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.


One thought on “The Trouble With Hourly Rates and ERP Installations

  1. Pingback: ERP Implementation and Integrators - The REAL Job - Thinking Tech

Comments are closed.