Dr. Darnell’s Class Notes VI

Dr. Darnell’s Class Notes

Amberton University

MGT6525 Agile Value Delivery

Summer (2023), Week 9:

Competency: Contract and Procurement Management for Agile Projects.

Introduction

When managing contracts and procurement in Agile projects, you must consider several factors. Agile methodologies propose several contract models that are more adaptable and flexible, such as the Incremental Delivery Contract, Time & Materials Contract, and others. Each contract model has unique advantages and disadvantages that should be considered in the project context (Ambler, 2013).

Agile projects typically use iterative development cycles, which help teams respond to change and uncertainty over following a fixed plan (Cohen, 2020). In traditional projects, procurement and contract management usually involve long-term contracts with detailed specifications, which can be inflexible and incompatible with Agile methodology. Instead, Agile contract management seeks to manage contracts in ways that allow room for changes and adaptations in the project requirements and priorities (Stark, 2019).

The focus of Agile procurement is on delivering value incrementally. Contracts in Agile projects are usually designed so that every incremental delivery adds value to the customer (Pichler, 2010). This requires careful planning and ongoing coordination with all stakeholders.

Beyond just the type of contract, the nature of vendor relationships also significantly impacts Agile procurement. Agile methodology encourages treating vendors as partners rather than just external entities, enhancing collaboration and meaningful contributions to the project (Boehm & Turner, 2005). Procurement in Agile is typically done incrementally, which allows for much-needed flexibility in the project (Eloranta et al., 2015). Risk management, too, is a continuous process in Agile projects, ensuring that any changes or challenges can be addressed iteratively (Dikert et al., 2016).

Here are some ways that procurement and contract management are adapted for Agile:

• Agile Contract Models: Different contract models are compatible with Agile methodology, including the Incremental Delivery Contract, Time & Materials Contract, Money for Nothing/Change for Free Contract, Target Cost Contract, Incentivizing Collaboration. and Outcome-based contracts (Larson & Gray, 2018; McKinsey & Company, 2020; Stark, 2019). Each model has its advantages and drawbacks, and selecting the most appropriate contract depends on the specific nature of the project and the organizational needs.
• Agile Vendor Relationship Management: Agile procurement necessitates cultivating collaborative relationships with vendors. Instead of treating vendors as outside entities, Agile encourages considering vendors as partners and incorporating them early in the process (Pichler, 2010). This approach enables vendors to comprehend the project goals and make significant contributions.
• Incremental Procurement: Agile procurement involves acquiring resources incrementally rather than procuring all resources simultaneously, providing flexibility and room for adjustment as the project progresses (Highsmith, 2013).
• Agile Risk Management: Agile procurement incorporates iterative risk management. Given that Agile projects adapt to changes as they arise, risk management becomes an ongoing process (Larson & Gray, 2018).
• Value Delivery: Agile procurement emphasizes delivering value incrementally. In Agile projects, contracts should be constructed to ensure every increment brings value to the customer (Denning, 2018). Iterative contracting: This involves creating shorter-term contracts that reflect the iteration cycles of Agile projects. This enables the buyer and seller to make modifications in response to the iterative feedback process (Beck et al., 2019).

Agile Procurement and Contract Management

Agile Contract Models

Agile contract models provide a foundation for navigating the complexities and uncertainties that characterize Agile projects. The suitable contract model for an Agile project depends on many factors, including the project's specific circumstances, the organization's risk tolerance, the relationship with the supplier, and the desired level of flexibility and control. Here is an overview of some Agile contract models:

• Incremental Delivery Contract/Fixed Price Agile Contracts: This type of contract works well in Agile as it aligns with the iterative nature of Agile projects. Payments are linked to each delivery increment, which motivates suppliers to keep up with the pace of Agile sprints (Larson & Gray, 2018). For instance, a software development project could have payments tied to the completion of each module or feature, keeping suppliers motivated to progress at the Agile iteration’s pace. The client sets the priority of the tasks, but the number of tasks completed in each iteration may vary. This type of contract can provide budget predictability while still allowing some flexibility (Miranda, 2014).
• Graduated Fixed Price Contracts: Graduated fixed price contracts, also known as "Fixed Price Work Packages," set a fixed price for specific project elements, allowing others to be more flexible. The idea is to establish a base price and then adjust the price upwards or downwards based on the complexity or simplicity of the task (Fowler, 2003). For example, foundational work, like setting up the server and database in a web development project, could be a fixed price. At the same time, the creation and implementation of specific functionalities like user interface and user experience are flexible and depend on the client's feedback throughout the iterations.
• Custom (Tailored) Contracts: Some organizations create custom Agile contracts that are tailored to their specific needs. These contracts typically contain elements of several different contract types and are designed to promote collaboration, share risks and rewards, and provide the flexibility required in an Agile project. A software firm working on a large-scale project involving both development and maintenance might devise a custom contract that has a fixed price for initial development (a well-defined portion) and uses a time and materials approach for maintenance and minor enhancements, which are more unpredictable and iterative (Fowler, 2003).
• Time & Materials Contract: These contracts are characterized by payment for actual work done, which could be advantageous for Agile projects due to their adaptive nature. Changes can be made flexibly within each sprint without renegotiating the contract. For example, a graphic design project might use this model, with clients paying for the hours spent creating and revising designs (Larson & Gray, 2018).
• Money for Nothing/Change for Free Contract: Under this model, clients can terminate the contract at any time (money for nothing) and can also introduce changes without extra charges (change for free). This contract can be particularly beneficial for Agile projects as it allows for incorporating learning from each sprint into the next with minimal disruption. A website design project could use this contract type, allowing for changes in design elements based on user feedback without renegotiation (Leffingwell, 2011).
• Target Cost Contract: Here, the client and the supplier agree on a target cost for the project. Any savings achieved below the target cost are shared between both parties. This can foster a sense of shared risk and encourage efficiency, which aligns well with the Agile value of "Customer collaboration over contract negotiation" (Beck et al., 2001, p.1). For example, a software company and a client agree on a target cost for developing an e-commerce website. If the project is completed below the target cost, savings are shared.
• Incentivizing Collaboration: Agile contracts can be designed to promote collaboration and shared risk. This can be realized through structures that reward collaborative behaviors, such as shared savings or gain share arrangements. Such contracts encourage the supplier and client to work together more closely, aligning with Agile's collaborative nature. For instance, an IT service provider and client might use a shared savings contract where both parties benefit financially from efficiencies and cost savings in the project (Stark, 2019).
• Outcome-based Contracts: These contracts focus on desired results rather than specific deliverables, allowing suppliers to adapt their work to achieve them. For instance, a business transformation project might have a contract focused on increasing revenue or customer satisfaction rather than specifying particular organizational changes (McKinsey & Company, 2020).
• Open Scope Contracts: These contracts define a high-level scope but leave the details flexible. This enables the customer to change the scope during the project and allows the service provider to adjust their efforts based on the changes in requirements (V?h?niitty, 2012). For example, a marketing campaign project might use an open-scope contract to allow for shifts in strategy based on market response.

Choosing the suitable contract model is not a one-size-fits-all decision but is contingent upon the project's nature and the organizational needs.

Agile Vendor Relationship Management

Agile methodology strongly emphasizes collaboration and partnerships rather than rigid hierarchies or relationships (Pichler, 2010). This philosophy extends to vendor relationships as well. In Agile procurement, vendors are not simply considered suppliers or service providers; they are treated as partners actively contributing to the project's success.

In traditional procurement and contract management, vendors are often seen as external entities that deliver a predefined product or service for a negotiated price. They are typically provided with comprehensive specifications, and communication is primarily limited to progress updates or dealing with issues. This approach creates a more transactional, less collaborative relationship between the client and vendor.

Agile procurement views vendors as valuable partners in the project delivery process. The Agile approach embraces uncertainty and recognizes that project needs may evolve. As such, vendors are involved early and continually throughout the project. Rather than being given a fixed set of requirements, they are part of the iterative planning, development, and review processes. This involvement can range from participating in sprint/iteration planning and daily stand-up meetings to contributing to retrospectives and other review activities.

For example, in an Agile software development project, the client might include the vendor in initial product backlog grooming sessions instead of supplying the vendor with a fixed set of requirements. This not only allows the vendor to understand the overall vision of the product but also provides an opportunity to contribute their expertise to help refine user stories and acceptance criteria. As the project progresses, the vendor participates in sprint reviews, where they can demonstrate their work, receive immediate feedback, and adapt future work plans based on this feedback.

This collaborative approach fosters a strengthened partnership between the organization and the vendor. It also helps the vendor feel a sense of ownership and commitment to the project's success. Ultimately, this can lead to better project outcomes and a more successful Agile project.

This collaborative approach to Agile Vendor Relationship Management brings several benefits:

• A better understanding of project goals: When vendors are involved early and often, they gain a deeper understanding of the project's objectives, the client's needs, and the value they are expected to deliver. This understanding enables them to align their work more effectively with the project's goals.
• Greater flexibility: Agile projects often experience changes in scope or priorities. Vendors who are seen as partners and involved in the iterative planning and review processes can adapt their work more quickly and effectively to these changes.
• Increased quality: The regular feedback loops in Agile projects enable vendors to receive and act on feedback more quickly, leading to continuous improvements in quality.
• Stronger relationships: By working more closely with vendors, clients can build stronger, more trusting relationships. These relationships can lead to increased collaboration, more innovative solutions, and a more successful project overall.

However, cultivating this type of vendor relationship requires a significant shift in mindset for many organizations. It requires openness, frequent communication, shared decision-making, and a willingness to adapt to changes. This can be a challenge in organizations used to more traditional, transactional vendor relationships. Both parties must be willing to work closely, share information openly, and adapt to changes. This can be a significant change from traditional vendor relationships, which are often more transactional and less collaborative (Pichler, 2010).

Incremental Procurement

The principle of incremental procurement is aligned with the Agile project management's iterative and incremental approach. Instead of procuring all resources, such as hardware, software, human resources, or vendor contracts, at the beginning of the project, Agile procurement acquires them in smaller increments as they are needed. This incremental approach is guided by the principle of prioritizing and delivering the most valuable features or components first (Highsmith, 2013). In the Incremental Procurement model, procurement is not seen as a one-time activity that happens at the beginning of the project. Instead, it is an ongoing activity that aligns with the nature of Agile project delivery, which breaks down projects into smaller, manageable parts, known as iterations or sprints.

The primary goal of incremental procurement is to reduce the risks associated with procuring all resources upfront. In the traditional project management model, where a project's requirements are expected to be fully defined at the beginning, the complete procurement of resources makes sense. However, Agile projects acknowledge that project needs can change significantly over time. As such, procuring resources as they are needed can prevent waste and allow greater flexibility.

Consider an Agile software development project as an example. The team could initially procure enough server capacity and software licenses for the first few iterations. These resources would be used to develop, test, and deliver the highest priority features. As the project progresses and more is learned about the system's performance, user behavior, and other factors, the team could make better-informed decisions about additional resources. For instance, they might find that they need more server capacity than initially expected due to higher-than-anticipated user traffic. Alternatively conversely, they might discover that they can optimize their code to use fewer resources, reducing the need for additional server capacity. From a human resource perspective, the team might initially contract a few key roles, such as a software developer and a tester. As the project progresses and the need for specialized skills becomes more apparent, they can bring in additional resources, such as a database specialist or a user experience designer.

This incremental approach offers several advantages:

• Enhanced Adaptability / Greater Flexibility: Agile is all about adaptability, and incremental procurement supports this by enabling organizations to adjust their resource procurement in response to changing project needs. By procuring resources incrementally, the organization can adjust the type or quantity of resources as the project's needs evolve.
• Risk Avoidance and Mitigation: By procuring resources as needed, companies can avoid the risk of procuring unnecessary resources based on assumptions or estimates that may later prove inaccurate. Procuring resources incrementally also helps mitigate risks. If the project's scope or direction changes significantly, the organization can avoid unnecessary expenditure on resources that are no longer needed.
• Optimized Resource Utilization: Incremental procurement ensures that resources are procured and used as needed, reducing waste and leading to more efficient resource utilization. This can help reduce waste and increase the project's overall return on investment.
• Better Vendor Relationships: Incremental procurement also allows organizations to build and maintain better relationships with vendors, as they are engaged throughout the project lifecycle rather than just at the beginning. References:

Incremental procurement requires a shift in mindset and demands more active procurement management throughout the project. However, for organizations willing to embrace these challenges, it can offer significant benefits in terms of risk mitigation, cost management, and project success.

Iterative Risk Management

Risk management is a critical aspect of any project, and Agile procurement performs iteratively in line with the Agile philosophy. Agile project management recognizes that projects are inherently uncertain and that risks and issues will emerge over time. Instead of trying to identify and plan for all possible risks at the start of the project, Agile risk management involves continuously identifying, assessing, and managing risks throughout the project lifecycle (Larson & Gray, 2018).

This iterative risk management approach aligns well with the iterative nature of Agile projects. At the start of each sprint or iteration, the project team and any involved stakeholders would review the current risk log, identify any new risks, assess the impact and likelihood of these risks, and plan appropriate risk responses. These could include mitigating the risk, transferring it, accepting it, or exploiting it if it represents an opportunity.

After implementing the risk responses, the team would monitor these actions' effectiveness and make any necessary adjustments. This ongoing risk identification, assessment, response, and monitoring cycle ensures that the project is always prepared to deal with emerging risks. For example, consider an Agile software development project. During the development process, the team might identify a risk related to integrating a new software component. Instead of waiting for a significant release to address this risk, the team could prioritize tasks related to this risk in the next sprint. They could then monitor the outcome and adjust their approach as needed based on the results.

This iterative risk management approach provides several benefits:

• Proactive Risk Management: The iterative risk management approach ensures that the project proactively identifies and responds to risks as they emerge rather than reacting to issues after they have occurred.
• Improved Risk Understanding: By continuously assessing and responding to risks, the project team gains a deeper understanding of the project's risk environment and can make more informed decisions.
• Increased Flexibility: The iterative nature of Agile risk management allows the project to adapt its risk responses as the project progresses and more information becomes available. This could mean adjusting mitigation strategies, reassessing the impact or likelihood of risks, or identifying new risks as the project evolves.
• Enhanced Stakeholder Engagement: Iterative risk management can also enhance stakeholder engagement. By involving stakeholders in the risk management process, the project can leverage their expertise, gain their buy-in, and ensure that risk management activities align with stakeholder expectations.

Overall, the iterative risk management approach in Agile Project Management is a critical element of Agile procurement and contract management, helping to manage uncertainty and drive project success. This approach is especially crucial in Agile procurement and contract management because risks can arise at any stage, from vendor selection and contract negotiation to delivery and contract closure.

Here are several key strategies used in Agile risk management for procurement:

• Continual Risk Identification: Risk identification is a recurring process in Agile. It means identifying potential risks upfront and continuously recognizing new risks as the project progresses and the context changes. For example, a vendor might experience financial difficulties during the project, creating a new risk that needs to be managed.
• Iterative Risk Analysis and Prioritization: Once risks are identified, Agile teams iteratively analyze and prioritize these risks. Risks are evaluated based on factors like likelihood, potential impact, and the project's capacity to respond to them. High-priority risks can then be addressed in upcoming sprints. For instance, if there is a high risk of delays in a vendor's deliverables, it might be necessary to rearrange the backlog to ensure the project timeline is not affected.
• Risk Response Strategies: Agile promotes quick and flexible responses to risks. These responses could range from avoiding risk, reducing the impact or likelihood of risk (mitigation), transferring risk to another party (usually via insurance or outsourcing), to accepting the risk. These strategies are adjusted as new information comes to light. For example, if a chosen vendor is consistently failing to deliver, an Agile team might decide to switch to a different vendor (risk avoidance) or introduce additional quality checks to catch issues earlier (risk mitigation).
• Risk Review Meetings: Regular risk review meetings are vital to Agile risk management. These meetings, which could be part of the project's regular sprint reviews or planning sessions, ensure that all team members and stakeholders know the current risks and the planned responses. They also provide a forum for discussing new risks and reassessing old ones.
• Risk Ownership: In Agile risk management, each risk is assigned to a 'risk owner,' who monitors the risk and ensures appropriate risk response actions are taken. In the procurement context, this could be the person with the primary relationship with a particular vendor.
• Contractual Risk Management: Agile contract management must be flexible enough to accommodate changes while protecting all parties interests. For example, a contract might include clauses allowing for scope changes or early termination while also providing mechanisms for dispute resolution and protecting against financial or other risks.
• Collaboration with Vendors: Vendors should be considered partners rather than adversaries. By involving them in the risk management process, organizations can leverage their expertise and insight to identify and manage risks more effectively. For example, a vendor might have insights into potential risks associated with their part of the project or suggestions for managing these risks.

Agile risk management in procurement is a dynamic, ongoing process that seeks to proactively identify and manage risks, facilitating better decision-making, improved project outcomes, and stronger vendor relationships.

Value Delivery

One of the Agile project management principles is the continuous delivery of valuable software or results. In the context of Agile procurement, this means contracts should be structured to deliver incremental value to the client, not just at the end of the project but at each iteration or sprint (Denning, 2018).

In traditional procurement, the value is delivered at the end of the project, and the contracts are usually output-based. This means that the contractor must deliver a predefined product or service, and the value or benefits are only realized at the end. However, in Agile procurement, the focus is shifted to value-driven contracts, where value is not delivered at once but incrementally after each iteration or sprint.

For example, a software development project being managed using Agile methodologies might involve several sprints or iterations to build different software features. Rather than waiting for the entire software to be built and delivered, each feature can be considered a value-adding increment and delivered as it is completed. This gives the client early access to each feature and allows for immediate feedback, which can be used to improve future sprints.

These contracts are customer-centric and focus on customer satisfaction as a measure of success rather than merely adherence to predefined requirements. Therefore, the meaning of "value" is primarily dictated by the customer's needs and perception. Agile contracts aim to provide maximum value to the customers at each project stage. To ensure that the customer's needs and the project's objectives are met, the contracts are designed so that each delivery adds value to the project, irrespective of its size. For example, in an Agile software development project, a contract could be structured to deliver features incrementally, with each feature adding value to the customer.

The incremental delivery of value also provides an opportunity for feedback from the customer, allowing for adjustments and refinements in subsequent iterations. This enables the Agile team to focus on high-priority features and ensures the project is continually aligned with the customer's needs and expectations.

Summary

We explored several Agile contract models that lend themselves to Agile philosophy's iterative and adaptive nature. These contract types include Incremental Delivery Contracts, Time & Materials Contract, Money for Nothing/Change for Free Contract, Target Cost Contract, and others such as Graduated Fixed Price Contracts, Custom Contracts, Incentivizing Collaboration contracts, Outcome-based Contracts, and Open Scope Contracts (Fowler, 2003; Larson & Gray, 2018; Leffingwell, 2011; McKinsey & Company, 2020; Miranda, 2014; Stark, 2019; V?h?niitty, 2012).

We also discussed vendor relationships in the context of Agile procurement. Agile methodologies emphasize the importance of collaborative relationships with vendors, viewing vendors not as outsiders but as integral partners in the project process (Pichler, 2010). The discussion further examined the concept of incremental procurement in Agile, which allows for adaptability and flexibility as the project progresses (Highsmith, 2013).

Risk management was another central topic in our conversation. Due to their inherent flexibility and responsiveness to change, Agile projects require continuous, iterative risk management (Larson & Gray, 2018).

Lastly, we focused on the principles of value delivery and iterative contracting within Agile procurement. Agile procurement stresses the importance of contracts ensuring incremental value delivery at each iteration or sprint (Denning, 2018). Correspondingly, iterative contracting is an approach that aligns with Agile's iterative development process, enabling changes and adjustments at the end of each iteration (Beck et al., 2019).

References

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