This document discusses challenges with traditional fixed price and time & materials contracting approaches for outsourced projects and proposes an alternative approach called feature point pricing. Feature point pricing involves agreeing on a price per unit of work, jointly estimating work in units, delivering completed units at the end of each iteration, and only paying for accepted units. This aligns incentives between the customer and supplier and allows for flexibility and collaboration similar to agile methodologies. Key benefits include only paying for working software, customer control over budget and prioritization, and embracing change. Open communication and fair allocation of risk are also important principles.

1. ...There has to be a
better way
Agile Edge October 2009
Toby Mckenzie

2. Why do projects fail?
Projects fail due to poor communication
between stakeholders
Regardless of the ‘Agile’ methodology - they
seek to address this

3. Communication

4. Agile Manifesto
Individuals and interactions over process and
tools
Working software over comprehensive
documentation
Customer collaboration over contract
negotiation
Responding to change over following a plan

5. We’ve heard the benefits
rd
of Agile
...but how do we deliver these benefits in an
outsourced relationship

6. Contracts sh
should protect
not dictate
an exchange of promi
mises of which the law will
provide a remedy
an agreement creating and defining the
obligations between two or more parties

7. Typical ways of procuring
ys
services
Fixed Price
Time & Materials

8. Fixed Price - The Good
Works well with stable requirements
e.g. Legislation projects

9. Fixed Price - The Bad
Illusion of control
Low in Collaboration
Not change friendly
Late visibility
Rarely get the best price
High cost of procurement

10. Time & Materials - The
Good
Responds well to change
Does not assume that you know exactly what
you want upfront

11. Time & Materials - The
Bad
Asymmetric distribution of risk
No incentive for a supplier to deliver early

12. So what are the
alternatives?
If it was my money, how would I want to
contract

13. What we don’t want
An Asymmetric Risk Profile
To pay for changing requirements
The contract to stop us from doing the right
thing for the project
To waste time (and money) producing a
detailed specification to argue over that will
change

14. What we want
Open and honest communication
A fair allocation of risk
To only pay for working software
To be able to prioritise the features according
to value not contract
To be able decide when it is done
To be more aligned with Agile development

15. Sounds simple...
and conceptually it is...

16. In a nutshell
Agree a price per ‘unit’
Perform joint estimation on the feature in
‘units’
Deliver the completed features at the end of
the iteration
Only pay for accepted features

17. How do we define
acceptance?
Before accept a feature into an iteration we
must define the acceptance criteria
Acceptance criteria must be unambiguous
Must be mutually agreed

18. How do we agree the
price per ‘unit’
Calibration

19. Joint Estimation?
If we cannot agree the estimate, it is because
one party does not understand something

20. Feature Point Pricing -
The Good
You only pay for accepted features
You are in control of the budget
You are in control of feature prioritisation
Change is embraced

21. Feature Point Pricing -
The Bad
Requires commitment from you

22. Risk
Risk should be born by the party best able to
manage it.
Uncertainty in the domain
Customer
Uncertainty in the technology
Supplier

23. Questions you will
always get
How much is it going to cost
How long will it take
Are you getting value for money

24. Next Steps
Get involved

25. Questions?

26. Reasons we outsource
Capacity Deficit
Skills Deficit
Risk Mitigation
and often all of the above

27. More aligned to ‘Agile’
Some guff from Agile Manifesto

28. As a Supplier
...I am tired of writing contracts to cover my
arse
...I am tired of negotiating with customers
details I know will change
...I am tired of watching what I say
...I am tired of doing what the contract requires
w
rather than what is right for the project

29. As a Customer
...I need to control the cost of my project
...I need to demonstrate value for money
...I need to satisfy my stakeholders
...I want an open and honest relationship
...I want to deliver business value rather than
negotiating if something is a change or not
...I need to achieve an outcome

30. Incentive Models
Completion bonuses
Revenue Share

31. What we are going to talk
re
about
Back to basics / Scene setting AKA Intro
Review of contracting approaches
Strengths & Weaknesses
Explore Alternative Approaches

32. Feature Point Pricing
We are used to creating product & iteration
backlogs
We are used to prioritising features / user
stories
We are used to estimating small units of work