Vince was disappointed and, as he exited the conference room, one of the manufacturing personnel commented to Vince, “Don’t you know that the manufacturing people usually go to lunch around 11:00 a.m.?” Vince came up with a plan for the next team meeting.
The Riverside Software Group (RSG) was a small software company that specialized in software to support the Human Resources Departments of both large and small corporations. RSG had been in business for more than thirty years and had an excellent reputation and an abundance of repeat business. In 2011, RSG was awarded a contract from a Fortune 100 company to develop an inventory skills software package. The Fortune 100 company maintained a staff of more than 10,000 project managers worldwide and a total employment of more than 150,000 employees. Although the company sold products and services across the world, it was also marketed as a global business solutions provider. Since most of the work was global, RSG utilized virtual teams on almost all projects. The difficulty was in the creation of the virtual team. Quite often, the project managers had limited knowledge of the capabilities of the employees around the world, and this made it difficult to establish a project team with the best available resources. What was needed was an inventory skills matrix for all employees. The contract with RSG was not that complex. Whenever the Fortune 100 company would complete a project, either for an external client or one of its worldwide clients, the entire project team would use the software to update their resumes, including the new skills they developed, the chemical or specialized processes they were now familiar with, and whatever additional information would be valuable to their company in determining the best available personnel for the next project. The project team also had to identify in the software program the lessons that were learned on that project, the best practices that were captured, the metrics and key performance indicators that were used, and other such factors that could benefit the company in the future. RSG saw this as an excellent opportunity. The client had done its homework well and created a detailed requirements package. Neither RSG nor the client expected any significant scope changes since the requirements were reasonably well established. The contract was a firm-fixed-price (FFP) effort of $1.2 million for labor and materials, an additional $150,000 in profit, and with a scheduled completion date of twelve months. Within the first two months of the project, RSG realized that this software package had tremendous potential and could be sold to many of its clients around the world. RSG estimated that clients would pay at least $75,000 for such a package and also pay additional costs for possible customization. The problem was that the contract with the client was FFP and all of the intellectual property rights stayed with the client.
If RSG agreed to allow the client to sell the package to other customers, RSG would probably have to spend about $10,000 in preliminary customization for each client. Detailed customization would be billed separately to each client. Additional costs, including documentation, packaging, and shipping/handling, would be about $5,000. Therefore, even adding in a small financial reserve of $5,000 as a risk factor for other design contingencies, RSG’s cost per package would be about $20,000 and it could sell for $75,000. Marketing and sales personnel believed that at least 100 of these packages could be sold worldwide. Given the potential of this effort, the company had to come up with a plan on how they would approach the client and request a change in the contract. The simplest solution would be to make the client a 50– 50 partner, but that could create problems with enhancements and upgrades to the package downstream. The second approach would be to see if the client would allow the contract to change to a cost-sharing effort. The profit of $150,000 would be removed from the $1,350,000 contract that now existed, and the remaining question would be the cost-sharing split. Originally, RSG considered proposing a 70– 30 or 60– 40 spilt with the greater percentage of the cost being paid for by the client. However, to make it attractive to the client, RSG decided to offer the client a 40– 60 split with the 60 percent paid for by RSG.
If the client accepts the offer, is it a win– win situation?
If the client accepts RSG’s proposal, the situation has the potential to be beneficial for both parties, creating a win-win scenario. For the client, a Fortune 100 company, there are distinct advantages. They would benefit from cost savings with the proposed 40-60 split, paying less than originally contracted for the software’s development. Additionally, there’s the opportunity to generate revenue from the software’s sales to other entities. The broader application of the software might also result in its more rapid improvement and evolution, which would, in turn, serve the client’s needs in the long run. Moreover, being a part of a widely recognized and successful software product could enhance the company’s reputation in the HR tech sector.
On RSG’s side, this arrangement opens up promising avenues. They can tap into substantial new revenue streams by selling the software to a wider clientele. This could further establish their footprint in the market and possibly allow expansion into new sectors. With the requirement to adapt the software for different clients, RSG would be engaged in continuous business, which could translate to long-term contracts and sustained revenue. Moreover, the intellectual challenge of customizing the software for diverse needs can stimulate innovation within RSG, contributing to its growth.
However, the realization of this win-win potential is contingent on several crucial factors. A clear and mutually agreed-upon understanding of intellectual property rights is paramount. It’s vital that the original client’s unique features are safeguarded, and RSG is clear about the extent of customizations they can offer to others. An equitable profit-sharing mechanism from external sales is another crucial element. It’s essential to define and agree upon this to preclude any future disputes. RSG must also prioritize the primary client’s requirements to ensure they don’t feel overshadowed by newer clients. And, importantly, to ensure the original client’s competitors don’t gain a strategic advantage, there should be stringent controls on software distribution.
In essence, while the arrangement offers promising benefits for both parties, its success hinges on clear communication, well-defined agreements, and a mutual commitment to uphold the terms. If managed skillfully, both the Fortune 100 company and RSG stand to gain considerably from this partnership.
If the client accepts the change to the contract, how much profit will RSG make if it can sell 100 units?
Let’s break down the potential profit for RSG if they manage to sell 100 units of the software:
Revenue from sales:
- Selling price per package: $75,000
- Total revenue for 100 units: 100 times $75,000 = $7,500,000
Total costs for 100 units:
- Preliminary customization per package: $10,000
- Additional costs (documentation, packaging, etc.) per package: $5,000
- Financial reserve (risk factor) per package: $5,000
- Total cost per package: $10,000 + $5,000 + $5,000 = $20,000
- Total cost for 100 units: 100 times $20,000 = $2,000,000
Profit from sales:
- Profit = Total revenue – Total cost
- Profit = $7,500,000 – $2,000,000 = $5,500,000
If RSG manages to sell 100 units, they stand to make a profit of $5,500,000.
This case, and questions, is take from the book “Project Management Case Studies – Sixth Edition” – 2022, by Harold Kerzner.
