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Proposal Feasibility Study using Stochastic Risk Model

Proposal Feasibility Study using Stochastic Risk Model. Anton Khritankov. 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

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Proposal Feasibility Study using Stochastic Risk Model

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  1. Proposal Feasibility Study using Stochastic Risk Model Anton Khritankov

  2. 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. Outline of proposal preparation process • Analysis and estimation are performed • Size and Effort • Risks are identified and estimated • Commitment is chosen depending on estimates • Financial part is prepared • Costs and price • Proposal feasibility study • Proposal document is released

  4. Analysis and estimation • Analysis and estimation are performed • Size and Effort • Risks are identified and estimated • Commitment is chosen depending on estimates • Financial part is prepared • Costs and price • Proposal feasibility study • Proposal document is released

  5. 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. 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. 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. Example profile Probability Cumulative distribution function(CDF) Profile is a CDF Density function (PDF) Impact

  9. Financial proposal • Analysis and estimation are performed • Size and Effort • Risks are identified and estimated • Commitment is chosen depending on estimates • Financial proposal is prepared • Costs and price • Proposal feasibility study • Proposal document is released

  10. 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. 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. Case study and tools • Support by Auriga-CPPM tools • RiskCalc • PricingModel • Case study • Identify risks • Compute project profile • Feasibility study and better pricing options • TRIM procedure • Three steps to perform feasibility study

  13. 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. 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. 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: • Misunderstood requirements • Missing implicit requirements • Problems in customer software • 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. RiskCalc. Output and analyze

  17. 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. 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. Model with minimum price

  20. PricingModel. Input and indicators

  21. PricingModel. Figures

  22. The TRIM procedure • Estimate project • Use interval “risk-free” estimates • Derive project profile • Identify risks using risk register • Compute project profile • 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. 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. 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: HealthCare • 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 Level4 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

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