Mike MacDonagh's Blog

Somewhere in the overlap between software development, process improvement and psychology

Tag Archives: business

Agile contracts? What about Weighted Fixed Price?

MichaelangeloAgile contracts are tricky. In fact Software Development contracts are tricky. Software development is a non-deterministic creative endeavour, you’d be better off trying to nail down the acceptance criteria for one of Michelangelo‘s sculptures than a typical software project. Software is complex.

A few years ago I was involved in putting together a contract model called “Weighted Fixed Price” and recently it occurred to me that I’ve never blogged about it, so I’ve dragged myself away from the source to do so.

What’s wrong with the normal models?

So, fixed price is bad because it only works when you can really accurately define the requirements, acceptance criteria and the potential risk exposure is tiny. Otherwise you get schedule and cost over-runs, formal change control etc. etc. Of course supplier’s always build in their risk buffer into the fixed price so it tends to cost a little more than honest T&M would. Software work is rarely this predictable which is why there are so many high profile failures.

Time and Materials is bad because it’s hard to manage across commercial boundaries and customers can feel that they’re paying for nothing, endlessly. Even defining waypoints is difficult due to changes in requirements and over time. Unscrupulous suppliers could just sit back taking the money, delivering as little as possible to avoid gross negligence but nothing more. Scrupulous suppliers could be working hard but hit by the many and varied risks arising from such complexity and yet perceived by their customers as the unscrupulous.

Of course there’s variations like Capped T&M, Phased Fixed, Phased Capped T&M etc. but they all start getting a bit complicated and hard to manage, not to mention open to gaming.

Then there’s models like pay-per-point and other “incentive” schemes that raise over-complication, missing the point and gamability to an art form. Just say “no”.

Competition

The real incentive to suppliers to do a good job is follow on work. That means that as a customer you need your suppliers to be in a competitive market, being locked in to individual suppliers leads to captive market behaviours.

Weighted Fixed Price?

In an attempt to put something in the middle between Fixed Price for low risk exposure and T&M/internal for high exposure I put together “Weighted Fixed Price”. The idea here is to to basically use a Fixed Price model but have suppliers weighted by previous performance affecting whether they get the business or not.

So if a supplier 1 delivers 10% late on Project A then when we’re looking to place Project B for 500k and we’re looking at each supplier’s estimates then we’ll add 10% to supplier 1′s estimate.  That means all over things being equal we’ll choose the other supplier’s who typically come in closest to, or even under, their previous estimates. Weighting is transparent to each supplier but not across suppliers.

This provides the following pressures:

  • Suppliers don’t want to underestimate, they’ll come in over their initial estimates and adversely affect their weighting and therefore their chance for follow on work
  • Suppliers don’t want to overestimate to artificially lower their weighting or build in risk buffers, they won’t get the work because they’ll cost too much
  • Suppliers don’t want to take on complex, high risk work because they can’t predict the effect on their weighting (more below)

Out-sourcing doesn’t transfer risks to suppliers, because the customer is still the one needing the business benefit and paying for it, especially when things go wrong. The Weighted Fixed Price model is intended to genuinely transfer the complexity risk to suppliers, if they’re willing to take it.

What happens when the supplier finishes early?

They deliver early, watch their weighting affect their potential for winning future work increase massively and enjoy their fixed price money meaning that they’ve increased their profit margin on this job.

What happens when they deliver late?

They deliver late, their weighting increases and they’re less likely to win against other suppliers next time. However, if they could predict that they’re going to deliver late early in the project then they could renegotiate with the customer in light of what everyone’s learned about the work.

What happens when suppliers don’t want to bid for work because it’s too risky/complex?

Excellent, this means that they’re honestly telling us that the work is too risky to predict. This means we shouldn’t be out-sourcing it in the first place, time to stand up an internal team or supplement with some time-hire contracts if we need extra capacity.

Conclusion

The Weighted Fixed Price model is an evidence based contract model can be used in competitive supplier markets for reasonably well understood work with low risk exposure. It incentivises suppliers to estimate accurately and deliver to their estimates as that affects their opportunities for follow on work. It incentives customers not to out-source overly complex risky work.

It’s not perfect because we’re still trying to contractually define how a sculpture should make us feel but it’s something you can add to the mix of contract models you use.

Social Business: Because people do the work

People, working together achieve business goals. Processes, plans and organisation charts don’t.

A group of people forming human relationships and interacting is often called a “team” but another equally applicable term is a “social network”. Add a common goal to do some work as opposed to sharing pictures of their latest cooking/pet/kid and you’ve got a bit of social business going on whether it’s recognised or not.

To get work done effectively you need teams to work together effectively and that means enabling the team to form relationships and collaborate together as a social network.  So how do you create an environment that fosters social networks focussed on achieving their goals and interacting with the wider organisation?

The answer to that question is variously termed “Enterprise 2.0″ (which I hate), “Social Enterprise” and “Social Business” which is a little ambiguous as it could relate to a business incorporating internal social awareness into it’s ways of working but it also refers to businesses who are aware of their interaction with their external community. Both of these meanings are based on the same awareness, only the direction of attention is different.

Any business can be enhanced by enabling people to work well together through cultural changes, process (ways of working) changes and supporting tooling. Image a world where:

  • You have an idea to improve your business capability, talk to your work mates who are sitting near you about it who help you refine the idea a little
  • You post the idea on a general ideas list within your organisation adding some tags to relate it to general topics
  • Other people in the organisation react to your idea based on finding from a tag feed, an activity stream, their relationship (work or social) with you etc.
  • They comment on your idea adding relevant experience and knowledge
  • Someone else IMs (Instant Messages) you about the idea and adds some useful thoughts
  • The idea has formed into something that sounds like it might be worth the company investing some time in, you promote the idea to a company backlog.

So far none of this feels like “work” and yet a network of people are forming around an idea that improves the business adding their expertise and opinions, collaborating on and for the business.

  • The idea gets given some time to investigate so you create an online project area, inviting the previous contacts to have a look and interact
  • You decide to have a meeting to look at the various ways forward for the idea, two team members are remote so they video conference in
  • You blog the meeting minutes to the project area so other interested people can add useful insights
  • During the lifetime of the project various team members post status updates and blogs about the progress, customers and users interact directly through face to face discussion, virtual discussion threads, vote on requirements etc. while the team continuously radiates progress and quality information in an open transparent fashion.

This part was definitely work but socially aware collaboratively work making use of a range of technologies to enhance the team’s way of working.

This is an example of social business, and one which I’ve had for real with one of my clients. You might already have things like wikis, a blogging platform, micro-blogging, social group areas, project areas etc. in which case integrating them and driving cultural change through soft practices to “allow” individuals to interact in a trusted collaborative environment might be necessary.

Alternatively you might have none of these things, but don’t worry you can get them for close to nothing as there are several excellent open source solutions for each of the technology features mentioned, in fact some open source packages (Social Business Software or SBS) can do most if not all of the above!

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