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Chapter 12 Outsourcing: Managing Interorganizational Relations Chapter Outline 1. Outsourcing Project Work 2. Request for Proposal (RFP) A. Selection of Contractor from Bid Proposals 3. Best Practices in Outsourcing Project Work A. Well-Defined Requirements and Procedures B. Extensive Training and Team-building Activities C. Well-Established Conflict Management Processes in Place D. Frequent Review and Status Updates E. Co-Location When Needed F. Fair and Incentive-Laden Contracts G. Long-Term Outsourcing Relationships 4. The Art of Negotiating A. 1. Separate the People from the Problem B. 2. Focus on Interests, Not Positions C. 3. Invent Options for Mutual Gain D. 4. When Possible, Use Objective Criteria E. Dealing with Unreasonable People 5. A Note on Managing Customer Relations 6. Summary 7. Key Terms 8. Review Questions 9. Exercises 10. Case 12.1: Shell Case Fabricators 11. Case 12.2: The Accounting Software Installation Project 12. Case 12.3: Buxton Hall 13. Case 12.4: Goldrush Electronics Negotiation Exercise 14. Appendix 12.1: Contract management A. Contracts B. Fixed-Price Contracts C. Cost-Plus Contracts D. Contract Change Control System E. Contract Management in Perspective F. Appendix Review Questions Chapter Learning Objectives After reading this chapter you should be able to: LO 12-1 Understand the advantages and disadvantages of outsourcing project work. LO 12-2 Describe the basic elements of a Request for Proposal (RFP). LO 12-3 Identify best practices for outsourcing project work. LO 12-4 Practice principled negotiation. LO 12-5 Describe the met-expectations model of customer satisfaction and its implications for working with customers on projects. Appendix Learning Objectives After reading this appendix you should be able to: LO A12-1 Describe the procurement management process. LO A12-2 Describe the differences between Fixed-Price and Cost-Plus Contracts and their advantages and disadvantages. Review Questions 1. Why do firms outsource project work? The main reasons why firms outsource project work are because it can be done cheaper, faster, and/or better by another firm than if they tried to do it themselves. In many cases, firms do not have the technology, manpower, and know-how to do the work. They also outsource work when their own resources are not available. 2. What are the best practices used by firms to outsource project work? Practices include: Establishing well-defined requirements and procedures Investing in extensive training and interorganizational team-building activities Establishing conflict management processes before the project begins Engaging in frequent review on how well the different parties are collaborating Insisting of co-location of participants when needed Using fair and incentive-laden contracts Establishing long term outsourcing relationships with reliable partners. 3. What does the term “escalate” refer to, and why is it essential to project success? Escalation is a control mechanism for dealing with and resolving problems. The basic principle is that problems should be resolved at the lowest appropriate level within a set time limit (for example, 24 hours) or they are “escalated” to the next level of management. This process is repeated until the problem is resolved. Escalation discourages participants from forcing concessions by delaying decisions. It empowers people to solve problems. There is no shame in pushing significant problems up the hierarchy; at the same time management discourages subordinates from passing up problems that the subordinates should have resolved. Time is money on the project, and escalation contributes to quick and effective problem solving. 4. Why is the principled negotiation approach recommended for negotiating agreements on projects? Project management is not a contest. People on a project are not opponents but allies attempting to complete a project. For this alliance to work there has to be a degree of trust, cooperation, and honesty. Principled negotiation is a method for developing win/win solutions while protecting yourself against those who would take advantage of your forthrightness. 5. What does the acronym BATNA refer to and why is it important to being a successful negotiator? BATNA stands for “best alternative to a negotiated agreement.” Essentially it represents the best alternative if you are unable to reach an agreement with the party you are negotiating with. BATNA reflects how dependent you are on the other party. If you have a strong BATNA you can walk away from a deal and say “no, unless we work towards a win/win scenario.” If you have a weak BATNA, then you are more likely to have to concede to the demands of the other party. BATNA is a true benchmark for determining whether you should accept an agreement. 6. How can a project manager influence customer expectations and perceptions? According to the met expectations model, customer satisfaction is a function of the extent to which perceived performance exceeds expectations. Through their interactions with customers, project managers can influence customers’ base expectations (what they expect to get) and perceptions of performance (what they actually received). The project manager, through frequent communication, educates clients so that they can make valid judgments as to project performance and reduces misunderstandings that can lead to disappointment and dissatisfaction. Exercises 1. Break into groups of four to five students. Assign half of the groups the role of Owner and the other half the role of Contractor. Owners: After saving for many years you are about to hire a contractor to build your “dream home.” What are your objectives for this project? What concerns or issues do you have about working with a general contractor to build your home? Contractors: You specialize in building customized homes. You are about to meet with prospective owners to begin to negotiate a contract for building their “dream home.” What are your objectives for this project? What concerns or issues do you have about working with the owners to build their home? Each Owner group meets with another Contractor group and shares their objectives, concerns, and issues. Identify what objectives, issues, and concerns you have in common and which ones are unique. Discuss how you could work together to realize your objectives. What would be the keys to working as partners on this project? This exercise is designed to generate a discussion of issues surrounding contractual relationships and the need for project partnering. After giving representatives from each group 5-10 minutes to share their concerns and objectives, we usually ask the Contractor group what the major objectives for the Owners are. Answers are recorded on the blackboard. Similarly, the Owners are asked what the project objectives are for the Contractors. Collectively, the class adds additional objectives. Below is a sample of typical responses: Owners Contractors A good deal (low cost) High profit margin High quality Good quality No surprises No surprises Completed on schedule Completed on schedule Flexibility Minimal changes Kept informed Minimal interference Pass inspections Pass inspections Peace of mind Referrals The list is used to discuss the idea that, while there are fundamental differences between what Owners and Contractors want from a project, they do share significant goals in common. We then turn the discussion to what it would take for the two parties to collaborate together. Students usually focus on the importance of trust, fair dealing, keeping each other informed, and appreciating differences. The importance of trust can be highlighted by asking students how they would behave if they didn’t trust the Contractor, and then inviting students to play the role of the Contractor and to discuss how the Contractor would react to this behavior. The subsequent discussion illustrates how a potential win/win situation ends up being a lose/lose situation. 2. Enter “outsourcing” in an Internet search engine and browse different websites. Who appears to be interested in outsourcing? What are the advantages of outsourcing? What are the disadvantages? Does outsourcing mean the same thing to different people? What are future trends in outsourcing? “Outsourcing” is a hot topic in business today and students are likely to find a wide range of references over the Internet. There are several ways this can be used to spur discussion in class. One is to ask the students to take what they found and talk about just the parts that relate to outsourcing in projects. Then, ask them how outsourcing in projects is different from manufacturing outsourcing. Many students will see outsourcing in a negative light. Another way to use this is to give the students a sample project, such as construction, and ask them how they would manage a company that worked on that type of project that did not want to use outsourcing. 3. Break into four groups and review the instructions for “Get the most you can” exercise provided by your teacher. Complete the exercise. What was your initial strategy? Did it change? If so, why? What does this exercise tell you about our ability to collaborate with each other? The “Get the Most You Can” exercise is a relatively short, intense exercise that introduces the importance of partnering on a project. Objective: To illustrate how people naturally adopt a win/lose posture when dealing with each other. Time Requirements: 20-35 minutes PROCEDURE Step 1: Break class into four groups and distribute instructions. Have each group designate a “Flasher” and “Record Keeper”. Ask the Flasher to clearly write in bold on separate sheets of paper a large “M” and a large “T”. Instruct the Record Keeper to record transactions for each round on the instruction sheets. Note: This exercise works best when the size of each group is less than eight students. For larger classes we suggest two options: Create four groups of 5 students each and have the remainder of the class act as observers. Break the class in half and have half of the students wait outside while you run the exercise with the remaining students. Those students who do the exercise act as silent observers during the second run of the exercise. Step 2: Briefly go over the payoff matrix and provide the group’s 3 minutes to privately decide which letter they wish to choose. Flashers flash their selected letters at the same time and the distribution of points is announced and recorded by the Recorder. Step 3: The instructor announces that the groups now have 4 minutes to communicate with each other and reach an agreement as to how to proceed. Round 2 ends with the letters being flashed and payoffs recorded. Step 4: Groups are given 2 minutes to decide privately how they wish to proceed for Rounds 3 & 4. Before round 5 groups are given the opportunity to talk to each other again for 4 minutes. Round 6 begins after a private 2 minute discussion. Before round 7 it is announced that the payoffs for this round are worth 10 times the original value and groups are given 3 minutes to discuss privately how they wish to proceed. Step 5. The exercise ends typically at the end of 7 round and group scores are posted on the board for everyone to see. Step 6: Discuss the results. This exercise is a variation of the classic Prisoner’s dilemma psychological experiment. Feelings and emotions typically run quite high by the end. Usually one or two groups break from the “T” win/win strategy and exploit the payoff strategy by choosing “M”. Often groups will deceive each other during the open discussion phase. Groups that fall behind will try to trick the others into playing fair (choose T) and end of up choosing M. Other groups will give up and become resigned to losing. A good kick off question is to ask each group what their original strategy was and if it changed why did it change? After allowing the losing groups to vent a bit, we try to put the experience into context by asking the class what this exercise says about our ability to partner with each other. We ask the students to think about the exercise as a project in which each group represents a different stakeholder (i.e., contractor, owner). We then ask them to assess project success by comparing the combined total points for all 4 groups with the optimum score possible (640= 6x4x10 + 4x100). The difference between the actual and optimum score is usually quite dramatic. We talk about how much the exercise resembles a real project in which there are opportunities to collaborate with each other as well as pursue individual objectives. We also point out that 99 percent of time the exercise ends with a win/lose scenario and that there is a natural tendency for groups to be competitive under ambiguous circumstances and time pressures. We conclude by asking how these negative results can be prevented. Students typically talk about the need to devote time up front before the first round begins to establishing trust and a common strategy. Here the key preemptive use of teambuilding message behind partnering can be highlighted. They also talked about the need for consequences for not playing fair. Here you can talk about whether the losing groups would ever want to work with the winning group again and the importance of being able to select your partners. We like to end the discussion by pointing out that this exercise is commonly used in partnering workshops to show how quickly working relationships can degenerate into intense win/lose scenarios. The antidote is strong leadership and a well-established set of procedures for dealing with conflicts in a timely, effectively manner. On the next page is the instruction sheet to be distributed to participants. Get the Most That You Can This is a game in which your goal is to get the most that you can. Depending upon the choices and the other groups make, you can get points or lose points. Through a number of rounds (alone or with one or more partners) you will select a letter, either M or T. How much you get (or not get) will depend on your choice and the choices of three other parties. The payoff matrix is as follows: All M’s Give up 10 points each (-) 3 M’s Get 10 points each (+) 1 T Give up 30 points (-) 2 M’s Get 20 points each (+) 2 T’s Give up 20 points each (-) 1 M Get 30 points (+) 3 T’s Give up 10 points each (-) 4 T’s Get 10 points each (+) Strategy: If appropriate, you may confer with your partner(s) prior to each round and make a joint decision. Round Choice Gain (+) Give Up (-) Balance Notes Case 12.1 Shell Case Fabricators Shell Case Fabricators (SCF) designs and builds shell casings that enclose electronic products such as calculators, cell phones, modems. Typically the cases are plastic or plastic compounds. SCF has six different production lines that cover different types of product. For example, the largest high-volume production line for modems can produce three different colors and two models (vertical and flat). Air Connection Links (ACL) is the biggest customer that buys product from this line. This high-output line now runs at full capacity on an eight-hour shift. The other five lines run smaller quantities and tend to meet the needs of other specialty products manufactured by different smaller firms. (Rest of case not shown due to length.) Should SCF accept or reject ACL’s request? Which option would you select? What risks are involved? SCF should carefully consider ACL's request before making a decision. Accepting ACL's request to increase production could have both benefits and risks: Accepting ACL's Request: Benefits: 1. Increased Revenue: Accepting ACL's request would lead to increased production and, consequently, increased revenue for SCF. 2. Customer Satisfaction: Fulfilling ACL's request could strengthen the relationship between SCF and ACL, potentially leading to future business opportunities. Risks: 1. Overburdened Production Line: Increasing production for ACL could overburden the high-volume production line for modems, leading to potential inefficiencies, quality issues, and delays. 2. Impact on Other Customers: Prioritizing ACL's request could negatively impact other customers who rely on the same production line for their products. 3. Quality Control Issues: Rapidly increasing production could lead to quality control issues, affecting the overall quality of the shell casings produced. 4. Employee Burnout: Asking employees to work longer hours or increasing production could lead to employee burnout and decreased morale. Given these considerations, SCF should carefully weigh the benefits and risks before making a decision. It may be prudent for SCF to negotiate with ACL to find a compromise that meets both parties' needs without overburdening the production line or compromising quality. Alternatively, SCF could explore options to increase production capacity or invest in additional resources to meet ACL's request without negatively impacting other customers or the quality of their products. How should SCF negotiate with ACL? How can SCF and ACL develop a positive, long-range relationship? Give some specifics. To negotiate with ACL and develop a positive, long-range relationship, SCF should consider the following strategies: 1. Capacity Planning: • SCF should explain to ACL that the high-volume production line for modems is currently running at full capacity on an eight-hour shift. • Discuss the possibility of increasing production capacity by extending working hours, adding additional shifts, or investing in new equipment. 2. Prioritization and Scheduling: • Work with ACL to prioritize their orders and develop a production schedule that meets their needs without sacrificing the needs of other customers. • Implement a scheduling system that allows for flexibility and quick adjustments to accommodate changes in demand. 3. Efficiency Improvements: • Explore ways to increase efficiency on the production line, such as reducing changeover times, optimizing workflows, and minimizing downtime. • Invest in automation or new technologies to improve productivity and reduce production costs. 4. Quality Assurance: • Assure ACL of SCF's commitment to maintaining high-quality standards despite increased production volumes. • Implement rigorous quality control measures and provide ACL with regular updates on quality performance. 5. Open Communication: • Foster open and transparent communication between SCF and ACL. Establish a dedicated point of contact for ACL to address any concerns or issues promptly. • Schedule regular meetings to review production schedules, address any issues, and identify opportunities for improvement. 6. Long-Term Planning: • Discuss long-term production requirements and explore ways to align SCF's production capabilities with ACL's future needs. • Consider entering into a long-term supply agreement with ACL to provide stability and predictability for both parties. 7. Value-Added Services: • Offer value-added services to ACL, such as customized packaging, just-in-time delivery, or product customization, to differentiate SCF from competitors and strengthen the relationship. By implementing these strategies, SCF and ACL can develop a positive, long-range relationship that benefits both parties. Open communication, flexibility, and a commitment to quality and customer satisfaction are key to building a strong partnership that is mutually beneficial. The case presents a common scenario: a small vendor dealing with a large company. For SCF it becomes a tradeoff decision: current return or future return. For Air Connection Links (ACL) the tradeoff decision is time to market, a new exterior design, and a two percent product performance improvement. The case does not present a clear path. However, the case requires at least two major areas for discussion: The immediate decision of accept or reject ACL’s request. Future vendor/owner relationship and project change control process. SCF faces a very common dilemma of being a vendor tied to a big company. Their BATNA is relatively weak. Most students will seek compromise by getting back to ACL with some backup data on a new, realistic estimate. The driver for this approach frequently is the late date for what is basically a design change. This is a very reasonable approach, but it is not the only approach. Can they resolve the issue and create a more positive, lasting win-win relationship? Discussion Items How good is the change control system of SCF? (Good, but design freeze agreement?) What are the major challenges facing SCF? How important is SCF’s business to SCF? Is SCF in a strong or weak BATNA? What is your assessment of ACL’s management? How important is the two percent performance improvement to ACL? How can SCF better manage the vendor relationship? Who designs the hardware? The shell casing? How long does it take to set up for a new design? (No information available) Is it too late to think of a “partnering arrangement?” Is it too late to make Sabin a part of the project team at SCF? Given the trend to use outside contractors, what kind of collaborative training would help SCF and ACL reduce the kind of situation they are now facing? When the discussion gets down to dealing with how hard to push, a discussion can ensue on the implications for each company. For example, if SCF holds tight on their estimate, what are the internal and external implications for future business and projects? If ACL gets tough, what are the implications for future projects with SCF? Will either company want to go down the confrontational path? Regardless of the approach taken, the impact and outcomes should be covered in detail. The Nature of Student Analysis Comments How long does it take to set up the new design for the dome modem? Ask ACL if they are willing to accept the risks that go along with the change? ACL acts as a bully who is unrealistic. It seems too late to start a new design with the time to market risk. The later the change is addressed, the greater the cost, duration, and risk. SCF is in a very weak BATNA position. SCF should present a justification for no change by listing risks inherent in a new design and time to market. If the new design fails, what happens to the January 15 deadline? Some form of a partnering relationship is needed for collaboration and negotiation. All of this student analysis can lead to the second driver of the case: improving the change control process. Although SCF has a project control process in place, tighter control on changes is needed. As an exercise, creating a list of proposed change process adjustments is not difficult for a class of creative students. In this SCF project a great deal of discussion will center on having a clear “freeze” date. One knowledgeable student of MS SharePoint suggested SCF as an excellent example where tracing and distributing change control from initiation to authorization would enhance the agreement between SCF and ACL. Using SharePoint to trace each step of a change request and its distribution to all parties can minimize misunderstandings. Students will always move to developing a more collaborative relationship that involves closer working relationships. Some form of a partnering relationship (even without reading an earlier chapter) is a common thread of suggestions. Possible Options for Song see’s Senior Exec’s Below: Abridged options outline of one team Accept Option Alternative 1: Accept €100,000 and €291,000 loss. Negotiate for strong future change control process in future. Develop a partnering arrangement that strives for win-win approach. Alternative 2: Conditional acceptance—share cost (e.g., €300,000 change cost) and risks. Negotiate for strong future change control process in future. Reject Option (If you are willing live with consequences) Reject and substantiate position: the costs are there and need to be covered to meet the launch date. Speak to problems of design change in SFC design and production departments. Talk to risks of missing launch date for ACL. Recognize need for change, but also stress the need for adhering to change control process and freeze dates. Debriefing can include several topics. The embedded key concepts from the case are tradeoffs, project risks, change control, project manager control and authority, negotiation, partnering, conflict resolution, outsourcing relationships, and strategic management. Take Away This case is a classic outsourcing situation of failure to establish relationship expectations and processes up front that assume win-win for both parties. A change control system both parties respect would help to avoid situations exposed in this case study. Failure to do so results in situations similar to Shell Case Fabricators. Case 12.2 The Accounting Software Installation Project Sitting in her office, Karin Chung is reviewing the past four months of the large corporate accounting software installation project she has been managing. Everything seemed so well planned before the project started. Each company division had a task force that provided input into the proposed installation along with potential problems. All the different divisions had been trained and briefed on exactly how their division would interface and use the forthcoming accounting software. All six contractors, which included one of the Big Four consulting companies, assisted in developing the work breakdown structure—costs, specifications, time. (Rest of case not shown due to length.) Why does this attempt at project partnering appear to be failing? The attempt at project partnering appears to be failing due to several possible reasons: 1. Lack of Effective Communication: Despite input from task forces and contractors, there may have been a failure in effectively communicating the project's objectives, requirements, and potential challenges to all stakeholders. This lack of clear communication could lead to misunderstandings and misalignment of expectations. 2. Inadequate Risk Management: Although potential problems were identified during the planning phase, it is possible that the project did not adequately address or mitigate these risks. Without effective risk management strategies in place, unforeseen issues may have arisen during the execution phase, leading to delays and setbacks. 3. Poor Project Planning: While there was initial planning and input from various divisions and contractors, the project may have lacked a comprehensive and detailed project plan. A well-developed project plan is essential for guiding the execution of the project and ensuring that all tasks are completed on time and within budget. 4. Contractor Performance Issues: Despite involving reputable contractors, including a Big Four consulting company, there may have been performance issues or misalignment between the contractors and the project goals. If contractors did not deliver as expected or failed to meet project requirements, it could lead to project delays and cost overruns. 5. Lack of Stakeholder Engagement: The failure of project partnering could also be attributed to a lack of active involvement and engagement from key stakeholders, including company divisions, contractors, and project managers. Without strong stakeholder engagement, it is challenging to ensure alignment and commitment to project goals and objectives. Overall, the failure of project partnering in the accounting software installation project could be due to a combination of communication issues, inadequate risk management, poor project planning, contractor performance issues, and lack of stakeholder engagement. Addressing these issues will be essential for the project to succeed. If you were Karin, what would you do to get this project back on track? To get the project back on track, Karin should consider the following steps: 1. Assess Current Capacity: Conduct a thorough assessment of SCF's current production capacity, focusing on the high-volume production line for modems. Identify any bottlenecks or inefficiencies that may be causing the line to run at full capacity. 2. Evaluate Demand: Review current and projected demand from ACL and other customers to determine if the current production capacity is sufficient to meet demand. 3. Explore Capacity Expansion: If the current production capacity is insufficient to meet demand, explore options to expand capacity. This could involve: • Extending working hours or adding additional shifts to the high-volume production line. • Investing in new equipment or technology to increase efficiency and output. • Outsourcing production to third-party manufacturers to supplement SCF's production capacity. 4. Negotiate with ACL: Communicate with ACL to discuss the current production constraints and explore potential solutions. This could include: • Negotiating revised delivery schedules to better align with SCF's production capacity. • Exploring options for ACL to share the increased production costs if capacity expansion is necessary. 5. Optimize Production Processes: Identify opportunities to optimize production processes and improve efficiency on the high-volume production line. This could involve: • Streamlining workflows to reduce downtime and increase throughput. • Implementing lean manufacturing principles to eliminate waste and improve productivity. • Investing in training and development programs to enhance the skills of production staff. 6. Diversify Customer Base: Explore opportunities to diversify SCF's customer base beyond ACL. This could involve: • Identifying new customers or markets for SCF's products. • Developing marketing strategies to promote SCF's capabilities to potential customers. 7. Continuous Monitoring and Improvement: Implement a system for continuous monitoring of production performance and customer demand. Regularly review production metrics and customer feedback to identify areas for improvement and make necessary adjustments to keep the project on track. By taking these steps, Karin can effectively address the production constraints and get the project back on track to meet ACL's demand and ensure the long-term success of SCF's business. What action would you take to keep the project on track? The recognition of mutual dependency has been lost; the “we” has moved to “us” and “them.” Teams have moved to making decisions independently rather than coordinating decisions that affect others. Problems have degenerated to the personal level rather than concentrating on the problem and solutions. No clear cut process is in place for identifying responsibility and escalating problems. No evaluation of the partnering process appears to have been in place. We frequently use a cause-effect diagram (see Chapter 2) and ask student groups to identify why collaboration is not working. (This teaching strategy is not always used; there are other approaches.) These problems are then placed on the board, with an attempt to classify the issues. This exercise is followed by suggestions to deal with getting the project back on track. The cause-effect approach is also a suggestion for Karin to use in compiling the responses due from stakeholders. This would get stakeholders to focus on major issues. Other suggestions are to again have an outside facilitator come in. The facilitator will be charged with providing team-building exercises that will bring home the mutual dependency of all stakeholders. Further, the facilitator could use the format suggested in the text of separating the teams and asking: What problems do others create? What problems do we create for other teams? What problems can we help other teams solve? (See Exercise 1 above for further ideas.) Bring teams back together and have each team report their answers to each of their questions. The facilitator could then assign people to groups to address each major problem and decide a process for solving the problem. Students are very creative in coming up with recommendations. For example, place all of the teams in one location and combine them into one team charged with the responsibility to come in on time and on budget. The major challenge for the instructor is to keep pushing for a holistic plan of action. That is, how can all of their recommendations be packaged to ensure the major problems will go away and stay away? Finally, we note that all partnering arrangements that have failed have one thing in common—none have carried through with the recommendation of evaluating by individual team and the total partnering arrangement. Regularly evaluating the partnering process quickly tells the project manager if and where the process is working fine, improving, or unraveling. Case 12.3 Buxton Hall Chad Cromwell, head of university housing, gazed up at the tower at Buxton Hall and smiled as he walked toward the landmark building. (Rest of case not shown due to length.) This case was written to provide an example of effective partnering. This case works well with Accounting Software case which is an example of an unsuccessful attempt at partnering. How successful was this project? While the scope of the project had to be compromised (exterior wall treatment) the project was done on time and within budget. Time was the most important objective and the building was completed in time for students to move in fall term. Furthermore, the customers (university) appear to be very satisfied with what has been done. What best practices were evident in the case? How did they contribute to project objectives? Several of the best practices associated with partnering are evident in the case: Pre-project team building. All the key participants participated in a pre-project teambuilding session that helped establish a common goal and sense of “we” versus “us and them”. During this session specific guidelines for dealing with potential problems were agreed upon which increased the likelihood that problems would be resolved in a timely and effective manner. Established Conflict Management Process was in Place. A 24 hour escalation clause was instituted in the project. Participants had the right to appeal to next level of management if a conflict could not be resolved at their level. This encouraged time problem resolution and cooperation within the project. Frequent Review and Status Updates. The status of the partnering arrangement was an integral part of the status review meetings. Data was collected by means of a web survey to measure the quality of the working relationships. Issues were identified early and dealt with quickly to prevent them from mushrooming into bigger issues. Co-location. Work was done on site at the university so all the principals had opportunities to talk to each other face to face. This contributed to timely decision making and development of social capital between participants that led to greater teamwork. Information was not provided regarding another key practice: Fair and incentive–laden contracts, though one could infer that Crawford Construction was satisfied with the compensation they received. A stark comparison can be drawn with the Accounting Software case where many of these practices are not evident. Students should be encouraged to think about how the application of these practices would make a positive contribution to the Software project and prevent the problems from escalating to the point they are at the end of the case. Case 12.4 Goldrush Electronics Negotiation Exercise The purpose of this case is to provide you with an opportunity to practice negotiations. (Rest of case not shown due to length.) This case must be done in class. You will be providing information that the students do not have from the textbook that is required to complete the assignment. That information is provided below on separate sheets for each project. These should be copied and handed out to each project team. The objective of this in-class exercise is to provide students with an opportunity to practice negotiating. Procedure Step 1: Student assignment (5-10 minutes) The class is divided into four groups, each comprising the project management group for one of the four projects at Goldrush Electronics. Ideally each group should range from 3-5 students. For large classes if space is available it is advisable to break the class into multiple simulations (i.e., three sets of four teams). This works best when you can spatially separate each set. Step 2: Instructions (10-15 minutes) Students read the Goldrush Electronics, “Background Information” section given below. Then the instructor passes out specific instructions for each project team. Announce that each team will meet with the management of the other projects to exchange personnel. Each group should plan how they want to conduct those meetings. Background Information Begin by having the students read the case from the textbook and make sure they understand the situation. At this point, they will have questions about how to decide among the engineers. Tell them that will be handled in a moment. To facilitate the trading process prepare index name cards for all the engineers and distribute the appropriate ones to each team. That way, trades can be made by simply exchanging the cards. Remind the students that personnel may be traded for one or more other personnel. Step 3: Negotiate (20-40 minutes) Teams meet and negotiate with the other project managers. Notes The way the points are configured it is impossible for all four teams to achieve the same score. Some students will try to use the compensation system (40% salary + 30% project performance + 30% firm performance) to try to devise an objective method for distributing personnel. While noble, this is impossible. Step 4: Project teams report scores (10 minutes) Instruct the teams to total their project scores and post them on the blackboard. Step 5: Discuss results (15-25 minutes) Discussion Questions 1. What was your initial strategy before starting the actual negotiations? How did you view the other groups? Initial strategies are likely to range from competitive to collaborate to indifference. Other groups will be seen as co-workers or competitors. A key trust issue is how willing the different groups are to divulge the information they have. 2. Did your initial strategy change once negotiations began? If so how and why? Groups tend to react to the strategies of other groups. If other groups are guarded and secretive then there is tendency for the other groups to act in a similar manner. Groups that fare well early on in the negotiations want to maintain their position. Groups who do poorly, tend to try to get everyone to cooperate and propose a system for allocating all the personnel to the different teams. 3. What could top management at GE have done to make it easier to reach agreement with the other groups? Most students will talk about the need for a project priority system so the best assignments can be given to the most important projects. Others will talk about the need for top management to lead the reassignment process. Finally, others will focus on the need to establish an organizational culture that encourages cooperation and doing what is best for the whole organization. This exercise can generate a lot of energy and emotion depending upon how cooperative the teams are. Some groups will be frustrated that there is not an optimal solution for all groups. They should be reminded that this is rarely possible in real life. Students should be encouraged to discuss the extent they applied principled negotiation techniques to the proceedings and how effective they were. Groups who took advantage of others should be reminded that while they came out winners in the scoring they probably generated ill will that is likely to come back and haunt them. For example, you can ask the other groups how willing they would be to be to cooperate with the group in the future. At the same time, the groups who cooperated and helped others generated “deposits” that could be used in future situations. Handouts for the four teams are given on the next four pages. Alpha Project You are the project manager of the Alpha project. Your project requires two of each of the following engineers: software, hardware, and design. You have been assigned the following personnel. Alpha Project Software Engineer Hardware Engineer Design Engineer Jill 4 Cameron 2 Mitch 4 John 4 Chandra 4 Marsha 4 You will have the opportunity to trade personnel with other project managers. You have rated the following personnel for your project. These ratings are based on your project requirements, and the confidence you have in each engineer’s abilities. Your objective is to end the simulation with highest total ratings. Software Engineer Rating Hardware Engineer Rating Design Engineer Rating Jill 4 Chuck 8 Mike 10 Jake 2 Craig 6 Monika 10 John 4 Chandra 4 Mitch 4 Jack 6 Cheryl 10 Max 2 Jennifer 4 Chad 4 Maile 6 Jeff 8 Cameron 2 Marsha 4 Johan 8 Casey 8 Maria 8 Juwoo 10 Carlos 6 Mark 2 Note: You must end the simulation with two of each type of engineers or receive a 0. Marsha and Mitch recently terminated a romantic liaison. If they remain on your team your total score will have 6 points deducted. At the end of negotiations you will be asked to total the ratings for each member that is on your team at the end of the session to derive an overall team score. Beta Project You are the project manager of the Beta project. Your project requires two of each of the following engineers: software, hardware, and design. You have been assigned the following personnel. Beta Project Software Engineer Hardware Engineer Design Engineer Jake 2 Casey 8 Mike 6 Jennifer 4 Craig 4 Maria 8 You will have the opportunity to trade personnel with other project managers. You have rated the following personnel for your project. These ratings are based on your project requirements, and the confidence you have in each engineer’s abilities. Your objective is to end the simulation with highest total ratings. Software Engineer Rating Hardware Engineer Rating Design Engineer Rating Jill 10 Chuck 10 Mike 6 Jake 2 Craig 4 Monika 10 John 6 Chandra 6 Mitch 10 Jack 4 Cheryl 6 Max 6 Jennifer 4 Chad 8 Maile 2 Jeff 8 Cameron 2 Marsha 4 Johan 2 Casey 8 Maria 8 Juwoo 8 Carlos 10 Mark 4 Note: You must end the simulation with two of each type of engineers or receive a 0. Mike and Casey do not work well with each other. If they remain on your team your total score have 6 points deducted. At the end of negotiations you will be asked to total the ratings for each member that is on your team at the end of the session to derive an overall team score. Theta Project You are the project manager of the Theta project. Your project requires two of each of the following engineers: software, hardware, and design. You have been assigned the following personnel. Theta Project Software Engineer Hardware Engineer Design Engineer Jack 4 Chuck 2 Monika 6 Johan 4 Cheryl 8 Mark 2 You will have the opportunity to trade personnel with other project managers. You have rated the following personnel for your project. These ratings are based on your project requirements, and the confidence you have in each engineer’s abilities. Your objective is to end the simulation with highest total ratings. Software Engineer Rating Hardware Engineer Rating Design Engineer Rating Jill 10 Chuck 2 Mike 10 Jake 10 Craig 8 Monika 6 John 6 Chandra 10 Mitch 6 Jack 4 Cheryl 8 Max 8 Jennifer 6 Chad 6 Maile 2 Jeff 8 Cameron 2 Marsha 8 Johan 4 Casey 6 Maria 4 Juwoo 8 Carlos 6 Mark 2 Note: You must end the simulation with two of each type of engineers or receive a 0. Monika and Chuck do not work well together. If they remain on your team your total score will have 6 points deducted. At the end of negotiations you will be asked to total the ratings for each member that is on your team at the end of the session to derive an overall team score. Zeta Project You are the project manager of the Zeta project. Your project requires two of each of the following engineers: software, hardware, and design. You have been assigned the following personnel. Zeta Project Software Engineer Hardware Engineer Design Engineer Jeff 4 Carlos 2 Max 8 Juwoo 4 Chad 4 Maile 2 You will have the opportunity to trade personnel with other project managers. You have rated the following personnel for your project. These ratings are based on your project requirements, and the confidence you have in each engineer’s abilities. Your objective is to end the simulation with highest total ratings. Software Engineer Rating Hardware Engineer Rating Design Engineer Rating Jill 10 Chuck 2 Mike 10 Jake 10 Craig 8 Monika 6 John 6 Chandra 10 Mitch 6 Jack 4 Cheryl 8 Max 8 Jennifer 6 Chad 6 Maile 2 Jeff 8 Cameron 2 Marsha 8 Johan 4 Casey 6 Maria 4 Juwoo 8 Carlos 6 Mark 2 Note: You must end the simulation with two of each type of engineers or receive a 0. Max and Maile just broke up and it was not pretty. If they remain on your team your total score will be deducted by 6 points. At the end of negotiations you will be asked to total the ratings for each member that is on your team at the end of the session to derive an overall team score. Appendix 12.1 Review Questions 1. What are the fundamental differences between fixed-price and cost-plus contracts? For fixed price contacts the price for work is agreed upon in advanced and is “fixed” as long as there are not changes in scope or provisions of the agreement. Price on cost-plus contracts is not finalized until after the work is completed and is based on costs incurred during the performance of the contract including overhead and a set profit margin. One big difference is that customers have a specified price in a fixed contract while they may only have a rough estimate for a cost-plus contract. A second major difference is that cost-plus contracts are much more flexible when dealing with scope and work changes. Under a fixed agreement the price for work outside the original contract should be negotiated and agreed upon before implementation. In the case of cost-plus changes once agreed upon may simply be added to the final bill. 2. For what kinds of projects would you recommend that a fixed-price contract be used? For what kinds of projects would you recommend that a cost-plus contract be used? As pointed out in the text, there is an inverse relationship between type of contract and risk for buyer and seller. Under a fixed price contract risk is high for the provider and low for buyer. Conversely, risk is low for provider and high for a buyer under a cost-plus contract. So at first glance the answer to this question would seem to depend upon whether you are a provider or a buyer. However, the theme of this chapter is that businesses that excel at outsourcing work treat each other as partners. Therefore, contract selection should not be based on individual advantage but what best suits the nature of the project. With this goal in mind, fixed contracts should be used for well defined, stable projects in which there is good historical data to base estimates on. Cost-plus contracts are more appropriate for less well defined projects, which are subject to change, and need to be done relatively quickly. Solution Manual for Project Management: The Managerial Process Erik Larson, Clifford F. Gray 9781259666094, 9780078096594
