Uv0367: This Case Was Prepared By Samuel E. Bodily, John Tyl

Uv0367 This case was prepared by Samuel E Bodily John Tyler Professor

Uv0367 This case was prepared by Samuel E. Bodily, John Tyler Professor of Business Administration, and Eric Clark, based in part on a class assignment submitted by Eric Clark to Professor James Dyer, University of Texas. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected].

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Bonuses, gain-sharing, competitive pricing—these ideas were attractive and simple enough, but they made negotiating a contract much more challenging for Eric Clark, director of the Central Region for Appshop, Inc. Clark was in the throes of settling terms and deciding whether and how to do the OS-7 project, a major implementation of Oracle software in all seven international locations of a large multinational company (the “client”).

Appshop had recently completed a successful implementation of Oracle financials in the client’s Dallas headquarters. Appshop had met or exceeded all stated objectives, and would continue to support corporate Oracle applications for the client. Appshop was the largest independent full-service Oracle consulting, applications-management, and outsourcing company. Privately held, Appshop had annual revenues of $25 million. Clark was responsible for growing the client base and selling additional professional services, as well as managing existing clients headquartered within his region.

The client had told Clark that it would like Appshop to do all the consulting for the OS-7 project. Clark and a team of consultants spent two weeks working on the strategy, scope, and timeline for the roll-out. Based on that analysis, Appshop calculated that the project would require 1,000 hours of work per month for 24 months from a variety of contracted professionals and support personnel, which would result in a total cost to Appshop of $140 an hour. Clark and his team were confident that this level of effort would result in a completed and functioning implementation. How much the implementation would save the client and how pleased the client would be with its performance were yet to be determined.

Clark’s team proposed billing the client $175,000 per month over 24 months, which would contribute $35,000 monthly, resulting in a present-value contribution of $789,700 for the OS-7 project, using an Appshop discount rate of ½ percent per month (compounded to 6.17 percent annually). After lengthy discussions, the client indicated they would award the contract but not at the $175,000 monthly payment. Instead, they offered two alternatives: either $155,000 monthly payments over 24 months or $125,000 monthly plus a $1.5 million bonus at month 24, contingent on commendable performance benchmarks.

Because these benchmarks were complex and difficult to meet simultaneously, the team estimated a probability of 0.7 of earning the bonus. The client indicated that refusal to accept either option could result in a Request for Proposal (RFP) being issued to competitors, including the Big 4 consulting firms. The RFP would specify monthly payments of the bid amount plus a gain-share based on documented savings from implementing the new Oracle applications, with specific savings-sharing schedules. The team estimated that savings would follow a triangular distribution with a low of $3.2 million, high of $12.8 million, and most likely value of $5.6 million. The bid for this RFP would be $150,000 per month, with an estimated 45 percent chance of winning the bid.

Clark’s compensation primarily depended on total contributions in his region, with a secondary incentive for maintaining a high blended hourly revenue rate. The case explores the negotiation strategies, risk assessments, and financial considerations surrounding this large-scale consulting project and competitive bidding process.

Paper For Above instruction

The case study of Appshop, Inc., involving its negotiations for the OS-7 Oracle software implementation project, offers a compelling exploration of strategic decision-making in consulting contracts within a competitive environment. This scenario exemplifies how firms in the IT and consulting sectors must balance pricing strategies, risk management, and client expectations to secure lucrative projects while maintaining profitability and reputation.

The core issue in the case centers around Appshop's negotiations with a multinational client over the pricing and structure of a significant project spanning 24 months. The initial plan was to bill the client at a fixed monthly rate of $175,000, reflecting a contribution margin of $35,000 each month. This plan yielded a present value of nearly $790,000 based on the company's discount rate. However, the client’s push for lower prices introduced alternatives: reduced monthly payments of $155,000 or $125,000 coupled with a substantial performance bonus. This situation underscores the common dilemma faced by service providers: whether to accept lower fixed payments or pursue variable, incentive-based arrangements that tie compensation to project outcomes.

In evaluating these options, Clark and his team employed various risk assessment tools, including probability estimates for earning the bonus and winning alternative bids. Their forecast of savings—spanning from $3.2 million to $12.8 million—used a triangular distribution, reflecting uncertainty and variability inherent in large-scale IT implementations. These estimates were critical for constructing gain-share arrangements that could potentially increase total project value but also introduced variability in revenue streams.

The bond between price, risk, and outcome probability is central to effective negotiation. Clark’s team considered the strategic implications of accepting or rejecting the client’s propositions, factoring in the competitive threat of the RFP process. If Appshop declined the lower priced options, the risk of losing the project altogether increased, but so did the potential for higher revenue if retained at initial terms. Conversely, bidding on the RFP with a lower bid and gain-sharing arrangement could accessible but uncertain payoffs, with the success probability weighed at 45 percent.

Overall, this case illustrates the importance of flexible financial planning, risk management, and negotiation tactics in consulting engagements. Firms must consider not only the immediate cash flow but also the future potential for gain-sharing, reputation effects, and market positioning.

From an academic perspective, the case aligns with theories of strategic contracting, agency relationships, and risk sharing in professional services. It highlights the importance of quantifying uncertain benefits and costs, employing probabilistic models to inform decision-making, and recognizing the competitive nature of consulting markets. Firms that effectively balance these factors can improve their likelihood of project success while optimizing their financial returns.

Thus, the Appshop case demonstrates the complex interplay between pricing strategy and risk management in professional services and underscores the need for rigorous analysis in contract negotiations, especially within highly competitive environments involving significant uncertainty.

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