Customer and supplier perspectives on contracting for GIS services
David R. Coates Intelligraphics International 741 N. Grand Avenue Waukesha, Wisconsin 53186
Abstract
In many ways, GIS services are unique when contrasted to most other products and services which energy or telecommunications companies purchase. To a large degree, the differences relate to the fact that the ultimate success of the service provision depends upon the cooperative efforts of the customer and the supplier. For example, in a data conversion effort, the customer may be responsible for critical components of the project effort such as provision and preparation of source data, resolution of data anomalies, and verification of deliverable data. Additionally, while the pace of a GIS implementation usually has significant financial ramifications to the customer organization, the implementation efforts must often cope with substantial variations to scope and specifications over the life of the effort. For these reasons, traditional contracting approaches such as “fixed price” or “time and materials” may not be the best format for use in a GIS services contract. The optimum contractual arrangement for GIS services must provide incentives to both the customer and the supplier for the efficient, consistent, and scheduled completion of the cooperative effort. This presentation will include frank discussion by an experienced customer and an experienced provider of GIS services of the prerequisite, and the potential risks and benefits of using various innovative approaches to contracting for GIS services. Introduction Data conversion is a complicated, expensive process, requiring significant interaction and cooperation between the customer and the supplier. No two conversion projects are alike. The unique aspects of each customer and each project, such as record type and content, database specifications and aesthetic preferences are what drive the need for interaction and cooperation. For a conversion project to be as successful as possible, the performance of both the buyer and supplier, as well as how they interface with each other, need to be clearly defined and understood. A well-constructed contract can be an effective tool to help define expectations and influence performance by both parties, thus reducing or eliminating surprises. “Boiler Plate” is a common term used to describe the standard terms and conditions in an organization’s purchasing contracts. This “boiler plate” is typically quite standard and well established, and is usually not subject to significant changes when used as part of a data conversion contract. This paper is not intended to address typical “boiler plate” issues. What this paper will address are those areas that are most important to the ultimate success of a conversion project, namely the delivery schedule, the quality of the converted product and the financial aspects of the project. We will present relevant issues and concerns in each of these areas from both the supplier’s and buyer’s perspective. We will also discuss several specific contracting mechanisms that have been used to successfully address these issues and concerns. Schedule The schedule in a conversion contract should define not only the starting and ending dates for the services but all of the key interim milestones as well. The schedule should address the timing of performance by both the supplier as well as the customer. Some key items that should be included are: specification and model development, source provision, pilot or prototype delivery, interim batch deliveries and final delivery and timing of acceptance. Buver’s Perspective - Typically, the customer will have several major concerns related to the schedule for the project. It’s important for the customer to know when final product will be flowing back, so that they can plan and schedule their own internal resources to veri~ the quality of the product and to deploy the system within the organization. The sooner the final data is delivered back to the buyer, the sooner the organization can begin to get the benefits from the system. This in and of itself can put significant pressure on accelerating the schedule as much as possible. Another important issue that relates to schedule is the credibility of the conversion project and its manager within the buyer’s organization. If key dates are consistently missed, and the schedule keeps slipping accordingly, then the project will lose credibility. This will result in other people and groups within the organization being less receptive to the potential benefits that the project can ultimately provide. Upper management support can also quickly fade if schedule creep occurs. Additionally, there is an important relationship between posting backlog and the conversion schedule. In most cases the customer’s records are “frozen” during conversion, and the longer the conversion takes, the greater the posting backlog that will build up. Overcoming a large posting backlog can be a significant challenge to the project’s resources. Sutmlier’s Perspective - Its very important that the conversion vendor have an opportunity for input into the conversion schedule, since they have such a direct impact on it and are also directly impacted by it. The supplier will want the customer to realize that in many respects, the pilot is the most difficult portion of the project, and needs to be allocated an appropriate amount of time. The supplier’s ability to deliver will also grow significantly throughout the life of the project, as their process becomes more refined and their personnel become more proficient with the project specifics. The project will fail against the schedule if this ramp is not taken into account. The supplier also needs some things from the customer in order to do the work. Before any real progress can be made, the project specifications and data model need to be defined and finalized. The vendor is also dependent on the buyer for a consistent stream of source documents and data, since in these types of projects, the customer is also the supplier of “raw material” to the project. A well-planned conversion schedule will take these considerations into account. Specific Contracting Mechanism - The following paragraphs addressing project schedule are taken from the contract for conversion between MidAmerican Energy Corporation and Intelligraphics International, A Division of ASI. In their proposal, the supplier shall provide an overall conversion schedule that identifies the following milestones for the designated conversion area:
On the delivery mid-point date and the final completion date, the number of units delivered on-site to the customer will be compared against the targeted quantities identified in the Detailed Delivery Schedule. Rewards or incentives will be implemented according to (a table in the contract) The milestone schedule delivered by the supplier as described above is reviewed by the customer and refined until mutually agreeable. Staffing levels are included as one measure of the supplier’s commitment to the level of resources to be dedicated to the job. The Detailed Delivery Schedule is provided based on experience gained in the pilot, so it is as accurate as possible. It must, however, work within the context of the previously committed to milestone schedule. The level of reward or incentive as described above can certainly vary. The important point is that two key performance milestones are established (the schedule midpoint and end date) to monitor the supplier’s performance. This provides enough measurement ability as well as some flexibility as the project progresses. Product Quality There are many criteria that must be considered when assessing the quality of converted data. Because of the nature of the work, a certain amount of subjectivity can come into play when describing the quality of conversion. Wherever possible, this subjectivity should be worked out of the quality evaluation process and replaced with defined, measurable standards. This helps to assure the buyer that they are getting the product they paid for and it is effective in communicating to the supplier those characteristics that are most important to the customer. Buyer’s Perspective - Most importantly, in the context of product quality, the buyer needs to be assured that they are getting what they pay for. They need to know that the product will function effectively when used as part of the various applications that are going to provide the project payback. A fimctionality driven focus on product quality will result in some aspects of the data being more important than others. The system used by the customer to score the data should take this into account. The customer has a right to expect that the quality of their record system will not be degraded as a result of conversion, but will more than likely be enhanced as a result of the complete inspection the records will undergo as part of the conversion process. From the buyer’s perspective, the contract also needs to address what happens if a deliverable does not meet the customers specifications. Returned work has the potential of being very disruptive to the flow of data within a conversion project. A process should be defined which reduces the potential for this kind of disruption. Supplier’s Perspective - Because of the nature of the work, the amount of human involvement in conversion, and the vast amount of detailed information contained in a utility’s record systems, the final product will never be perfect. With the proper processes, however, it will be very accurate, achieving scores of 99% or better. Requiring perfect data in certain areas from a conversion vendor is only feasible when automated tests can be employed to check these areas. If the customer has a series of automated tests they will be using to check the product, the supplier will want these tests as well so they can run them prior to delivery, thus ensuring their success at the customer’s site. It is very important to the conversion supplier that clear, objective, measurable standards are established for evaluating the quality of the converted product. If the deliverables are not consistently scored, or if too much subjectivity is allowed into the evaluation process, then the vendor may, in effect, be shooting at a moving target. This makes it difficult to train staff on the project and to provide them with meaningful feedback. Particularly early on in the project, it is important to get thorough, timely feedback from the customer, so that problems can be worked out of the conversion process, and rules can be established to convey the customer’s expectations to the conversion staff. Specific Contracting Mechanism - The conversion contract between MidAmerican Energy Corporation and Supplier addresses quality issues in a thorough, well-defined manner. The acceptance criteria are very complete and cover all pertinent aspects of product quality. The following items summarize the MidAmerican energy quality criteria:
The conversion contract between MidAmerican and Supplier contains a relatively unique section that addresses incentives and penalties for product quality. The following is a portion of that section. Upon receipt of deliveries from the supplier, the customer will perform a quality audit as described (elsewhere in the contract). Customer will not reject supplier’s data as a result of substandard quality, but will initiate penalties in the form of credits to the customer. For each percentage point data falls below 98% accuracy, a credit will be due to the customer calculated at 4?X0of each delivery’s billable unit value. Additionally, for each percentage point data falls above the 98’-XO accuracy, a performance bonus will be due to the supplier calculated at 4°/0 of each delivery’s billable unit value. If the quality of the product is not at specified levels, customer personnel perform corrections to the extent they feel they are necessary. This minimizes the potential impact that a batch rejection can have on the overall delivery schedule, and also gets the individual batch implemented as quickly as possible. This procedure is not followed for the first couple of batch deliveries for a project or work area, where the specific feedback gained from the return of marked up plots to the supplier is most important. Even after the procedure is invoked, and even for batches that are of acceptable quality, there maybe value in providing specific feedback to the supplier. In these cases, the results are reviewed together and discussed. Price & payment schedule The key financial aspects of a conversion project are price and payment schedule. The price for the project is typically lump sum or unit based, or some combination of the two. Which to use depends upon a number of different factors. Payment schedules for projects can vary significantly and will address items such as startup fees, progress payments, retainage and payment terms. Buyer’s Perspective - Arguably, the financial aspects of a conversion project are always the most important. If a conversion project doesn’t make sense financially, it doesn’t make sense. AM/FM implementation is undertaken to achieve benefits that provide a positive return on the buyer’s investment. Because of this, its important for a buyer to know, as closely as possible, what their total cost for conversion will be. The price provided by the supplier should cover the “ordinary” type of variations that typically occur on a project. If the project is planned and priced responsibly, there shouldn’t be the need for frequent change orders. If the number of units actually converted varies somewhat from the number expected, the vendor should be compensated for the actual number they convert, and this should be at the original unit price. If there are major variations in scope, or if the total number of units converted varies wildly, then change orders and modifications to the unit price may be necessary. A buyer also wants to do as much as possible to make sure they are getting their money’s worth. A vendor should be allowed to make a fair profit, but not an excessive one. Additionally, some retainage or hold back on a per delivery basis is appropriate, at least until the delivery is accepted, so the buyer has some recourse if the vendor’s performance falters. Supplier’s Perspective - Price and cash flow are, of course, very important issues from the vendor’s point of view. The vendor is in business to make a profit, and if the work is not priced fairly, this isn’t going to happen. Cash flow is also high on the list of critical issues, because it is the lifeblood of the conversion company, just like any other business. The vendor’s costs can be divided into two categories, fixed and variable. Fixed costs are those that are incurred on a project at a relatively fixed level, independent of the number of maps or features converted. These types of costs typically include software development, training, documentation, travel, procedure development, project analysis, and many aspects of project management, among others. Variable costs are those that vary directly with the number of maps and features converted. These types of costs typically include map preparation, digitizing, quality control, and some data processing steps. Both maps and features are the drivers for these types of costs, since each of these steps has a “setup” type cost most closely related to the number of maps converted, and a “production” type cost most closely related to the number of features converted. A pricing mechanism that addresses each of these cost types is ideal from the supplier’s perspective. A conversion vendor’s expenses are predominantly made up of salaries. There are other costs, such as facilities costs, equipment and travel, but far and away the largest single cost component is salary. There is no real raw material cost associated with producing a converted product. Because of this cost structure, a conversion supplier has limited opportunity to manage the timing of payables within their business. Salaries must be paid on time. The vast majority of all expenses associated with a conversion deliverable will have been paid prior to the product reaching the customer’s hands. This is why reasonable payment terms are so important to a data supplier. Specific Contracting Mechanism - Several aspects of the MidAmerican and Supplier contract were specifically put in place to address the concerns discussed above. In summary:
A well-planned contract can help guide both parties through some of the more difficult areas of a project, and can take some of the uncertainty out of resolution when problems arise. A successful conversion project starts with an effective well-written conversion contract. In the best of projects, many times the contract is written, signed and left on the shelf to collect dust. Even in these cases, a thorough contract and contracting process can positively impact the results of a project, because of the clear communication of expectations, obligations, and abilities which comes about as a result of the successful contracting process. Whether you employ any of the contract mechanisms discussed in this paper or not, it’s important that the contract you enter into for conversion be written in the context of the issues and concerns from both the buyer’s and supplier’s perspective. The buyer of conversion services typically “drives” the contracting process, and it is clearly in their best interest to write a contract that is not too one-sided in favor of the supplier. Conversely, it is not in the buyer’s long-term best interest to write a contract which is too one sided in their own favor. Under this scenario, the ultimate obligations of the supplier, and therefor the expectations of the buyer, may not be met. In this case, the project will obviously be less than successful. Equitable contracts that are fair to both parties result in good will, realistic expectations and the greatest likelihood for success. | ||
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