Abstract: This blog post provides insight into various partnering models and helps to select the appropriate contractual set-up for working with external experts and consulting firms on an S/4HANA project.
As a rule, the contractual models between end customers and commissioned external experts (system integrators, etc.) are set up in such a way that the contractual situation alone is enough to directly advantage one party over the other, or a constellation is created in the contract that forms a direct motivation for one of the parties to advantage the other.
THE CORRESPONDING COMMON CONTRACTUAL MODELS ARE
– Accounting according to time and effort (T&M) -> incentive for the external partner to account for as much as possible
– Time and effort accounting with cost ceiling (T&M with CAP) -> Incentive for the external partner to shift the cost ceiling further and further by means of scope change requests; on the other hand, no incentive for the external partner to provide services beyond the cost ceiling, even if the quality is not yet right.
PROJECT WORK WITHOUT WASTE
How much better would it be if the contractual agreements were drawn up in such a way that all participants would be permanently counteracted in the desired direction, the agreed goal and all times that do not serve to achieve the goal are eliminated in the project. That would be lean – project work without waste! Such models are possible and practicable. One model that I have come to know as the most effective is a so-called shared risk cost ceiling and relatively easy to sketch: The Shared Risk Cost Ceiling.
THE SHARED-RISK COST CEILING
1. a cost estimate is made based on the elements already outlined in the previous section for the description of the objectives.
2. a cost ceiling is agreed which deviates max. 10% from the cost estimate (this is how estimation inaccuracies are addressed); this is also budgeted
3. the following agreement is made for deviations:
– For falling below the cost ceiling, the external partner receives a bonus, e.g. 30% of the difference value.
– If the cost ceiling is exceeded, the external partner may only bill the expenses at e.g. 30% of the otherwise agreed hourly rate.
If the company now tenders about half of a possible saving (in this case 100%-30% = 70% / 2, i.e. 35%) for the internal project participants as a credit rating, all project participants are steered in the right direction, many discussions become unnecessary and thus considerably less time is wasted (by the consulting partner as well as internally).
Here is a calculation example using the above figures:
Cost estimate of the external partner: EUR 500,000 (assumption 500 md a 1,000 EUR/day)
Agreed shared risk cost ceiling: EUR 550,000
Total charged on completion / acceptance: EUR 450,000
Realised underrun EUR 100,000
Bonitings:
external partner (30% of savings) EUR 30’000
internal project team (35% of savings) EUR 35’000
Total cost to the enterprise (EUR thousand) 450+30+35 = 515.
So the company also saved EUR 35’000 compared to the budget and at the same time created a high motivation for all project participants to reach the given goal.
With a view to completeness: Exceeding the cost ceiling (budget) in this calculation example would then only be charged at 30% of the daily rate, i.e. EUR 300/day.
Tools such as contract templates and their application I plan to make available and explain in detail within the framework of PodCasts. If you don’t want to or can’t wait for it, feel free to write to me and we will surely find a faster, individual way for you.