Wednesday, August 14, 2013

Agile in Fixed Price Fixed Scope projects - Hybrid Contracts

It is well known that the traditional methods are not yielding to a better success rate of a project and thus there is a tendency to lean on Agile Methodologies. At the same time, clients feel secure with Fixed Price and Fixed Scope project as their financial outlay is limited and there is no ambiguity. What they miss however in this process is the value delivery. The traditional project management methodologies focus on the Scope, Time and Resources where all three are constraints. Ideally the focus should be on the Value and Quality delivered, given the constraints there by guaranteeing a better success rate of the project.

The software vendors are doing business and they work to earn profits. As such, with Fixed Price projects, the vendors tend to limit their efforts to deliver the agreed scope. With the pace at which changes are happening around any business, freezing scope for a project early on is nearly impossible as software delivered to such scope frozen early on is often less usable. With change is the key driver in optimizing the value delivery, clients and vendors have conflicting views on the change.

Agile methodology has evolved over these years and offers a solution to the problem of optimized value delivery. However, clients still feel that Agile approach does not secure their interests in terms of a definite price and time. Of course, their concern is genuine as they cannot afford to sign a project contract where the cost and time are elastic. While the basic premise of Agile is to embrace the changes, to succeed, it depends on a very high level of trust between the vendors and the clients, where both should work for a common goal and the contract should be profitable to both.

Having said that the Fixed Price (FP) Fixed Scope (FS) contracts offer very limited opportunity for vendors to practice Agile methodology. Making either FP or FS elastic will give some room for practicing Agile methodology. Let us explore how this can be accomplished in the contracts. Both the above contracting models requires a high level of trust between both the vendors and the clients.

Fixed Price Elastic Scope (FPES) contract: In this model, while the price is fixed, the scope can be variable. This model can practice a hybrid Agile approach, the scope is broken down to features and the development happens feature by feature. Depending the time taken to implement a feature, more features are added or removed. For instance, if a feature estimated to take 30 days is implemented in 20 days, one or more new features can be added to fill the time saved. Similarly if the implementation takes 45 days, then one or more features will be removed.

To bring in incentive for both vendors and clients, a discount factor can be agreed upon, which is applied while adding or removing features. For instance, in a case where the vendor has saved 10 days for a feature, the client instead of adding a feature that needs 10 days to fill the gap, will only add a feature with 5 days of effort, where the discount factor would be 50%. The same discount factor is applied on the converse (where implementation exceeds the planned effort).

Elastic Price Fixed Scope (EPFS) contract: In this model, the Scope is fixed, but the pricing is variable. The idea behind this approach to is arrive at a base rate and a profit factor. While the base rate and the profit factor, along with the generic terms and conditions are covered in the Master Services Agreement, the actual project scope can be covered in multiple Statement of Works (SoW). Requirement elicitation and scoping can be the first SoW. This way, the project can be split into smaller working software modules and the work items can be scoped in stages / phases. This approach will help the clients in handling changes with ease.

Here again, an approach like 60:40:20 can be adopted to prioritize the work items. This approach requires the work items to be grouped into Must have features, Good to have features and Fixes. Every SoW can comprise of 60% of Must Haves, 40% of Good to haves and 20% of fixes emerged out of previous deliveries.

The incentives for both vendors and clients can be based on categorization of the work items as New feature, Clarification, Fixes. New features are the scope items as elaborated during elicitation. Clarifications are such items that emerge out of elicited requirements during the design or build phase. Fixes are incorrect implementations by the vendors, basically design and build defects. Costs for each SoW can be computed by applying the profit factor on the base rate. For instance, the New features will be charged at base rate + profit, clarifications will be charged at base rate and fixes will be charged at base rate - profit.

With the above, we are not concluding that Agile cannot be practiced in an FPFS project. There are still ways and means that a hybrid agile approach can be thought of and practiced so that value delivery is the primary focus for all the parties. Do share your thoughts in the form of comments on the subject, and I will cover those in my next blog.