Clients hate surprises! At least, they hate the ones that don't involve a clown popping out of a big box. The key...
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issues here are the management of expectations and the art of negotiation. Let me explain.
You should avoid shocking the heck out of a client by surprising him with a budget overrun or schedule slippage. By keeping an eye from the start on the expectations of the customer in respect to time and money, you can prevent this. Most of all, you need to know why the expectations are shaped like they are. Is it because the manager is only authorized until a certain budget? Because a nephew of his wife's brother drunkenly said at a dinner party that it should not take more than 4 months? Because all the costs have to be booked with this quarter? Why?
Rarely are budget and schedules really fixed and unmovable (Euro introduction and Millennium were exceptions). So find out the real reasons and generate alternatives that are more realistic and keep in line with the real reasons. And while running the project, make sure you keep providing feedback to the customer so that his needs are still met.
If, sadly enough, you did manage to catch the customer by surprise, you have to negotiate the best deal you can make. For this you need the reasons behind his expectations as mentioned earlier. Also, you need to consider what the client wants from the project in the first place; conquer a new market before the competition does, or replace the legacy systems before they collapse and endanger the production. You need to know the business priorities: speed, quality, scope and so forth? If speed it is, try to negotiate a smaller scope, but keeping the schedule. If scope of the new service is fixed and it should be on the market before the competition does, leave out some quality. Make sure you explain to the client the trade offs to be made. You cannot have it all!
If after all this you succeeded in negotiating a new deal with the client, keep him in the loop from now on! Manage expectations from the start. A lot of project managers (PMs) think that by making their project transparent to the client, the customer will spot all the problems. DUH! The customer will find out anyway. By making the project transparent, the client doesn't get informed after everything taken place. You manage expectations effectively, and you get the bonus of a proactive client, they can help you out if they know problems before they occur. Afterwards they can only complain.
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