if a customer really tries to document all of its wishes and requirements before the project starts, it is almost certain that additional requirements will be added over time, or that existing requirements become irrelevant. A change in requirements will likely result in additional costs and delays.
BVP as a possible solution
There are several ways to deal with the issues described above. One of these is the use of the Best Value Procurement (BVP) methodology. Instead of focussing on finding a supplier that offers the lowest price, this method primarily focusses on the added value offered by the supplier. The supplier is given more freedom to describe how it intends to approach the assignment. In an opportunity and risk dossier, the supplier can demonstrate how it distinguishes itself from others and whether it has a proper grasp of the project risks. Interviews also provide an opportunity to thoroughly assess key employees that will be involved during the project.
Is BVP the solution in all cases? Certainly not. Some organisations are very convinced by the methodology, while others consider BVP too uncertain. Effective application of the methodology can also be challenging in practice. But the underlying philosophy is at least worth being mentioned in this series.
Other blogs in this series
In the next blog in this series we will address pitfall number two: incorrect set-up of the contract negation process. In part three of the blog series we will then take a closer look at the phenomenon of positional bargaining. Hyperlinks will be added once the blogs are online.
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