Wednesday, June 05, 2013

Update 2013: Agile 2008 - Money For Nothing



Update 2013: The Money for Nothing and Your Change for Free strategy has been widely deployed as the basis of most agile contracts. See the Money for Nothing and Change for Free patterns at ScrumPlop.org.

Scrum was designed for hyperproductive teams. If you can run at 5-10x your competitors velocity and quality you should generate 5-10x more revenue. Why do so few great Agile teams do this? Their business model sucks!

You got to watch how they do it on MTV. Otherwise you will be pushing refrigerators for the rest of your life. Money for Nothing and Your Change for Free was the theme of my presentation at Agile 2008. The right method of Agile contracting can double, triple, or quadruple your margins. Get rid of hourly billing. It just keeps you on the treadmill!

Gerry Kirk has a good writeup of my Agile 2008 presentation on his blog.

Money For Nothing: Deliver More Value For Your Client (And You)
Written by gerrykirk on August 19, 2008 – 3:19 pm

These are notes from Jeff Sutherland’s Agile 2008 presentation “Money For Nothing and Your Change For Free: Agile Contracts“. Jeff summarized his talk in this way:

“The “Money for Nothing” strategy works when customers want fixed price estimates for the entire contract up front. The Agile contract allows termination of the contract early when the value of features drops below an ROI criteria. The contract allows the customer to save 80% of their remaining funds by giving the Agile vendor 20% of the remaining contract value in return driving the margins of an Agile contractor from 15-20% up to 50-80%.”

From Scrum Butt to High Performing Team

Jeff began his presentation by talking about the Nokia Test For Scrum Certification, which Nokia uses to measure their team’s level of agility (see questions and scoring method in slide show below). Jeff had everyone in the room score their own team. I rated people in general at a 5 out of 10, which is just above the starting average. Anything 8 and under is in the ScrumButt category.

Why is this important? Teams that score high tend to be the high performing teams. They also generate much higher revenues, based on Jeff’s analysis:

* Great Scrum: 400% revenue increase
* Good Scrum: 300%
* Pretty good Scrum: 150% - 200%
* ScrumButt: 0 - 35%

Jeff also compared agile to waterfall teams, suggesting high performing agile teams can outperform waterfall teams by a 5-6x margin. The problem is, contracts that are time and materials don’t reward high performance. T&M is low risk and low margin, you only get paid for the hours you put in, even when you take far less time than your competitors. Fixed price contracts aren’t any better, with vendors trying to out-discount each other. Many vendors only making money if the project is late and over budget due to change requests and building functionality that users do not want.

3 comments:

LP Site said...

Hi Jeff,

I just read your "Money for Nothing" presentation. The "Change for Free" concept is one of the best things I've ever heard of. I mean, following agile internally is great, but how do you make with agile work when you're working for an external client? How do you make sure that their constant changes don't kill the project?

I own a Chicago-based offshore software development company. I've seen projects spiral out of control because the client didn't like the interface, because they changed their minds on how to implement a feature, or because they wanted to add features they didn't think of at first. It became very adversarial.

The "change for free" clause makes so much sense because it forces the client to stick to the process, or end up paying for any overages.

Brilliant.

Best,

Raza Imam
www.SoftwareSweatshop.com

aks said...

I see two issues here :

a) There is an assumption that mos t of the requirements are not required by business and will be cancelled. I know many companies who do a Lean project before digitization to find out true/minimum requirements. In such cases all requirements need to be implemented.

b) The number 20% is arbitary. For many service companies 25-30% margin is possible, specially the Indian ones. For the cancellation to be profitable to the service company, the cancellation fee must be more that margin. Which customer will pay 25% + 5% = 30% as cancellation fee ?

I feel the presentation harps a bit too much on "Money for Nothing" and does not bring these 2 points very clearly. Howeve I have not "listened" to Jeff so not sure about that.

Max_Headroom said...

Hi Jeff,

Nice to be back after being oblivious to the fact that you were scrumming along, all this time.

If there was easy to remember the "jeffsutherland.org" was that but it had also changed.

I am managing a software project that has become a snake in the grass. It should have been framed up in the 80-20 way before it started - if I had read your 2008 Dire Straits presentation I would have been better off - but next time I am going to do it differently keeping in mind what "aks" has commented too.

Thanks for great postings and it is a pleasure to read and apply that knowledge.

BR,

Ajit