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Managing Risk in Custom Software Projects: A better engagement model.

All software projects have some element of risk.

Even just doing a part of an existing, well-understood application from one platform to a newer one can end up with unexpected problems that drive up costs and time to deployment.  A custom software project, which may have many unknowns, can run into many issues. Unlike other commercial software products that can be rolled out in increasingly larger test betas and banged on by thousands to even millions of users, custom software tends to be mission or business critical, with more limited ability for extended test periods.

So it has to be right, and getting something wrong can be very costly.

The engagement model that you and your software development partner choose can shift risk to either party. It’s important to understand your options.

 

FIXED PRICE VS. HOURLY RATES

  • Fixed Price

Consultant takes all of the risk.

  • Time and Material (T&M)

The client takes all of the risk cost wise.

Is one better than the other? It really depends on the situation.

A consultant will happily accept T&M as they can bill like lawyers – whenever they do something, they will be compensated. Most clients don’t want a completely open ended approach, but it may be appropriate when they have very well defined requirements and they may have very specific concerns about the detail of how they are billed, perhaps having rules (set by purchasing departments) about rates they are willing to pay for specific services.

In the fixed price model, the consultant takes the risk for delivering on a set of objectives and the client may not feel the need to micromanage the process to reduce cost, making for a more productive relationship.   One of the realities we’ve discovered in our years of doing this is that clients tend to have more ideas than money – so setting a budget with a realistic and focused scope for the project is critical to reduce potential tensions.  In setting that budget, clients should think hard about the value of the project to the business.  Value may not always be reduced to a hard dollar number, it can be evaluated in both subjective and objective ways.

Quantifiable Aspects

  • Increased employee productivity
  • Decreased time to process orders
  • Automation of expensive manual processes

Subjective Measures

  • Increased customer or partner satisfaction
  • Decreased employee turnover
  • Competitive pressures to offer similar features or services

These are ultimately quantifiable but may not be easily apparent up front.  It’s important that clients think these through carefully to understand the value of a project, because it should dictate what they’re willing to spend on it.

 

VALUE-BASED BILLING: FIXED-BUDGET, SCOPE CONTROLLED

eForge takes a slightly different approach.

We like to call it fixed budget, scope controlled.  We aim to de-risk your custom software project by ensuring that it meets whatever your budget is, based on the value you perceive for the project.  But to do it, the project’s scope has to be tightly controlled.  Typically, clients come to us with great ideas they want implemented – but that usually exceed the amount they want to spend.  We work with clients to define the scope very carefully, striving to meet the real requirements that deliver the value to the business and solve the problem. One example of this might be a client saying:

“We need an iPhone and Android app to give our customers a mobile capability for checking their order status”.

The actual solution might be reworking the web interface for the most widely used mobile browsers to provide a mobile friendly, but less expensive, easier to maintain, and ultimately less risky solution.

We aim to de-risk your custom software project.

We work with clients to define their scope very carefully.

The scope controlled, fixed budget approach reduces risk for both sides.  Tight scope control avoids ambitious projects that can run into major unforeseen complexities. Fixed budget assures the client that they are not going to run wildly over budget.  Some other built-in advantages are that the client can track expenses to milestone completion, and if there is a mismatch between completed work and expense, it can be addressed before it becomes a major problem.  eForge also tracks actual time and material spent on projects, and if it actually takes less time and effort than forecast, we can pass the potential savings to the client.

 

START SMALL & BUILD TRUST

In the end, our job is to decrease the risk in the project and deliver a solution that addresses your core business challenge.  One way we like to do this is to start by defining a small piece of the project, something that might take 2 to 4 weeks.  At the end of that period, we deliver a working part of the solution.  It might be a UI prototype, or some other working piece.   Upon successful completion of that project we move forward with the client further defining the larger scope and the costs.  In this way, the client gains experience with the consultant, the process, and the quality of the results.

Before you engage with any software development team, be sure to consider the risks of building custom software and the firm’s approach to de-risking your project. If they try to push all of the risk on you then just walk away.

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