Assessing the value in value-based pricing: Page 3

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One of the criteria for a successful contract is good metrics. The best engagements for value-based contracts tend to be those that are revenue-generating or cost-saving and apply to a particular department or function. "The more discreet the project, the more you can put a box around it and say this is what is affected by it, the easier it is to do value pricing," says Christian Munz, a Framingham, Mass.-based senior analyst for systems integration at International Data Corp. (IDC). For example, finding good metrics in the installation of a customer relationship management (CRM) system can be difficult, he says. "Unless the system itself is a new way to distribute products and services, it's hard to quantify the incremental revenues generated by the system," Munz says.

User buy-in and involvement throughout the project also are critical to success. "It's teamwork," says Ardie Bucher, an Indianapolis-based partner in the consulting practice of PricewaterhouseCoopers, in New York City, and leader of the firm's global facilitation and deployment group. "The client usually provides more people than we do. If they don't do their share and we help bring systems to bear, but they don't follow through, then we have lost."

Consultancies engaged in value-based pricing
Most IT consultancies are involved in some sort of value-based pricing. The following firms are working on value-based engagements with clients. Note that Big Five accounting firms are somewhat restricted by Securities and Exchange Commission regulations in the types of value-based contracts they can enter.
Andersen Consulting

Computer Sciences Corp.


Ernst & Young LLP


Both Bucher and Garry Crowell, a Boston-based senior manager with Ernst & Young who focuses on pricing and negotiating contracts with clients, note Big Five accounting firms--as well as firms that audit public companies--are somewhat restricted by Securities and Exchange Commission (SEC) regulations in entering into value-based deals with audit clients. That does not mean, however, that these firms cannot put some sort of risk or reward incentive into consulting contracts with audit clients. "You want to make sure the fees being paid are on your competencies and efforts and performance--the service firm's performance as opposed to the business performance," says Crowell. Massachusetts' Campbell says to be very careful in the selection of your partners.

"Be clear that your project is well defined and scoped out with milestones that are deliverable," advises Bonnie Digrius, an independent analyst based in Basking Ridge, N.J. Secondly, she notes, "have very clear terms and conditions and commitments on both sides--not just what the consultant is going to do but what you are going to do." Lastly, at every milestone, it is important to determine whether you have accomplished your objective and be willing to tweak the contract if you need to.

Supply chain systems implementations are ideal for value-based contracting. The success of ERP implementations, however, where the new system impacts a number of departments, is difficult to measure. Here, experts say, the best type of arrangement other than the traditional time-and-materials contract is to base risk and reward on timeliness of delivery. For example, rewards could be linked to the completion of various modules of SAP.

Think before you act

It may sound like a good idea to negotiate your next systems integration project on the overall cost savings or revenue gained, but be prepared to spend a lot more time up-front and ultimately pay more for the installation than you would under a traditional time-and-materials contract. Sure, you'll have a successful project, but the time and effort expended to draft the contract, keep up with the reward metrics, and make sure your staff is heavily involved in the project may not make this type of deal worth your while.

Bucher points to a project where PricewaterhouseCoopers helped a client reduce its accounts receivable by $200 million. PricewaterhouseCoopers installed a system that helped achieve these results while the client worked on improving its processes. "Who was responsible for the $200 million decrease? How much comes from the process side, how much from technology? How do you measure that?" he asks.

Some who have tried value-based pricing are not sold on the concept. A CIO who has worked with systems integrators in value-based contracts says it's a "very difficult concept to make work." He notes, "I haven't seen a value-based pricing model that has the right incentives."

The CIO, who asked not to be identified, points to the estimation process as a major problem and notes that most consultants will not estimate their time, expenses, and other costs properly. "That is why integration people work their people so hard, they're trying to catch up," he says. "Do you want to be the one who is forcing them to cut corners because you are exacting a penalty? I would rather get the project done right than have people cut corners to save a few dollars."

The cio has worked in both the government and corporate America and says value-based pricing works better in the public sector, where the consultant absorbs all up-front costs and is paid solely on the benefit gained. //

Lisa Gandy Wargo is editor of Global IT Consulting Report, a monthly newsletter on news and trends in IT consulting--including IT strategy, systems integration, and outsourcing. Wargo, a non-practicing CPA, has been covering consulting for over a decade. GITC, based in Fitzwilliam, N.H. is published by Kennedy Information. Wargo can be contacted at lgandywargo@kennedyinfo.com.

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