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Moving from traditional Fixed Bid / T&M to ‘Outcome based’ pricing model using Function Points - Practical challenges & Inferences

The Joint 13th CSI/IFPUG International Software Measurement & Analysis (ISMA13) Conference

Mumbai (India) – March 6, 2017

Saurabh Saxena, CFPS, PMP

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2ISMA 13 – March 6, 2017 https://isma13in.wordpress.com

More than 11 years experience in Software Sizingmeasurement – Certified Function Point Specialist(IFPUG)

Member of various IFPUG International Committees –appointed as Function Point Country Representative(India)

Globally, several Function Point based articles andWhitepapers published

Established Function Point based model (Estimations,Productivity & Quality Analysis) for major Telecom,Insurance and Banking customers

Mr. Saurabh Saxena

(Country Representative India)

Function Point Expert

Zensar Technologies

Pune, Maharastra

India

About the Author




Agenda Goals of the Presentation

Pricing Models – ‘Fixed Bid’ Vs. ‘Time and Materials’ Vs.‘Managed Services / Outcome / Unit based’

Proposed ‘Outcome based Operating Model’

Function Point based Estimations & Pricing

Transformation Roadmap & Continuous Improvement

Customer Story – Past Experience




Pricing isn’t that Easy




Pricing Models What are they ?

A Pricing Model refers to the contractual agreement between aservice provider and a service gainer

Traditional models (‘Time & Material’ / ‘Fixed Price’)

simple to understand and implement but not very optimal

Mature models (‘Manage Services’ / ‘Outcome base’)

provide a long lasting Win-Win partnership




Mature Models Benefits

Customer

• Directly aligned to Customer’s business outcome/ objective

• Focus completely on their core strategic initiatives

• SLA driven approach results in measurable benefits

• Knowledge retention becomes more streamlined and sustainable

• Enhances visibility into consumption pattern

• Potential for higher eventual savings as labor arbitrage is replaced by productivity and synergies between tasks

Service Provider

• Empowered with a sense of ownership and incentivized to think big & innovate

• More independent and have a relatively interference free project management

• Able to manage capacity during spike in work load and new client on-boarding

• Bring their best practices into the project, thereby making key process improvements




Manage Services Models

Vision

Go

ve

rna

nc

e

& C

on

tro

ls

Strategic

Partnership

(Deep understanding of Customer’s IT

footprint)

Technology Alignment to

Business growth

(Technology leadership)

Best Practices

For IT Service Improvement

Outcome Based /Managed Services

Service Ownership

Cost Predictability

Outcome driven Governance

• Reduce ‘Total Cost of Operations’• Improved Productivity & Utilization• Business Value Output

Customer Goals

Through

Ve

nd

or

Dri

ve

rs

Driven




Mature Models Service Offering

Traditional ENGAGEMENT MANAGED SERVICES

ENGAGEMENT ALIGNMENT

MANAGEMENT

MEASUREMENT

OWNERSHIP

PARTNERSHIP GAIN

EVALUATION PARAMETERS

TACTICAL

SKILLS DRIVEN

OPERATIONAL MEASURES

SPLIT

LIMITED SCOPE

STRATEGIC

SERVICES DRIVEN

OUTCOME DRIVEN

COMPLETE

TRUSTED & VALUE BASED

QUALITY

TIME • SLA Adherence

• SLA Adherence for Outputs to be delivered • YOY % COQ reduction Vs IT Budget

• SLA Adherence for Tickets • % Service Uptime improvement• Time to Market Improvement

Traditional Models Output Based Pricing

• SLA Adherence

PRICING• Output based Pricing

(FP/Ticket/Transactions)• Payment based on Outputs Delivered &

SLA adherence

• Capacity / FTE based• Payment based on Efforts &

SLA Targets Met




Manage Services Model

Framework and Transition Plan

09-03-2017 www.zensar.com | © Zensar Technologies 2016 9

• Kick-Off current services delivery in Managed Services Model

o Team in action

o New MS metrics review & reporting

• Stabilize the Operations

• Continues Service Improvement

Steady State

4 – 6 weeks 4 weeks

Stakeholder CommunicationDesign

Managed Service Frame work Run and Stabilize

• Establish MS Team Structure for engagement

• Transition Action Plan with Target Steady State

• Implement Governance Model

• Measure Performance and Volume of Delivery

• Create Baselines

Execution – 1 Cycle

• Agree on Managed Services Model and Units of Work

• Develop Program Plan

• On-board MS Implementation Consultant

• Finalize Transformation Roadmap

• Initiate Change Management

Initiate & Buy-In

Setup the Model

Communication & Change Management

Target Operating Model Pilot Baselines

• Develop Target Operating Model

o Unit based Estimation & Pricing model

o Tools, Processes and Frameworks to track, measure and report the Unit of Work

• Create & operationalize Demand Forecast & Capacity model

• Finalize Estimation and Pricing model

• Finalize SLAs & Metrics

• Customer’s approval

Define the MS Framework

Strategic Partnership Engagement

* Timelines are Indicative

Ongoing




30-60-90 Model

90 Days Before60 Days Before30 Days BeforeCheck the skillset of available

associates and plan trainings if needed

Size the Function Points of the work to be performed and get it approved

from Customer

Pipeline ProjectsProjects pipeline forecast for next 3 months along with high level size Minor Enhancement <10 FPs Small Enhancement – 11 - 30 FPs Medium Enhancement – 31 - 60 FPs Large Enhancement – 61+ FPs

Probable Release planSubset of the Pipeline Projects as per prioritization along with following details: Scope Documents Impacted Applications and

Interfaces

Fixed Final Release PlanSubset of Probable Release Plan along with following details: Release schedule for different

Applications Requirements that will GO-LIVE Finalized Requirements Document Defect Fixes

Customer

Service Provider

The Resource Ramp Up/Ramp Down will be done based on the forecast

of Work in pipeline




Team Utilization

For any project, there are always peaks & troughs in the work load month on month although the assigned resource capacity remains constant.

Moving to Output Based Managed Services model requires Service Provider to manage teams/individuals as per the utilization measures and taking appropriate actions based on the overall utilization of the teams/individuals

Team/Individual Utilization Percentage

Optimum Utilization90-100%

Utilization a bit on low side

Utilization on a lower side

Least Utilization

75-90%

50- 75%

Below 50%

Ideal resource utilization : Win-WIN for both Customer and Service Provider

Utilization drops but up to an acceptable limit : The resources can work on System Health Initiatives

Drop in Utilization below 75% : Service Provider may reuse the available capacity across other projects / applications/ assignments as shared resources

Consistent under utilization below 50% for continuous 2 weeks : Service Provider may ramp down the resources post notification to the customer. If customer wants them to retain them, they will be charges on T&M rate card basis




Estimation is an ART




Outcome based Estimation & Pricing

Support

Volume &

Complexity

/ Actuals

Function

Points

Application Support &

Maintenance

Production Support Operations Support Customer Support

Incidents Meetings Research Requests

Service Requests Capacity Management Deploy Readiness

Problem Records Ad-hoc requests

Monitoring Efforts for Alerts/ Jobs

Root Cause Analysis efforts

Application Enhancements & Development

Development Enhancement

New Project/ Development Work Request for Enhancement




Support Size Model Support

Analyze the Ticket Volumes and Complexity

Define Ticket Type & Complexity Classification

Arrive Effort Trending per Ticket typeIncidents |Service Requests | Problem Records

Baseline Ticket Productivity (hrs./unit)

Determine Support Requirements• Applications & Technology in Scope• Type of Tickets

Ticket Type Simple Medium Complex

Incidents P1 P2 P3

Service Request P4 P5 P6

Problem Records P7 P8 P9




Function Point Model Development and Enhancement

• Functional Flows• Database• Use Cases/ High level Req.• Interfaces• Inbound & Outbound feeds/

Reports

• Transaction Functions –Inputs, Outputs and Queries

• Data Functions – Internal DB & External Referred DB

• Interaction with Application experts to bridge all gaps

• High-level Estimations based on Function Points

Requirement Analysis

FP CountingVerification

Sessions with Application Experts

Estimates




Support Size Model Support

DERIVE BASE RATE

BASE RATE ADJUSTMENT

Step 1 Step 2

Service Location

Skill Demand(Vanilla/ Niche)

Service Coverage

ADJUSTED RATE – Y$/TT

VOLUME BASED DISCOUNTS

Step 3

Tier-1X ~ 2X

Tickets/ Month

Tier-22X ~ 4X

Tickets/ Month

Y$/ TT

Y1$/ TT

Tier-0Sustainable Demand< X Tickets / Month

Min. revenue

$A/month

Tier-3> 4X

Tickets/ MonthY2$/ TTBASE RATE

per Ticket Type (TT)

Adhoc Requests/ Overheads

Ticket

Volume

Productivity on

Complexity basis




Function Point Pricing Model

Development and Enhancement

DERIVE BASE RATE

BASE RATE ADJUSTMENT

Step 1 Step 2

Service Location

Skill Demand(Vanilla/ Niche)

Productivity on Complexity Basis

ADJUSTED RATE – Z$/FP

VOLUME BASED DISCOUNTS

Step 3

Tier-1X ~ 2X

FP/ Month

Tier-22X ~ 4X

FP/ Month

Z$/ SP

Z1$/ SP

Tier-0Sustainable Demand

< X FP/ Month

Tier-3> 4X

FP/ MonthZ2$/ SPBASE RATE / FP

Interfaces / Data /

Transactions

Scope / Requirements

Complexity

Function Points

Min. revenue

$B/month




Price Points

Application Support & Maintenance• Adjusted Base Rate – Y $/TT

Requirement Complexity

Productivity (Hrs/FP)

Regular Niche

SIMPLE 10 ~ 15 hrs/FP

Z1 Z2

MEDIUM 15 ~ 20 hrs/FP

Z3 Z4

COMPLEX 20 ~ 30hrs/FP

Z5 Z6Min. revenue $A/month for Minimum Sustainable Demand

Min. revenue $B/month for Minimum Sustainable Demand

Ticket Type Simple Medium Complex

Incidents Y1 Y2 Y3

ServiceRequest

Y4 Y5 Y6

ProblemRecords

Y7 Y8 Y9

Application Development & Enhancement• Adjusted Base Rate – Z $/FP




Invoicing Milestones and Deliverables

Invoicing Mechanism Milestones Deliverable% of Total FP distribution

Application Enhancements & Development

(Function points)

Requirement Analysis Requirement Document 10%

Design Design Document 15%

Coding & Unit Testing Unit Tested Code / UTC / UTR 35%

System Integration Testing / QA System Test Cases / Results 30%

User Acceptance Testing Support Defect fix 10%

Invoicing Mechanism Milestones Deliverable PaymentApplication Support &

Maintenance(Support Volumes)

L2 ticket Defect fix

After Deliverables

L3 ticket Defect Fix & Test Results

Others(Effort Based)

Customer Support Closed Requests

Operation Support Completed Activities

• Warranty, Release Management & Project Management efforts on Enhancements/Projects/WRs will be tracked on actuals and converted into Equivalent FPs (~ 15% to 20% of overall efforts)

% to be mutually agreed between Customer and Service Provider




AREA METRIC/ KPI UNIT IMPACT

PRODUCTIVITY

FP Productivity (Hours/ FP) Effort per Function PointTIME

Function Points per Full Time Employee FP / FTE

DEFECTSDefect Density (Defect/FP) Defects detected per Function Point

QUALITYDefect Potential Expected # of Defects / FP

CHANGESOverall Scope Creep FPs for Scope Creep

SCOPE

Average size of FPs per CR FPs / # of CRs

OVERALL SIZE

Application Size FPs

# of Resources for Support FTE per 1000 FPs

Re-engineering effort benefits Maintenance hours / FP

ESTIMATES Estimated vs. actual effort (variance) Estimated FP vs. Actual FP

RE-USE

Reusable assets created# of FPs reusable assets created per 1000 FP

COST% reduction in effort towards new development due to knowledge assets reuse

FP’s saved through reuse expressed as a percentage of the total FP’s of the initiative.

COST Cost per Function Point Cost($) / FP

FP KPIs for MS Health Index




Value Proposition

Productivity Improvement 3%~5% YoYSME Development Framework, Process improvement, Trainings, Reusable Assets

Optimum Resource Utilization 3%~5% YoYCross Skill and Upskill across LOB’s and Applications, Demand Forecast and Capacity management, Core Flex Resource Model

System Health Initiatives 3% ~ 5% YoYRCAs, Preventive Maintenance, work load forecast

Process & Quality Improvement 3% ~ 5%Streamline processes as per Industry Best practices, SLA & KPI driven maturity model

Service Provider’s committed to create value for Customer & reducing cost by leveraging multiple improvement levers




Qualitative Benefits to Customer

Customer retains IT Control, while transferring Risk and Service Management Responsibility to Service Provider

Productivity Improvement and effective Resources Utilization

to deliver maximum no. of deliverables

Customer’s Management is free fromResource Mgmt. and Operational Overheads, hence focus on Strategic needs of Assurant

Single point of ownership

Service Quality Assurance through mutually agreed Best

Practices and Service Provider’s IP tools/Frameworks

Payments is significantly based on No. of Tickets/ FP delivered and not based on CapacityBENEFITS




Customer Story

14

9

5

0

2

4

6

8

10

12

14

16

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Year 1 Year 2 Year 3

Major Banking Customer

% Over Budget/Schedule Dollars (Millions) out of Financial Control

Quantative Benfits

Traditional Model

MS Model Pilot

MS Model Full fledge




THANK YOU !!!

[email protected] /[email protected]



mailto:[email protected]

mailto:[email protected]


Fully Mature FP based Model

Support

Contract Year 1

State of Artefacts –Completen

ess/ Correctness

Business Criticality and System Complexity

High Medium Low

Application Software Stability Application Software Stability Application Software Stability

Poor Moderate Good Poor Moderate Good Poor Moderate Good

Good 450 425 400 350 325 300 250 225 200

Moderate 500 480 450 400 380 350 300 280 250

Poor 550 525 500 450 425 400 350 325 300

Price per 100 Function Points for each application

Numbers are SAMPLE and not actuals




Critical Success Factors

• Mutual understanding and agreement on standard measure of unit work and mechanism formeasurement

• Predictable work load forecast (30-60-90) plan to have to ensure the Delivery capacity andcapability managed optimally for mutual beneficial

• Availability of standard Tools/templates (project Estimation, Change, Release & ITSM tools) toaccurately measure and reconcile volume of work quantitatively, to support new Operating model

• Change of terms and conditions w.r.t Pricing, Rate card and (FP/SP based rate card)

• Mutual Agreement on service procurement and Invoicing and Billing Process (Invoice now will haveoutput units in place of Hours/resource Names)

• Manged Service Roles and Responsibilities shift w.r.t Managed Service model between ServiceProvider & Customer

• Minimum quantity of work commitment (X volume/Month/per service Line) from Customer tohave win-win situation for both sides for Optimum utilization of capacity & capability




Assumptions

• Moving to Output based charge, Critical need to have Mutual SLAs from both partner side as wellas customer side (e.g. Milestone based Delivery SLA with Service Partner and milestonedeliverables acceptance SLA for customer to minimise delays in schedules from both side)

• Any new scope to be added to new model will need to go through Change Management Process(Transition phase to new model)

• Any scope of work that cannot be quantified into work units (Mutually agreed) will be charged onFixed Capacity based Monthly

• In new Model, Service Provider will have control on Resource Management, will have Teamrestructure as per new model, however if Customer would like to retain some named resourcesand location preference. Work delivered by named resources will be charged on T&M basis

• Service Provider will charge minimum volume of work where Customer could not generate monthlyminimum commitment of work mutually agreed

