The Trouble With Hourly Rates and ERP Installations

I was honored to be asked by a mentor and friend to sit in on a meeting of a corporation that was having some ERP implementation–shall we say–difficulties. It was eyeopening in several ways. I’ll start with hourly rates. I’m still thinking through the rest of the items.

Turns out there were two firms helping this company implement–a horizontal software integrator and a narrow vertical vendor–both of them used the hourly rate billing model. The total fee–as best I could add–were close to $500,000. The client was unhappy primarily because they didn’t get enough service. The consultants weren’t there when they were needed. Several items didn’t get done that the consultants should have been responsible for. To top it all off, there were system problems and the project wasn’t yet finished. The fees, by the way, seemed to be about 50% or so “over budget” from the client’s perspective. Bad juju all around.

The fee analysis the consultants brought showed that they were–indeed–well within budget. The problem was that several changes had been requested, additional work was required, and when you added this in the budget was right as rain. Their numbers didn’t look wrong to me; looked pretty much like every hourly implementation project I’ve done in the last 25 or 30 years.

The point, though, is that the client isn’t happy. And they think they’ve been overcharged. And they didn’t get services they needed.

All of this is the result of a client that wanted to hold costs down (which every client should), and a consultant that wanted their client to be happy with the fee and the implementation. In truth, I don’t see any way that the consultant / implementers could have avoided the issue, gotten the work, and still made the client happy. Here are the options:

Prepare an Inclusive Budget Based on Past ERP Experience (READ: High, but realistic)

Result: the fees look out of kilter with other competitors, project is lost, client winds up with a lower priced competitor. The project often goes over budget and the client doesn’t get the ROI they had anticipated.

Prepare a Low Budget Direct at Selling the ERP Work

Unfortunately, this is sometimes done. Sometimes clients pick the “three days of training” option. Then I get a call when three days of training results in the installation of the product and nothing more.

Prepare a “Happy Path” Budget

This option assumes that nothing goes wrong, that the client has enough internal expertise to solve the problems that arise, and that management won’t get hacked when the project is over budget and late. This is what the consultant in this case did.

Only the first and last options are ethical. The first won’t get you much work. The last almost guarantees that the project will be over budget and late (which is why most projects are over budget and late).

The Solution

There’s one more option–the one Data Guidance Group is committed to–guaranteed or fixed fee pricing. This requires the consultant to set a realistic scope (or provide realistic options for scope), and gives the consultant incentive to manage the scope. The projects we’ve done on a fixed fee basis (now 100% of our projects) have resulted in 100% satisfaction from clients, no overcharges, and much better outcomes. There have been change orders, but our clients are good at understanding scope.


ERP and Obamacare

On first glance, there seems to be little connection between ERP and Obamacare. Until, that is, you read articles like this one about Applebee’s CEO, who says that Applebee’s won’t be hiring to offset the cost of the Affordable Healthcare Act. One of the objectives of ERP software is to reduce the amount of effort (labor) to produce a business result. Simply put, to be able to handle more transactions with less effort.

ERP Does More With Less

Several businesses have observed over the last few years that employees they laid off during the recession really weren’t needed. They would not be creating the jobs again when the economy comes back full force. Some of these businesses are experiencing an increase in sales, and discovering that they really did need the employees. They are thinking about hiring again.

Enter Obamacare. Suddenly the employees that looked fairly affordable (at, let’s say, $10 an hour) don’t look so affordable. The minimum cost for many businesses is $2,000 for each employee they don’t cover. So how do they proceed?

Properly implemented ERP will allow many of these businesses to do more with the employees they currently have. Properly implemented means simply that the features in the software designed to save the business money are used. This implies training and business processes designed to help employees use the ERP software.

Should You Look for a New ERP System?

No. Not yet. Begin with an evaluation of your current system. When we talk with businesses about their systems, we often find that training and understand the possibilities are more important than the system. We’ve discovered over the last 20 years that more often than not, a new system simply locks in old processes. Start by looking at the business and its needs. Then consider an ERP system if it’s needed.