Risk driven contract selection for agile projects

Which contract type to use for agile projects?.

This is being discussed everywhere without a firm conclusion. Recently I came across this again in a linkedin group where they discuss about agile and lean. Agile advocates true partnership with the client. During my past ten years of entrepreneurial experience, wherever we signed a contract or MOU, things did not work out well, because the trust element was lacking. Everything was seen from the angle of contractual terms and conditions. Business relationships which really thrived were based on trust and a win-win spirit. You get lot of benefits of of this and please share part of it with me attitude really worked well.

In a project scenario, ideally the product owner come from the customer’s side. In an outsourced environment this may not be feasible, hence we operate with the help of proxy product owners. The proxy product owner or the product owner is the representative of the customer, and is part of the integral agile process. It is not about just making profit to the supplier, but about delivering maximum value to the customer.

In the traditional waterfall, we had the following contract types; fixed price, cost reimbursable, time&material and purchase order. Whether we follow agile or waterfall, these contract types are applicable. The criteria to choose the contract types must be the clarity of requirements than agile Vs waterfall. For projects where product backlog and key user stories are clear, and the technology is also well known, then fixed price is still valid. If the requirements clarity is not very high then the next best option is Cost reimbursable. If the requirements clarity is totally lacking the T&M. If we are in a long term business partnership with a client then the best suitable contract type for agile is ‘Cost + Benefit share’, where the cost is reimbursed to the supplier during the development phase and a percentage of the returns on investment (ROI) is also shared with the supplier for a pre-determined period.

So, the options are many. What need to change is the shift in focus from the profitability of the supplier to value to customer, and eating a piece of the cake as well. Contract types are just a vehicle of smooth delivery of value, and must be decided based on functional and technical risks at hand.