Client + Vendor Contracts w/ Agility

Vendor Based Professional Service Contracts with an Agility focus.?

Contracts play a huge role on how a vendor is engaged and where their focus lies.

For instance: Vendor Contract for software integration or general professional services for development.

Recently I was engaged with a team purchasing a vendor tool that required professional services to help integrate the tool with the existing systems but also enhance and optimize the tool being purchased for future potential outcomes.?

With this scenario you can see there is a level of uncertainty which needs to be discovered during the integration and dependency on the partnership between both the client and vendor

Lets look at a couple of contract types:

Fixed Price Contracts?(most commonly used)

• Benefit:?Best for clearly defined deliverables with little to no variability. Also low maintenance on both parties
• Focus:?Scope/Deliverable Based. At the beginning of a project, the least amount is known; therefore if you are focused on delivering against predetermined scope items which were assumed at the beginning of a project there is limited to no ability to adjust when new information as its discovered.
• Risk:?The Vendor Assumes the risk, which usually means they will pad the amount to hopefully absorb the uncertainty. The client usually will want something different in the end and will not be satisfied with the outcome or manage a lot of change requests and pay more for what they want.

Time & Materials contracts

• Benefit:?Aligned better for uncertainty
• Focus:?Capability based which allows for the resources being brought on to a project to address the concerns as they come.
• Risk:?Client assumes the majority of the risk. Client is usually concerned that the vendor will "bleed" the client dry due to high hourly rates and the potential to prolong the project as long as possible. Unsure if they will get the project objectives to their liking due to budget constraints.

So, what can be done?

People forget that

• Both options can have a Cap
• Both options can have an Incentive

That’s where you can even the risk level and satisfaction level on both sides while creating a strategic partnership rather than a typical client / vendor relationship.

Time & Materials with Incentive

In order to address the uncertainty of the project start with a Time & Material contract

• Focus on the Capabilities in a contract versus titles and roles as it’s the capabilities you are hiring for not the perceived title and its expectations.
• Negotiate Resource Rates down to the vendors Cost (e.g. $200/hr = $120 Cost + $80 Profit)
• This allows the vendor to be whole and are not paying out of pocket for their own Resources
• Then calculate the accumulative Profit per hour in their rates to provide them as a lump sum incentive to meet mutually agreed upon milestones/check points
• I suggest to creating each milestones to be a measurable objective (e.g. MVP, Epic, Feature, etc.). This also allows for alignment between both parties on shared goal/objectives without defining scope.
• Add a clause in the contract to pay the incentives at each milestone, which will create motivation (urgency) on both sides to meet each milestone
• At the end of each milestone conduct a review to determine if the objectives were met or if they were missed, at that point adjustments can be made or incentives can be batched until the next milestone

Agility is all about adapting to change; inherently learning new information will change your original solution. Structuring contracts to align the goals between a partnership and compensating accordingly plays a huge role in a cohesive team.?

Let me know your thoughts and how you have tackled this issue.