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Drive Business Excellence with Outcomes-Based Contracting: The OBC Toolkit

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Making Outcomes-Based Contracting Work With Facts

Introduction by Amit Anand, Robert Asen & Vijay Anand of Cognizant

Using metrics to develop effective results-based contracts
Managing outcome based application contracts requires a combination of scope management,
pricing, and, above all, quality. As suppliers and clients evolve the relationship, the
need for clear facts dominates conversations.
The premise of outcomes-based contracting is that hours (and indeed rate) are inputs to
the ADM process (not outputs), and that structures that measure programming results are
now both possible and achievable. Outcomes-based structures bring the original intent of
software to the forefront—creating successful results. While many companies have shifted
from input-based to output-based contracting, forward-thinking IT leaders are also taking
steps to define a sustainable outcomes-based relationship with their ADM suppliers.
Outcomes-based contracts focus on how the delivered product adds value, while inputand
output-based contracts focus on the resources and the activities needed to deliver the
outcome, respectively.

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Drive Business Excellence with Outcomes-Based Contracting: The OBC Toolkit

  1. 1. Drive Business Excellence with Outcomes-Based Contracting The OBC Toolkit
  2. 2. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 2 Introduction by Amit Anand, Robert Asen, and Vijay Anand of Cognizant It is one thing to hear about trends, but it’s another to see them in action every day. At Cognizant, we have the opportunity to observe firsthand the steady shift of ADM objectives from being IT-centric to sales- and marketing-centric. Whether it is maintaining a monolithic backend system, restructuring a services platform, or developing a new mobile app, our clients’ requirements are tied more closely than ever to business goals. Redefining the supplier and buyer relationship based on the impact of the software to business, rather than its direct output is a natural progression for the ADM outsourcing industry. Does the enhanced backend system provide more stability for users? Does the new services platform help prepare the company for digital business? Does the new mobile app provide secure financial transactions? Outcome-based relationships are still new amongst ADM suppliers and buyers. A spectrum of constructs has been defined in the past few years; some were even put into practice. There were two observable common elements in the more viable constructs: 1. Significant benefits to both the suppliers and buyers 2. Measurements that can be objectively, accurately, and repeatedly taken Typically, the benefits are numerous. Buyers receive more timely deliverables and at higher quality, and suppliers can better resource their staff and optimize for profit. However, most constructs lacked clearly defined critical success factors. In this paper, CAST puts forth several viable frameworks for measuring outcome-based contracting relationships. We believe that clearly defining deliverables is a worthwhile effort, and provides a linchpin for a truly viable outcome-based construct. We hope you find this paper to be as insightful as we do. 1.1
  3. 3. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 3 Table of Contents 1.1 Introduction 2 1.2 Making Outcomes-Based Contracting Work 4 1.3 Using Facts In An Outcomes-Based Engagement 6 2.1 Outcomes For New Work 7 3.1 Outcomes for Maintenance 9 4.1 Business Outcomes 10 5.1 Automated Metrics in the Toolkit 10 6.1 Conclusion 11 6.2 About CAST 12 6.3 Authors 13 6.4 Reviewers 14 6.5 About Cognizant 15
  4. 4. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 4 Making Outcomes-based Contracting Work Using metrics to develop effective results-based contracts Managing outcome based application contracts requires a combination of scope manage- ment, pricing, and, above all, quality. As suppliers and clients evolve the relationship, the need for clear facts dominates conversations. The premise of outcomes-based contracting is that hours (and indeed rate) are inputs to the ADM process (not outputs), and that structures that measure programming results are now both possible and achievable. Outcomes-based structures bring the original intent of software to the forefront—creating successful results. While many companies have shifted from input-based to output-based contracting, forward-thinking IT leaders are also taking steps to define a sustainable outcomes-based relationship with their ADM suppliers. Outcomes-based contracts focus on how the delivered product adds value, while input- and output-based contracts focus on the resources and the activities needed to deliver the outcome, respectively. THE CASE FOR CHANGE 60% of all software projects are considered failures with larger project more likely to fail. 57% of CIOs favor OBC Source: Consortium for IT Software Quality, “60% software projects fail (one of 2),” http:// it-cisq.org/wp-content/ uploads/2015/02/CISQ-Seminar- 2014-9-17-HERB-KRASNER-The- State-of-Software-Process-and- Quality-in-the-State-of-TX.pdf 1.2
  5. 5. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 5 In an outcomes-based relationship, the buyer’s focus is purely on the quality and the impact of the deliverables. They will seek to answer questions such as: • How resilient and efficient is the delivered product, and how will it impact my business operations? • How secure is the new code? Does it increase my risk of exposure to breaches? • Does the deliverable make my overall software landscape more complex, making it harder for me to deliver future enhancements quickly? • How has the relationship with my supplier changed over time? Outcome-oriented IT leaders care very little (or not at all) about how many man hours were used in delivering the product, what development method was used, or the lines of code written. A successful outcomes-based contract has three components. I. Outcome The first component is the objectives or desired results. Outcomes should be IT-related (e.g., Add field to report) or strategically motivated (e.g., reduce security vulnerability). Other outcomes can be more tactical, such as creating a low-complexity application that can react more quickly to business and market demands. II. Quality Every piece of code changed, added, or deleted from an application can represent an increase or decrease in risk/quality. Some are tangible in nature, such as non-compliance with regulations or an accidental bypass of firewall policies. Others are related to the
  6. 6. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 6 stability of the software, such as poorly written code that causes the software to be less stable, perform slower, and exposes vulnerabilities in application architecture. III. Pricing for the Result Pricing for OBC is based on the result, and not the process. It requires a balance between knowing the value of the outcome and allowing the supplier sufficient flexibility to achieve the goal without interference. Each outcome based activity should be tracked and used as feedback to the next activity. For IT-based outcomes, there are specific metrics around Cost/FP that can serve as a guide. Pricing should be for the outcome at the quality level demanded. It should not be accepted until the results meet those specifications. Quality and fit-to-purpose are the suppliers concern. In a nutshell, the goal of an outcomes-based arrangement is for each party (client and supplier) to focus on what matters to them. Clients seek functionality at a price and acceptable quality level, while suppliers seek profit and the ability to manage revenue. An outcomes based relationship is one where the process is managed by the supplier, who gets compensated for “successful” delivery. Success is assessed in three ways: conformance to specification (outcome), quality of the deliverable, and its impact to wider business objectives. The following OBC Toolkit describes how to objectively measure the success of an outcomes-based deliverable. Using Facts In An Outcomes- Based Engagement Moving to an outcomes-based contract is not a complex activity, but it requires careful planning of how the new delivery model will affect the business of IT. Many of these changes will be obvious and clearly beneficial, while others are more subtle; all will help make the ADM process more effective regardless of the sourcing decision. Making Quality the keystone for success: The Metrics Toolkit Measurement of the current state gives IT organizations the basis for improvement. A benchmark provides important information around the state of the portfolio, the program or the process. For any metric that has an industry-standard definition, benchmarking should be used. In any outcomes-based relationship, it is important to understand the current state of software quality. In application development standards from the Consor- tium for IT Software Quality (CISQ), ISO, IEEE and MITRE are commonly referenced. 1.3
  7. 7. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 7 Outcomes For New Work The completion of an outcomes-based packet is only one dimension of meeting the IT deliverable. The other dimension is quality. New Work Scope Measurement Examples New Work Risk Measurement Examples These metrics are suggested as they drive decisions around risk. It is essential that as the outcomes-based process is rolled out, software does not degrade. The metrics above pro- vide the essentials for managing new development in an outcomes based framework. 2.1 METRIC USE FORMULA Function Points A standardized quantification of business functionality in software measures complexity and results of the delivered product Number of Function Points Enhanced and Added by Work Packet Storyboard / Script / Function Delivery Ratio Number or amount of work delivered compared to the work scoped by the agreed-upon pricing METRIC USE FORMULA Number of New Critical Violations Introduced The most critical violations of industry best practices measure the over risk of the application after integrating modified or added code. Risk per Function Point Evaluate risks (e.g., defects, or best practice violations) within the delivered product Change in User Impact Measures the impact of new deliverables to user experience and satisfaction based on application Robustness and Efficiency Where: Eff stands for efficiency score n = release number Structural / Architectural Security Measures the impact of new deliverables to application security Where: Sec stands for security score n = release number
  8. 8. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 8 In a leading US-based financial services firm, internal IT leaders struggled with frequent outages, sluggish performance, and an inability to keep up with competi- tors’ relentless pace of new enhancements. IT leaders found it hard to articulate de- sired outcomes. Further, without the right technology-based solution, it was impossi- ble to measure the deliverables from their four application development suppliers. Suppliers were becoming increasingly frustrated with the lack of clarity from their client, other than the anecdotal claims of subpar deliverables and a push to drive down post-production incidents. A Clear Answer Internal IT leaders used CAST’s indus- try-standard metrics to define two mea- sures of risk: (a) critical violations per function point, and (b) application Ro- bustness; both were measured before test- ing and production. For the top business critical applications, they defined a thresh- old for each of the two measures by collect- ing baseline data over six months. Then, suppliers were invited to participate in a voluntary program that lasted for three months before the new outcome-based contracts were implemented. In the new relationship, the testing team rejected code that did not meet the risk thresholds, and application owners reject- ed the project if function points delivered according to CAST were not consistent with initial estimates. The suppliers could deliver the project in any way they chose, but were not com- pensated for their work until the testing team and application owners approved. Valuable Change The improvement in application quality was quickly evident. While some sup- pliers resisted the new way, they became committed once they saw the results of suppliers who embraced it. Production incidents declined as early during the vol- untary trial period. With CAST’s help to pinpoint where the riskiest problems re- sided, IT leaders were able to clearly de- scribe how quality should be improved, and their suppliers were able to focus on the right areas. AN OUTCOME-BASED CASE STUDY
  9. 9. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 9 Outcomes for Maintenance When the outcomes to be measured are for code maintenance or existing work, the rate of change can be used. The same basic metrics expanded to cover the change rate. Maintenance Work Scope Measurement Examples Maintenance Work Risk Measurement Examples Some of these metrics can be used in SLA, Risk / Gain and other output based contracts. Consistent with the current best practices for contracting, these require benchmarking and a change rate. 3.1 METRIC USE FORMULA Function Points A standardized quantification of business functionality in software measures complexity and results of the delivered product Number of Function Points Enhanced or Deleted by Work Packet Storyboard / Script / Function Delivery Ratio Number or amount of work delivered compared to the work scoped by the agreed-upon pricing METRIC USE FORMULA Number of New Critical Violations Introduced The most critical violations of industry best practices measure the over risk of the application after integrating modified or added code. Risk per Function Point Evaluates risks (e.g., defects, or best practice violations) within the delivered product Change in User Impact Measures the impact of new deliverables to user experience and satisfaction based on application Robustness and Efficiency Where: Eff stands for efficiency score n = release number Structural / Architectural Security Measures the impact of new deliverables to application security Where: Sec stands for security score n = release number Change in Application Complexity Measures how the new deliverables have contributed or detracted from the application’s ability to agilely respond to business demands in terms of application Changeability and Transferability Where: Chg stands for changeability score n = release number
  10. 10. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 10 Business Outcomes While not strictly within the IT scope, there is no question that IT contributes to business -based outcomes. The metrics toolkit can support business-based outcomes as well. Business Outcomes Measurement Examples These examples show how the OBC toolkit can support both IT and, indirectly, non- IT business outcomes. While most suppliers will not agree to results that they do not completely control, the link between business and IT outcomes are what makes IT more effective. Automated Metrics InTheToolkit Metrics are essential in the process and there really is no reasonable alternative to auto- mated collection. Automation provides a consistent, deterministic view of the data. In the study cited above, Capers Jones suggests that both manual and automated estimating processes work reasonably well for less than 250 function points but that automated esti- mating processes based on function points provides a much greater level of accuracy. • Clearly Define Work Packets –Retool estimating process to define manageable work packages. Create an estimating process that is both fair and achievable. Involve the supplier in this process as they will have templates for 4.1 5.1 OUTCOME METRIC EXAMPLE Increase Agility to Meet Business & Market Demands CAST Changeability measures the amount of bad coding and architectural practices that makes it difficult and unnecessarily time consuming to enhance software Remove unneeded complexity and bad coding practices to prepare for acceleration of business demands. Increase Customer Satisfaction CAST Robustness, Efficiency, and Security measures how users experience the application Reduce application downtime caused by software defects, a frequently logged complaint by users. Reduce average time to make changes to a module Improvement in changeability metric Modularize, eliminate dead code Reduce Invoice production time by 20% Invoice Production (Run times) Improve performance on each program to reduce time.
  11. 11. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 11 estimation that can be quite helpful. This helps reduce risk by inspecting the work as the project progresses. • Business value estimation - Business value should be assessed for each work packet. This will not only help justify the investment in the change but also help prioritize the work packets. As each one is standalone, the work packets can be re-arranged. Priority should always be given to the high value work. • The project plan – Using the work packet process, the functionality to be delivered can now be planned as a series of packet releases. This is also the best time to confirm value to the business and measurement. Conclusion Moving to an outcomes-based relationship with your ADM supplier can dramatically change the IT’s image within an company. An ADM outcome based contract increases enhancement frequency to the business, improves throughput for IT, and provides nev- er-before freedom to manage its bottom line to the supplier. Language independent, standards-based, transparent and highly predictable, OBCs can bring support and devel- opment costs down while delivering the functionality your business needs. This activity has a few basic rules for success: a) Focus on the functionality, not the hours b) Use the estimating process to improve predictability c) Specifications are critical, design for smaller efforts d) Quality is not an option, it is a delivery requirement e) Learn and repeat IT has long looked for a results-based approach to application development. Out- comes-based ADM pricing models provide an opportunity to move beyond a straight hours-based contract, into a structure that will prevent business failure and the devalua- tion of IT. 6.1
  12. 12. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 12 About CAST CAST (Euronext: CAS) is the world leader in software analysis and measurement, with unique technology that introduces fact-based transparency into application development and sourcing, transforming it into a management discipline. More than 250 companies across all industry sectors globally, one-third of them listed on the Global 2000, rely on CAST to prevent business disruption while reducing their hard IT costs and software risk. CAST is an integral part of software delivery and maintenance at the world’s leading IT service providers such as IBM and Capgemini. Founded in 1990, CAST serves IT-intensive enterprises worldwide with offices in North America, Europe and India. www.castsoftware.com contact@castsoftware.com 6.2
  13. 13. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 13 Authors Bill Dickenson is an independent consultant with Strategy On The Web , and former VP of Appli- cation Management Services for IBM, who brings decades of experience in application development, maintenance and integrated operations. Profession- al experience with multiple industry verticals at IBM, PwC, CSC, and DuPont in operations, new business development and executive leadership. John is responsible for evangelizing CAST’s messag- ing and creating meaningful content for colleagues and clients. He is keenly interested in helping com- panies take advantage of innovative technologies in practical ways. Before CAST, John was a product marketer at INTTRA, a global shipping platform. He held various marketing and product manage- ment roles at Maersk Line, the largest shipping company on the planet. John obtained his MBA from Rutgers, and Bachelors in Supply Chain Man- agement from Syracuse University. 6.3 Bill Dickenson President Strategy on theWeb John Chang Director,WorldwideProductMarketing CAST Software
  14. 14. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 14 Robert Asen leads Cognizant Business Consulting’s Strategic Services practice in North America, focus- ing on cross-industry management and technolo- gy strategy. During his 25-year career, Rob’s client service has focused on CIO advisory, post-merger business and technology integration, business/IT alignment and operating model transformation. He holds BS and MS degrees from the State University of New York at Albany. Rob can be reached at Rob- ert.Asen@cognizant.com Vijay Anand is an Assistant Vice President with Cognizant Business Consulting’s Platform Envi- sion & Strategy team as part Delivery Excellence. He has 18+ years of experience in advising clients on continuous & industrialized delivery, nonlin- ear based commercial model transformation, and productivity improvement in ADM.  Vijay holds a MBA from Thunderbird at Arizona State Universi- ty, U.S and an undergraduate degree in Computer Engineering.  He can be reached at Vijay.anand2@ cognizant.com Amit Anand is a Senior Director within Cognizant Business Consulting’s Banking and Financial Ser- vices Practice. He has 13-plus years of experience in successfully leading and managing large IT trans- formation and operating model initiatives for vari- ous clients. Amit holds a bachelor’s degree from the IIT Delhi and an MBA from the Indian School of Business, Hyderabad. He can be reached at Amit. Anand@cognizant.com. Robert Asen VicePresident,StrategicServices Cognizant Business Consulting Vijay Anand AssistantVicePresidentwith PlatformEnvision&Strategy Cognizant Business Consulting Amit Anand SeniorDirector, BankingandFinancialServices Cognizant Business Consulting Reviewers 6.4
  15. 15. Making Outcomes-Based Contracting Work With Facts | The OBC Tool-kit 15 About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consult- ing, and business process outsourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cog- nizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 100 development and delivery centers worldwide and approximately 218,000 employees as of June 30, 2015, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant. 6.5

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