Commercial Models for Agile Delivery

Common Commercial Models

There are two common financial models used to fund IT projects;

1. Fixed Price = risk scope and quality
   
2. Time and Materials = risk cost and time

There are also a number of variants on these models, such as Time and Materials with a cap, fixed price with hold-back, penalties, bonuses etc.

Over time, CFO's have become experienced in matching and managing these funding models in relation to traditional IT projects through many years experience and the accumulation of relevant metrics. However, with the change in delivery model from Waterfall to Agile, this historic metrics and past experience are rendered irrelevant. Further, the traditional funding models do not appear to fit well with the Agile approach.

Key Success Factors

With traditional funding and delivery models the key success factors have been accurate up-front scoping and estimating, coupled with tight delivery and financial management. This is not the case with Agile delivery; here the key success factors are Priotitisation and Scope Management (through continuous Customer Engagement) and the degree of trust (and symbiosis) between the Customer and the Supplier.

The Challenge

The challenge facing CFO's is for a given financial period, how do they satisfy the equation:

SUM ( requirements, delivery approach, funding model, supplier ) == Budget

CFO's need to adopt a three stage process to satisfy this equation;

• Step 1: match the requirements to the delivery approach.
• Step 2: match the delivery approach to the funding model.
• Step 3: match the supplier to the project (requirements + funding model).

Note: there is a wider challenge of how total budget allocation is shared across projects that this article does not attempt to address.

Assuming that the CFO has matched a set of requirements to the Agile delivery model, the CFO then needs to determine the funding model best suited to that delivery and then match the supplier best suited not only to the requirements but also the delivery model and the funding model.

In addition to the traditional models, listed above, there are some alternative funding models that are perhaps better suited to an Agile delivery approach;

Alternative Funding Model

One such alternative funding model is that of Fixed Effort. In this model, the CFO budgets a fixed amount of effort for a project, for each given period. Following the Agile approach for scoping, prioritising, scheduling and managing scope iterations are defined and delivered using the fixed effort available. Over-runs are then managed, not by increasing resources (cost and time) but by decreasing scope. This is similar in nature to that of fixed price, however the contract is for effort rather than scope (as it would be in a traditional fixed price contract). In order for this model to be successful two key factors need to be present;

1. Continuous Customer Engagement: this is the only effective way that scope can be managed to ensure that a working solution can be delivered for the available fixed effort.
2. Customer / Supplier Relationship: a high degree of trust and symbiosis needs to exist between the two parties.
   

From a Customer perspective, this model can appear to carry risk in terms of paying for an inefficient supplier to deliver little scope whilst burning all the available budget (effort); to mitigate this risk, it is also recommended that project funding is managed on a per-iteration basis. For each iteration (work package) fixed effort is provided and the delivery carefully monitored. Subsequent iterations can then be better estimated and scoped based on the fixed effort available. This also allows both parties to re-evaluate the engagement at each stage. Importantly, it allows the Customer to dis-engage early if there are concerns over the matching of requirements, delivery model, funding model, and the supplier. This iteration based funding approach to delivery does carry some risk where customer and supplier are new to each other and where the customer is not looking at a long term relationship with the supplier. However, in situations where there is already a symbiotic relationship between the Customer and the Supplier, this model actually provides a high degree of risk mitigation (it is in neither parties interest to dis-engage at the cost of the longer term relationship). Further mitigation can be provided by the addition of hold-back, penalties and bonuses to the contract giving incentives to manage and deliver scope within the fixed effort.