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Agile Contracts by Drew Jemilo (Agile2015)

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Agile has moved far beyond commercial software into the world’s largest enterprises and government agencies. We have scaling methods which can help launch vehicles into the atmosphere and beyond, yet traditional contract mindsets have put a drag on escape velocity. But there’s good news! We have agile explorers discovering the next frontier of contract agility. Join us for this Agile2015 session and enter the new era! This era includes the Scaled Agile Framework® (SAFe®)

TRADITIONAL MODELS TO LEAN-AGILE APPROACHES
Fixed requirements, big up-front design, and gated processes have been the norm. The rationale seemed logical in the past. It would not make sense to award a contract or commit to a major development investment without knowing what the system is supposed to do, how much it costs, and when it will be completed. We assumed that complex systems could be fully defined before they were built, that requirements and solutions would not change, and that we could build it right the first time.

Traditional models exist but Lean-Agile contract approaches are gaining momentum in both the commercial and the U.S. Federal space. Find out more!

Published in: Technology

Agile Contracts by Drew Jemilo (Agile2015)

  1. 1. 1Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Agile Contracts Blast Off to a Zone of Collaborative Systems Building Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Drew Jemilo, CTO Scaled Agile, Inc. @drewjemilo
  2. 2. 2Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Our Lean-Agile scaling methods are keeping pace, but are traditional contracts putting a drag on escape velocity?
  3. 3. 3Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Contents 1. What’s Slowing Us Down? 2. Common Commercial Contract Models – Moving to Agile, Case Study 1: A Consumer Automotive Supplier 3. U.S. Federal Government Contract Models – Moving to Agile, Case Study 2: A Government Contractor 4. Agile Contracts: A SAFe® Approach
  4. 4. 4Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved What’s Slowing Us Down?
  5. 5. 5Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved We Cannot Know Everything Up Front https://en.wikipedia.org/wiki/Dr._Evil $1 MILLION dollars!
  6. 6. 6Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Our Contracts Reflect the Iron Triangle
  7. 7. 7Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Let’s Look at an Alternative… Scope: Detailed requirements with big up-front design Can you really know everything up front? Flexible requirements driven by a vision, backlog, and roadmap Traditional contracts Schedule: Shorter horizon consisting of iterations to show progress through working software and enable fast learning cycles Agile contracts Fixed delivery date with phase-gate milestones Do phase-gate milestones really indicate progress and validate assumptions? Cost: Fixed cost Should we consider cost & Cost of Delay (CoD)? Do we motivate through incentives and penalties? Time & Materials or Shared Pain/Gain (often Incentive/Penalty Cost-Plus in a government context)
  8. 8. 8Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved The Constraint Comes from Traditional Mindsets Procurement We need to know exactly what, when, and how much… and also a discount” Lawyers Let’s reduce risk and avoid law suits” Program Managers Let’s reduce risk by having phase-gate milestones to check on progress” Architects Let’s create the design up front to meet our deadlines” Sales Let’s do whatever it takes to get the bid (and my commission)” “ “ “ “ “
  9. 9. 9Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Attaining Escape Velocity Procurement There’s value in collaborative relationships and mutual motivation” Lawyers Agile can actually lower risk… and there are existing contract models to support it”Program Managers Let’s measure progress through working software, business value achieved, and risk reduction” Architects Let’s keep our design options open as long as is economically feasible” Sales Let’s not just get new customers… let’s create happy ones” “ “ “ “ “
  10. 10. 10Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Common Commercial Contract Models
  11. 11. 11Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Firm Fixed-Price Contracts  Overview: – Fixed price and delivery date – Assumes fixed requirements – Changes usually come with a fee – Risk shifted to supplier  Pros: – Well understood in the industry  Cons: – Requires up-front detailed specs and risk analysis – Changes can be expensive – Final cost and delivery date are less predictable – Promotes the “blame game,” and reduces transparency $
  12. 12. 12Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Time and Materials Contracts  Overview: – Price based on rate – Contract does not contain a complete specification of the system – Ends as specified by customer – Risk shifted to customer  Pros: – Well understood in the industry – Good if vision and solution are unclear  Cons: – Lack of objective milestones – Can encourage supplier to maximize billable time 
  13. 13. 13Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Cost-Plus Contracts  Overview: – Customer pays for all supplier’s cost plus an additional fee that contains the profit. Variations: • Cost-Plus Fixed Fee – Supplier has pre-specified profit fee • Cost-Plus Incentive Fee -- Supplier receives a higher profit fee if they meet or exceed a specific target • Cost-Plus Award Fee -- Supplier receives awards based on more subjective determinations like quality, timeliness, and responsiveness – Risk shifted to customer compared to Firm Fixed-Price contracts  Pros: – Allows more flexibility than Firm Fixed-Price contracts  Cons: – Promotes “gaming the system,” the “blame game,” and reduced transparency
  14. 14. 14Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Target Price Contracts  Overview: – Contract contains a target in effort, a negotiated profit for the supplier, and often a deadline – May be set up with minimum and maximum hours – Both sides have “skin in the game” and share in the pain/gain – Contract awards take into account trust and collaboration, not just cost – Risk shared; overruns and underruns are split  Pros: – Increases collaboration, incents scope management, and drives transparency  Cons: – Requires reasonable clarification of ambiguities and risks, but overall, a good “Shared Pain/Gain” model
  15. 15. 15Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Agile Contract Trends  Overview: – Has vision, flexible roadmap, and backlog, but variable scope – Has fixed quality – Has a price range or ceiling – Has scope and expense management processes; governance and decision-making processes; and motivational and cooperative models – Has "Checkpoint Phase" to test cooperation and "Exit Points" for contract termination  Pros: – Has benefits of Agile, with a governance process for “checks and balances” – Fast feedback cycles provide greater supplier performance visibility  Cons: – Requires a new way of thinking by Procurement, Legal, etc.  For more information, see Agile Contracts: Creating and Managing Successful Projects with Scrum, Andreas Opelt, et. al., 2013, Wiley Publishing
  16. 16. 16Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved A Consumer Automotive Supplier Moving to Agile, Case Study 1:
  17. 17. 17Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Context  “SupplyCo” supplies parts to an automotive company (“AutoCo”)  AutoCo integrates components (mechanical, firmware, software) from hundreds of suppliers  AutoCo does an up front best-effort analysis  Despite ambiguities, AutoCo needs a cost range from each supplier (the magnitude is in the millions to billions of dollars)  SupplyCo is a strategic supplier and treated like a partner; collaboration is as important as cost
  18. 18. 18Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Outcome  A “Fixed-Price Plus Changes” contract was used, with a buffer based on historic data  Before the contract was binding: - They gained agreement up front on capabilities which were then broken down into hundreds of features - They created a flexible roadmap, knowing it would change - The agreed to share cloud-based tools to increase transparency and reduce hand-offs  Once the contract was binding: - Change requests went through a Kanban system to reduce delays - Plan adaptation happened at increment boundaries
  19. 19. 19Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved U.S. Federal Government Contract Models
  20. 20. 20Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Government Contracting Context  Federal Contracting Officers have more power, delivery responsibility, and personal liability  Competitive bids are required (if over a context-specific amounts) due to government policies, statutes, and trade treaties  Required to be an open, public bidding process (except with heavy up-front approvals)  Have to disclose evaluation process
  21. 21. 21Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved The Federal Journey to More Agile Contracts Commercial Sector Lean- Agile Best Practices ------------------- Fewer and less rigorous constraints; recognizes Lean-Agile value proposition Greater Contract Agility ------------------- Apply TechFar for greater contract agility Federal Airspace Federal Acquisition Regulation (FAR) ------------------- Constraints on the acquisition process TechFAR ------------------- Highlights flexibilities in the FAR to help agencies implement the “plays” in the Digital Services Handbook U.S. Digital Services Handbook ------------------- Draws from 13 key “plays” in the private sector including Agile practices 1 2 3
  22. 22. 22Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Federal Acquisition Regulation (FAR) 16.4-Incentive Contracts – 16.402-1 Cost incentives. – 16.402-2 Performance incentives. – 16.402-3 Delivery incentives. – 16.403 Fixed-price incentive contracts. – 16.403-1 Fixed-price incentive (firm target) contracts. – 16.403-2 Fixed-price incentive (successive targets) contracts. – 16.404 Fixed-price contracts with award fees. – 16.405 Cost-reimbursement incentive contracts. – 16.405-1 Cost-plus-incentive-fee contracts. – 16.405-2 Cost-plus-award-fee contracts. 16.5-Indefinite-Delivery Contracts – 16.502 Definite-quantity contracts. – 16.503 Requirements contracts. – 16.504 Indefinite-quantity contracts. 16.6-Time-and-Materials, Labor- Hour, and Letter Contracts – 16.601 Time-and-materials contracts. – 16.602 Labor-hour contracts. – 16.603 Letter contracts. FAR Contracts Types* 6.2-Fixed-Price Contracts – 16.202 Firm-fixed-price contracts. – 16.203 Fixed-price contracts with economic price adjustment. – 16.204 Fixed-price incentive contracts. – 16.205 Fixed-price contracts with prospective price redetermination. – 16.206 Fixed-ceiling-price contracts with retroactive price redetermination. – 16.207 Firm-fixed-price, level-of-effort term contracts. 16.3-Cost-Reimbursement Contracts – 16.302 Cost contracts. – 16.303 Cost-sharing contracts. – 16.304 Cost-plus-incentive-fee contracts. – 16.305 Cost-plus-award-fee contracts. – 16.306 Cost-plus-fixed-fee contracts. * https://www.acquisition.gov/sites/default/files/current/far/html/FARTOCP16.html 1 The FAR system governs the acquisition process by which the U.S. federal government purchases goods and services
  23. 23. 23Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved U.S. Digital Services Playbook See https://playbook.cio.gov 1. Understand what people need 2. Address the whole experience, from start to finish 3. Make it simple and intuitive 4. Build the service using agile and iterative practices 5. Structure budgets and contracts to support delivery 6. Assign one leader and hold that person accountable 7. Bring in experienced teams 8. Choose a modern technology stack 9. Deploy in a flexible hosting environment 10. Automate testing & deployments 11. Manage security and privacy through reusable processes 12. Use data to drive decisions 13. Default to open, publicly accessible data 2 The U.S. Digital Services Playbook provides guidance for applying relevant private sector (and more agile) approaches to procurement
  24. 24. 24Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved TechFAR Publication See https://github.com/WhiteHouse/playbook/blob/gh-pages/_includes/techfar-online.md Traditional Software Development Agile Software Development Pre-Award Pre-Award • Government Lead role • Product Owner role • Requirements with big up-front design • Product Vision and Roadmap Post-Award Post-Award • Long, linear development phase of design, development, and testing • Release Planning and Sprints • User stories become deployable code • Customer typically involved at the end • Product Owner/customer feedback per user story • Performance Measurement – Contractor conformance to pre-award detailed requirements • Performance Measurement - Contractor performance throughout each sprint and release (bug defect rates, speed of time to value, etc.) 3 TechFAR highlights flexibilities in the FAR to help agencies implement agile contracts
  25. 25. 25Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved A Government Contractor Moving to Agile, Case Study 2:
  26. 26. 26Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Indefinite Delivery/Indefinite Quantity (IDIQ)  What is IDIQ? – Consists of a Master Contract with a vision and budget – A pool of suppliers (“Providers”) are qualified for the Master Contract – Under the Master Contract, Task Orders with scope are created as needed – For each Task Order, a qualified provider is selected and the Task Order becomes a binding Delivery Order  Pros: – Simplifies and expedites the procurement process – Validates vendor collaboration and performance while maintaining competition – Less overhead in moving from contract model to contract model  Cons: – When switching vendors, will lose the teams and their knowledge base – May impact architectural consistency and integrity A federal agency put out an RFP for an IDIQ Task Order
  27. 27. 27Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Context  After the federal agency put out the IDIQ Task Order, the contractor put in a bid along with other qualified contractors  The Task Order contract model was Cost-plus-award-fee with fixed cost and schedule, and variable scope  Goal: Select a single qualified supplier  Gave each contractor the same set of functionality  The “winner” would be paid and become the selected qualified supplier for future Task Orders
  28. 28. 28Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Initial Challenges  The federal agency tried using velocity as a metric  System flexibility was difficult to quantify: • “Flexible architecture” was open to interpretation; some suppliers took more short cuts than others • There were many integration points; different integration solutions were implemented resulting in varying effort across suppliers  The contractor had a difficult time engaging the federal agency
  29. 29. 29Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Outcome and Lessons Learned Outcome  The Cost-plus-award-fee model allowed a more subjective selection process (e.g., supplier responsiveness, completeness of functionality) and the contractor won due to their responsiveness and system flexibility Lessons Learned  Understand the danger of velocity-based comparisons  Have frequent contact to synchronize, prioritize, and negotiate scope  Consider a single supplier to balance the value of competition against the benefits of stable teams, decreased delays, and architectural consistency
  30. 30. 30Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Agile Contracts: A SAFe® Approach
  31. 31. 31Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved The Scaled Agile Framework® (SAFe® ) ScaledAgileFramework.com 1. Code Quality 2. Program execution 3. Alignment 4. Transparency Core Values Synchronizes alignment, collaboration, and delivery for large numbers of teams
  32. 32. 32Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved SAFe Managed Investment Contracts 1. Define the Program Vision and Roadmap 2. Contract one to two Program Increments (PI) at a time 3. Manage priorities with the Program Backlog; prioritize with the customer via WSJF* for each PI 4. Evaluate jointly and objectively the solution at the end of each PI ▸ The customer can stop, continue, increase, or decrease funding based on results ▸ With reasonable notice to the supplier, the customer can exit when sufficient ROI is achieved * Weighted Shortest Job First. See http://www.scaledagileframework.com/wsjf/
  33. 33. 33Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Move to the Zone of Collaborative Systems Building Responsiveness to Change0% SAFe® Managed Investment Contracts Time & Materials Contracts Zone 1: Challenging Expectations Zone 3: Innovation and Exploration Zone 2: Collaborative Systems Building Firm Fixed-Price Contracts  
  34. 34. 34Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Benefits of Collaborative Systems Building  Better economic outcomes for customers and suppliers, and earlier ROI  Better risk management  Higher transparency and predictability  Faster feedback cycles – Shorter time between learning and action – More frequent feedback on supplier performance  Balances benefits of: – Over-constrained specifications vs. extreme innovation – Predictability vs. the freedom to explore better economic alternatives
  35. 35. 35Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Thank you! Questions?
  36. 36. 36Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved References Commercial  Agile Contracts: Creating and Managing Successful Projects with Scrum, Andreas Opelt, et. al., 2013, Wiley Publishing  Flexible Contracts, Susan Atkinson and Gabrielle Benefield, http://www.flexiblecontracts.com  Agile Contracts Primer, Tom Arbrogast, Craig Larman, and Bas Voddee, http://www.agilecontracts.org  Contracting in Agile Software Projects: State of Art and How to Understand It, Shi Hao Zijdemans and Christoph Johann Stettina, 2014 Government  Software Development: Effective Practices and Federal Challenges in Applying Agile Methods, http://www.gao.gov/products/GAO-12-681  Federal Acquisition Regulation, https://www.acquisition.gov/?q=browsefar  U.S. General Services Administration Acquisition Policy, http://www.gsa.gov/portal/content/104579  Procurement Challenges: Private vs. Public Procurement Law, http://www.procurementoffice.ca/2013/03/25/procurement-challenges-private-vs-public- procurement-law
  37. 37. 37Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Appendix A: “Book Report” on Agile Fixed-Price Contracts
  38. 38. 38Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Has the following: Agile Contracts: Creating and Managing Successful Projects with Scrum, by Andreas Opelt and Boris Gloger (Templates available) ▶ Vision ▶ Backlog ▶ Fixed quality ▶ Price ceiling ▶ Quantifiable value measures Fast feedback cycles provide greater supplier performance visibility Agile Fixed-Price Contracts Overview
  39. 39. 39Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Agile Fixed-Price Contracts – Steps Define program vision and roadmap Create reference backlog items: size, value, risk Define fixed-price range based on velocity/cost (not yet contractually binding) Define scope & expense management processes Define governance and decision-making processes Define motivational and cooperative models 1 2 3 4 5 6 Other contract elements included, as needed (e.g., IP ownership, liability, indemnities, warranty, etc.)
  40. 40. 40Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Agile Fixed-Price Contracts – Elements Checkpoint Phase Initial period to test cooperation Riskshare Cost-sharing model when the fixed-price range is exceeded Exit Points Points either party may terminate the contract in a controlled manner ▶ Gone south – cooperation and delivery distressed ▶ Gone north – sufficient value has been achieved !
  41. 41. 41Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Appendix B: “Book Report” on Flexible Contracts
  42. 42. 42Leffingwell et al. © 2015 Scaled Agile, Inc. All Rights Reserved Replaces “Statements of Work” with “Statements of Target Outcomes” (SOTO) Written as a “Minimum Viable Contract” ▶ Simple English, short, lightweight provisions, can be expanded as needed ▶ Lower legal/admin costs Contract is a set of targeted outcomes ▶ Shorter duration so that reprioritization and improvements can be applied in the next SOTO ▶ Supplier creates options to meet the targeted outcomes ▶ Problems are explored with potential paths to solve them Flexible Contracts book coming soon. See http://www.flexiblecontracts.com/book Flexible Contracts (Templates available)

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