Universiteit Leiden Computer Science Contracting practices in traditional and agile software development Name: Emmanouil Pilios Date: 09/08/2015 1st supervisor: Dr. C. J. Stettina 2nd supervisor: Prof. Dr. T. Baeck MASTER'S THESIS Leiden Institute of Advanced Computer Science (LIACS) Leiden University Niels Bohrweg 1 2333 CA Leiden 1 The Netherlands To my family Στην οικογένεια μου 2 Contents 1. INTRODUCTION ....................................................................................................... 7 1.1 Summary ................................................................................................................... 7 1.2 Problem Statement .................................................................................................... 8 1.3 Research Question ..................................................................................................... 8 1.4 Outline of the thesis................................................................................................... 9 2. LITERATURE REVIEW ............................................................................................. 10 2.1 Project Management ................................................................................................ 10 2.2 Software Project Management ................................................................................ 11 2.2.1 Differences between methods ........................................................................... 12 2.2.2 Waterfall ........................................................................................................... 13 2.2.3 Agile Methods .................................................................................................. 17 2.2.4 Extreme Programming (XP) ............................................................................. 20 2.2.5 Scrum ............................................................................................................... 22 2.2.6 Agile adoption .................................................................................................. 24 2.3 Procurement ............................................................................................................ 27 2.4 Project Contracting Methods ................................................................................... 28 2.4.1 Related Framework ........................................................................................... 29 2.4.2 Fixed-Price-Fixed-Scope Contracts .................................................................. 31 2.4.3 Time & Material Contracts ............................................................................... 32 2.4.4 Cost Plus Contracts ........................................................................................... 36 2.4.5 Target/Cost Price Contracts .............................................................................. 37 2.4.6 Pay per Sprint Contracts ................................................................................... 40 2.4.7 Agile-Fixed-Price-Contracts ............................................................................. 41 2.4.8 Collaborative Agile Contracts .......................................................................... 42 2.4.9 Two Phased Model Contracts ........................................................................... 43 2.4.10 Exit Arrangement ........................................................................................... 44 2.4.11 Risk Buffer ..................................................................................................... 45 3. METHODOLOGY ....................................................................................................... 46 3.1 Survey Methodology ............................................................................................... 47 3.2 Questionnaire Construction ..................................................................................... 48 3.3 Questionnaire Design .............................................................................................. 49 3.4 Data Collection ........................................................................................................ 53 3 3.4.1 Pre Study........................................................................................................... 54 3.4.2 Questionnaire Distribution ............................................................................... 55 3.4.2.1 Own Network ................................................................................................ 55 3.4.2.2 Network Expansion ....................................................................................... 56 3.4.2.3 Social Networks ............................................................................................. 56 4. RESULTS ..................................................................................................................... 58 4.1 General Questions ................................................................................................... 59 4.2 Introduction Contracting ......................................................................................... 62 4.3 Contracting in Context ............................................................................................ 66 4.4 Contracting Challenges ........................................................................................... 76 4.5 Background Questions for Software Development ................................................. 77 5. DISCUSSION ............................................................................................................... 80 5.1 Data Analysis .......................................................................................................... 80 5.1.1 General Information for the Respondents ........................................................ 80 5.1.2 Introduction in Contracting .............................................................................. 80 5.1.3 Contracting in Context ...................................................................................... 83 5.1.4 Contracting Challenges ..................................................................................... 85 5.1.5 Software Development Background ................................................................. 86 5.1.6 Agency Theory ................................................................................................. 88 5.2 Research Questions ................................................................................................. 90 5.3 Threats to Validity ................................................................................................... 90 6. CONCLUSION ............................................................................................................. 92 6.1 Future Work ............................................................................................................ 93 6.2 Recommendations ................................................................................................... 93 APPENDIX ....................................................................................................................... 94 A.1 Email Text Template .............................................................................................. 94 A.2 LinkedIn Post Template ......................................................................................... 94 A.3 Questionnaire.......................................................................................................... 95 REFERENCES ............................................................................................................... 110 4 Figures Figure 1: Traditional and emerging agile methods (Nerur & Balijepally, 2007). _____ 13 Figure 2: Implementation steps to develop a large computer program for delivery to a customer (Royce, 1970). ______________________________________ 14 Figure 3: Summary (Royce, 1970) _________________________________________ 17 Figure 4: Adoption in Agile Methodology and Techniques (Ambler, 2006). ________ 18 Figure 5: The Agile software development manifesto (Beck, 2001). _______________ 19 Figure 6: A general agile development process features an initial planning stage, rapid repeats of the iteration stage, and a form of consolidation before release (Szalvay, 2004). _____________________________________________________________________ 20 Figure 7: A simplified XP process (Szalvay, 2004). ___________________________ 21 Figure 8: The SCRUM process (Stellman & Greene, 2005). _____________________ 24 Figure 9: Agile Methods in use (VersionOne, 2014) ___________________________ 26 Figure 10: Leading causes of failed agile projects (VersionOne, 2014)_____________ 26 Figure 11: Improvement from adopting agile methodologies. ____________________ 27 Figure 12: Preliminary framework for understanding contracting practices as affected in project contexts. Practice contributes benefits predominantly for: Project Owner ( ), Supplier ( ), both ( ), none ( ) (Zijdemans & Stettina, 2014) ___________________ 31 Figure 13: Fixed-Price-Fixed-Scope Contract Plot (Stevens, 2009a). ______________ 32 Figure 14: Time & Material Contract Plot (Stevens, 2009a)._____________________ 33 Figure 15: Time & Material with fixed scope and a cost ceiling Plot (Stevens, 2009a). 35 Figure 16: Time & Material with variable scope and a cost ceiling Plot (Stevens, 2009a). _____________________________________________________________________ 35 Figure 17: Target Price Contract Plot (Stevens, 2009a). ________________________ 39 Figure 18: Pay per Sprint (Stevens, 2009a). __________________________________ 41 Figure 19 : Questionnaire structure _________________________________________ 49 Figure 20: Main factors affecting IT project success (McLeod & MacDonell, 2011) __ 50 Figure 21: Countries of distribution ________________________________________ 59 Figure 22: Respondent’s side _____________________________________________ 60 Figure 23: Industrial sector of respondent’s organization _______________________ 60 Figure 24: Respondents’ roles ____________________________________________ 61 Figure 25: Years of experience in the field of software contracting ________________ 62 Figure 26: Suppliers’ knowledge in software development projects _______________ 63 Figure 27: Customers’ knowledge in software development projects ______________ 63 Figure 28: Average knowledge in contracting software development projects and respective contracting practices for suppliers and buyers. Knowledge is measured as: 1. not at all, 2. slightly, 3. moderately, 4. very, 5. extremely knowledgeable __________ 64 Figure 29: Average knowledge in contracting software development projects and respective contracting practices for all respondents. Knowledge is measured as: 1. not at all, 2. slightly, 3. moderately, 4. very, 5. extremely knowledgeable _______________ 65 Figure 30: Average size of projects in euros (€) _______________________________ 65 Figure 31: Concerns when contracting in software projects ______________________ 66 5 Figure 32: Average suitability of contracting practices considering budget as the most critical aspect of the project. Suitability is measured as: 1. not at all, 2. slightly, 3. moderately, 4. very, 5. extremely suitable ___________________________________ 67 Figure 33: Average suitability of contracting practices considering quality as the most critical aspect of the project. Suitability is measured as: 1. not at all, 2. slightly, 3. moderately, 4. very, 5. extremely suitable ___________________________________ 68 Figure 34: Average suitability of contracting practices considering time as the most critical aspect of the project. Suitability is measured as: 1. not at all, 2. slightly, 3. moderately, 4. very, 5. extremely suitable ___________________________________ 69 Figure 35: Average suitability of contracting practices considering ambiguous requirements as the most critical aspect of the project. Suitability is measured as: 1. not at all, 2. slightly, 3. moderately, 4. Very, 5. extremely suitable _____________________ 70 Figure 36: Average suitability of contracting practices considering uncertain customer involvement as the most critical aspect of the project. Suitability is measured as: 1. not at all, 2. slightly, 3. moderately, 4. very, 5. extremely suitable _____________________ 71 Figure 37: Average suitability of contracting practices considering first time collaboration as the most critical aspect of the project. Suitability is measured as: 1. not at all, 2. slightly, 3. moderately, 4. very, 5. extremely suitable __________________________ 72 Figure 38: Average suitability of contracting practices considering the project is executed using agile software development methods. Suitability is measured as: 1. not at all, 2. slightly, 3. moderately, 4. Very, 5. extremely suitable __________________________ 73 Figure 39: Best average suitability on each factor for suppliers ___________________ 74 Figure 40: Best average suitability on each factor for buyers ____________________ 74 Figure 41: Best average suitability on each factor for all respondents ______________ 74 Figure 42: Best general suitability _________________________________________ 75 Figure 43: Best general suitability with standard deviation ______________________ 75 Figure 44: Challenges when contracting in Agile projects _______________________ 76 Figure 45: Understanding of Agile methods. Importance is measured as: 1. not at all, 2. slightly, 3. moderately, 4. Very, 5. extremely important ________________________ 78 Figure 46: Effectiveness of software development methods. Effectiveness is measured as: 1. not at all, 2. slightly, 3. moderately, 4. Very, 5. extremely effective _____________ 79 Figure 47: Regression Analysis ___________________________________________ 81 Figure 48: Coefficients __________________________________________________ 82 Figure 49: Regression analysis ____________________________________________ 86 Figure 50: Coefficients __________________________________________________ 87 Figure 51: Regression analysis ____________________________________________ 88 Figure 52: Presentation of supplier and buyer in Agency Theory _________________ 89 6 1. INTRODUCTION 1.1 Summary This thesis is about contracting practices that are used by software development companies and their clients. More specifically, it addresses what the current state of knowledge is on these and how Agile methodologies can be adjusted to the current methods that are being used. Contract negotiation is a very important aspect for software development projects and project management in general. This is because it can affect the entire structure of the project, its methods and the actions that need to be followed in order to be completed. The collaboration for the project requires mutual trust between the supplier, who is the software developer, and the customer, who is the contractor, because they have to find a successful way to share the risks between them. Thus, a good contract arrangement can be important for future agreements for both. While software product development increasingly moves towards collaboration with and across small entrepreneurial companies, our understanding in contract arrangements to enable more flexible collaborations is limited. For example, as Kettunen and Laanti (2008) describe, Agile project management is becoming increasingly popular in software and R&D projects in general. However, while Agile methods enable more flexible work in arrangements and contracting types, in large new product development (NPD) organizations these methods cannot be necessarily sufficient and thus, a more complete view of agility is needed. 7 1.2 Problem Statement Many, especially smaller, software companies have little expertise in law and contract arrangements. It is difficult for them to adjust contracting practices to the current methods they use. Especially, it is difficult for them to understand the advantages and disadvantages a specific practice can bring for different stakeholders (e.g. supplier and project owner). The existing literature in contracting practices using Agile methods is insufficient. This is mainly because it is based in empirical experiences from practitioners and that is the reason for a context to exist and help the companies to understand how to choose contracting practices. In order to close this gap, a better understanding of the perceptions of suppliers and project owners towards the contract types, their elements as well as advantages and disadvantages for both sides, is necessary. Thus, the aim of this thesis is to survey the current state of knowledge on contracting practices by the companies in order to understand which practice is favored, by which stakeholder group and in which context. This could build ground for a concrete guide that lists new practices that implement Agile methods. Having a guide with contracting practices would be beneficial for practitioners and especially helpful for them to try to find the best contracting type in order to share the risks and the benefits between the supplier and the customer of the contract. 1.3 Research Question This thesis will examine in more detail the state of knowledge of contracting law in IT companies. Additionally, it will try to get more insight in their current challenges and their perceptions towards specific contracting practices (e.g. fixed-price, T&M) and agile methods. Subsequently, the following research questions can be concluded from the above questions that mentioned. 8  What is the current state of knowledge on contracting practices in software development companies and their clients?  What are the preferred contracting practices across buyers and suppliers? 1.4 Outline of the thesis The thesis is organized as follows. In the second chapter there is a literature review of what is project management and software project management. Also, there is an elaboration on traditional methods of software project management such as waterfall and on Agile methods such as Scrum. Their main differences are also presented. Additionally, procurement is described. Furthermore, a presentation in detail of some relevant contracting practices is given. The third chapter contains the methodology that is followed for the thesis. Moreover, how the questionnaire for the survey was constructed and designed and where it was distributed are explained in detail. In the fourth chapter the results of the questionnaire are presented and analysed. The last chapter contains the conclusion of the thesis and a proposition for future work. 9 2. LITERATURE REVIEW In this chapter the fields that constitute the background of the research question will be presented. More specifically, a literature review of what is project management and software project management, as well as methods for the latter and contracting practices that have been developed so far will be briefly analyzed. Additionally, agility in software project management and how it can be compatible or adjusted to current contracting practices will be examined alongside with the advantages and disadvantages that offer. For the literature study, papers that analyze contracting methods and contracting practices or present empirical experiences of the way some software companies are making contracts, were used. 2.1 Project Management Project management traditionally defined as the process of planning, organizing, motivating and controlling resources, actions and rules in order to complete successfully specific goals and objectives within a specified period of time (Turner & Müller, 2003). Particularly, this process is used in a project as a set of actions in order to produce an exclusive deliverable and also, it uses deadlines, starting and ending points to reach the target. In order to meet the requirements of the deadlines and the budget for a project, effective management is needed. For more complex projects, management can become more challenging. However, there are a lot of benefits of effective project management. For example, delivering things on time and on budget gives predictability to similar projects. 10