Article

Disruptive application outsourcing: Flexibility at a fixed price

Linda Tucci, Executive Editor
Count the ways an application outsourcing deal can go bad, and the head spins. The project runs over budget. It doesn't come in on time. Change orders end up costing as much as the original fixed price of the contract.

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Or perhaps you've taken the time and materials approach to a perfect application, only to cut your losses when it appears that no amount of time can produce the needed materials.

"When outsourcing projects fail we see a growing risk between IT and the business community," said Doug Mow, senior vice president of marketing at Exigen Services Ltd., an application outsourcing provider in San Francisco.

Mow touts a "disruptive" engagement model that he says will reduce project risk and foster a better relationship with your business partners. The model -- dubbed flex-agility -- offers unlimited change orders at a fixed rate by taking a serial, or iterative approach to projects.

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Sound too good to be real? Flex-agility rests on certain assumptions, Mow agreed. It works best, for example, at companies where technology is viewed as a competitive advantage, where the business is dynamic and time to market is an important component of revenue growth, he said.

Success depends on business people participating on a regular basis in defining the project. And the model also assumes your business users, like most technology consumers, will be satisfied with much less functionality than originally scoped. "I use PowerPoint all the time. I like it, but I use maybe 10% to 15% of the features,' Mow said.

Waterfall vs. agile

The best way to grasp the model, Mow said, is to spell out how flex-agility differs from traditional methodologies used by providers and clients.

In the "waterfall" methodology, the project is meticulously scoped before any action is taken. Considerable time is spent interviewing business users: IT is interviewed at length to get a good sense of what goes into the project. Documentation can reach the size of a phone book. Once everyone signs off on requirements, the project moves into a design phase, then on to development and, finally, coding. The aim is to nail down requirements at each juncture before closing the door and moving on to the next phase. This approach assumes that mistakes and changes are better made early than at the end. It's not uncommon for the project lifecycle to last 18 months. The idea is to plan until you get it perfect, then do the coding.

For public-sector organizations required to vet contracts in an open-bid process, where everyone is bidding on the same specifications, the waterfall method works well, Mow said. The danger is that by the time the project is done, the marketplace has moved on, rendering it obsolete. If the contract is fixed-price, the vendor bears most of the risk if changes are made.

Using the agile method, that same 18-month project is chopped into 18 one-month segments. The provider is constantly taking the project's temperature, asking and analyzing what has changed to make sure the project reflects what is important to the business. The work is usually billed by the hour. The business bears the risk; the vendor is running on the meter. Under time and materials, not to exceed a specified amount, the business bears less risk but runs the danger of having to take what it gets at the point the money runs out.

Flex-agility

What Exigen is trying to provide is a "highly iterative process," like the agile method, with the business side participating on a regular basis, not at the end of 18 months. If business conditions change, so can the project, in real time. "The relationship between IT and the business becomes more of a partnership. The wall dissolves,' Mow said.

Gartner Inc. analyst Helen Huntley, who covers outsourcing for the Stamford, Conn.-based research firm, said she was intrigued by Exigen's combination of iterative and agile development techniques but cautions that continuous change can become too much of a good thing.

"While this approach can be considered a positive, it should not come at the detriment of long-term planning, which includes business articulation of its needs, both current and future projections," Huntley wrote in an email.

Strategic planning tied to business goals and objectives should not be put at risk, Huntley said. "The flex-agility approach may allow too much flexibility for some firms, which could come at a cost to the business in regards to productivity, efficiency and quicker return on ROI, if that is the value driver for the work effort."

For clients who are unable to articulate project requirements (the waterfall approach), flex-agility could serve as a catalyst to get them moving on projects incrementally, at minimal risk, Huntley said. "My concern remains though that incremental thinking will come at a cost to long-range planning. In some companies this might be OK, for it is better to get moving on a direction versus remaining stagnant."

Rather than bill by the hour, Exigen offers unlimited changes for a fixed price. The focus is on making the customer happy with the result, not billing for every change. How can Exigen afford to do that? The collaborative approach usually means projects finish earlier, Mow said, either because the project never gets off course or because the business side decides enough is good enough -- it can live without the other things it asked for.

When outsourcing projects fail we see a growing risk between IT and the business community.
Doug Mow
senior vice president of marketingExigen Services Ltd.
If the project ends early, Exigen clients pay a "small termination fee."

"Nominal as it is, it is pure margin to us, and in some ways increases our profitability," Mow said. Exigen, which fields development centers in Russia and the Baltic region, moves on to another project or, in many cases, another project from the "happy customer" that finished early.

Mow said speed is a hot commodity for many Exigen clients, who are more concerned about time to market than cost. Time lost to a competitor or a missed opportunity can cost big.

Of course, the business users' time is money. Their participation costs the company money. Mow acknowledged that in some instances it would not be cost-effective for a business user to participate -- a stock trader, for example. "In those cases, business could send a proxy to project meetings," he said.

Let us know what you think about the story; email: Linda Tucci, Senior News Writer


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