Professional services industries have traditionally charged their clients based on Time & Materials. Lawyers, consultants, and psychologists etc., all follow similar principles. In recent times, however, there has been a focus on value based/fixed pricing (pricing strategy based on value perceived) in the market place.
Having worked in the ERP world for about 16 years, I have managed fixed price as well as time based projects and I am happy to admit that one is not better than the other but one is definitely more suited than the other in any given situation.
In the ERP industry, often clients don’t know how they can leverage the ERP system when they start the project.
Here are my impressions of their suitability:
Time Based Pricing Model
The biggest advantage of time-based model is flexibility. You don’t have to make all decisions at stage zero of the project. An overall guideline of the scope, success criteria, functionality is established at the project planning stage but the client can manoeuver these priorities as they respond to the market conditions and changes. This is a critical advantage for any project that goes on for a significant length of time.
In the ERP industry, often clients don’t know how they can leverage the ERP system when they start the project; the flexibility of time based pricing allows for greater efficiencies in the project.
The downside is that if there are client personnel changes that affect the project team, they might affect priorities and end up costing more. In my experience though, this is rare because Dynamics NAV implementations normally last for 3-6 months, which is long for a project but short enough to not have many personnel changes.
Value Based/Fixed Pricing Model
The biggest advantage of this model is visibility and assurance. The scope is fixed in all its detail and deliverability; clients know exactly what they will get as the final ERP solution when the initial planning phase ends. This is specially useful for companies that are relatively stable in their processes and market demands.
The success of fixed price projects depends on the quality of the project scope – sometimes this phase can consume more time than expected. The quality of the scope also relies on the project team clearly understanding the ERP product as well as the business processes in order to find the best match and be able to implement the best practices.
I have seen both models succeed and both models fail. Success or failure comes down to the quality of people implementing and planning the project. I would go as far to say that the quality of the team surpasses the pricing model offered so even if the clients forgo their preference of model but get the best team, the project will be successful regardless.