© 2006-2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 1 Warren S. Reid, Managing Director WSR Consulting Group,

© 2006-2008 Warren S. Reid All Rights Reserved© 2006-2008 Warren S. Reid All Rights ReservedThis model will change and be updated over timeThis model will change and be updated over time 11

Warren S. Reid, Managing DirectorWSR Consulting Group, LLC

PH: 818/986-8832 Fax: 818/986-7955

E-mail: [email protected]: www.wsrcg.com

Blog: blog.wsrcg.com

1. When IT goes All Wrong!2. Why Systems Fail?3. Known Risks: Business, Technology & Contract4. Purpose of “Fair” Contracts & Your Part in It? 5. Introduce the Case & Assignments

Contracting for Computer Services:A Case Study for Systems & SW Engineers

For USC CS-510 November 14 & 17, 2008

mailto:[email protected]

http://www.wsrcg.com/


IT Industry Continues to IT Industry Continues to StruggleStruggle

Chaos Report (Standish Group)2004

ChallengedChallenged((on averageon average):):

Time Overruns: Time Overruns: 84%84%

$$ Overruns: $$ Overruns: 56%56%

Rqmts delivery: Rqmts delivery:

~67%~67%


When IT Goes All WrongWhen IT Goes All Wrong (2004-(2004-08)08)

FBI Terror/Crime Sys $170MMFBI Terror/Crime Sys $170MM – – mismanagement, poor planning, mismanagement, poor planning, design changesdesign changes

Student Loan InterestStudent Loan Interest – Lost – Lost $8mm interest in sw calc.$8mm interest in sw calc.

UK Pension Sys CrashUK Pension Sys Crash – – 80,000 80,000 pub serv couldn’t pay checkspub serv couldn’t pay checks

ICIICI – Chem Industry Giant – inabil to – Chem Industry Giant – inabil to fulfill cust orders due to botched impl fulfill cust orders due to botched impl re BPR – Customers defect re BPR – Customers defect ----39% 39% Stock value wiped outStock value wiped out

UK Air Traffic ControlUK Air Traffic Control – – sys down sys down – cancel/delays hit 200K passengers– cancel/delays hit 200K passengers

MESDAQMESDAQ – day 1; yrs later halts w – day 1; yrs later halts w upgrade errorsupgrade errors

London Stock ExchangeLondon Stock Exchange – – on on last tax day, cap gains issueslast tax day, cap gains issues

BarclaysBarclays – small piece of hw brings – small piece of hw brings down whole bank sys for 18hrs – 5mm down whole bank sys for 18hrs – 5mm cust can do nothingcust can do nothing

$3.8bb$3.8bb Hosp Sys in trouble (3/07)Hosp Sys in trouble (3/07) AnotherAnother Mars explorerMars explorer (4/07)(4/07) NANA BlackberrysBlackberrys down – 4hrs (4/07)down – 4hrs (4/07) $38bb –$38bb – “ “Oops! Techie Wipes Out Oops! Techie Wipes Out

$38B Fund”:$38B Fund”: Keystroke mistake deletes Keystroke mistake deletes data for Alaska’s oil-funded account (3/20/07)”data for Alaska’s oil-funded account (3/20/07)”

LAUSD; Giant Sanitation LAUSD; Giant Sanitation Company Company

Singapore Higher EducationSingapore Higher Education Hospitals (missing/incorrect data; Hospitals (missing/incorrect data;

death)death) State Highway PatrolState Highway Patrol Pizza, Pizza; Soft Drink CoPizza, Pizza; Soft Drink Co U.S. government student (privacy)U.S. government student (privacy) Outsourcing to IndiaOutsourcing to India Major NA bank: millions of accts Major NA bank: millions of accts

thrown – poor sw tests; 2wks to fix; thrown – poor sw tests; 2wks to fix; but mo probsbut mo probsw email phish; > $100mm to fix w email phish; > $100mm to fix


It’s the Same in Every It’s the Same in Every Case!Case!

““He SaidHe Said … She Said” … She Said”# Category He Said (Customer)… She Said (Vend’r, Integ, Consult, OS)…

Sys doesn’t work; Not what wanted

Limited functionality

Sys failed in field

SW, services & expertise oversold

No one can use it! Poor training

Sys is “fundamentally flawed”

Never told us that/poor advice!

Sys is full of bugs

U failed as Sys Integ. Proj. Mgr.

Un-qual/stable/commit Ee, PM, SC

Quit good PM & SDLC meth; Risk up

U chgd mind; Don’t know want/need

U changed scope

U d/not do req’d Biz Proc Reengineer

U conducted ref checks/ due diligence

“Right staff” never did train/refresh

Only 2 more months to test/fix probs

U d/not follow recs; Bad decis-makers

Bad data conver/i’faces; Always bugs!

No! U failed as Sys Integ. Proj. Mgr.

Un-qual/-stable/-commit staff, PM, SC

Unwilling 2 comply w prom/need meth

1 Feasible1 Feasible

2 Capable2 Capable

3 Compatible3 Compatible

44 CredibleCredible

5 Usable5 Usable

6 Stable6 Stable

7 Culpable7 Culpable

8 Reliable8 Reliable

9 Responsible9 Responsible

10 Available10 Available

11 Suitable11 Suitable


Risks Known B4 Project Risks Known B4 Project StartsStarts

PeoplePeople/Resource Risks/Resource Risks TurnoverTurnover, culture, x-comm., culture, x-comm. Top Mgt Commit; Proj ChampTop Mgt Commit; Proj Champ Partner; Ref. Chks/Ref’s RefsPartner; Ref. Chks/Ref’s Refs

Requirements RisksRequirements Risks Poor Project CharterPoor Project Charter Incompl, Misunderst, GallopIncompl, Misunderst, Gallop I’faces,I’faces, Data Convers’nData Convers’n

TechnologyTechnology HW, SW, Net, HW, SW, Net, D/BD/B, I’net, , I’net, Security; PrivacySecurity; Privacy

CC – Correctness – Correctness II – Integrity – Integrity AA – Available – Available

Tool avail? mature? train? use?Tool avail? mature? train? use?

ProjectProject & Tech Mgmt Risks & Tech Mgmt Risks Client, Depts, Users, IT, Vend, O/S consults, attys, custs, analyst, mkt Client, Depts, Users, IT, Vend, O/S consults, attys, custs, analyst, mkt

“expectations”“expectations” Unclear Leadership –Unclear Leadership – SIPMSIPM

ProcessProcess Risks Risks Project under- or mis-estimatedProject under- or mis-estimated SEI-CMMi SEI-CMMi level; level; ETC &EVM StdsETC &EVM Stds Sched, $$, estimates, change controlSched, $$, estimates, change control Not enough time for testingNot enough time for testing Shortcuts to SDLC Shortcuts to SDLC on the flyon the fly

ProductProduct & Other Risks & Other Risks Performance, testednessPerformance, testedness & readiness& readiness -abilities-abilities (scale, use, test, port, maint) (scale, use, test, port, maint) Competent T/O proc, supt, maint?Competent T/O proc, supt, maint? compet; economy; org; regulatorycompet; economy; org; regulatory


Requirements: Why So Requirements: Why So Difficult!Difficult!


Requirements: Why So Hard – Requirements: Why So Hard – Still?Still?


What Can Possibly Be What Can Possibly Be Misunderstood?!Misunderstood?! Everything!Everything!

People are differentPeople are different People have differentPeople have different::

Objectives; GoalsObjectives; Goals Experience, education, expertiseExperience, education, expertise Styles of understanding and communicatingStyles of understanding and communicating Cultural training and biasesCultural training and biases Understanding of prioritiesUnderstanding of priorities Fears: spoken and unspokenFears: spoken and unspoken Abilities, talents, logic, creativityAbilities, talents, logic, creativity Understanding of what is subjective v objectiveUnderstanding of what is subjective v objective Implied/understood without being spokenImplied/understood without being spoken (needs, reqmts, (needs, reqmts,

sizzle)sizzle) What won’t be misunderstood?What won’t be misunderstood?


# Category What They Understood: Cust/Prov What the Contract Says

System description

Functional Requirements

Performance Reqmts

Roles & Responsibilities

Conduct of Project

Custom Programming Services

Sys. Integ; I’facing; Testing; Convert

Acceptance Testing Process

Key Delivs: QA; Train; Doc; Sys Works

Maint, upgrades, fixes, enhancem’ts

All proposals/work-prod/proms up to K

ALL Systems Go!

Costs/Pymts; ADR; TERMination; Renew; Title; X-hire; Site prep; Install hw, sw, nw, BPR; confid; $ protect; Liability limits/exclusions

Bounds scope; Uber-theme

… as per specs dated ____?

Scal-? Port-? Avail-? Maint-? Use-? SMART?

RM? Dispute escal/resol? HR reqts?

WBS, est, staff, delivs, PM, SDLC, bugs

Config, SDLC, PM, est, test, I’face, maint-?

Results NOT Resources; “Success” def

Who? How? When? Where? Criteria?

Exist? Depth? Maintainable? S/O proc

T/Over stds? Work stds? LTCO? Metrics

“Parole evidence” rule; 4 corners only

What’s acceptable? Checklist? Vote?

There’s more to the Sys than a sys (SOS): $$ limits; penalties; ownership; holdbacks; remedies; limits of liab; privacy; hot sites

1 Suitable?1 Suitable?

2 What Works?2 What Works?

3 How Well?3 How Well?

5 How We Do It?5 How We Do It?

6 Just for Me?6 Just for Me?

7 U Prove it 17 U Prove it 1stst!!

8 Min Reqmts8 Min Reqmts

9 More Min Reqs9 More Min Reqs

10 & Tomorrow?10 & Tomorrow?

11 $$ = Mouth?11 $$ = Mouth?

What Can Possibly Be Misunderstood?!What Can Possibly Be Misunderstood?! Everything!Everything! “We Thought … “We Thought … Contract Says”Contract Says”

4 Who Does what?4 Who Does what?

12 Go-Live12 Go-Live

13 Other Key Issues13 Other Key Issues


Why Are Contracts (K) So Why Are Contracts (K) So Important,Important,& Why Must YOU Know About & Why Must YOU Know About Them?Them? They offer They offer clear & explicit delineation of rights, obligations & expectationsclear & explicit delineation of rights, obligations & expectations of the of the

partiesparties Generally produce:Generally produce:

much much better working relationshipbetter working relationship much much > prospect of proj success > prospect of proj success ($, Sch, F&F, QA, SH, Risk($, Sch, F&F, QA, SH, Risk; < costs, staff, inv; > cust serv, ; < costs, staff, inv; > cust serv,

mkt share) mkt share) less chance for either major disputes or total disinteg of relat bet parties s/unexpect probs less chance for either major disputes or total disinteg of relat bet parties s/unexpect probs

arisearise Honeymoon: forces Honeymoon: forces identification, negotiation, appreciation of others’ viewsidentification, negotiation, appreciation of others’ views, beliefs , beliefs

& objectives before you do your deal& objectives before you do your deal Must be a living document – able/willing to adapt to changesMust be a living document – able/willing to adapt to changes An An understanding of risks (id & allocation), financial responsibility, knowledge of understanding of risks (id & allocation), financial responsibility, knowledge of

law, strong sense of valuelaw, strong sense of value beats size for good contracting beats size for good contracting Computer lawyer, tech advisor, business advisor/consult, domain advisorComputer lawyer, tech advisor, business advisor/consult, domain advisor ““Standard K form” favors vendor/large Cs & freq used as sub for good mgt/K activStandard K form” favors vendor/large Cs & freq used as sub for good mgt/K activ K language often incomplete & ambiguous; Drafters are gone; shelf deathK language often incomplete & ambiguous; Drafters are gone; shelf death Matters of:Matters of:

FactsFacts LawLaw EvidenceEvidence RiskRisk TechnologyTechnology


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 "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 AB gets 3% whether or not C ever pays IYB Also diff, how IYB paid by its Cs:

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.


What is an Applications Service Provider? (ASP)

ASP Model 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

Common ASP features: 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: 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: 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


_________________________________________________________________________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.

The basic structure of the relationship looks pretty straightforward. 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.

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.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.

ItsYourBid.com MEMORANDUM MEMORANDUM [1][1]From: Ted Gearhead, Head of MISFrom: Ted Gearhead, Head of MISTo: Warren S. Reid, CEOTo: Warren S. Reid, CEORe: Deal with AuctionBid.comRe: Deal with AuctionBid.comDate: March 13, 2008Date: March 13, 2008


___________________________________________________________________________Ted. Thanks for useful memo. I agree w everything you say but have contract concerns.

1. Getting the site operational. 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 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 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 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 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

ItsYourBid.com MEMORANDUM MEMORANDUM [2][2]From: Ted Gearhead, Head of MISFrom: Ted Gearhead, Head of MISTo: Warren S. Reid, CEOTo: Warren S. Reid, CEORe: Deal with AuctionBid.comRe: Deal with AuctionBid.comDate: March 13, 2008Date: March 13, 2008


AuctionBid.comAuctionBid.comMEMORANDUMMEMORANDUM [3][3]To: Michael King, CEO From: Connie Coder, VP, Business Development Re: Contract with ItsYourBid.comDate: March 13, 2008__________________________________________________________________Michael:

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

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.

#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.

Some equip may sell for tens of thousands of dollars, so our cut will be several thousand dollars

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!

We do mods at our expense. S/not be large $$ amt. We I’face w sw being devel by IYB for basic website nav

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

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.

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.now you meet w our attys this Saturday. Let me know of any other issues that they think are important.


AuctionBid.comAuctionBid.comMEMORANDUM MEMORANDUM [4][4]To: Connie Coder, VP, Business Development From: Michael King, CEORe: Contract with ItsYourBid.comDate: March 13, 2008_______________________________________________________Connie: Thanks for the memo. I am quite excited about this relationship.

Competit >everCompetit >ever; all start auct site. Impacted Rev. New Ks < rev. Bad econ. ; all start auct site. Impacted Rev. New Ks < rev. Bad econ. We REALLY need this dealWe REALLY need this deal..

I like IYB’s biz mod; we I like IYB’s biz mod; we hv chance to make lot more $ w less tranxhv chance to make lot more $ w less tranx; IYB startup – ; IYB startup – concern re long haul fin concern re long haul fin stabstab. Must . Must terminate if IYB gets in serious financ probsterminate if IYB gets in serious financ probs. IYB Pres says they flush, but worry nonetheless. . IYB Pres says they flush, but worry nonetheless.

Cost lot $ mod swCost lot $ mod sw for IYB; MUST recoup $ + make profit. Thus, for IYB; MUST recoup $ + make profit. Thus, we do absol min work necwe do absol min work nec get site up/run get site up/run

If If potent’l deal w $ upfront, we delay IYB wkpotent’l deal w $ upfront, we delay IYB wk; Push 6 mo ; Push 6 mo 9 w lang for mo if 9 w lang for mo if IYB changes incr work >planIYB changes incr work >plan

They want 100% guarantee uptime; unrealistic; sell large equip – some downtime no big deal. They want 100% guarantee uptime; unrealistic; sell large equip – some downtime no big deal. Get Get 97% w less penalties and w limited remedies (we try diligently to fix…)97% w less penalties and w limited remedies (we try diligently to fix…)

Bc we incurr host $, but IYB pay us % of act revenues fm S, we depend on their sales effort. If can’t 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: attract S, make no money. So incl min paymts clause: $5K/mo or we can terminate K.$5K/mo or we can terminate K. Give them impetus Give them impetus to mkt websiteto mkt website

We We own ALL rights to swown ALL rights to sw we develop. At K end, we keep sw… so we develop. At K end, we keep sw… so they don’t move to another auction they don’t move to another auction hosting servicehosting service. K s/be min 5 yrs to insure we recoup sw invest, w option 5 more years either party can . K s/be min 5 yrs to insure we recoup sw invest, w option 5 more years either party can exercise. If renewed, want exercise. If renewed, want % incr fm 3% incr fm 3 6% 6%

If IYB files If IYB files Bankruptcy or doesn’t pay by payment due dateBankruptcy or doesn’t pay by payment due date, want K , want K termination rights on 30 days noticetermination rights on 30 days notice. . Complete pending auct, NO new ones last 30day per.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.now you meet w our attys this Saturday. Let me know of any other issues that they think are important.


d(y)d(y)hh: : f(y)f(y)pp

++ (l)(l)++

(c) (c) = = PP22R R

AFTER YEARS OF EXPERIENCE:AFTER YEARS OF EXPERIENCE:THE THE GOLDENGOLDEN ANSWER! ANSWER!


AFTER YEARS OF EXPERIENCE:AFTER YEARS OF EXPERIENCE:THE THE GOLDENGOLDEN ANSWER! ANSWER!

d(y)d(y)hh : f(y): f(y)pp ++ (l)(l)++

(c)(c) == P P22RR


QUESTIONS/COMMENTSQUESTIONS/COMMENTS

Warren S. Reid, Managing DirectorWarren S. Reid, Managing DirectorPH: 818/986-8832 PH: 818/986-8832 Fax: 818/986-7955Fax: 818/986-7955E-mail: E-mail: [email protected]@wsrcg.comWebsite: Website: www.wsrcg.comwww.wsrcg.comBlog: blog.wsrcg.comBlog: blog.wsrcg.com

WSR CONSULTING GROUP, LLC

mailto:[email protected]

http://www.wsrcg.com/

Documents

© 2006-2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 1 Warren S. Reid, Managing Director WSR Consulting Group,