. . . select a winning contractor and then expect them to deliver on the requirements within the specified time frame and budget. However, this traditional approach almost always led to failures—each a spectacular waste of taxpayer dollars.
—Jason Bloomberg, ‘Fixing Scheduling with Agile at the VA.’ Forbes
Agile Contracts
Note: This article is part of Extended SAFe Guidance and represents official SAFe content that cannot be accessed directly from the Big Picture.
Builders of large-scale systems must continually align with Customers and other stakeholders on what’s being built. And they often must do so amid continuous changes driven by development discoveries, evolving customer needs, changing technologies, and competitor innovations.
Traditionally, requirements and design decisions were made up-front to ensure customers were getting what they wanted. That was the basis of the contract with the systems provider. But these early requirements and design decisions constrained teams, reducing their ability to adapt to emerging data that could have informed a Solution that could have delivered better economic and competitive value. In short, the contract held them back. Thus, attempts to manage risk by requiring early specificity often backfire to the disadvantage of all stakeholders.
Other contract approaches have evolved to avoid this, with more shared risk and reward. In many cases, they worked better. But even then, the conventional thinking of fixed requirements tends to influence agreements and expectations.
What’s needed is a more Agile approach to contracts, one that benefits both parties in the near and long term. This article describes the current state and then guides an Agile Contract approach, the ‘SAFe Managed-Investment Contract.’
Details
Traditional Approaches to Purchasing Contracts for Systems
Buyers often outsource complex systems development to Suppliers who can build the systems needed to run their businesses. There’s a range of approaches to contracting, from firm fixed prices to time and materials, with almost every point in between. Figure 1 characterizes these various approaches and highlights how the parties share risk.
However, almost everyone generally understands that neither extreme delivers the best overall economic value, as discussed in the sections below.
Firm Fixed-Price Contracts
On the left end of the scale are firm-fixed-price contracts, standard in today’s industry. The convenience of this approach is the assumption that buyers will get exactly what they want and are willing to pay for, as Figure 2 illustrates.
On the surface, this makes sense. In addition, it provides an opportunity for competitive bids, which may be required in many cases. In theory, competitive bids can offer economic advantages, as the request can go to the supplier with the lowest cost.
However, there are many downsides to this approach:
- It assumes that the buyer’s needs are well understood before implementation.
- The buyer’s needs must be reflected in early requirements specifications and design details. This triggers Big Design Up-front (BDUF) traditional development and contracts.
- The contract is typically awarded to the lowest-cost bidder, who may not provide the optimal long-term economic value for the buyer.
Moreover, critical decisions are made far too early to get a fixed bid when little knowledge about the solution is known (see Principle #3 - Assume variability; preserve options). The parties have entered into the ‘iron triangle’ of fixed scope, schedule, and cost, as illustrated in Figure 2. And if facts change, both the buyer’s and supplier’s hands are tied to the contract, which may now define something no one wants to build or buy precisely as was stated when written. Much of the time is spent negotiating contract changes, with significant waste.
Worst of all, once the agreement is entered, each party has an opposing economic interest:
- It’s in the buyer’s short-term interest to get as much out of the supplier as possible for as little money as possible
- Conversely, it’s in the supplier’s best short-term interest to deliver the minimum value necessary to meet contractual obligations and maximize supplier profits.
The net result is that this type of contract often sets up a win-lose scenario, which then influences the entire business relationship between the parties, typically to the detriment of both.
Time and Materials Contracts
It’s clear why many would want to move to the right of the spectrum of approaches shown in Figure 1. But the time and materials agreements on the far right—which might appear to be highly Agile on the surface—also have their challenges. The buyer has only trust to count on. Trust is a precious commodity, and we depend on it in Lean. But misunderstandings, changes in the market or technical conditions, and changes in buyer or supplier economic models can force the trust to take a back seat. After all, it’s in the supplier’s financial interest to continue getting paid for as long as possible. This can drag contracts out for longer than necessary. Coupling this approach with a phase-gate process, whereby real progress can only be known at the end, compounds the problem.
Challenges can exist on the buyer’s side as well. For example, when interviewed during a project postmortem, Stephen W. Warren, executive in charge and CIO of the Department of Veterans Affairs Office of Information and Technology, noted that according to the project manager, “the project was never in crisis since they were spending the entire budget every year, and thus were able to renew their funding for the following year. The measure of success at the time was whether the project would continue to get funding, rather than whether it could deliver the necessary functionality [1].”