Core Systems Implementations... Are Fixed Bid Deals Successful?

I know a lot of folks are looking at various systems for their insurance company. The top two are Duck Creek Technologies and Guidewire. There are others that might fit the bill as well, such as DRC or InsureSoft.

The trend today is for an SI to do a fixed bid for the end to end implementations. I started the trend for Duck Creek some 10 years ago or so and it was a successful model. Back then, we didn't have too much competition so when we did the deal, we priced it accordingly and correctly. Naturally, you need about a 30/70 ratio of onsite to offshore and you also need to account for the inefficiencies of using offshore.

Today, there is a lot of competition and most of the large vendors are pricing fixed bid deals at a loss. Sounds like a good deal, right? Unfortunately, to paraphrase and old saying, "you can't stuff a 5 lb. bag with a 10 lbs. of potatoes. Too many of these implementations are just plain failing. Let's have a short discussion on why.

So, what happens when an SI prices the deal too low (either accidentally or on purpose)? More than likely, the vendor already has an idea that the margin is too low or at a loss. They most likely bid low to keep their resources busy and/or to meet the unrealistic quotas their bean counters placed upon them.

The SI probably hired many of their key resources shortly before winning the deal as they use a "just in time" hiring model to keep costs low. Because of this, they pay top dollar and they end up hiring the chronic job hoppers. You know, the ones that stick around long enough to get a higher salary a few months later somewhere else. Generally, these types of folks are not the best but have impressive titles and high salary. They even can have decent resumes but I generally steer clear of these guys because they aren't focused on their craft and they will most likely jump when the next offer comes along.

Next, before the project begins, the SI is most likely already trying to figure out how to scale back the project and reduce the amount of effort required for the deal. They are also trying to figure out how to increase the offshore to onshore ratio to reduce cost, most likely using a 1:1 ratio for a offshore person vs. an onshore person. Let me tell you, anyone who thinks an offshore resource is as efficient as an onshore resource doesn't know what they are talking about. Generally, with an equally skilled offshore resource to an onshore resource, you must factor in a 30% or greater loss of efficiency and that's with seasoned teams that know how to work together! New offshore teams should have a 100% loss of efficiency requirement. I will speak of this in another blog in the future.

After the project starts and has been moving along with a discern-able burn rate, the bean counters at the vendor will start pushing for scaling back the resource cost to bring up the margin. Most likely to reduce headcount or reduce the skill set classification assigned in favor of resources that have lower salaries. However, if the project is like most.... the vendor project management team is already needing to ramp up the offshore team, not ramp down. The project management is already seeing a trend of falling behind because they did not properly account for the inefficient offshore percentage factor. So, the vendor bean counter and the vendor project management team at this stage have opposite goals. Who wins? Bean counters every time. Already, the project is in jeopardy and this is one good reason fixed bid deals fail.

Fixed bid deals can be successful but there is a certain formula to selecting an SI, writing the contract and vetting the team. I will discuss this in another article.

My guess is that at least 80% of all fixed bid Core System deals fall far behind and cost the client at least 50% more by the time they reach the finish line. Most likely, the project will be doubled in the time-frame. If the estimate was 12 months, figure 24 months. These projects generally come to closure with a compromise. Client reduces scope and agrees to an increased time-frame. Client also will agree to an certain additional cost of which the vendor will take a loss on to save its reputation.

The reality is, however.... that the cost and time-frame in the end is more than it would have been if the client had a tried and true process to follow and experience in outsourcing. But... that's a lot to ask of a CIO. They have enough on their hands to all of a sudden become an outsourcing expert.