How Much Are You Paying Your Technology Vendors Upfront?

Too much? Some of you are thinking, “I don’t pay vendors a dime upfront!”.  Some of you stopped and thought, “Well, I did that before, but I’d never do it again.”  And, some of you said, “Yeah, what’s the problem with it?”

The problem with paying vendors too much upfront is that you lose leverage when the rubber meets the road. When the vendor tells you that the software you paid millions of dollars for upfront is “working as designed” when you know it’s a defect, what leverage do you have? Unfortunately, if you’ve paid too much upfront for the software, you don’t have many legs to stand on.

Now, don’t get me wrong, scenarios where 20% of the contract value is paid upfront isn’t an issue. Tiered payments throughout the contract as the vendor meets their milestones is a great idea and also isn’t an issue.

I’m talking about all or nothing payments up front or large lump sums paid for services not yet rendered or software not yet delivered.  I’ve heard of Tier 1 technology vendors commanding over $1,000,000 up front before performing technology services on a $3,000,000 contract. Really? A cool million? For what? First class seats? You better hope you’ve got the GSA rates in your contract or you really will be paying for first class seats!

If you have a vendor telling you that they have to have all fees paid upfront or a very large sum paid upfront for services or software, ask the five why’s to get to the center of that tootsie roll pop. I guarantee you’ll find something fishy!

Demystifying the Statement of Work

In your project, Statements of Work (SOW’s) are where the rubber meets the road and unfortunately, many project managers don’t put as much work into them as they should. If there’s a conflict with your vendor, you better believe they’ll pull out the Statement of Work you both signed 10 months ago and gleefully identify the section you forgot to include. Get ready for the “get out of jail free” card!

Using the Who, What, When, Where, Why and How method to keep things simple, here are some questions to get you started on that ever-elusive Statement of Work and stop the dreaded writer’s block.

1) Who?

• Who are your stakeholders? What do they want out of the project? Do you have business requirements or a project plan?
• Who will perform the work for the project? Will you perform a majority of the work or is the vendor performing the heavy lifting for you? Use a Work Breakdown Schedule (WBS) format to list the specific tasks for each party (you and the vendor) and be as specific as you can about the work.  Avoid “mutual responsibilities” if you’re able to, as this is always an area of contention.

2) What?

• What will the vendor do for you and your company?  Are they performing a gap analysis or are they coding?
• What deliverables will the vendor provide your company at the end of the Statement of Work (i.e. Requirements Document, Design Document)? This is overlooked in a majority of SOW’s. You’re paying the vendor for a service and at the end of the service, you should get something in return. So, what are the deliverables? Make sure you’re not paying them $250,000 for a fifteen page PowerPoint presentation!
• What’s your acceptance criteria for the deliverables? This is also overlooked. What do the deliverables have to look like for your company to accept them? Do they have to pass heavy QA within your IT department? Or, does your CEO have to review and sign off on them? Identify your acceptance criteria give yourself time in the Statement of Work to review the deliverables before accepting them.

3) When?

• When does the work with the vendor need to start?
• When does the work with the vendor need to finish?
• When do you need the project deliverables from the vendor?

4) Where?

• Where will the vendor perform the work for your company? Onshore? Offshore? Onsite? Offsite?

5) Why?

• Why do you need the vendor’s services? Is this work that can be done in-house or do you have to use a vendor (make vs. buy decision)?

6) How?

• How much will the services cost? Have you gotten a quote from the vendor? Will they perform the services on a fixed fee (less risk to you and your company) or a time and materials basis (more risk to you and your company)?