Embracing Agile Contracts

By Etienne Laverdière, SPCT and Hélène MALO-WITTEMBERG, SPC

This article kicks off a three-part series dedicated to agile contracts. We will delve into the principles, practices, and advantages of agile contracting, specifically focusing on SAFe Managed-Investment Contracts. Our discussion will cover how agile contracts can transform client-supplier relationships into win-win partnerships centered on outcome delivery. This series draws on our reflections shaped by extensive experience in both the private and public sectors.

Agility Across the Entire Value Stream

Since the Agile Manifesto was first penned, software development within organizations has seen a profound transformation. The increasing adoption of agile methodologies has fostered enhanced collaboration with end users, incremental value delivery, and continual adaptability to changes to boost customer satisfaction. New roles such as Product Owners, Product Managers, and Business Owners have been integrated into the workforce. These roles collaborate closely with teams and customers to accelerate the flow of value. Developed in the early 2010s, the SAFe framework supports this collaboration, coordinating dozens or hundreds of Agile Teams within Agile Release Trains and Solution Trains.

However, organizations that rely heavily on suppliers often experience only marginal performance improvements compared to traditional waterfall methodologies. This discrepancy can be attributed to the fact that while these organizations have refined their internal operations with Lean-Agile methods, their external supplier relationships are still constrained by antiquated contracting practices. Contracts based on fixed specifications and heavy documentation are at odds with the dynamic nature of agile projects, which thrive on continuous learning and adaptability. As a result, these organizations fail to fully capture the benefits of agility and instead inherit the drawbacks of the waterfall model. This illustrates a key principle of systems thinking: a system cannot evolve faster than its slowest integration point.

To address the challenges of an increasingly uncertain and volatile post-COVID world (VUCA), it is crucial to reconsider our way of collaborating with our suppliers and to adopt an agile approach across the entire flow of value creation.

A Brief History of Contracts in IT

Contracts traditionally range from fixed-price to time-and-materials contracts. Various hybrid models, such as target-price and cost-plus contracts, are positioned between these extremes. These alternatives allow parties to share both the benefits and the risks associated with price and schedule variations.

The Fixed-Price Contract

Originating from the realm of waterfall development, the fixed-price contract outlines features, deadlines, and costs upfront, constituting what is commonly called the iron triangle. With its linear development stages and thorough documentation, this contract obligates the supplier to deliver the project according to the predefined specifications established in earlier phases.

This contractual approach is best suited for projects with well-defined requirements that are unlikely to change. However, in the dynamic, often disrupted context of digital environments, where IT project execution more closely resembles research and development than manufacturing, this method falls short.

• It typically locks in specifications too early, reducing flexibility and increasing the risk of a deliverable mismatch.
• Moreover, it excludes the client from the software development process, often leading to subpar outcomes.
• These contracts are further hampered by lengthy acquisition cycles, which escalate lead time costs and fail to align with modern business needs for speed, flexibility, and adaptability.
• Furthermore, this approach frequently results in contracts being awarded to the lowest bidder, which can pressure the quality of the product or service and place the majority of risks on the provider, who must work within these strict limitations.

The Time-and-Materials Contract

In contrast to fixed-price contracts, time-and-materials contracts allow clients to pay for resources used rather than specific outcomes. Specifications, delivery dates, and total costs remain flexible, adjusting to the project's evolving needs. This flexibility often makes time-and-materials contracts appear ideal for agile contexts.

However, projects under these contracts may extend beyond their expected timelines and budgets as suppliers lack financial incentives to expedite completion. Regardless of whether an agile methodology is employed, the client is responsible for managing the project, including budget control and the quality of work. They are responsible for overseeing commitments and ensuring the efficient utilization of the supplier’s resources to meet their expectations. Consequently, all delivery risks are transferred to the client.

Contracts with Target Prices or Cost-Plus Models

Contracts featuring target prices or cost-plus elements try to blend the benefits of fixed-price agreements with the flexibility of time-and-material contracts. Despite this, they often introduce complexities and uncertainties that may become counterproductive.

• Target price contracts include a risk-sharing mechanism that activates if costs exceed the established target or performance surpasses expectations. However, they might not be ideal for projects in dynamic settings where needs evolve rapidly and iteratively. Renegotiating objectives and costs in such environments can be slow and cumbersome, contradicting the agile principles of speed and flexibility.
• Cost-plus contracts compensate the supplier for all incurred costs plus a predetermined profit margin. These contracts can lead to less stringent resource management and potentially cause budget overruns, as they provide little incentive for suppliers to minimize costs.

Overall, these types of contracts often fail to provide a viable solution for agile contracting. Frequently, they shift risks and management burdens without ensuring adaptability or maintaining the fluidity required for agile engagements.

Contractual Approaches in an Agile Context

In an agile context, the following contractual models are frequently seen:

• Fixed-price per Sprint Contract: In this model, the agile team commits to delivering a defined set of objectives per sprint at a fixed price, determined by the team’s velocity or capacity. This approach requires clear sprint objectives and is designed to provide cost predictability for each development sprint.
• Fixed-price per Story Contract: This model charges a fixed price for each user story, delivered in accordance with pre-defined acceptance criteria. It demands meticulous management, requiring that each user story be individually assessed, which extends beyond merely achieving sprint goals.
• Fixed-price per Story Point Contract: Payment is made based on the estimated complexity of tasks completed, measured in story points. This model resembles a time and material contract more closely than the others, as payments are directly linked to task completion or specific effort. It places a considerable risk on the client, who must ensure tasks are well-defined and achievable within the set framework and align with the organization’s broader goals.

These models are frequently combined and tailored to suit the project's specific constraints and the organization's contractual flexibility. While they seamlessly integrate into agile methodologies, without proper governance, there is a risk that they may focus primarily on deliverables rather than the desired outcomes. Formalizing the vision, defining clear outcome objectives, and engaging in continuous evaluation is crucial. This ensures that agreements fulfill task delivery and create tangible value for the client.

The key challenge in agile contracting is to meld the flexibility of a time-and-material contract with the security of a fixed-price commitment, ensuring alignment with evolving strategic objectives while preventing cost overruns.

Sourcing and vendor management leaders must reconcile the collaborative, flexible culture of agile software development with the more rigid discipline of managing application outsourcing contracts. Modify sourcing strategies to adopt agile's trust principles while verifying that vendors deliver.

Gartner, How to Contract for Agile Development Services, 2017.

The Collaborative Approach with SAFe Managed-Investment Contracts

Introduced by Drew Jemilo at the Agile 2015 annual gathering, SAFe Managed-Investment Contracts are designed to foster shared responsibilities through open cooperation and co-management of risks. This contractual approach benefits from leveraging the SAFe framework to facilitate seamless collaboration between clients and suppliers during PI planning, System Demos, or Inspect and Adapt events.

This approach allows parties to commit credibly without sacrificing adaptability, enhancing mutual trust and ensuring dependable value delivery by the supplier. The contract enables objective value assessment at each PI or iteration, facilitates issue forecasting, enhances collaboration, and permits timely commitment adjustments

This enhanced flexibility promotes experimentation and innovation, aspects that are often neglected in traditional contracts. SAFe Managed-Investment Contracts additionally stand out due to their more effective cost control, improved deadline management, and continual adaptability to change. This dynamic and flexible approach to collaboration makes these contracts especially well-suited for thriving in uncertain technological environments while ensuring a clear definition of value delivered.

Over time, this agile contracting model strengthens the partnership between the client and the supplier and ensures the supplier's alignment with the client's strategic objectives.

In our next article, we will explore what we identified as the four stages of the SAFe Managed-Investment Contracts:

• Pre-commitment
• Contract Definition
• Contract Execution
• Contract Closure

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