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Entries categorized as ‘Customer Relationship’

Structuring Software Development Relationships

August 20, 2009 · Leave a Comment

How to structure a contract with customers is an interesting problem, especially since the two parties don’t know each other in the beginning. We want the contract to be fair in distributing risk between the parties. We want to write the contract in such a way that neither side has an incentive to take advantage of the other. Finally, we want to write the rules of the game such that when things go awry, both sides have an incentive to fix the situation rather than descend into worse.

Early Stage IT is in a unique position. On the one hand, we do work for clients and that puts us in a “supplier” role. On the other hand, as virtual CIO for our clients, we play a “client” role vis-a-vis other suppliers. With both roles in mind, we did a survey of billing practices people employ. In this search, we favored billing practices that align with agile development. To cite some models:

  • 10 Contracts for your next Agile Software Project by Peter Stevens. It’s well written and concise, and a recommended reading for all. How many people’s blog entries get translated into a half-dozen languages?
  • A 5-part series by Chris Parsons of Eden Development.
    • Parts 1, Part 2 and Part 3 argue that fixed price arrangements are inappropriate for software development because they’re implicitly set up to pit client and supplier against each other. This wastes valuable project budget and time on working out what to do when the project changes. I concur.
    • Part 4, argues that time and materials types of arrangements shift the risk to the client but the adversarial nature of the relationship remains. It’s not a good model for new relationships but can be OK once trust has been built up.
    • Part 5 describes what they actually do. The elements we like are (a) giving clients an expectation of the budget, (b) weekly billing, (c) setting weekly expectations and “gently” exceeding them and (d) no-surprises billing — meaning that things like management fees, infrastructure usage fees are blended into the programmer rate.
  • The Vertical Slice by Lars Thorup. It’s beautiful in its simplicity and I like it. It ensures the supplier has a stake in the success of the client. The 50% number, however, does not fit the risk profile of Early Stage IT’s typical clients.

Of all the different models, we like three the best. In order

  1. Peter Stevens’ Money for Nothing, Changes for Free
  2. Chris Parsons’ Billing with Integrity
  3. Peter Stevens’ Time and Materials with Variable Scope and Cost Ceiling

As always, feedback is welcome.

Categories: Customer Relationship
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Cash, Credit and Equity

January 26, 2009 · Leave a Comment

In this economy, Moody’s Says 10% of Companies May Face Cash Shortfall in 2009. The number of companies facing a credit crunch (and a cash flow problem) is a concern.

How does a startup like Early Stage IT survive and grow in this economy? By maintaining a focus on cash flow. Our billing and payment model is unusually cash-flow centric but there is something in it for you too, dear customer. A pet peeve we’ve heard from customers is the lack of transparency in IT. Comments like “we got this bill but we have no idea for what” are far too common. Here are a set of principles we will use:

  • We only work with prior authorization for the work and agreement on the resources that will be deployed for that work. You always know what we are working on and billing you for.
  • We obtain authorization on a regular basis: weekly, two-weekly or monthly. The period is agreed upon at the beginning of the relationship, and revisited from time to time. The time period is deliberately set to be short. It gives you a view into what’s going on at a detailed level.
  • We require that the client set aside funds at the beginning of the work period and expect to be paid within 15 business days of the end of that period.

In other words, at this stage of our development, we need to be sensitive to cash flow. Once the economy improves, we may consider other arrangements upon mutual agreement, such as credit.

Would we work for equity instead of cash? We are not venture capitalists. We don’t know how to evaluate future worth of a company and invest in it. In other words, No.

That said, we still need to provide our clients an opportunity to get to know us. We will spend up to a half day helping potential clients assess their IT requirements at no charge. Furthermore, since we are just starting out, we are looking to select a few clients to pilot our services in exchange for references and referrals.

Your thoughts? Are there other financing arrangements we could/should consider?  Please comment on this post if you think so.  Thanks in advance.

Categories: Customer Relationship
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