1. 1 First, some interesting numbers: ~2,000 682@3 ~80 2 >200 [To be defined on March 23]

2. 2 “Costs and Risks on Software Acquisition Projects” Dr Maliha Haddad Assistant Professor Management Science Department School of Business and Public Management George Washington University Washington, DC Dr. Anita J. La Salle Professor and Chair, Information Technology Department Director, Masters of IT Management Program Kogod School of Business American University Washington, DC From SEPG 2004 – March 10.

3. 3 Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks. Role of Organizations re Software Projects Organization is sole developer (In-House Projects) Organization contracts for software (Out-House Projects) Organization is prime,with one or more external sub- contractors Domain of interest First,

4. 4 Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks. Presents some “twists” on the widely accepted advantages of outsourcing software projects: Looks at some hidden costs of being a customer in a software contracting relationship. Identifies some risks inherent in outsourcing software projects. Serves as guideline to both software contractors and customers engaged in software contracts.

5. 5 Outsourced Software Projects incur hidden costs and substantial risks. Some Research Questions (background): Is it possible to identify “hidden” costs of outsourcing software projects? Is there a relationship between the size of the project and the hidden costs? Is there a minimum baseline cost for a contracted software project independent of its size or complexity? Where and when are the outsourcing costs incurred? What are the risks that are incurred by outsourcing projects?

6. 6 Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks. What we will cover: Research into software project outsourcing Initial research findings Findings about outsourcing hidden costs Findings about outsourcing risks More on risks Conclusions

7. 7 Research Strategy: Are there hidden costs? 1. Explore Estimation Processes Used by Contracting Organizations 2. Identify and Quantify Sub-Contracting Costs 3. Develop “hidden-cost” Estimation Model The survey/interviews The organizations The projects Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

8. 8 Research into organizational practices Survey/interviews of 26 orgs. about acquisition practices. (Fed. Govt., Telecomm.,DoD, Financial Inst.) Contracts for $30K to $50M Projects: Business, Eng., AI/ES, Hybrids Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

9. 9 Study focus: $ to contracting organization during SDLC to acquire, manage, control, and support the software contract. Time effort of personnel to support the contract. Other resources needed for contract support. Before, during and after product deployment Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

10. 10 Some initial research observations: [lack of] Organizational awareness of models [lack of] Formal institutionalized software acquisition plans or project tracking plans Traditional “order and wait” scenarios [lack of] Software requirements document specificity Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

11. 11 Some initial research observations (continued): [lack of] Acquisition project management processes for: Contract management Configuration management for tracking Internal/external personnel oversight processes Tracking progress against requirements and costs Artifact inspections Risk identification and management Metrics gathering Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

12. 12 Most organizations did not have formal methodologies in place for estimating the projected cost of their involvement in contracted projects, nor do they have processes in place for scheduling their resources that must be involved in projects. Most organizations do not have formal procedures for collecting and archiving metrics about contracted projects, they do not classify internal costs as part of the project, nor do they include internal costs as part of any economic feasibility analysis for a contracted project. Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

13. 13 Some research results: The hidden costs of contracting software is substantial – mean value is 190% of the contract. Linear relationship between hidden costs and project size (for the study sample): M = 2.2 * KLOC + 52 (person months) Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

14. 14 When and where are the hidden costs generated within the contracting organization? Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

15. 15 Distribution of “hidden” costs across SDLC Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

16. 16 Distribution of “hidden” costs by resource types Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

17. 17 Implications of Findings: Results of the study support the need for contracting organizations to embrace recommended and evolving methodologies (such as SA-CMM). Few of the studied projects were housed in organizations having maturity levels beyond the Initial Level (only eight of the target organizations were even aware of their maturity level). The availability of project data was more of an artifact of individual initiatives than organizational policy. Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

18. 18 Implications of Findings (continued): Organizations that fail to adopt structured software acquisition processes may have many of the same project risk profiles as organizations that fail to adopt structure software development processes [we will return to this issue]. A formal, institutionalized, software acquisition project management process model will require that the organization plan all aspects of the acquisition, manage software requirements, track project team and contractor team performance, manage the project’s cost and schedule baselines, evaluate the products and services, and successfully transition the software to its support organization. Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

19. 19 Implications of Findings (continued): must be Risk management integrated into all aspects of the project, and the organization should provide the training required by personnel involved in the acquisition. Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

20. 20 The Next Steps: Given the data elicited during the last phase of the research and the results of the study, can we devise a risk assessment/management model that will capture the project risks that are unique to the software outsourcing domain? If we are able to identify sub-contracting risks, what are some mitigation techniques that contracting organizations can put in place to manage risk? Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

21. 21 Some next step issues: What are some outsourcing “Risk Categories” that may impact schedule, performance, cost? How can these risks be managed (i.e., oversight techniques)? How can organizations work with contractors to devise mitigation and contingency plans? What are the costs of managing subcontracting risks? Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

22. 22 The second part: Risk Identification and Management as a Major Component of Customer-Contractor relationships Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

23. 23 Nature of risks in software contracting Impacts of contracting risks on organizations Sources of software contracting risks: Customer Internal Risks Contractor Internal Risks Risks at the Interfaces Customer Internal Risks Contractor Internal Risks Risks at the Interfaces Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

24. 24 Inaccurate estimates of effort (time, scope, $) Personnel knowledge (software + acquisition) User availability and involvement Specification of customer requirements Contract specificity (processes and interfaces) Creeping requirements Unanticipated coordination and oversight … and more … Inaccurate estimates of effort (time, scope, $) Personnel knowledge (software + acquisition) User availability and involvement Specification of customer requirements Contract specificity (processes and interfaces) Creeping requirements Unanticipated coordination and oversight … and more … What are some internal risk sources for customers? Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

25. 25 What are some contractor internal risks? [Adherence to process models such as SEI’s CMMI is meant to reduce or eliminate most of contractor’s risks – or provide guidelines for risk management plan.] [Additional problems arise if the contractor is sub- contracting!] Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

26. 26 Mutually accepted ambiguous contract Ill-defined interfaces Multiple contacts Antagonistic interfaces Deficient inspections Loosely defined checkpoints Unavailable testing criteria, processes, data, benchmarks Mutually accepted ambiguous contract Ill-defined interfaces Multiple contacts Antagonistic interfaces Deficient inspections Loosely defined checkpoints Unavailable testing criteria, processes, data, benchmarks What are some of the sources of risk at the interface between the customer and the software contractor? Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

27. 27 Shared repositories Configuration management of artifacts Risk management program Quality assurance program Expectations of re-use and maintainability Missed schedules Shared repositories Configuration management of artifacts Risk management program Quality assurance program Expectations of re-use and maintainability Missed schedules What are some of the sources of risk at the interface between the customer and the software contractor? Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

28. 28 Costs of tools and management software Incompatible deployment and development infrastructures Security Transient personnel Unanticipated direct costs Costs of tools and management software Incompatible deployment and development infrastructures Security Transient personnel Unanticipated direct costs What are some of the sources of risk at the interface between the customer and the software contractor? Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

29. 29 Incompatible processes and standards Activity synchronization “Gutless” oversight Manager end-around play Negotiating change Test site requirements Contract termination and litigation Incompatible processes and standards Activity synchronization “Gutless” oversight Manager end-around play Negotiating change Test site requirements Contract termination and litigation What are some of the sources of risk at the interface between the customer and the software contractor? Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

30. 30 Process is still “King/Queen” – especially in an outsourcing environment. The cost of outsourcing a software project is not the cost of the contract. Outsourcing software projects incurs “hidden costs” that are substantial. Outsourcing software projects incurs substantial risks: within the client’s organization, within the contractor’s organization, and at the interfaces between client and contractor. Process is still “King/Queen” – especially in an outsourcing environment. The cost of outsourcing a software project is not the cost of the contract. Outsourcing software projects incurs “hidden costs” that are substantial. Outsourcing software projects incurs substantial risks: within the client’s organization, within the contractor’s organization, and at the interfaces between client and contractor. Conclusions: Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks.

31. 31 Contact information: Focus of Presentation: Outsourced Software Projects incur hidden costs and substantial risks. Dr Maliha Haddad mhaddad@gwu.edu Assistant Professor Management Science Department School of Business and Public Management George Washington University Washington, DC Dr. Anita J. La Salle lasalle@american.edu Professor and Chair, Information Technology Department Director, Masters of IT Management Program Kogod School of Business American University Washington, DC