The Controversial Approach of LITIKO: Why the Company Chose T&M
In IT fields such as business automation, implementing modern solutions for the customer is no less complex a process than classical software development. Therefore, it is quite logical that in this field there is an eternal debate about which model of client-contractor work to choose. LITIKO has made its final choice in favor of the T&M model and is ready to prove the correctness of this approach.
One Problem, Two Approaches to Solving It
Let’s imagine a hypothetical “average” customer of a business automation project – a relatively large company that wants to automate various business processes – from management accounting and bookkeeping to document management and warehouse accounting. Today, this can be done using a comprehensive BPM platform from a Western vendor or Ukrainian development. For example, LITIKO works with well-known platforms such as Creatio, M-Files, and Scriptum.
In other words, all business management can be concentrated on one platform, without scattering between different programs, as it was before. However, such comprehensive automation, despite all its benefits, is a complex multi-month project. After all, every business is unique and individual, which means that the contractor’s specialists (IT integrator) will have to do a huge amount of work to implement the customer’s requests in the created BPM system.
Accordingly, the first task for the customer is to choose an IT integrator. And then negotiations on price and budget begin. But at the same time, it is also a discussion of which project implementation model will be chosen: Fixed-Price or Time and Materials.
Let’s explain for those who are encountering this topic for the first time.
Fixed-price is a type of contract and pricing model where the payment amount depends on the resources used and the time spent by the contractor. In other words, the contractor is forced to take on the risk of cost overruns, exceeding the allotted time, and other risks.
Time and Materials is a type of contract and pricing model in which the contractor’s work is paid based on the time and materials spent by the contractor’s employees to complete the work, regardless of how much work is needed to complete the project. T&M is usually used in projects where it is impossible to accurately estimate the size, or when there is a likelihood that requirements will change during the project implementation.
Undoubtedly, fixed-price contracts are a favorite scenario for clients, and for a good reason: the contractor takes full responsibility and bears all the risks. Plus, the costs are defined from the very beginning, so you can simply plan the budget and deadlines, and then write down the requirements and wait for the new BPM system to start working in the company.
However, in real life, everything works differently. If the contractor has to sign a contract on Fixed-price terms, he will try to minimize his own risk as much as possible, that is, to create a “buffer” in the form of additional customer funds and excess time. This most often happens when the product is new or the area of implementation is unfamiliar.
Given that there is currently a large-scale transition from Russian BPM platforms to Western and Ukrainian ones in Ukraine, it can be said that IT integrators are working in conditions of great uncertainty (let’s not forget about the war and the associated additional risks). Accordingly, the project implementation estimate in the case of Fixed-price reflects not only the efforts but also the potential unknowns that can significantly increase the overall cost.
There is an alternative to this, but both the customer and the contractor need to show character.
T&M Helps to Consider All Project Details: Flexibility for Better Results
Weighing all the pros and cons of the two approaches, LITIKO made a principled decision: to move from the Fixed-price project implementation system (sometimes also called FixCost) to the Time and Materials (T&M) system. This decision is related to the understanding of one important fact: it is important for us in Ukraine to create a clear, transparent, and civilized environment for IT project implementation. And not to act on the principle of “grabbed the customer – and then whatever happens.”
In fact, with the Time and Materials approach, the whole dynamic changes. Payment transparency in the case of T&M requires greater accuracy in tracking and evaluation. That is, the customer gets the opportunity to save significantly – he does not have to overpay for the risks initially included in the project by the contractor. However, the client takes on the monitoring of the project implementation progress.
Moreover, he is forced to approach the addition of new requirements to the system and its implementation more responsibly. Because the customer will see: any new requirement is new costs of money and time that he will incur. But there are advantages to this: the customer will have to review his requirements. That is, not to “stuff” everything that comes to mind into the project, but to determine the key business processes and discard unnecessary operations. In fact, this is how a business process audit takes place – when the company’s management thinks about what is needed for the business and what is superfluous.
But let’s return to the issue of the customer’s work cost. There is a persistent myth: with the T&M approach, the implementation of a BPM platform can drag on almost indefinitely, and the project implementation costs will only grow. But this is not the case. T&M provides a flexible approach when the parties (the customer and the IT integrator) work in a mode of constant dialogue. In any case, the work begins with research (the so-called Discovery phase) and writing a technical task.
It is at this stage that the planned budget for the entire business automation project becomes clear. Also, the flexible approach allows the customer to take into account all the necessary details regarding the implementation of the BPM system in interaction with the contractor. Because it is during the Discovery phase that the customer’s requests are formed. And then their implementation begins thanks to the same flexible implementation system.
In other words, in fact, there is a mixed model, in which a small contract is first concluded for the analysis of the customer’s business, description of requirements, and development of a precise technical task. And after that, when the scope of work and the result required at the output are clearly defined, the parties sign a contract directly for the implementation of the automation system.
And here the greatest advantage of T&M contracts is placed on the scales – their transparency. For the customer, the budget and the progress of all work are absolutely transparent, he sees how the calculation and cost management are carried out at each stage of the project. He can change the assessment of his own needs, he sees that the IT integrator works honestly, without hiding the arising difficulties, without hiding the costs in unnecessary actions. Thus, the quality and budget remain under the customer’s control.
A Few Practical Tips
Western management experts, who have historically more experience working with both the Fixed-Price model and the Time and Materials model, give the following tips for creating a T&M contract:
- Clearly define expectations
- Keep detailed records (accounting)
- Set realistic deadlines and budget
- The customer and the contractor should communicate regularly
- Regularly send/request invoices
- Wait for approval before any changes
- Consult a lawyer
According to the same Western advice, each T&M contract should include 10 main components:
- Scope of work
- Labor rates
- Markup on materials
- Overhead costs
- Payment schedule
- Maximum number of working hours
- Non-exceedance clause
- Change order procedure
- Breach of contract clause
- Disclaimer.