Contracting for Computer Services:
A Case Study for Systems & SW Engineers
For USC CS-510 November 14 & 17, 2008
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When IT goes All Wrong!
Why Systems Fail?
Known Risks: Business, Technology & Contract
Purpose of “Fair” Contracts & Your Part in It?
Introduce the Case & Assignments
Warren S. Reid, Managing Director
WSR Consulting Group, LLC
PH: 818/986-8832
Fax: 818/986-7955
E-mail: wsreid@wsrcg.com
Website: www.wsrcg.com
Blog: blog.wsrcg.com
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
1
IT Industry Continues to Struggle
Chaos Report (Standish Group)
2004
Challenged
(on
average):
Time Overruns: 84%
$$ Overruns: 56%
Rqmts delivery: ~67%
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
2
When IT Goes All Wrong (2004-08)
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FBI Terror/Crime Sys $170MM –
mismanagement, poor planning, design
changes
Student Loan Interest – Lost $8mm
interest in sw calc.
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UK Pension Sys Crash – 80,000 pub
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ICI
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oil-funded account (3/20/07)”
serv couldn’t pay checks
– Chem Industry Giant – inabil to fulfill
cust orders due to botched impl re BPR –
Customers defect --39% Stock value wiped
out
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UK Air Traffic Control – sys down –
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cancel/delays hit 200K passengers
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MESDAQ – day 1; yrs later halts w
upgrade errors
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London Stock Exchange – on last tax
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day, cap gains issues
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Barclays – small piece of hw brings down
whole bank sys for 18hrs – 5mm cust can
do nothing
$3.8bb Hosp Sys in trouble (3/07)
Another Mars explorer (4/07)
NA Blackberrys down – 4hrs (4/07)
$38bb – “Oops! Techie Wipes Out $38B
Fund”: Keystroke mistake deletes data for Alaska’s
LAUSD; Giant Sanitation Company
Singapore Higher Education
Hospitals (missing/incorrect data; death)
State Highway Patrol
Pizza, Pizza; Soft Drink Co
U.S. government student (privacy)
Outsourcing to India
Major NA bank: millions of accts thrown –
poor sw tests; 2wks to fix; but mo probs
w email phish; > $100mm to fix
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
3
It’s the Same in Every Case!
“He Said … She Said”
# Category
He Said (Customer)…
She Said (Vend’r, Integ, Consult, OS)…
1 Feasible
Sys doesn’t work; Not what wanted
U chgd mind; Don’t know want/need
2 Capable
Limited functionality
U changed scope
3 Compatible
Sys failed in field
U d/not do req’d Biz Proc Reengineer
4 Credible
SW, services & expertise oversold
U conducted ref checks/ due diligence
5 Usable
No one can use it! Poor training
“Right staff” never did train/refresh
6 Stable
Sys is “fundamentally flawed”
Only 2 more months to test/fix probs
7 Culpable
Never told us that/poor advice!
U d/not follow recs; Bad decis-makers
8 Reliable
Sys is full of bugs
Bad data conver/i’faces; Always bugs!
9 Responsible
U failed as Sys Integ. Proj. Mgr.
No! U failed as Sys Integ. Proj. Mgr.
10 Available
Un-qual/stable/commit Ee, PM, SC
Un-qual/-stable/-commit staff, PM, SC
11 Suitable
Quit good PM & SDLC meth; Risk up
Unwilling 2 comply w prom/need meth
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
4
Risks Known B4 Project Starts
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People/Resource Risks
 Turnover, culture, x-comm.
 Top Mgt Commit; Proj Champ
 Partner; Ref. Chks/Ref’s Refs
Requirements Risks
 Poor Project Charter
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Incompl, Misunderst, Gallop
Security; Privacy
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C – Correctness
I – Integrity
A – Available
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Shortcuts to SDLC on the fly
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Product & Other Risks
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Tool avail? mature? train? use?
Unclear Leadership – SIPM
Project under- or mis-estimated
SEI-CMMi level; ETC &EVM Stds
Sched, $$, estimates, change control
Not enough time for testing
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I’faces, Data Convers’n
Client, Depts, Users, IT, Vend, O/S consults,
attys, custs, analyst, mkt “expectations”
Process Risks
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Technology
 HW, SW, Net, D/B, I’net,
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Project & Tech Mgmt Risks
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Performance, testedness & readiness
-abilities (scale, use, test, port, maint)
Competent T/O proc, supt, maint?
compet; economy; org; regulatory
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
5
Requirements: Why So Difficult!
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
6
Requirements: Why So Hard – Still?
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
7
What Can Possibly Be Misunderstood?!
Everything!
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People are different
People have different:
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Objectives; Goals
Experience, education, expertise
Styles of understanding and communicating
Cultural training and biases
Understanding of priorities
Fears: spoken and unspoken
Abilities, talents, logic, creativity
Understanding of what is subjective v objective
Implied/understood without being spoken (needs, reqmts, sizzle)
What won’t be misunderstood?
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
8
What Can Possibly Be Misunderstood?! Everything!
“We Thought … Contract Says”
# Category
What the Contract Says
What They Understood: Cust/Prov
1 Suitable?
System description
Bounds scope; Uber-theme
2 What Works?
Functional Requirements
… as per specs dated ____?
3 How Well?
Performance Reqmts
Scal-? Port-? Avail-? Maint-? Use-? SMART?
4 Who Does what?
Roles & Responsibilities
RM? Dispute escal/resol? HR reqts?
5 How We Do It?
Conduct of Project
WBS, est, staff, delivs, PM, SDLC, bugs
6 Just for Me?
Custom Programming Services
Config, SDLC, PM, est, test, I’face, maint-?
7 U Prove it 1st!
Sys. Integ; I’facing; Testing; Convert
Results NOT Resources; “Success” def
8 Min Reqmts
Acceptance Testing Process
Who? How? When? Where? Criteria?
9 More Min Reqs
Key Delivs: QA; Train; Doc; Sys Works
Exist? Depth? Maintainable? S/O proc
10 & Tomorrow?
Maint, upgrades, fixes, enhancem’ts
T/Over stds? Work stds? LTCO? Metrics
11 $$ = Mouth?
All proposals/work-prod/proms up to K
“Parole evidence” rule; 4 corners only
12 Go-Live
ALL Systems Go!
What’s acceptable? Checklist? Vote?
13 Other Key Issues
Costs/Pymts; ADR; TERMination; Renew; Title; There’s more to the Sys than a sys (SOS):
$$ limits; penalties; ownership; holdbacks;
X-hire; Site prep; Install hw, sw, nw, BPR;
confid; $ protect; Liability limits/exclusions
remedies; limits of liab; privacy; hot sites
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
9
Why Are Contracts (K) So Important,
& Why Must YOU Know About Them?
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They offer clear & explicit delineation of rights, obligations & expectations of the parties
Generally produce:
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much better working relationship
much > prospect of proj success ($, Sch, F&F, QA, SH, Risk; < costs, staff, inv; > cust serv, mkt share)
less chance for either major disputes or total disinteg of relat bet parties s/unexpect probs arise
Honeymoon: forces identification, negotiation, appreciation of others’ views, beliefs &
objectives before you do your deal
Must be a living document – able/willing to adapt to changes
An understanding of risks (id & allocation), financial responsibility, knowledge of law, strong
sense of value beats size for good contracting
Computer lawyer, tech advisor, business advisor/consult, domain advisor
“Standard K form” favors vendor/large Cs & freq used as sub for good mgt/K activ
K language often incomplete & ambiguous; Drafters are gone; shelf death
Matters of:
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Facts
Law
Evidence
Risk
Technology
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
10
CONTRACTING AGREEMENTS FOR SYSTEMS SERVICES: A Case Study
©2008 by Warren S. Reid & Michael D. Scott, Esq.
All Rights Reserved
For USC Graduate School for Systems Engineering (CS 510)
Basic Fact Situation
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"ItsYourBid.com" ("IYB") well-funded Internet start-up
IYB's biz model: create site for online aucts of new/used heavy indus equip
Id’d "AuctionBid.com" ("AB") as ASP of auct sw/bid process services on I’net
Gen, ASPs charge a fixed, per tranx fee to cust.
Parties agreed to diff biz model:
 Here, not paid flat fee/tranx, but get 3% Total Amt IYB to receive/C/tranx
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AB gets 3% whether or not C ever pays IYB
Also diff, how IYB paid by its Cs:
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Seller reqd to est auction sale price (sp) & pay IYB 10% of est up-front.
If SP of successful bidder =< est, IYB gets no more.
If SP >est, IYB w/get 50% of DIFF fm Seller. So Sellers w/not low-ball est.; 3%  AB
Bc payment strategies not normal auction, AB to custom sw to IYB specifically
AB gets no up-front pymts to dev sw, but believes > $ opps here – so will invest
AB will also host auction site on its hw at no added cost
You, part of Deal Team (lawyer, exec, SE, PMK) w/get mo client info fm memos.
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
11
What is an Applications Service Provider? (ASP)
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ASP Model
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Common ASP features:
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ASP fully owns & operates sw apps and servers
ASP generally bills on "per-use" basis or monthly/annual fee
The advantages to this approach include:
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ASP provides computer serv to custs over network
Custom client sys can also I’face to sys.
ASPs grown w  costs of special sw > $$ range of S/M-size cos. (’03-’08 $4bb 10bb)
W. ASPs, sw complex/$$ less; upgrade/dist sw to end users <; maint current, 24x7 suppt
SW integ issues elim fm client site
SW app $$ spread > clients
ASP expert w particular sw app knowhow > than in-house staff
Key sw sys kept current, avail, managed for perform by experts
> relia-bility, avail-, scal-, security of computer systems
SLAs guarantee certain service of service
Reduction of internal IT costs
Some inherent disadvantages include:
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Client accepts app as is; ASPs only make cust solutions for largest Cs
C may rely on ASP for crit biz funct – limits control of funct relying on ASP
Changes in ASP mkt may result in type/level of service avail
Integration w C's non-ASP sys c/be problem
Eval ASP security, stabil, resources ELSE: Loss/compromise of control of data, image, security
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
12
ItsYourBid.com
From:
To:
Re:
Date:
MEMORANDUM [1]
Ted Gearhead, Head of MIS
Warren S. Reid, CEO
Deal with AuctionBid.com
March 13, 2008
_________________________________________________________________________
Warren: I evaluated all proposals, think AuctionBid.com (“AB”) is right fit for our needs/unique biz model. As “virtual” company, we want to invest
as little $ as poss up front to get started & AB looks like ideal solution. We want to avoid buy computer equip, rent
space for comp center, hire lots of employee - generally doing what normal startup would do. AB c/both host site &
provide us w sw for online aucts. They can run aucts & maintain hw & sw for us. It seems like an ideal fit.
Our one web designer, Tom Thumbs, w/be designing &
programming our website. He do all graphics, set up how home & auction pages look, design sw
that allows sellers to sign up for service, & post info on heavy equip they plan to sell, incl
descrips/pics. Tommy also designed & writing sw for buyer sign up, nav site & place bids. Only
piece missing, & it’s critical, is sw to actually run aucts, keep track of bids, etc. That’s for AB.
The basic structure of the relationship looks pretty straightforward.
AB has a sw package that permits website like ours to run aucts. For normal auct site, like eBay, AB software just “plugs into” website’s sw & works
like charm. However,
because we run our auctions diff, it necess for AB mod its sw.
Contract (K) we negotiate needs to provide for AB to make agreed-upon mods at own expense, & provide us w
modif sw package to plug into website sw Tommy designed & in process of writing.
AB had access to T’s design. AB says mod sw works w/o TT modifying what already done. Even tho
AB is expert in auct sw, from exp, know cust sw never works as designed; reqs tweaking. So must
provide short per (30 days) aft AB done w mods so we c/test sw, make sure works properly.
Bc we won’t have computers ourselves to do testing, AB will need to provide us w/access to their computers to do testing.
Concern: AB extreme busy. Their auction sw very popular; dozens of cos sign up w AB to run aucts.
I w/be working closely w our outside counsel, so if there are any things you want me to pass on to them, let me know.
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
13
ItsYourBid.com
MEMORANDUM [2]
From: Ted Gearhead, Head of MIS
To:
Warren S. Reid, CEO
Re:
Deal with AuctionBid.com
Date: March 13, 2008
___________________________________________________________________________
Ted. Thanks for useful memo. I agree w everything you say but have contract concerns.
1. Getting the site operational.
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Auct website IS our business. If not up on sched, we out of business.
AB invests in IYB BUT if AB get big C pays for sw dev/mod, we on back burner; not GoLive.
Need sched to ensure, NMW, AB gets us fully up in 6 mos -- incl 1mo test; Not 1 day more! We clear?
2. Payments to AB
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Make sure contract clear we pay them 3% of what we are due fm seller for each auct – not fixed price.
So: 3% of minimum that seller pays us up front. Minimum w/be 10% of seller ests equip will sell for.
AB gets 3% of S owes us at END if actual SP > est. ; We get 50% of diff S est & act SP; AB get 3% of the 50%
Bc it c/take time S pay, we want up to 90 days to pay AB fm auct end. If paid < 90, we pay AB 10d aft get check.
If no paid in 90/or at all, still owe AB 3%, t/be paid on 90th day. These are big corps & govt) so no-pay risk small.
3. Tommy Thumb
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Tommy genius; W/o him we screwed. If he goes, b/sure AB can’t hire him w/i longer of 6 mos of gone or K end
4. Service Level
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Website avail =lifeblood; NEED 99% uptime SLA/any 24 hrs. If unmet any 3 days/mo, AB pays $1K/hr for unavail
If prob for AB, AB arrange hot-swap auct back-up website if prime goes down/unavail on I’net for any reason.
Only except monthly maint w/site unavail for up to 1 hr/mo for sched maint of comp sys. Sun 2am – 3am PST
5. Term & Termination
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K s/b 5 yrs long w option for us to renew addl 5 yrs w/exact same terms (will change % due AB auct 3%4%)
Website=our biz, AB can’t term K - NMW. AB only remedy -- sue for damage; xcept if owe >$10K, w/hv 30 days
If don’t pay, AB phase out website by sw mod to preclude new aucts; aucts in progress on day 30 go to end
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
14
AuctionBid.com
MEMORANDUM [3]
To:
Michael King, CEO
From: Connie Coder, VP, Business Development
Re:
Contract with ItsYourBid.com
Date: March 13, 2008
__________________________________________________________________
Michael:
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After long time, ItsYourBid.com (IYB) responds + to our Prop to provide web hosting & auction sw services. A
start-up, but seem well-fund’d. Auct site their whole biz; worry if w/cn provide needed service. Assuaged concern
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IYB diff biz model; s/wk well for large $$ S vs our clients who charge S a flat fee (or % of SP), and pay us fixed, per
auction fee. They need signif mods to our core sw.
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#s look good: 3% of est min (IYB gets 10%); plus 3% of SP over est (IYB get 50%) is signif more money than usual
fixed $5.00 fee/auction charge. If S est is $10K but sells for $14K, IYB gets 10% of $10K = $1K PLUS 50% of $4k
= $2k for $3k total. We get 3% of $3k = $90.
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Some equip may sell for tens of thousands of dollars, so our cut will be several thousand dollars
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We give IYB 90 days to pay bc they bill S (too large $$ for credit cards). We get paid whether IYB gets paid or not!
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We do mods at our expense. S/not be large $$ amt. We I’face w sw being devel by IYB for basic website nav
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IYB web designer, Tom Thumb’s designs look relativ straightforward. Concern if sw TT develop’g changes signif
fm what saw, cause us redesign/rewrite sw mods. K s/limit IYB’s abil to change once K signed/pay us for changes
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Agreed to get site up in 6 mos of K sign. No problem as long as Tommy still there ( or “as good” replacement.
Also depends on their not changing sw design after K sign. If they do so, may take longer to get website up.
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If Tommy leaves/IYB expands prog dept, IYB may try to steal some AB progs. Incl a non-solicitation clause in K.
I know you meet w our attys this Saturday. Let me know of any other issues that they think are important.
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
15
AuctionBid.com
MEMORANDUM [4]
To:
Connie Coder, VP, Business Development
From: Michael King, CEO
Re:
Contract with ItsYourBid.com
Date: March 13, 2008
_______________________________________________________
Connie: Thanks for the memo. I am quite excited about this
relationship.
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Competit >ever; all start auct site. Impacted Rev. New Ks < rev. Bad econ. We REALLY need this deal.
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I like IYB’s biz mod; we hv chance to make lot more $ w less tranx; IYB startup – concern re long haul fin
stab. Must terminate if IYB gets in serious financ probs. IYB Pres says they flush, but worry nonetheless.
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Cost lot $ mod sw for IYB; MUST recoup $ + make profit. Thus, we do absol min work nec get site up/run
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If potent’l deal w $ upfront, we delay IYB wk; Push 6 mo 9 w lang for mo if IYB changes incr work >plan
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They want 100% guarantee uptime; unrealistic; sell large equip – some downtime no big deal.
Get 97% w less penalties and w limited remedies (we try diligently to fix…)
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Bc we incurr host $, but IYB pay us % of act revenues fm S, we depend on their sales effort. If can’t
attract S, make no money. So incl min paymts clause: $5K/mo or we can terminate K. Give them impetus
to mkt website
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We own ALL rights to sw we develop. At K end, we keep sw… so they don’t move to another auction
hosting service. K s/be min 5 yrs to insure we recoup sw invest, w option 5 more years either party can
exercise. If renewed, want % incr fm 3 6%
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If IYB files Bankruptcy or doesn’t pay by payment due date, want K termination rights on 30 days notice.
Complete pending auct, NO new ones last 30day per.
I know you meet w our attys this Saturday. Let me know of any other issues that they think are important.
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
16
AFTER YEARS OF EXPERIENCE:
THE GOLDEN ANSWER!
h
p
d(y) : f(y) +
2
(c) = P R
(l)+
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
17
AFTER YEARS OF EXPERIENCE:
THE GOLDEN ANSWER!
h
d(y)
p
f(y) +
:
(l)+
2
(c) = P R
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
18
QUESTIONS/COMMENTS
WSR CONSULTING GROUP, LLC
Warren S. Reid, Managing Director
PH: 818/986-8832
Fax: 818/986-7955
E-mail: wsreid@wsrcg.com
Website: www.wsrcg.com
Blog: blog.wsrcg.com
© 2006-2008 Warren S. Reid All Rights Reserved
This model will change and be updated over time
19