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Ill-Defined Statement of Work

Author: Larry Chester

Any business doing custom work needs to carefully define the terms and expectations of the delivered product. Having open-ended, or ill-defined terms for a project can lead to many issues—none of them good. Primary among them is the challenge between cost, pricing, and customer satisfaction. In the struggle to keep the customer happy, the amount of work increases, costs rise, and frustration sets in—often on both sides.

Bringing Value Through CFO Insights

There are many ways that a customer and vendor can come to agreement on the terms of a transaction. When the inventory items are stock, the questions and solutions are easy and readily available (e.g., “… just look on page 105 in the catalog.”). But when an item is custom produced, whether it be hard goods, soft goods or an intangible, the line of accepted terms and conditions becomes blurred, and the longer the project takes, the greater the company’s costs, and the more blurred the line becomes.

  • Business – Software development company
  • Location – Suburban Chicago
  • Sales – $3,500,000
  • Ownership – Two equal partners

Initial Contact –

The company had grown steadily in its five years of operation. The two owners were initially salesman and programmer. As the company grew, staff was added, and responsibilities for project sales and completion was passed down to staff-level employees. As projects took longer and longer to complete, cash became stretched, and customer satisfaction went out the window. This was coupled with frustration among the programming staff from working on “unending programs.”

Significant Findings and Recommendations:

Project Specifications

The company’s entire “product line” was built on their ability to develop custom applications or modify standard software to meet their clients’ needs. Statements of Work (SOW) were loosely written in terms of functionality, but never signed off on by the programming staff. Since sales were at a fixed price, soft specifications resulted in missed communications and unending projects with no increase in revenue.

Recommendations

  • Involve the programming staff in the sales effort. Then, the specifications and programming time needed would be fully understood by both sides of the house, and realistic pricing could be established at the outset of the project.
  • Develop a detailed SOW that not only lays out the functionality, but the programming methodology, so that both the client and the internal staff agree and are committed to time, functionality, and price.
  • Require that changes in programming need to be fully documented by the salesperson and programmer, with a sign-off by the client, along with pricing changes.
  • Establish milestones, and a series of functionality tests—conducted by both programmers and the client—for verification of completion of the project.

Sales Efforts

The company promoted itself as industry agnostic. This allowed the sales team to approach any company as a potential client, to sell them the programming services of their staff. In spite of their success, each new industry ended up being a cold sales effort, since there were no referrals.

Recommendation

  • Identify specific industries for some of the company’s more successful projects and use those as a basis of case studies and promotional pieces for their work.
  • Use those promotional efforts to approach other businesses in the same sector, showing their skill in solving problems specific to that industry group.
  • Join trade associations and attend meetings to promote their abilities to resolve specific industry problems.
  • Get referrals from clients, especially from companies who are respected and used as examples in the case studies.

Profitability

As the company stretched to find new customers, they provided discounts to new clients to keep their staff busy. In addition, projects that were “extended” involved additional work and expense even though revenue had been fixed.

  • Be careful with discounts. Since value is often tied to expectations, discounts sometimes have unintended consequences. The client who got the work for 60% of the initial quote may consider the work only 60% as valuable. Value is in the mind of the beholder.
  • Use change orders to ensure fair compensation. As projects are developed with a tighter SOW, any changes requested by the client would require a change order which would, in turn, include additional charges for the additional work.

Cash Flow

The young owners of the company had short-term goals and wanted to live life to the fullest. The result was spending money on their personal pleasures rather than using it to develop the company more fully. The company, therefore, was often short of cash to pay bills or cover upcoming payroll.

Recommendations

  • Decide on, and stick to, long-term business goals. Is the goal to own a company that will last long into the future or work in a business that will support a certain lifestyle for the next few years (before they run out of money)?
  • Develop a policy of partial payments during the length of each project. With milestones established, they could arrange for payments at the completion of each stage, providing continuous cash flow during each project.

Project work is rewarding but needs to be properly managed. There is continued creativity required to sell and complete unique work. But when the program is ill defined, or has aspects that are open ended, it is sometimes difficult to agree when the project is complete. This creates a lack of communication between staff, company management, and the client. That difficulty affects customer satisfaction, profitability, and cash flow.

It’s important to clearly identify the terms of each project during the sale. Involving all members of the team during the planning and sales portions of the project assures that everyone is on the same page. This leads to a greater likelihood of satisfaction for both staff and client. In the end, that positive experience yields referred sales, better profitability, and more consistent cash flow.

Bringing Value Through CFO Insights

There are many ways that a customer and vendor can come to agreement on the terms of a transaction. When the inventory items are stock, the questions and solutions are easy and readily available (e.g., “… just look on page 105 in the catalog.”). But when an item is custom produced, whether it be hard goods, soft goods or an intangible, the line of accepted terms and conditions becomes blurred, and the longer the project takes, the greater the company’s costs, and the more blurred the line becomes.

  • Business – Software development company
  • Location – Suburban Chicago
  • Sales – $3,500,000
  • Ownership – Two equal partners

Initial Contact –

The company had grown steadily in its five years of operation. The two owners were initially salesman and programmer. As the company grew, staff was added, and responsibilities for project sales and completion was passed down to staff-level employees. As projects took longer and longer to complete, cash became stretched, and customer satisfaction went out the window. This was coupled with frustration among the programming staff from working on “unending programs.”

Significant Findings and Recommendations:

Project Specifications

The company’s entire “product line” was built on their ability to develop custom applications or modify standard software to meet their clients’ needs. Statements of Work (SOW) were loosely written in terms of functionality, but never signed off on by the programming staff. Since sales were at a fixed price, soft specifications resulted in missed communications and unending projects with no increase in revenue.

Recommendations

  • Involve the programming staff in the sales effort. Then, the specifications and programming time needed would be fully understood by both sides of the house, and realistic pricing could be established at the outset of the project.
  • Develop a detailed SOW that not only lays out the functionality, but the programming methodology, so that both the client and the internal staff agree and are committed to time, functionality, and price.
  • Require that changes in programming need to be fully documented by the salesperson and programmer, with a sign-off by the client, along with pricing changes.
  • Establish milestones, and a series of functionality tests—conducted by both programmers and the client—for verification of completion of the project.

Sales Efforts

The company promoted itself as industry agnostic. This allowed the sales team to approach any company as a potential client, to sell them the programming services of their staff. In spite of their success, each new industry ended up being a cold sales effort, since there were no referrals.

Recommendation

  • Identify specific industries for some of the company’s more successful projects and use those as a basis of case studies and promotional pieces for their work.
  • Use those promotional efforts to approach other businesses in the same sector, showing their skill in solving problems specific to that industry group.
  • Join trade associations and attend meetings to promote their abilities to resolve specific industry problems.
  • Get referrals from clients, especially from companies who are respected and used as examples in the case studies.

Profitability

As the company stretched to find new customers, they provided discounts to new clients to keep their staff busy. In addition, projects that were “extended” involved additional work and expense even though revenue had been fixed.

  • Be careful with discounts. Since value is often tied to expectations, discounts sometimes have unintended consequences. The client who got the work for 60% of the initial quote may consider the work only 60% as valuable. Value is in the mind of the beholder.
  • Use change orders to ensure fair compensation. As projects are developed with a tighter SOW, any changes requested by the client would require a change order which would, in turn, include additional charges for the additional work.

Cash Flow

The young owners of the company had short-term goals and wanted to live life to the fullest. The result was spending money on their personal pleasures rather than using it to develop the company more fully. The company, therefore, was often short of cash to pay bills or cover upcoming payroll.

Recommendations

  • Decide on, and stick to, long-term business goals. Is the goal to own a company that will last long into the future or work in a business that will support a certain lifestyle for the next few years (before they run out of money)?
  • Develop a policy of partial payments during the length of each project. With milestones established, they could arrange for payments at the completion of each stage, providing continuous cash flow during each project.

Project work is rewarding but needs to be properly managed. There is continued creativity required to sell and complete unique work. But when the program is ill defined, or has aspects that are open ended, it is sometimes difficult to agree when the project is complete. This creates a lack of communication between staff, company management, and the client. That difficulty affects customer satisfaction, profitability, and cash flow.

It’s important to clearly identify the terms of each project during the sale. Involving all members of the team during the planning and sales portions of the project assures that everyone is on the same page. This leads to a greater likelihood of satisfaction for both staff and client. In the end, that positive experience yields referred sales, better profitability, and more consistent cash flow.

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