Insuring project risk: future potential.

• Author: Spangenberg, John
• Position: Technology

High commodity prices, the credit crunch, the implosion of the financial markets and overall general economic uncertainty are forcing many firms to look for new ways to reduce costs and risks.

Business agility and business change often are essential components of sustainable business success--along with the willingness and the ability to accept risk. Agility and change agendas usually have their genesis in information technology-enabled projects and programs. And these projects frequently require significant investment, organizational change and management oversight with no guarantees of success.

Such programs and projects are increasingly initiated and executed with the involvement of one or more external partners. Both the principal party and the external partner face risk throughout any such initiative, with each party seeking ways to reduce its own risk, usually at the expense of the other.

Contract negotiations often center on reaching acceptable and equitable levels of risk for both. Depending upon the type of business relationship and the form of contract, this may not be easy.

For example, engaging with an offshore supplier to develop the software required to support and enable a major business-change initiative is becoming increasingly common. Moving the contractual relationship away from the traditional customer/supplier model toward a shared-risk partnership can help mitigate the risk and enhance the rewards for both parties. Different contractual and business models range from a simple time and materials (T&M) contract to a fully structured joint venture.

Under the T&M model, the financial risk of failure is totally borne by the customer as the supplier will, all other things being equal, be paid for the work it is instructed to perform. Cost overruns from the original budget will also be at the customer's expense. Of course, from a qualitative angle, a T&M contract can lead to a higher-quality outcome as the supplier is motivated to provide a comprehensive, robust, fully functional and fully tested solution (albeit at a potentially high cost and perhaps with solution-delivery delays resulting in later achievement of financial objectives).

Such issues have led enterprises to seek fixed-price contracts, whereby the supplier agrees to provide the specified solution at a price that will not vary, provided the specification does not change.

There's little doubt that while such a relationship can, and usually does, reduce the...