Download - Offers & Pricing
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Offers & Pricing
for agile & lean software development
Photo: Wikimedia Commons
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About Me
Kurt Häusler (@kurt_haeusler)
Practitioner (not trying to sell anything)
Recovering victim of prevailing management
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About MeBSc
CSM
CSP
MSc
PSM I
KCP
PMI-ACP
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Offers & Pricing
Ask questions any time
Details mostly relevant for service providers, and some product companies
May be less relevant for internal IT and other product companies
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What Not to Expect
Not about contracts
I am not a lawyer
Too country specific anyway
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Contracts
Standard contracts or templates not that useful
Focus on reducing risk so that people don’t worry about them as much
My focus is much more on “customer collaboration”
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Central Themes
What not to do
Offers
Pricing models
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Offers & Pricing
There are many options available
Might be more important what we don’t do
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“Unlearning - the deconstruction of old assumptions - has to
precede the learning of new norms.” - John
Seddon
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Sources of these Ideas
ToC - Throughput Accounting
Kanban Community
Lean Startup
#NoEstimates
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Background
Scrum and Kanban at a Product Company
Scrum and Kanban at a Software Development Service Provider
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Sources of these Ideas
Resolving impediments
Inspecting and adapting
Applying Kanban to provide visibility, and change, outside the walled garden
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Impediments
Time & Materials Billing
“Projects” as the negotiable entity
Fixed Price / Fixed Scope
Requirements negotiation outside “agile” process
Misuse of estimation
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Impediments (cont.)
Basing prices on guessing
Hourly/Daily Ratecards
Time-tracking
Accounting, controlling and targets based on percentage billable hours
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All Symptoms of the Same Problem
Knowledge work can NOT be measured in hours (unless we are bodyleasing)
Time spent typing in source code is NOT the most significant factor influencing costs or total lead time
Even educated guesses are an unprofessional tool when spending other peoples money (compared to concrete measurements)
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The 2 Dimensions of a System
Lead Time - Property of Item
Throughput:Property
ofSystem
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What is the Customer Paying for?
Someone to sit and type in source code for a certain amount of time?
More time spent working = more value?
Or software features?
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Size is MeaninglessThe process itself
Who performs the work
All the other process steps up and downstream from development
Randomness
Delays / Queues
Customer upgrade / versioning cycles
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Size is Meaningless
After experimenting with t-shirt sizes, we observed no correlation with lead time, and only a small correlation across the development stage
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The Current Situation
Fixed price is bad
Therefore T&M must be the right way to do it
This way of thinking seems to dominate
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The Current Situation
Offers and pricing usually occurs outside the “walled garden”
“That’s business, not IT”
Basic approach is classic agile - reduce the batch size
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The Current Situation
Current approach dooms us to “Scrummerfall”
Slogging through a predefined, contractually committed backlog in sprints is not agile.
It’s a death march
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A Solved Problem?
Agile fixed price / variable scope
Money for nothing, change for free
Never seen either in the wild
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Offers
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Negotiating Projects
Ignores reality that requirements change
Excludes true agility
Extremely high risk
Too much WIP in the system
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Negotiating Requirements Outside Agile Process
Extremely high lead times
Extremely wasteful
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Kanban @ Bewotec
About 15 columns
Initial 5 columns all tracking “project” sized items
The rest were all “features” of around 20-30 stories.
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Kanban @ Bewotec
Lead Times were around 3 years
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CFD New Development
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CFD for Maintenance
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MVPs
The lean startup community are the experts when it comes to developing products like this
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Lead Times
Story splitting or expand/collapse don’t make your lead times any shorter
Lead time starts when the “deal is made” with the customer
You don’t get to restart the clock by switching batch-sizes
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Story about Workshops
I was once invited to take part in an “initial customer workshop”
Turned out to be detailed requirement analysis
“But we have a column on the board for that, and it isn’t the backlog”
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In Short
Split the current BCUF into two levels
Small initial “action plan with general pricing”
Small regular agreements about what to do and how much it costs
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Action Plan
No requirements
General pricing only
No signatures
No commitments
Can change
Details are context specific
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Requirement Negotiation
Occurs regularly within the agile process
Kanban Queue Replenishment
Represents commitment, may not be changeable
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2-Stage Commitment
Kanban community are extremely advanced here
1st commitment to begin but not to finish
2nd commitment to deliver
Removes the need to say anything concrete about requirements up front
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Pricing Models
Creative Commons SA-BY: Empty Homes
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Pricing Models
From worst to best
Specific attention paid to the problems of the worst and the second best which is my favorite
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Pricing Models
Time & Materials
Fixed Price / Fixed Scope
Fixed Price / Variable Scope
Fixed Price per Team Day or Sprint
Rent Team Capacity
Price per Feature
Value Based
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Time & Materials
Wikimedia Commons
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T&M
Punishes innovation
Requires time tracking
If combined with estimate-based promise, has all disadvantages of fixed price
High risk of damaging customer relations
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Estimation
Lots of discussion about estimation as a planning tool
But everywhere I have seen it being used it was for offers and pricing
No one talks about money!
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Misuse of Estimation
OK for sprint planning
Rather unprofessional tool to use for an offer or a price
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Kurt’s Estimation Rules
Only relative units (SPs), never hours or days
Only good for a non-binding, rough idea of duration (sprint or release plan)
Don’t give it to the customer if they treat it like a promise
Never use them for pricing
Process should not depend on accuracy of estimates
As soon as someone thinks about “improving accuracy” of estimates, that is a smell of misuse
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Guess-based Pricing
Estimates are usually supposed to relate to “size”
Size is I believe supposed to correlate to development time
Development time (and size) is one of the least significant factors influencing an items lead time, and its impact on our throughput
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Ratecards
Role Rate
Senior Management 250
PM/Architect 190
PO/SM/Senior Dev 110
Backend Dev 90
Frontend Dev 75
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Ratecards
Obviously offensive
Require not only hourly estimation in advance but categorizing work according to role
I have seen architects sitting idle because we only offered the work at a lower rate
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Time Tracking
Time spent recording hours is the least of it
What about work that advantages several customers?
I have seen people do the poor time consuming solution, because the quick clever one leaves us out of pocket
Assumes we want to maximize effort
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Billable Hours Target
e.g. 80% of booked hours must be billable
20% time not on customer projects? Just like Google!
If customer doesn’t want to see pairing, training, non-project meetings or refactoring in the bill, they come out of the 20%
Doesn’t suit many roles
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Another Little Story
One department has two projects running
One is fixed everything
The other is T&M
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Fixed Price / Fixed Scope
Second worse model
Only really bad because of risk
Not a problem as long as price large enough, scope small enough and delivery date far out enough
T&M significantly worse
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Fixed Price / Variable Scope
I think this is the same as “agile fixed price”
Why should the price be fixed if the scope is variable?
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Fixed Price per Team Day or Sprint
Some people call this T&M
OK if you have a single customer and a lot of trust
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Renting Team Capacity
As a percentage of WIP or throughput for an agreed duration
NOT as a percentage of employee hours
A little bit more financial risk in exchange for “locking in” capacity especially when maintenance is involved
MVP for 50k special offer!
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Price per Item
Based on throughput and average total costs
Should be recalculated frequently
Margin can be smaller than usual
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Price per Item
Team costs €100,000 per month
Delivers on average 175 items per month
Cost is €575 per item
Plus 5% margin for €605 price per item
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Price per Item
I use 12 month moving average for both costs and throughput
Can add on extras for other costs of service: e.g. fixed delivery date and expedite
Deal is made and price is fixed at queue replenishment
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A Good RatecardTeam Standard Intangible
Fixed Delivery Date
Expedite
X
Y
Z
670 605 910 1210
400 350 1100 1500
710 700 770 850
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But...
Don’t all items have to be the same size?
How to explain that every thing costs the same?
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Value Based Pricing
The holy grail of pricing models
Hard for a service provider to use
Customer often doesn’t know what it is worth or is willing to share it
Could be good for product companies IF we don’t use imaginary numbers or guesses
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Value Based Pricing
Most of the previous models do actually have a value based component
The customer does it for us
Main thing for a service provider is covering costs
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Value Based Pricing
For more info see Alan Weiss
Especially good for consultants
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Other Pricing Models
Price per story point
Auctioning free slots in the input-queue
Incremental Funding Method
Utilizing asymmetry of payoff-functions
Monte Carlo simulations
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Conclusion & More Info
More options than just fixed everything and T&M
Value-based best but hard
Price per item my current favorite
http://kurthaeusler.wordpress.com/2013/05/20/pricing-and-a-little-bit-about-estimation/