A high attrition rate and remote working in the local software development industry are forcing companies to find a lower risk approach to new development projects.
Software house Global Kinetic says there are two traditional methods of contracting - one based on time and materials, the other based on fixed costs. But these expose businesses to unacceptable risks, so a hybrid methodology is gaining traction in the market as more businesses look for predictability.
Sergio Barbosa, CIO of Global Kinetic, and CEO of its open banking platform, FutureBank, explains that when it comes to analysing projects, Function Point Analysis (FPA) pioneered in the 1980s by IBM as a unit of measurement that places a dollar value on software development, is once again immensely relevant.
“In a world of agile development, FPA gives the customer a clear sense of what they will be getting within a defined time frame. The expectation is managed by the customer, and they are able to prioritise the most important delivery.
“The project will almost never go over budget because you're always managing the expectation and with managed teams as a service, customers have a fixed monthly cost and fixed delivery timeline. With a hybrid of fixed costs and time and materials we are able to deliver the best of both methods in a way that massively reduces risk and eliminates overruns,” he explains.
COO Lóren Rose says according to the OfferZen’s 2022 State of the Developer Nation report more than 30% of South African developers are looking to move jobs within the next 12 months. “The report also warns that one in five South African developers work for companies based in a different city, underpinning the impact that remote work has had on the country’s limited skills base.”
This ‘brain drain’ is forcing companies to adopt a hybrid methodology to contracting, she says.
“A fixed-price contract is a contract where the agreed-upon price for the job is unchanged throughout the project. It doesn't matter if more time, materials or labour must be used than first estimated, the price stays the same,” says Rose. “Another way of contracting is time and materials. In fixed-cost projects, risk lies with the supplier so they will have to assume the cost of overrun. In time and materials projects, the risk lies with the customer, so they will need to assume the cost of overrun.”
In the local IT space, the fixed-cost approach, while still widely embraced, is often a cause for relationship breakdowns, according to Global Kinetic.
“Scope will naturally evolve over time in relation to changing market conditions, user behaviour and innovation," Rose points out. "Large, fixed-cost projects can no longer be seen to be a viable option within the current technology landscape where responsiveness is key to gaining a competitive advantage.
“Change is inevitable and the cost and overhead of managing that change in fixed-cost projects is what creates friction that leaves both customers and employees unhappy. Unfortunately, many customers still lean toward a fixed-cost approach as it provides more tangible guarantees in terms of managing cost, even though in reality they do little to guarantee return on technology investment.”
Budget overruns
In 2012 McKinsey and Oxford University reported that more than half of large IT projects had overrun their defined budgets by more than 45%. A decade later the firm updated its findings, and things had only got worse.
The 2022 findings showed that just one in 200 projects reviewed had delivered the intended benefits on time and within budget. What's more, the reviewed IT projects overall had exceeded their budgets by an eye-watering 75%, had overrun schedules by 46%, and had generated 39% less value than originally predicted.
Rose says although these are international statistics, it follows that South Africa will experience the same trends as other, more developed countries. “Global Kinetic is also constantly experiencing these challenges in its work with local clients,” she says, adding that the financial impact of these overruns is staggering.
According to the Consortium for Information & Software Quality (CISQ), the cost of unsuccessful development projects reached US$260-billion in 2020, which represented a 46% increase since the previous estimate two years earlier. “We believe South Africa to be comparable, if not worse,” says Rose.
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