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Agile Under Contract
Win–Win Contracts
mary@poppendieck.com Mary Poppendieck www.poppendieck.com

2. A True Story
The Cast of Characters Act II
Harold (Senior Plant Product Engineer) Every month for 18 months
Dave (Division Engineering Manager) I travel to XRI
Harold often comes with me
Me (Process Control Engineer)
We review the work of the
XRI (The Vendor) XRI development team
Act I Act III
Dave signs a time-and-materials System is delivered on time.
contract against his boss’s Saves plant ½ its cost 1st month.
advice to go fixed price. Harold is a hero.
My job is to keep Dave out of Dave looks brilliant.
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trouble and make sure Harold I become plant IT manager.
gets what he needs. XRI: profit + reputation.
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3. Lessons Learned
Lesson 1: Detailed “requirements” are actually
solution design.
 Observation 1: Responsibility for success
lies with the solution designer.
 Conclusion: Responsibility for success lies with the
organization that specifies the detailed “requirements”.
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4. Why Not Fixed Price?
 Early Scope Definition (protects the vendor)
 Excess Scope (protects the customer)
Features and Functions Used in a Typical System
Often or Always Sometimes
Rarely
Used: 20% 16%
19%
Never
Often
45%
13%
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Always
7% Rarely or Never
Standish Group Study Reported at XP2002 by Jim Johnson, Chairman Used: 64%
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5. Lessons Learned
Lesson 2: Development is a learning process.
 Observation 2: An experienced vendor can guarantee a
solution that works; but it should not be expected to
guarantee the exact details of that solution.
 Conclusion: Solution design emerges during
the course of a contract, not as its first stage.
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6. Case Study:
Stamping Dies
Japan US
Mistakes very expensive Mistakes very expensive
Never-ending changes Never-ending changes
Focus: Reduce Time Focus: Reduce Waste
Early Design – Early Cut Wait to Design – Wait to Cut
Designer makes changes Slow change approval system
Target cost (includes changes) Fixed cost (changes are profit!)
10-20% cost for changes 30-50% cost for changes
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Half the time, Half the cost Twice the time, twice the cost
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7. Lessons Learned
Lesson 3: Start with a clear understanding of the
critical business results that must be delivered.
 Observation 3: It is the job of the development team
to determine how to deliver those results.
 Conclusion: Both parties must be committed to work
together to achieve the business goals.
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8. The Purpose
of Contracts
Conventional Wisdom
 Companies inevitably look out for their own interests
 Contracts are needed to limit opportunistic behavior
The Agile Approach
 Assume other party will act in good faith
 Let the relationship limit opportunism
 Use the contract to set up incentives
 Align the best interests of each party
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with the best interests of the joint venture
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9. Lessons Learned
Lesson 4: Mitigate development risk with frequent
delivery/assessment.
 Observation 4: It is technically possible, less expensive,
and very desirable to deliver software in small increments.
 Conclusion 4: Regular delivery, deployment and evaluation
of useful functionality is the best software development
risk mitigation strategy.
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10. Case Study: T5 Agreement
Heathrow Terminal 5 In Practice
 2002 – 2008  147 Sub-Projects
 ₤4.2 billion  Integrated Team
 Target Cost
BAA
 Pool of incentive/risk money
 Delay would threaten existence
 2/3’s split among contractors
 Studied other terminal projects  On Time
 Assumed responsibility for risk  On Budget
T5 Agreement  Very Safe
 Legally binding
 Contractors agree to:
 work in teams
 mitigate risks
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 work to achieve the best
possible results
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11. Contracting Approach
1. Treat software development as a professional service.
 Most organizations contract for services
 (legal, marketing, engineering, software maintenance).
 Software development contracts should follow
the patterns established for service contracts.
2. Contract for measurable business (not technical) results
 Specify levels of desirable/acceptable performance
 Multiple levels: aspiration, acceptable, unacceptable
 Plan for incremental delivery/deployment/assessment
 Maximum of 10% of contract (or 1 month) per increment
 Assess/adjust overall approach after each increment
3. Make both parties mutually responsible for results
 Risk should be born by the party most capable in the area
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 Use the contract to align incentives of both parties
 Consider overall target cost with short fixed price sub-contracts
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12. Target Cost
 Based on high level business goals.
 Target cost includes all changes
 Target is the joint responsibility of both parties
 Goals and target cost are clearly communicated to
workers who are expected to work together and
compromise to achieve the goals within the cost
 Negotiations occur if target cost might be exceeded
 Neither party benefits
Workers at all levels have clear incentives to work
collaboratively, compromise, and meet the target.
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13. Partnership Contracts
Structure
 Umbrella or framework contract
 Establishes critical business expectations
 Establishes target cost / schedule
 Release work in stages
 Keep stages small
 Each stage is an iteration
 Iteration scope depends on the most pressing business needs
and the professional judgment of the development team
Contract Form
 Describes the services, not the deliverables
 Establishes high level expectations and constraints
 Establishes ownership and intellectual property rights
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 Provides the framework for negotiating iteration details
 Provides for disagreements: escalation, mediation, and termination
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14. The Agile Approach
Win-Win Contracts
 Based on mutual commitment
 To critical goals and constraints
 Provide for risk sharing
 Risk born by party most able to manage it
 Establish correct incentives for all parties to work
together for the good of the Joint Venture
 Assume learning will occur over time
 Expect a professional response to change and uncertainty
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 Almost always yield faster, better, cheaper results

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Thank You!
More Information: www.poppendieck.com
mary@poppendieck.com Mary Poppendieck www.poppendieck.com