Negotiating Estimates

Congress of Vienna

In my previous post dealing with Ron Jeffries (since revised) “Summing up the discussion”, I focused strictly on the customer-focused aspects. I did, however, note some language regarding negotiating estimates that I wanted to touch on:

“Negotiating” estimates is deeply embedded into most cultures. It probably started in the marketplace in the village in ancient Greece, where the carrot guy tried to get three hemitetartemorions for his carrots, and your great-to-the-nth grandmother talked him down to one.
We assume that a contractor’s estimate has fat in it and we assume that we need tough negotiation to squeeze it out. The better the contractor is at estimating, the more this process hurts him, because he has nothing left to squeeze. And in the end, it hurts the buyer as well: the only way the contractor has to survive is to cut quality.

Jeffries is absolutely correct that negotiation is an ancient tradition. Likewise, he is correct that shaving an accurate estimate may well end up costing the customer in reduced quality (especially if giving point estimates, which is an incredibly poor practice, in my opinion). What he fails to mention, however, is that negotiating an estimate need not happen. In fact, negotiating an estimate without negotiating the deliverable is pretty much the worst possible thing you could do. You’re risking either your profit margin or any future business with the customer and quite possibly, both. It’s a bad idea for a vendor and incredibly ill-considered for in-house IT (it’s not like you can take the money and run).

In my opinion, when someone is willing to change an estimate without a change in what they’re estimating, it’s a bad sign. If you adequately understand the information at hand, have some experience, and have made a good faith effort, there’s no reason to be willing to change the estimate without learning more about what is or is not needed. It’s not really a negotiation if only one party is getting what they want, particularly if the other party is getting abused. For the abused party, striking back (by shaving quality without the customer’s knowledge) is counter-productive. The only negotiation should be what’s in scope and what’s not.

In a balanced relationship, the provider can explain what the customer is getting for their money and the customer realizes they won’t get something for nothing. Communication and collaboration can provide the basis for trust. Trust is essential for both parties to become partners in delivering the best possible product.

Advertisements

5 thoughts on “Negotiating Estimates

  1. I think we agree throughout, Gene. An important further topic relates to situations where there is less “balance” than we’d like to see. We might explore whether estimates, not estimates plus scope, are often “negotiated”, when, and why?

    I think it happens in at least these cases:

    First, in a software product development organization or IT organization that treats development/IT as a cost center. In this case there’s may be a “negotiation” between business side people and development. If this takes place at the management level, the matters under negotiation will be money and time, and rarely scope. If it takes place with the dev team involved, whether facing the dev management or the eventual business manager.

    Second, a contract software house often treats its initial bid as a way to get the business, and then uses “change control” as a way to make up the difference. When a company works in this mode, they are often tempted to cut below what the dev team estimated, because there’s a salesman in the loop, or because they need to keep the cash flow coming. Here again, dev is at a serious disadvantage in negotiation because of the power structure.

    Now, as I see it, when there’s someone with power, or perceived power, over whoever is doing the estimating, the negotiation will not be in balance and there’s potential trouble. I suspect we won’t disagree over that either. We’ll see if and when you reply. 🙂

    It seems clear that going to a sort of pay as you go model would help address this power balance, and that’s really what the #NoEstimates folks are trying to set up. It brings the customer inside the team and gives them the best shot at a viable product, and reduces the chances for inappropriate pressure.

    That said, many organizations, for reasons good and not so good, will not move in that direction. I’m not sure just what teams could do to move toward a more healthy approach. Maybe Kate Oneal will have an idea. I’ll ask her.

    Like

    • It’s nearly always “when I reply” 🙂

      I agree that we are very close to being on the same page. I think the main area of disagreement is in the cause of the dysfunction. My position is that abuse of estimates stems from a deeper issue – changing a practice won’t eliminate the abuse. Changing culture will. Changing that culture (where possible) involves convincing the players that it’s in their best interests to change, which it is.

      It’s not always possible to get people to change; sometimes you have to vote with your feet. That being said, it can be done if people are willing. I’ll expand on that in my next post.

      As to the when of estimate negotiation, fully agree. Also, I’m firmly convinced that it’s a bad idea for both. In-house IT is getting lots of flak these days (and cracking down on “shadow IT” is really not a good way to improve their rep). The outside vendor situation is also a well-worn cliche. I’ve dealt with vendors who were smart enough to play it straight (and were rewarded with repeat business for doing so), but I realize that organizational issues may get in the way (I did some time in local government, so I’m familiar with perverse incentives in the procurement space). As I noted above, sometimes the only way to win is not to play.

      Like

  2. To quote Mahan Khalsa, author of Let’s Get Real or Let’s Not Play:

    Never Give Something for Nothing

    If you have to give a concession, get a value exchange in return.

    Never give the same scope, timing, and division of labor at just a lower price. Never! Please! Unilateral concessions on price only convince the purchaser they were right to beat you up on price, and they always will. Your only recourse is to artificially raise your prices so they can beat you up. You reinforce a dysfunctional practice.

    If you have to give a concession, get a value exchange in return. It doesn’t have to be monetary.

    Some examples include:

    • You don’t have to write a formal proposal (only an “engagement letter”), and you pass the savings on to them.
    • The client agrees to provide certain marketing and advertising value based on their true experience with your company.
    • The client provides some R&D work that can be leveraged on other opportunities—perhaps they commit resources to measuring results.
    • They sign up additional business now and get a volume discount.
    • They pay early.

    Think of your company’s profit and loss statement. What line on that statement will get charged for this discount? How will the client con- tribute to that line item in return?

    Reciprocity, quid pro quo, and equivalence of action are fair.

    Liked by 1 person

  3. Pingback: Conflicts, Collaboration, and Customers | Form Follows Function

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s