1. CEE-SECR 2009 October 28-29. Moscow, Russia Proposal Feasibility Study using Stochastic Risk Model Anton Khritankov

2. 2 CEE-SECR 2009 Introduction  Let’s consider an RFP process: ­Buyer issues a Request-for-Proposal ­Suppliers submit proposals ­Buyer chooses a supplier who receives the contract  Proposal includes ­Technical description of the solution, size, efforts ­Financial details: price, contract type alternatives, … ­Marketing information  Supplier should evaluate proposals it submits: ­Competitive, Reliable, Profitable

3. 3 CEE-SECR 2009 Outline of proposal preparation process 1.Analysis and estimation are performed  Size and Effort  Risks are identified and estimated 2.Commitment is chosen depending on estimates 3.Financial part is prepared  Costs and price  Proposal feasibility study 4.Proposal document is released

4. 4 CEE-SECR 2009 Analysis and estimation 1.Analysis and estimation are performed  Size and Effort  Risks are identified and estimated 2.Commitment is chosen depending on estimates 3.Financial part is prepared  Costs and price  Proposal feasibility study 4.Proposal document is released

5. 5 CEE-SECR 2009 Software estimation  Estimation is forecasting of software project results ­Diverse methods: expert, formal models, by chance… ­Measures: Effort, Duration (Schedule), Product Size, Cost  Representing estimates ­Point estimate, e.g. tomorrow’s forecast is T = +27 *C ­Interval estimate, e.g. +25..+29 *C, or 27±2 *C ­Estimate is a random value, e.g. follows Beta distribution  We use effort estimate and interval representation for project size

6. 6 CEE-SECR 2009 What is risk?  Risk is an impact associated with an event occurring  Common in software industry: ­Qualitative measures: high, medium, low ­Risk Exposure = (Probability) X (Impact of the event)  More general approach to risk measurement: ­Impact of the risk is a random value ­Cumulative distribution function (CDF) defines probability of a specific impact for the risk

7. 7 CEE-SECR 2009 Stochastic risk model  Independent risks model ­Register of risks relevant to project domain/industry/type ­Risk profile and risk scope for each risk ­All risks are mutually independent ­Total impact is a sum of risks impacts  Project profile is a CDF of a sum: ­Project efforts estimate ­Total risk impact

8. 8 CEE-SECR 2009 Example profile Probability Impact Cumulative distribution function (CDF) Density function (PDF) Profile is a CDF

9. 9 CEE-SECR 2009 Financial proposal 1.Analysis and estimation are performed  Size and Effort  Risks are identified and estimated 2.Commitment is chosen depending on estimates 3.Financial proposal is prepared  Costs and price  Proposal feasibility study 4.Proposal document is released

10. 10 CEE-SECR 2009 Pricing models  Pricing model: How to calculate price from efforts and other costs ­Effort, SG&A per FTE, Rates,… => Net Profit ratio, Price  Fixed-Price model ­Both parties agree on a specific price for the product  Time-and-Material (T&M) ­Parties agree on specific rates (price per man-day)  Total Risk Identification and Management (TRIM) model ­Parties agree how to share possible risks and bonuses

11. 11 CEE-SECR 2009 Proposal feasibility study  Project success indicators ­Success probability (when Net profit ratio > Minimal) ­Net profit ratio with 75% probability  Feasibility study: ­Ensure project is successful ­Revise project implementation approach ­Choose a pricing model with minimum price ­Present pricing options to the Customer

12. 12 CEE-SECR 2009 Case study and tools 1.Support by Auriga-CPPM tools  RiskCalc  PricingModel 2.Case study  Identify risks  Compute project profile  Feasibility study and better pricing options 3.TRIM procedure  Three steps to perform feasibility study

13. 13 CEE-SECR 2009 Auriga-CPPM tools overview  RiskCalc ­Implements risk model ­Derives project profile from effort estimates and risks profiles ­Uses Monte-Carlo simulation  PricingModel ­Implements pricing models ­Calculates pricing options for different models ­Allows to adjust parameters and get to optima

14. 14 CEE-SECR 2009 Case study  Software to support Sales agents operations ­Extend to support another team ­Reflect changes in business processes  Original proposal ­~73 man-days, Fixed-Price model ­Contract price 3.78 (relative value) ­Success ? ­Should we release such proposal ?  Let us use tools and perform feasibility study

15. 15 CEE-SECR 2009 Identify risks and compute project profile  Re-do effort estimation ­Efforts are in [0.86, 1.14]*73 man-days ­Most-likely value is 73 man-days  Identify risks using enterprise risk register, accepted risks: 1.Misunderstood requirements 2.Missing implicit requirements 3.Problems in customer software 4.Project is underestimated, some tasks are not planned  Combine the risk-free estimate and risk profiles ­Most-likely project size increased to 110 man-days (1.5 times !)

16. 16 CEE-SECR 2009 RiskCalc. Output and analyze

17. 17 CEE-SECR 2009 Feasibility study  Provide inputs ­Use project profile from RiskCalc ­Success criteria: Net profit ratio > 10% ­Specify SG&A per FTE, Salary rates and project setup costs  Evaluate original financial proposal ­80% success (quite good, net profit > 12%, price = 3.78) ­Can do better than Fixed-Price 3.78 ?  Adjust sales parameters to get better options ­Change external rate, risk share, success criteria

18. 18 CEE-SECR 2009 Better pricing options  Anything better than Fixed-Price 3.78 ?  TRIM model ­Increase rates, lower clients’ risk share ­76% success (still good, net profit > 10%, price < 3.70) ­Price lower than 3.70 with 75% probability  T&M model ­Slightly decrease rates ­100% success (adequate, net profit = 10%, price < 4.03) ­Price lower than 4.03 with 75% probability

19. 19 CEE-SECR 2009 Model with minimum price ModelTRIMT&MFP Net profit (75%) >10%=3.70>12% Price (75%) <3.70<4.03=3.78 Success76%100%80%

20. 20 CEE-SECR 2009 PricingModel. Input and indicators

21. 21 CEE-SECR 2009 PricingModel. Figures

22. 22 CEE-SECR 2009 The TRIM procedure 1.Estimate project ­Use interval “risk-free” estimates 2.Derive project profile ­Identify risks using risk register ­Compute project profile 3.Choose pricing model and check feasibility ­Adjust TRIM, T&M and FP models parameters ­Develop pricing options and review success indicators ­Revise project implementation approach if failed

23. 23 CEE-SECR 2009 Summary  Main results: ­TRIM model for contract pricing ­Mathematically consistent risk model ­Proposal feasibility study  Tool support: ­RiskCalc to obtain project profile ­PricingModel to evaluate project profit and pricing options  Case study. Sales agents support  Feedback and piloting

24. 24 CEE-SECR 2009 Q&A  2006-2008 Global Services 100 and 2008-2009 Global Outsourcing 100 company ­Top 10 Leaders, Emerging European Markets ­Best 10 Companies by Industry Focus: Health Care  In business since 1990—first in Russia  Incorporated in the U.S. in 1993  4 engineering centers—Moscow (3), N. Novgorod (1)  250+ FTEs with low attrition & rotation  CMMI Level 4 company  SPICE (ISO 15504) assessed ­Life critical software compliant  Member of  Focus on software R&D and product engineering for high-tech clients  Leader in system-level & embedded development services  Proficient in Web & enterprise applications