Once Upon Time at J.D. Edwards

It’s the Fee Models, Stupid

In my last post, I summarized the ongoing challenges of SAP systems integration as observed firsthand and through deep primary research. A major part of the public debate as to what improvements can be made has centered upon certification. Many believe that better certification of consultants is needed. I have already weighed in on this matter (Certainly Certifiable: SAP SI’s, Not Just Consultants http://snipurl.com/udywk ) in which I argue that the systems integration companies should be certified, not just their individual consultants. I wrote that in April of 2009 and have since amended my thinking.

All of the large systems integrators are CMMI certified to at least level 3 but as mentioned in my previous post, that doesn’t stop them from regularly ignoring CMMI-adherent methodologies. (read this and weep: http://snipurl.com/uif1o ) The point is that certifications do not necessarily lead to good field performance and high levels of client satisfaction. In that light, just because a consultant is SAP-certified does not particularly means that he or she will perform well in the field. Clearly certifications of any kind may contribute to project success but I still believe that this type of improvement is tinkering when what we need to is blow up the model.

In research that I completed in 2005 and 2007 regarding the relative field performance of the leading SAP systems integrators, I had deep input from 1,502 clients of the six leading SAP systems integrators for projects completed from 2003-2007. In addition to providing details regarding each system integrator’s performance (across twelve criteria such as adherence to budget, SAP technical skills, efficacy of knowledge transfer, et al), they also let us know what fee model was applied.

Fixed fee, by which a predetermined global fee is applied and which may or may not include expenses. Clients opting for fixed fee seek to reduce cost risk and place a greater responsibility on the systems integrators for results. As a consequence, they tend to take a lesser level of client ownership.

Time and Materials, by which a budget is established and a systems integrator bills time at a daily or hourly rate as well as expenses as incurred.

Mixed fee engagements tend to include time & expenses for client-dependent phases (e.g. design) and fixed fee for vendor-dependent phases (e.g. configuration) as a way of reducing risk with a balanced time and cost adherence mindset.

Value-based, such as gain sharing or benefits sharing. Clients opting for value-based fees reduce risk by paying lower rates in return for a percentage of measurable financial gains. Such clients are more motivated to gain measurable benefits than to simply adhere to time and cost. This model requires a high level of client ownership.

When we ran results sorted by fee model, we found that, while only five percent of the engagements were value-based, clients reported:

Highest performance criteria scores for 11 of 12 criteria
Highest levels of exceeding goals (as opposed to meeting those goals or falling short) for all ten goals tested (e.g. reducing costs, streamline financial management, consolidate IT systems…) and often by a very big margin.

As for problem levels:

Fixed Fee engagements had the highest citation of no problems (44%) with value-based engagements second (38%).

Value-based engagements had the lowest average number of problems per engagement (1.3 compared to a group average of 1.6).

There was not a single citation of ‘Scope Poorly Managed’ in value-based engagements and seven of the thirteen problems were cited least often for this fee model than for the others.

The time & expense model reflected the highest problem per engagement (1.8) and the highest citation frequency for eight of the thirteen problems.

Over-all fixed fee engagements had the worst performance. Clients tend to love fixed fee because they feel they are getting predictable cost. Yes, but they also tend to get predictably mediocre results. If I’m a systems integrator on a fixed-fee project, I also have predictable margins, so where’s my motivation?

J.D. Edwards: A Business Solutions Firm (Briefly)

I have long been a fan of value-based billing and I believe it’s time that we do what we can to retire the other models as much as possible. I have felt this way for a very long time and once, briefly, there was a firm that shared the vision.

In 2002, with new management and a consulting director named Jim Christianson, J.D. Edwards created a methodology and the necessary tools to turn the sales and delivery model for ERP on its pointy head. I had the great pleasure of collaborating with them, most especially with the talented Scott Lutz (now at SAP). In brief, here is the scenario that was made possible:

1. Potential client shows what improvements they wish to make to their business with a focus on their Profit and Loss sheet.

2. J.D. Edwards identifies the key performance indicators (KPIs) driving current results.

3. J.D. Edwards identifies the core business processes that drive those KPIs.

4. J.D. Edwards identifies the software that supports the core business processes (and a cost estimate)

5. J.D. Edwards provides a measure of business gains that will be made for each KPI.

6. J.D. Edwards provides a time and cost estimate for relevant consulting.

Given a credible probable cost/benefit scenario (in $$) the client has the option of a standard time and expenses fee model or can negotiate gain sharing.

The implementation project that follows is directed toward deriving business benefit for the client. It is not viewed as a mere “IT project” but as business enablement. While the client may still be budget-conscious (it will be less so in a gain-sharing deal because fees will be reduced), it will be even more focused on measurable benefit. As such, the engagement will be embraced by business people and that elusive grail -business & IT alignment- will be attained.

What I just described is a client-supplier partnership that beats the living hell out of any fixed fee arrangement.

J.D. Edwards built all of this and had successfully piloted it into the marketplace. At their final Quest event, they shared their plans to reduce the traditional sales workforce with more consultative sales people who could fulfill the above scenario. No longer would they be just a software firm. They would become a business solutions firm.

This all came crashing to a halt shortly thereafter when they were acquired by PeopleSoft, where the services leadership was arrogant, uninformed, and fairly stupid (yes, I had to work with these people before and after the acquisition).

The Selling Model Has to Change First

Clients who are new to SAP tend to talk first with the software vendor and later with potential systems integrators. This misfortune of this order is that software vendors do not sell according to the JDE scenario and tend to focus overmuch on IT issues. Thus, by the time a systems integrator comes along, clients are not looking at driving measurable value, they are looking to keep costs down. Deloitte has an excellent program called Enterprise Value Map but a pair of their partners shared with me some years ago the news that few clients actually bite, often for the reason cited above.

Partners at other systems integrators described similar frustrations so in November of 2004, I wrote twin articles:

How ERP Vendors Sell the Wrong Things to the Wrong Buying Audience — In the Wrong Way, Wrongly

Features and Functions Are Dead — And Never Lived for Today’s ERP Buyer
Total Cost of Ownership Falls Flat at Board Level
Lower the Volume of Software Engineering, Raise the Volume of Value-Based Services

This is the way software is still sold.

How ERP Vendors Can Sell the Right Things to the Right Buying Audience the Right Way

Selling the Enterprise Application Value Chain
Taking the Cue From Systems Integrator Alliance Partners

I repeat all of this same advice to SAP today, all the more loudly given the passage of time.

SAP, in its Value Engineering tools and assets, largely has the ability to fulfill the JDE scenario, which I believe would help solve its dilemma in the SME (see my posting regarding this: http://snipurl.com/ti92h). The trouble is, however much SAP speaks to being a business solutions firm, they remain very much an information technology firm that seeks to leverage software as the answer to all questions.

If value is the cart and SAP software the horse, then clients should be shown the value first as a means of enticing them to get the horse.

Advice to clients: seek out value-based fee models for all of your engagements.

Advice to systems integrators: market your value drivers more vigorously than your technical prowess and learn to partner with your clients.

Advice to readers: please provide feedback. What else can we do to improve the systems integration experience for clients?

A Closing Fable

This actually happened about six years ago. I was asked to take a call from the CIO and three direct reports of a large state. It turned out to be the potential conflict-of-interest call that I had in more than four years at META Group. The state client had engaged a major systems integration firm on a gain-sharing basis. They had projected $200M in benefits over four years but in less than three years they had generated $400M in benefits and expected another $200M in the coming year. State auditors were on their case because, through gain sharing, the amounts they had reimbursed to their systems integrator were very, very high.

While the callers asked what they might do to negotiate a new deal with the systems integrator, I could not answer as the systems integrator in question was a client of my Professional Services Strategies. I did pose one question, however: If the fee model had not been gain sharing, would their benefits have been so high? Their collective answer was no way. They added that throughout the project they continued to find new ways to generate benefits so that even though the final project was a bit a late and more than a little over budget, it was a success in every way.