A friend on a new consulting gig was asking me about IT management and why it’s so hard to deliver on time and within budget. Here are some rambling thoughts wondering if IT is trying to solve the correct problem. They should be able to:
- Understand how their company “makes money”–their corporate strategy for success and metrics for determining progress towards that goal
- Be able to evaluate requirements (i.e., cost, schedule, and features) in terms of the above metrics and goals
- Be able to cost and price and understand the difference between the two
What is the difference between cost and price? Why would price be different than cost? Cost is a description of the impact on your resources of doing something–of meeting a set of requirements. Price is a means for communicating your priorities and preferences to those whose requirements you are asked to meet.
From the perspective of managing a project, there are only three requirement: Cost, schedule, and features, and it’s accepted project management practice that only two of them can be specified at a time (as engineers say: “Better, faster or cheaper–pick two”). If you understand your corporate strategy you can help your customers understand which two are the most important. For example, in the retail financial services world, IT costs are often only a small part of the budget for a new product launch. However, the IT portion of the project can still be on the critical path–if the IT part is delayed or doesn’t meet the feature and quality requirements the opportunity cost is great. It would then be reasonable to assume that the sponsoring business group would be willing to pay a high premium–possibly above estimated costs–to guarantee that their feature and schedule requirements are met.
It’s not enough to be willing to adjust prices to meet feature and schedule requirements. You need to be operationally prepared to accept the work. This is done by maintaining a level of staffing slack above your expected work level. Your level of slack bounds your capacity to meet new requirements and new projects. How much slack is required?
That’s a harder question than deciding how much slack to pay for. One way to calculate it would be to identify the corporate cost of missing features or delaying delivery. The cost to the company should approximate the price they’d be willing to pay to avoid it, which is to say, the price they’d be willing to pay for slack.
Interestingly, it’s likely that maintaining slack across the team and the IT organization will probably lower overall costs, but my theory that IT is just discrete manufacturing probably deserves its own post.
[...] In talking about the role of price in marketing, Seth Godin reinforces my beliefs about IT management. Yesterday I said that price is your tool as the vendor to communicate with your customer. And the price you set shouldn’t necessarily be based on your costs. Seth says: My point, and I do have one, is that price is a signal, a story, a situational decision that is never absolute. [...]
By: Joshua Herzig-Marx - Seth Godin reads my blog? on March 9, 2006
at 4:30 pm
[...] Pricing isn’t just a tool for completing and invoice or estimate. Pricing is a marketing signal. Pricing yourself low signals that you don’t value your work or consider your product above average. Customers who choose you for your price signal that they care less about your quality. A while back, I stated that an IT project has only three requirements: cost, functionality, and schedule, and that only two of those may be specified. Choosing your business’ product based on price signals that your client doesn’t care either about schedule or functionality (and quality is a function). Price yourself right, and you get the clients you want. [...]
By: Joshua Herzig-Marx - Pricing and Small Business Success on April 14, 2006
at 12:31 pm