CEE-SECR 2009October 28-29. Moscow, Russia

Proposal Feasibility Study using Stochastic Risk Model

Anton Khritankov

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

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

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

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

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

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

CEE-SECR 2009

Example profile

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.00 1.15 1.31 1.46 1.61 1.76 1.92 2.07 2.22 2.37

Probability

Impact

Cumulative distribution function(CDF)

Density function (PDF)

Profile is a CDF

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

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

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

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

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

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

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

CEE-SECR 2009

RiskCalc. Output and analyze

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

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

CEE-SECR 2009

0.00

0.04

0.08

0.12

0.16

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Actual Effort0

1

2

3

4

T&M

FP

TRIM

Model with minimum price

Model TRIM T&M FP

Net profit (75%)

>10% =3.70 >12%

Price (75%)

<3.70 <4.03 =3.78

Success 76% 100% 80%

20

CEE-SECR 2009

PricingModel. Input and indicators

21

CEE-SECR 2009

PricingModel. Figures

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

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

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