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1.  Introduction

One of the outputs of process 12.2 Conduct Procurements is the procurement agreement, usually put in the form of a contract, which contains the terms and conditions under which the seller produces the procurement for the buyer.

The purpose of this post is to list the major elements of the procurement agreement.  Rather than listing them in a random, laundry-list fashion as appears in the PMBOK® guide itself, I plan to put them categories depending on the knowledge area they are related to.

2.  Elements of the Procurement Agreement

Obviously, most of the elements deal with procurements, but many deal with the constraints within which the procurements must be delivered, in particular with regard to the scope, time and cost of the project.

Inspection and acceptance criteria are related to quality issues, but so are warranty and limitation of liability, as those are related to the cost of nonconformance that come under the costs of quality.

Insurance and performance bonds are considered part of risk management because they are a form of transferring the risk from the buyer to the seller.  This is the overall risk of the product and its effect on the project; the cost risk of producing the product is handled by the various penalties and incentives under the cost management category.

Reporting of performance is part of communications management, but the management of the suppliers as stakeholders in the overall project must be also be considered.  Finally, if the supplier needs to make a change in the scope of the product being produced, it must submit the change request to the buyer who will then consider it as part of the Integration Management process of Perform Integrated Change Control.

So it can be seen that not just the basic requirements of the product (the inspection and acceptance criteria, delivery deadline, and pricing), but also any effects of the product on the project as a whole must also be considered explicitly in the overall procurement agreement.

Once the procurement is set up, the next process is where the procurement process is monitored and controlled throughout the period of the project in which it is performed.  That process, 12.3 Control Procurements, is the subject of the next post.

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1.  Introduction

There are four procurement-related project management processes, one in each of the following process groups:  planning, executing, monitoring & controlling, and closing.  The second process is therefore in the Executing Process Group, and is the process whereby the supplier of the procurement is selected.

This post is devoted to the Inputs, Tools & Techniques, and the Outputs of this second of the four procurement processes, 12.2 Conduct Procurements.

2.  Inputs

The basis for having a procurement at all is the Make-or-Buy Decision.  This is important to keep in the background of this process, because conditions within the organization, external market conditions, or those of the project itself (cost overruns, delivery delays, etc.) may change to the point that the scales are tipped away from “buy” back to “make”.

Most of the inputs of this Conduct Procurements process come from the previous process 12.1 Plan Procurement Management, the output of which is the Procurement Management Plan.  This is the blueprint containing the guidelines for all the other procurement processes.

The Procurement Documents contain the Procurement Statement of Work, the “seed” of the procurement scope, which is the portion of the scope of the entire project out of which is carved the portion of the scope that is going to be provided by the procurement.  These Procurement Documents can include the Request for Proposal which goes out to the sellers, in response to which they produce the Seller Proposals.  These Seller Proposals are then judged according to the Source Selection Criteria, not to mention the past experience with sellers contains in the Operational Process Assets (OPAs).

3.  Tools & Techniques

The Bidder Conferences are there to clarify the requirements of the product that the buyer

is requesting, and to make sure that the prospective sellers understand them before submitting their proposals.  The sellers may be solicited through a list of pre-qualified sellers that is enlarged through various forms of Advertising.  Once they submit their proposals, the buyer may judge them using Expert Judgment, Independent Estimates, or more formal Proposal Evaluation Techniques such as a formal evaluation review process.  Analytical Techniques may analyze the cost risk and other risks of the procurements.  Further Procurement Negotiations with the sellers may clarify the requirements to the point that a draft contract may be negotiated.

4.  Outputs

The sellers that qualify are the Selected Sellers, and from those a final Seller is selected with whom there is a final Agreement that is put into the procurement contract.  Resource calendars are updated to make sure that the resources provided by the seller are accounted for in terms of their quantity, availability, and timing in terms of the larger project they will be used on.

The procurement will occasion changes in the project baselines (scope, time, and cost), and the communications management plan will be updated to reflect the coordination required between the seller and buyer.  Project Documents like the stakeholder register and risk register will be updated to reflect the inclusion of the seller in the stakeholders to be managed and the risks of the procurement to be included in the risk register of the project as a whole.

If there are any changes that the seller proposes to the scope of the procurement, they are treated like any other change request through the Integrated Change Control Process.

The main output of course of this process is the Agreement between the seller and buyer in the form of a Procurement Contract.  This will be the basis for the executing, monitoring & controlling, and finally closing of the procurement.  The next post covers the elements that are typically included in a procurement contract or agreement.

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1.  Introduction

As part of the process 12.1 Plan Procurement Management, one of the outputs of the process that go into Procurement Documents like a Request for Information (RFI) or Request for Proposal (RFP) is the Source Selection Criteria.  Often times these criteria are made into a checklist that is used as a “scoring sheet” to rate seller proposals.

The 5^th Edition of the PMBOK® Guide  lists the various criteria that are included as part of the Source (i.e., Supplier) Selection Criteria  However, they are listed in apparently random, laundry-list fashion, and this post was designed to put some order into the list by arranging them by category.

2.  Source Selection Criteria

These are the questions that should be asked by the organization requesting proposals from suppliers in order to rate or score those proposals.   These questions make up the source selection criteria.

One of the few knowledge areas represented in the list of categories that PMI did not include in the above list was that of the Time Management knowledge area, and so I added a crucial criterion for the selection of a seller that PMI left out, perhaps because it’s so obvious:  the ability of the seller to meet any deadline specified by the organization.

This is a list of possible criteria that might be used in the case of a complex project.  Of course, in the case of a simple project, where the product needed from the seller is readily available off the shelf from various sellers, the only criterion needed might be the cost.

These criteria are prepared in order to give an objective basis for choosing the seller in the next process, 12.2 Conduct Procurements.  An outline of the inputs, tools & techniques, and outputs of that process is the subject of the next post.

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1. Introduction

The Project Statement of Work is an input to the 4.1 Develop Project Charter process in the Initiating Process Group, in the Integration Knowledge Area.   The output of that process is the Project Charter.    The Procurement Statement of Work is an output of the 12.1 Plan Procurement Management process in the Planning Process Group, in the Procurement Knowledge Area.

The purpose of this post is to make the distinction between the Project Statement of Work and the Procurement Statement of Work.

2. Project Statement of Work (SOW)—What is it?

The best way I can describe the Project Statement of Work is as the “seed” of the project. It is watered during the Initiating Process into the Project Charter which causes it to germinate and become a seedling. The seedling is planted in the ground during the Planning process of creating the Project Scope Statement. It then turns into a plant during the Executing Process (where it is given sunlight and water, analogous to project resources) and Monitoring & Controlling Process (where it is checked periodically to see if there are any adverse conditions such as pests or diseases), and is finally harvested at the time of the Closing Process.

3. Project Statement of Work (SOW)—How does it fit into the flow of PM Processes?

The SOW is the seed or kernel of the idea for the project which is then developed at a high level for the purpose of approval of the project during the Initiating Process Group as process 4.1, Develop Project Charter. As seen in the previous post, this Project Charter, if approved, is developed at a higher level of detail in the Planning Process Group as process 5.3, Define Scope. So here’s the flow of how the documents are connected:

3. Project Statement of Work (SOW)—Who creates it?

This is going to depend on the end result of the project is going to be a product, service, or result that is used internally within the company, or is to be delivered to an external customer.

If the sponsoring organization is the one that is going to use the end result, then the sponsor is the one that originates the SOW. If a customer is the one that is going to use the end result, then the customer is the one that originates the SOW. The SOW may be part of a bid document (request for proposal, request for information, request for bid) or as part of a contract.

4. Project Statement of Work (SOW)—What’s in it?

The PMBOK® Guide references 5 inputs to the 4.1 Develop Project Charter process, two of which are the generic Enterprise Environmental Factors (EEF) and the Organizational Process Assets (OPA), the “company culture” and “company processes” that are inputs to many PM processes. The other three are the Project Statement of Work, the Business Case, and Agreements.

Here are more detailed descriptions of these three inputs.

a. SOW
The components of the Project SOW are as follows:

1. Business need–why do the project?   It could be because of market demand, technological advance, legal requirement, government regulations, or an environmental consideration.
2. Product scope description–characteristics of the product, service, or result for which the project is undertaken.
3. Strategic plan–the project must contribute to the organization’s overall objectives or high-level mission statement

b.  Business Case

How is the business need (the first element listed above) different from the business case? The business case takes the business need outlined in the SOW (element 1 in the chart above) and justifies how the result of the project (element 2 in the list above) will satisfy that need AND align with the strategic goals of the organization (element 3 in the list above).  It is the analysis that ties together the 3 elements of the SOW like so:

c. Agreements

As mentioned above, IF the product is to be made for a customer, then the SOW may come from the contract, a memorandum of understanding (MOU), a letter of intent, or some other form. The key is that the statement of work may come either internally (from the sponsor) or externally (from the customer).

Now that we have established in detail what the Project Statement of Work is, let’s discuss the Procurement Statement of Work.

5.  Procurement Statement of Work

The Procurement Statement of Work or SOW is derived from the project scope baseline (which consists of the project scope statement, the Work Breakdown Structure or WBS, and the WBS dictionary), which is one of the inputs to the process 12.1 Plan Procurement Management.    It is that portion of the project scope which is to be included in the procurement contract. As the Project SOW is the “seed” of the project as a whole, the Procurement SOW becomes the “seed” of the procurement, which from the seller’s standpoint will become the seed of that company’s project, which will be to produce and deliver that procurement to the buyer.

Like the Project SOW, the Procurement SOW needs to be clear, complete, and concise (with the understanding that the requirements of being “complete” and “concise” can sometimes seem to be in conflict and need to be balanced).    In terms of being “complete”, it needs to have sufficient detail for the sellers to determine if they are capable of producing that product, service or result.    Such details can include:

• specifications
• quantity desired
• quality levels
• performance reporting requirements
• deadlines
• collateral services required (such as post-operational support for procured item)

The Procurement SOW is then incorporated into procurement documents (another output of this process) used to solicit proposals from sellers.    Examples of such procurement documents include:

• Request for Information (RFI)
• Request for Proposal (RFP)

Once the seller makes a proposal to the buyer, the Procurement SOW is refined by both sides and then put into the procurement contract.

Another output of the 12.1 Plan Procurement Management process is the source selection criteria that, together with the Procurement SOW, are put into the procurement documents.    What elements go into the source selection criteria is the subject of the next post.

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This series of posts take the Ken Wilber’s introduction to Integral Theory called A Brief History of Everything and discusses the 20 tenets concerning the concept of a holon and how they can be applied to the field of project management. This post covers tenet #3.

A holon is an entity which consists of components, and yet is itself a component of a larger whole. The reason for the introduction of the concept is that bridges the philosophical divide between those who think that reality is composed of isolated units (atomism) and those who think that it is composed of a large web of interconnected parts). The first two tenets are as follows:

1. Reality as a whole is not composed of things or processes, but of holons.

2. Holons display four fundamental capacities: The horizontal capacities of self-preservation, self-adaptation, and the vertical capacities of self-transcendence and self-dissolution.

To those two tenets discussed in posts from the previous two Sundays, I add the third tenet.

3. Holons emerge

The self-transcendent capacity of holons is a vertical drive, meaning that holons have an innate capacity to organize into a larger holon. Atoms organize into molecules, which organize into cells, etc. But the larger holon (larger in the sense of complexity, and not just in terms of size) not only comprises the smaller holons within it, but adds to it the emergent properties that come from the interactions between them. Molecules can form chemical compounds that form reactions that do not occur between isolated atoms, and cells can participate in biological functions such as reproduction that do not occur between isolated molecules.

What does this have to do with project management? A group of interconnected projects is organized into a program, and a group of projects and programs that achieve the same overall strategic goals is organized into a portfolio.

The program and portfolio manager deal with problems that differ not only in degree but also in kind from the project manager. A project manager needs to report to these managers in such a way that their needs are met as well.

To repeat an example from the previous post in the series, a project manager who tries to get the cost and schedule performance index as high as high as possible should realize that from a program manager’s standpoint, too high of an index is not desirable either. This would mean that the project manager used less resources than he or she was given to work with in the schedule and budget, which would seem like a good thing. But if too many resources pile up unused, the program manager will want to use those resources for the other projects in his or her portfolio, and may see these unused resources as a waste. So releasing unused resources to the program and the company as a whole should be in the back of a project manager’s mind as well as the more usual consideration of not wanting to use more resources than originally given by the program manager.

Going in the downward direction instead of upward, the same principle applies. A project is more than the sum of the people working on it; they must function as a team. This means that creative solutions to a problem will be sparked between members with different perspectives that would not have occurred of the members had thought about the problem individually.

The project manager must reconcile competing ideas, or allocate project resources between members that come from different departments, and who therefore will have different perspectives. A blogger I know named Driftglass once described during a podcast a situation in a company he used to work for in the IT department. The software engineers who wrote the initial programming code would always try to get their code written before the deadline so they would appear as heroes in the organization as a whole. The only problem was with the next group of engineers who would have to patch together the code into a coherent system only to find it laden with bugs and errors that took so much time to correct that they would regularly blow past deadlines. This brought them negative attention from management. “Why can’t you be more like that first group of engineers? They always make their deadlines; why can’t you?” They gave incentives to the first group, and penalized the second group. This incentivized the first group to create code in an even more hurried and slapdash fashion on the next project, and of course the beleaguered second group had increasing problems of morale. This blogger said that the project manager was clueless as to the real reason for their delays, and just thought they were making excuses. The project manager did not understand the interaction between the phases of the project work, and thus failed in managing the project as a whole, which should be a set up as a non-zero-sum game of its members. The wins of one team member or group of members should never come at the expense of others.

The final example comes at the enterprise level. I read in a post by Yves Smith in her blog Naked Capitalism about a hedge fund manager who became the CEO of Sears. Because of his ideology inspired by the writings of Ayn Rand, he had a preconception that “capitalism = competition”, and so thought that his departments should compete against each other for the company’s resources. This management model has proved disastrous for Sears as their plummeting sales have demonstrated. Using the concept if a holon, you can see that a firm like Sears is a part of a larger whole consisting of other similar firms. They do indeed compete with each other and that competition does form one of the ingredients of a capitalist economy.

However, the firm is also at the same time a whole which consists of parts called departments. These must cooperate, not compete with each other, if the firm is to survive. What is happening now is that the mental energy of those in the departments is spent not on fighting the competition, but in fighting each other. The end result is that Sears is losing to the competition which consists of firms that are not embroiled to the same extent in infighting.

So holons at the same horizontal level that cooperate may allow the holons at the next highest level to be stronger in their competition. This is easy to see in the realm of biology where prey can gain survival advantage over stronger predators by cooperating in groups, where they would have no chance to win again the predator on a one-to-one basis.

For that reason the project must always look at the project as a whole, and must always remember that the project is simultaneously a part of a larger whole, the organization which is sponsoring he project. Only by holding these two aspects simultaneously in one’s mind as a project manager can you balance the combination of cooperation and competition that is the truer picture of the life of an organization than a simplistic ideology of pure competition that exists nowhere but in the pages of a novel.

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On January 24, 2010, a catastrophic earthquake of magnitude of 7.0 struck 25 km west of Port-au-Prince, the capital of Haiti.   A non-profit group called Little by Little had just finished a medical mission in Haiti at a clinic sponsored by Mountain Top Ministries.   They had gone back to the house they were staying in and preparing for their trip back to the United States the following day.

All of a sudden, they heard a sound that one of them described as a sound like an 18-wheeler careening of the road and coming straight for the house they were staying in.     Then the ground started shaking, and outside the trees were swaying violently as if caught in a severe windstorm, although the sky above was clear blue.    They realized they were experiencing an earthquake, but one more violent than those even from Haiti had ever remembered experiencing.    The house they were in was intact, but they decided to try to go to the clinic they had just finished working at to see if it people needed help.

And then, an hour or so later, reports came in to the clinic that they were desperately needed in the capital of Port-au-Prince.    Their experiences during the next 8 hours form the basis of a documentary by Mercedes Kane.    She is a filmmaker who graduated from Governors State University in University Park, who when talking to her sister-in-law who had been one of the members of that medical mission, thought that it would make a great subject of a documentary.   She went to a screening of the film at the Unitarian Universalist Church in Park Forest tonight (August 24, 2013), and she stayed for a question and answer session afterwards.

The film is based on the experiences of the medical mission team as seen through the eyes of those who experienced it, especially Sue Walsh, who wrote a book about the experience called Walking in Broken Shoes.    The title of the movie comes from one point, where in the midst of witness tremendous human suffering at the hospital, Sue Walsh remembered something that one of the pastors had said in a sermon that he gave to the Little by Little team just before they left for Haiti.   He compelled them to use their faith to see in the eyes of the sufferers they were going to help “the face of God” that would help them treat those people with grace, love, and humility.

The most moving part for me came at the end of the movie when Sue Walsh describes collapsing in a bed at the end of the most gruelling 8-hour shift of her entire life, when her clothing was still covered in the viscera of the people she had been desperately trying to help.    She felt a strange calm, almost like that of a mother for a newborn baby, whose clothing may be covered in fluids from the baby’s own body, and reacting to the experience not in disgust, but with a sense of being physically bonded to the baby in a way almost impossible to describe.    She was now bonded to the Haitian people in a similar visceral way that would make the earthquake a life-altering experience for her and others on the team.

The film had a profound impact on the audience at the screening as well, and the film was followed by a half-hour of questions from the audience about how she came to make the film, and why she thought it was important to make it.

I recalled reading stories about the earthquake brought out the worst in some people in Haiti, as looting and violence broke out in several places in the struggle for scarce resources.   So it was important to revisit the history that event and show how it could bring out the “better angels of our nature”, among the volunteers from the United States who went to Haiti to help the Haitian people help themselves, and of course among the Haitians themselves.

I thank the Unitarian Universalist Church of Park Forest for hosting the screening, and for Mercedes Kane for spending the time to answer questions from the audience.    You cannot NOT be moved by this film, and I heartily recommend that you watch out for the opportunity to see it in the months ahead as it goes into distribution.

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I have been asked by the Area Governor to become the Assistant Area Governor.   This is the second time I’ve been given this opportunity, and I had a one-word response to his request:  YES!

The reason is because I remember the last time I was an Assistant Area Governor, when I was in my previous Toastmasters club in Orange County, California, and I learned so much during the experience.    When I moved to Chicago at the beginning of the summer, and joined my new Toastmasters Club, I was searching around for a way to “step up my game” and become a larger part of not just my own club, but the surrounding area, division, and district.

I am writing this post to describe the 5 ways an Assistant Area Governor (or Assistant AG) can assist the Area Governor (or AG) and even more importantly, the 5 ways that an Assistant AG can gain from the experience.

A.   Five Ways an Assistant Area Governor can Help the AG

1.   Area Visits

An Assistant Area Governor can assist the AG with visiting the clubs in the area.   An AG must visit each of the clubs in his or her area, AND do what is called a Club Report for each of those clubs.   If you have 4 clubs, that means 4 visits, right?   Well, the time investment is greater than just 4 evenings spent at the area clubs–it means you have to write the club reports, and you have to sometimes follow up with each club to get all the information you need for the report.   In our Area, there are two NEW clubs being added to the 4 already there.    That means that the AG has 50% more club visits to do, so he felt he needed some help.    It was the fact that I had already been an Assistant AG before that made our AG think of asking me to become his assistant.   I will go with him to the club visits and help him with the reports.

2.  Area Speech Contests

The Area Speech Contest is more complicated than the Club Speech Contest because you need to organize the venue. coordinate the schedule with all of the clubs in your area that are doing their own speech contests, and you need to staff the contest with judges, timers, contestants, contest masters, not to mention those who run the registration desk or set up refreshments.   For those Areas that using the speech contest as a fundraiser, you must also set up an opportunity drawing (raffle).     An Assistant AG can help the AG set up and run the Area Speech Contest.

3.   Division Council

If the Area has an Area-wide meeting with the AG, president and VP Education of all the clubs in the area, then the Assistant AG can help with this.

4.  District Executive Committee

The District Executive Committee meets once a month to discuss district-wide issues, and all AGs and Division Governors are invited.   An Assistant AG can assist by going to these DEC meetings and helping discuss the issues affecting the area and then disseminating any information gained from the District Officers.

5.   Club Mentoring

If there are new clubs in the area, they need to be guided in the first six months of their existence, and this task falls on the Area Governor.   An Assistant Area Governor can assist with this.

So that outlines what an Assistant AG can do for the AG.   But what does the Assistant get out of the experience?

B.   Five Ways an Assistant AG can Gain

The main reason why an Assistant AG can gain is by preparing oneself for becoming an AG in the following year.   How does this work?

1.  Preparation for AG role–knowing the area clubs

An Area Governor who already knows the clubs in his area, and all the prominent officers of those clubs, is going to have an easier time assisting them with what they need because a) he or she will already be familiar with their needs and b) he or she will already be familiar with the officers who will need to make use of any assistance provided.

2.  Preparation for AG role–knowing division, district

An Area Governor who already knows the officers in the division and district will be able to spend time from the first day of his or her office solving problems, rather than developing relationships with those who are in a position to help solve them.

3.  Preparation for AG role–contest master

By assisting with the Area Contest, all of the lessons learned as an Assistant AG will mean that the contest will go REALLY smoothly when he or she takes over the AG role.

4.   Club mentoring

Because the AG knows of all the new clubs forming in the area, he or she can steer an opportunity to the Assistant AG to charter, sponsor, or mentor one of the new clubs.   This is an important milestone and one of the most difficult and time-consuming projects that one often takes as the last step in becoming a Distinguished Toastmaster or DTM , the pinnacle of completion of both the public speaking and leaderships tracks in the Toastmaster Educational program.

5.   Networking

If you are looking for a new job, or what to be prepared if you have to look for a new job in the future, then the contacts you make as an Assistant AG at the club, area, division, and district level will be invaluable for you in establishing yourself as a brand that will add value to any prospective company you want to work for.

In these ways, you get as much as an Assistant AG as you give to the AG by assisting him of her in his role.   If you are interesting in stepping up your Toastmasters game beyond your home club, then definitely ask your Area Governor if he or she needs an assistant!

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1.  Introduction

It should come as no surprise that the output of process 12.1 Plan Procurement Management is the Procurement Management Plan.  The purpose of this post is to outline the various elements in the plan.  They are listed in the 5^th Edition of the PMBOK® Guide as a sort of laundry-list in bullet point format, but I felt it would be better to understand the contents of the plan by grouping each element with what knowledge area it most closely relates to, or whether the element has to do with Enterprise Environmental Factors (external to organization) or Operational Process Assets (internal to organization).

2.  Elements of the Procurement Management Plan

Most of the knowledge areas were represented in the items listed by the PMBOK® Guide as elements of the Procurement Management Plan; I added some elements for those knowledge areas that were missing such as Quality Management (quality metrics to be used as performance criteria in final acceptance or rejection of deliverables), Stakeholder Management (including suppliers as stakeholder group to be managed), and EEFs (industry or professional organization information resources regarding potential sellers).

3.  Conclusion

You can see from the Procurement Management Plan that all of the knowledge areas of the project management plan are addressed.   This is understandable since, from the seller’s point of view, the production of the procurement for the buyer is a project in and of itself.    The task of the buyer is to coordinate the seller’s “project” (the procurement) with the buyer’s project (the creation of the product, service, or result) for which the procurement from the seller will be used.

The next post will discuss another key output of the Procurement Management Plan, the Procurement Statement of Work.

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1.  Introduction

Chapter 12 of the 5^th Edition PMBOK® Guide covers Procurement Management, and the first process 12.1 Plan Procurement Management has as its main output the Procurement Management Plan, which sets out the guidelines, policies, and procedures for conducting, monitoring and controlling, and then closing the procurement process.

The very first tool & technique of the process 12.1 Plan Procurement Management is the Make-or-Buy Analysis.  If the decision is made to do all the project work in-house, as opposed to purchasing some components of the project work from outside sources, then there will be no procurements.  In a way, you can say that the knowledge area of Procurement Management is the only optional knowledge area in that it is conceivable to have projects that do not require procurement management during the course of the project.

But even so, in the planning stage, it is necessary to plan for the possibility of procurements unless it is absolutely certain from the scope of the project that they are not going to be needed.  How do you know whether the possibility becomes a certainty?  Through the Make-or-Buy Analysis.

2.  Make-or-Buy Analysis:  Direct and indirect costs

The costs of producing the component of the product in-house are compared to the costs of having the component produced from outside sources.  PMI stresses the important point, however, that both direct and indirect costs must be considered.  The direct costs are those of making or acquiring the product, and the indirect costs are the support costs for the product.

For example, if you buy a software package from a company, you need to consider the support that this software package will require, in terms of training for the team members who will use it, the necessity for upgrades, and the “help desk” required for team members who have questions regarding its usage.

Another indirect cost is the cost incurred if the quality of the component does not conform to specifications, either those set by the company (i.e., some components lie outside the control limits) or worse, those set by governmental regulations (i.e., some components lie outside the specification limits).  These costs of non-conformance may include

•  the costs of scrapping the non-conforming components or repairing them  or the warranty and product liability costs if the non-conforming components are caught in the inspection process
• the costs of warranty or product liability claims and/or lawsuits if the non-conforming components are not caught in the inspection process and are passed on to the consumer

For this reason, a high-risk component (such as the airbags in an automobile) might be best left to a company that has specialized knowledge in producing them.  In a way, procuring high-risk components rather than producing them in-house is one form of risk response called risk transfer (purchasing insurance is yet another form of risk transfer).

3.  Make-or-Buy Analysis:  Purchase vs. Lease

If a company decides to buy a product rather than make it in-house, then another level of decision must be made, whether to purchase the product, result, or service outright or whether to lease it from the seller.

4.  Make-or-Buy Analysis:  Cost Risk

In describing the make-or-buy analysis, PMI uses the phrase “risk sharing between the buyer and seller”.  In order to avoid confusion between this kind of risk, and the risk I mentioned in paragraph 2 as one of the possible indirect costs associated with purchasing a product from a seller, let me refer to this first type of risk as “cost risk”.

How does this differ from regular risk?  To answer that question, let’s go to the textbook definition of risk:  an uncertain event or condition that, if it occurs, has a positive or negative effect on one or more project objectives.  If one of the project objectives is considered producing the overall product within the allotted budget, then the cost of purchasing a component of the product from a seller has a cost risk, i.e., the risk that the actual final cost of the component may differ from what the initial budgeted cost is for that component.  And this is where the contract type comes in.  In a previous post, I outlined the three types of procurement contract, a) fixed cost, b) cost-reimbursable, and c) time & material contracts.

In fixed cost contracts, the cost risk is borne by the seller, since if the final cost of the component differ from the initial budgeted cost, then the seller is only paid the initial budgeted amount, and the seller will end up producing the component at a loss.

In cost reimbursable contracts, the cost risk is borne by the buyer, since if the final costs of the component differ from the initial budgeted costs, then the buyer pays the seller the final costs.  The seller will end up producing the component at a profit, but the buyer is now over budget on the project.

The “uncertain event or condition” in this case has an effect on the cost objective of the project.  However, there are other types of risk to the project, for example, the risk that the schedule objective (the deadline) or the quality objective (meeting all technical requirements) that need to be considered in the make-or-buy analysis.  There are ways of modifying the fixed cost or cost reimbursable contract so that not just the cost risk, but the overall risk is shared more equally between the seller and buyer.  This is done by offering fees, awards, or other incentives for the seller to produce the product not just within the budgeted amount, but on time and in conformance with the buyer’s scope requirements.

5.  Conclusion

The three most important concepts to remember when it comes to the make-or-buy analysis are the following:

•  to compare the cost of making the component in-house vs. purchasing the component from outside the company, you need to consider both the direct costs and the indirect costs (cost of ongoing support for the component, cost of nonconforming quality, etc.)
• if the make-or-buy analysis leans towards “buy” rather than “make”, the type of procurement contract will depend on how the risk is to be shared between the buyer and seller; fees, awards, or incentives can be specified in the procurement contract as ways to make the risk sharing more equal between the two parties
• in considering the risk, you need to take into account the cost risk (risk to the cost objective of the project, i.e., whether the final cost of the component will exceed the initial budgeted cost for that component), as well as the other types of risk (such as risk to the schedule, scope, and specified level of quality).

The other tools & techniques of process 12.1 Plan Procurement Management include expert judgment, market research, and possibly informational exchange meetings with potential bidders.

The output of process 12.1 Plan Procurement Management is the Procurement Management Plan, and the next post will outline the various elements that this plan entails, and how these elements relate to the other 9 knowledge areas involved in project management.

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Tonight we had the Fall Speech Contest at our local Toastmasters Club. Some things worked out well, but there some glitches as well. I wanted to write down 5 lessons learned from this recent contest which will help us next time around.

1. Send out instructions for major roles early

I composed step-by-step directions for each of the roles, including the contestants. That worked out well. However, the major roles such as chief judge were sent by e-mail only this afternoon and people need more time to absorb the information. Next time: send it at least one week in advance.

2. Enlist help from visitors from other clubs if necessary

We had several club members not show up, which left us shot-handed. But we decided to enlist the help of those who were visiting from other clubs, and that worked out well. So in the future, we should start visiting other clubs as well to ensure that we will have visitors from other clubs in the future when we may need them again.

3. Appreciate those participants from other clubs
I had Certificates of Appreciation made for our contestants, but not for the helpers from other clubs I mentioned in the last paragraph. Luckily I had an extra blank certificate printed up just on case I needed it, which I gave to the test speaker. In the future, I’ll print out several extra certificates and give them to those whose help we enlisted.

4. Have extra dialogue ready
There are times when the contest flow stalls, for example when the judges are not ready with their ballots yet. In those cases, rather than observe a “minute of silence” which is not interesting to experience as a guest, it is best to have some jokes or conversational tidbits ready to fill in those spaces.

5. Print extra agendas
Because it was a club contest night, there were more visitors than we normally would get. That’s a good thing! However, that also meant we almost ran out of meeting agendas, which are important for a visitor to receive in order to follow what’s going on. Next time, I’ll have extras printed up!

The spring contest should go even more smoothly if I keep these five lessons in mind!,

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