Fixed Price Contracts
To understand accountability for results, it is necessary to delve deeper into the different types of work-streams that are possible in software services:
- Application Development: This is the development of new business software applications
- System Integration: This refers to the integration of multiple software systems (custom built as well as off-the-shelf products) to create a larger software system.
- Production Support: This is the round-the-clock work that is needed to keep a software system operational
- Application Maintenance: This refers to the ongoing changes that need to be made to an application to keep it current with user needs
How can a vendor take accountability for end results in each of these cases?
The basic idea is to device a fixed price model for each of these work streams. A fixed price model commits the vendor to deliver certain end products for a certain price on a certain date. The challenge in each of the above cases is to define the “end products”.
In the case of application development, this is very simple. The end product is nothing but the fully functional software system. A fixed price contract from requirements definition all the way to production roll out will shift the onus of success away from the buyer on to the vendor. This way the vendor is no longer leasing out his capacity; instead, he applies his capacity to produce a final result which is then sold to the buyer.
Development of a new insurance policy administration system for administering personal automobile policies would be a good example of application development. It is eminently possible to define the requirements, create the screens, design, program, test the software and deliver to production roll-out, all under the ambit of a fixed price contract.
In the case of system integration, the end product is the larger, integrated software system. Here too, a fixed price contract from requirements definition all the way to production roll-out will hold the vendor accountable for success.
In reality, most system integration efforts are way too large for a single, fixed price contract with a single vendor. These are likely to be broken into multiple contracts awarded to multiple vendors. By making all these contracts fixed price, the buyer can ensure that all the vendors are accountable for their part of the results.
I have seen a system integration program that integrated
- a custom web front end for Internet sales
- a CRM product implementation for call center agents
- an order management product implementation for order fulfillment
When all these were pulled together, this pretty much constituted the sales and order fulfilment function of that company. The company was smart enough to hammer our a fixed price deal with a system integrator and benefited immensely!
In the case of production support and application maintenance, there is no end product because these are steady-state process which are carried out day after day, week after week, month after month, year after year. Also, these activities require less skill and knowledge that application development and system integration. Hence, there is a natural temptation to buy capacity from a vendor and be done with it. This is precisely what is happening today. This is the reason for the large-scale commoditization of software services in India.
This is the heart of darkness.
In my next post, I will discuss how it is possible to be result oriented even in the heart of darkness!
