The Use of Agile Methods by the Entrepreneur

Israel GatSebastian Hassinger

A Different Kind of Presentation• Aspires to foster discussion of new topics and draw

in new constituencies to Agile Austin:– Entrepreneurs, Intrapreneurs, Venture capitalists

• “This presentation is a 'think-piece,' the spelling out of an interpretation, with enough illustrations to strengthen the case and stimulate interaction.“

[Paraphrased after Carlota Perez]• Agile is becoming more business-relevant amidst the

current macro-economic crisis:– Focused on the “What” of Agile rather than the “How”– Applies Agile principles end-to-end, and then some:

• Primarily with respect to contractual aspects• Secondarily with respect to customer development aspects

Agenda

• Part I: A New Paradigm• Part II: The Agile Contract Problem• Part III: Applicability to the entrepreneur,

intrapreneur and the venture capitalist

The Classical Techno-EconomicParadigm a la Perez

• A sequence of events characterizes each of the techno-economic cycles:– Major technological innovation introduces new

infrastructure– The new infrastructure disrupts both industry and

commerce (and very possibly society)– In good time the new infrastructure becomes a stabilizing

force• The technology gets understood and harnessed• Confidence builds in the new order that evolves around the

technology

– Inertia becomes the legacy of successful innovation

Five Successive Technological Revolutions

Revolution Name Country Initiation Year

First The ‘Industrial Revolution’

Britain Arkwright’s mill 1771

Second Age of Steam and Railway

Britain The Liverpool-Manchester railway

1829

Third Age of Steel, Electricity and Heavy Engineering

USA and Germany

The Carnegie Bessmer steel plant

1875

Fourth Age of Oil, the Automobile and Mass Production

USA Ford Model-T 1908

Fifth Information/Tele-communication

USA The Intel Microprocessor

1971

Source: Carlota Perez, Technological Revolutions and Financial Capital Source: Carlota Perez, Technological Revolutions and Financial Capital

Revisionist Techno-Economic Theory a la Hagel, Brown and Davison

• The historical pattern itself has been disrupted:– Disruption followed by stabilization is no more the case

• The pace of change in Information and Telecommunication is exponential– Uncertainty and instability are pervasive– Sustained periods of prolonged equilibrium are unlikely

• Both business and social systems need to adapt on an on-going basis to turbulent changes– But, the entrepreneur can now punch “above his weight

class” through the global digital infrastructure(*) Hagel, Brown and Davison, Shaping Strategy in a World of Constant Disruption, Harvard Business Review,

October 2008

Implications for Strategy• “This is not the time to be passive and wait

out the storm.” [Christine Davis; Cutter Consortium]

• Two schools of thoughts to choose from:– Adaptive: Winners are those that can move faster than

their competition Sense change and respond quickly– Shaping: Winners use technology changes to create new

business eco-systems Alter the industry/market fast

• Both strategies critically depend on Agility– “Agility is the ability to act quickly and with

economy of effort in accurate response to change and also to initiate change for business advantage” [Paul Allen; Cutter Consortium]

Role of Software in Your Strategy• As software is malleable, it can respond exceptionally

well to the exponential pace/change in the new paradigm:– As an end to itself– As embedded software– As part of a business process/initiative

• The higher the embedded software content in a product is, the more malleable the whole product becomes:– Example: cellular phones

• Chunking through Agile methods facilitates quick changes on a granular level at any phase of the product life cycle

Relentless Innovation• Geoffrey Moore: Many kinds

of innovation– Disruptive innovation– Product innovation– Platform innovation– Value engineering

innovation– Process innovation– Business model innovation– Line extension innovation– Enhancement innovation– Various others

• Jim Highsmith: Innovation through experimentation

– Learning what does not work is as important as learning what works

– The low cost of experimentation enables finding by trying

– For Agile, the bi-weekly Agile iterations provides a “firewall” that caps investment

Sustainable Innovation• “All known compound objects decay and become

more complex with the passage of time unless effort is exerted to keep them repaired and updated. Software is no exception…

• Indeed, the economic value of lagging applications is questionable after about three to five years…

• The degradation of initial structure and the increasing difficulty of making updates without “bad fixes” tends towards negative returns on investment (ROI) within a few years.”

[Capers Jones, Estimating Software Costs]

Software Decay

• Once on far right of curve, all choices are hard

• If nothing is done, it just gets worse• In applications with high technical

debt, estimating is nearly impossible• Only 3 strategies

– Do nothing, it gets worse– Incremental refactoring,

commitment to invest– Replace, high cost/risk

• Source: Jim Highsmith 1 2 3 4 5 6 7 8

Years

Technical Debt

Co

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Ch

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Co

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ProductRelease

ActualCoC

Optimal CoC

ResponsivenessTo Customers

Avoiding the Shiny New Toy Syndrome• Four considerations to keep in mind while

relentlessly pursuing innovation:– Software developed today might indeed be sold as a shiny

new toy tomorrow– However, unless the underlying software process is

improved, a little down the road the new software will have maintenance problems similar to today’s software

– The corrosive effect of technical debt on the shiny new software will become more and more severe as a function of time

– Whatever strategy you follow, sustainability is critical• “Cut costs by cutting costs” strategies will accelerate your

technical debt

The Agile Process Platform• Sustainable value creation can transform Agile into a

process platform customer and vendor share• Requirements for a successful Agile process

platform:– Agile principles considered indivisible:

• Customer as partner in a distributed innovation modus Share customer own learning and plans

– Joint infrastructure between vendor and customer• Ease of use of both process and practices of Agile

through the software life cycle Reduced risk

– Shared benefits:• Passing on the benefits of Agile from vendor to

customer Agile contracts

Agenda

• Part I: A New Paradigm• Part II: The Agile Contract Problem• Part III: Applicability to the entrepreneur,

intrepreneur and venture capitalist

The Agile Contract Problem

• Internally or externally, relationship between supplier and customer defined by mutual risk/reward sharing pattern – implicit or explicit contract

• Defines parameters of relationship• Contract language assumes zero trust

– Developed expressly to eliminate the ‘wiggle room’ we seek to create with Agile

• Challenging to build trust a priori between parties so that you can create the context for meaningful collaboration• Requires creation of 2nd dimension to the “risk” axis – “agility”

Business / Technology Culture Gap

• Not product of simple misunderstanding• Difficult to defuse anxiety with Agile rhetoric like

“fail fast” and “walk away with working code”• Risk all tied to accuracy of estimates• Downside for customer is very significant

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$/Time/Iterations/Stories/Features

Marginal Dev’t Cost

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Agile Perception

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Marginal Dev’t Cost

Biz Perception

Fixed Price, Fixed Scope• The classic software contract, and emblematic of the

pitfalls of development that spurred the creation of Agile• Estimating will remain a black art• Have to assume a lot about the problem and the solution• However, might still be necessary with conservative

customer• Applying Agile to go as fast as possible can produce

outsized margins• Legitimate to earn more margin vs. T&M since the developer is

taking on execution risk not present in T&M• Can sneak in change clauses that allow for modifications if

both parties agree.

Time and Materials

• “Pay as you go” with no scope boundaries – no execution risk for developer

• T&M allows no risk mitigation for customer – fully exposed project

• Plenty of room for Agile methodologies to be used (or not)

• Enforce self-discipline: – deliver working code, tight sprint management, etc

to avoid unintentionally taking advantage

Incremental Payment for Incremental Delivery

• Define multiple small fixed price projects• Deliver per schedule, invoice on acceptance• This is an approximation of typical sprints but with a

fixed scope up front• Agility introduced through flexibility of definition from

one iteration to another at the acceptance stage• Can be useful to ease customers into Agile• Still difficult to preserve reprioritization of backlog

based on experience, introduction of new or changed story points

Fixed Price per Function or Story Point

• Closely related to incremental delivery, but more Agile face up front

• Forces use of Agile – have to agree on sprint length and create a backlog of sprints to even get started– Make sure to build flexibility into the estimating process to

take advantage of learning as you go• Still at mercy of black art of estimating size of effort,

however the small scale of stories ensures any error won’t be that big

• Can be a hard sell for more traditional customers (“story point? No requirements document?”)

Money for Nothing

• Sutherland’s experimental approach works for developers with strong established brand or business with existing faith in Agile

• Interesting reconfiguration of relationship between business and software supplier

• Great for modifying a fixed cost contract to reward Agile efficiencies• Overrun risks still owned by developer – set discounted rate in advance• The % split of remaining contract should be determined by supplier’s

expected margin in order to ensure indifference to early termination

Varieties of Contractual Experience

• Ideal doesn’t just balance risk but actually creates structural incentive to drive Agile collaboration

• Entirely new dimension to the ‘shared risk’ scale• Reward rapidity, don’t penalize changes to features• New approaches being experimented with currently• All current generic models are imperfect, however all can be mitigated with

modifying clauses

Contract Style Trust required Agile compatibility

Fixed everything Little Little

Fixed price per function or story point

Medium Good

Incremental delivery with payment on acceptance

Medium Medium

Time & Materials Lots Medium

Money for Nothing Medium Lots

Current Best Principles

• It depends.• Do more “free” work up front with the business, assess:

– Where they are with Agile and Waterfall and development in general– Where they are with their business model and plan– Appetite for risk and experimentation

• Push for the maximum trust and novelty they will tolerate.• Generally inversely proportional to their business’ maturity• Common problem – customers see fixed cost estimate for entire

project as canonical, don’t accept that 80% of the total scope might deliver 100% of function

• Ensure your rates are matched to the level of risk you are assuming

Agenda

• Part I: A New Paradigm• Part II: The Agile Contract Problem• Part III: Applicability to the entrepreneur,

intrapreneur and venture capitalists

Agile lessons for business innovation

• Both Shapers and Adapters driven by need for continuous innovation

• Neither internal nor external innovation begin with understanding of customer

• Start with stories & design goals, not an elaborate business plan• Take advantage of lowered barriers to

entry in digital marketplaces• Iteratively discover the customer and

define the product in tandem• Variable engineering costs• Contained cost of experimentation

The Lean Startup

Steve Blank and Eric Ries

Process API for Highest Caliber Developers

• “Agile” as a set of methodologies allows non-technical innovators to access the way techies build stuff

• Formalizing what tiny startup development teams do naturally– creates an interface through which non-technical

people can take advantage of the same approach• Requirements-driven processes were created to

fill the culture gap between business and development

• Agile is a better translation

Post-Internet Startups

• Classic model: 2 propeller heads with a neat new toy approach VC for money and business maturity

• New model: business person has entrepreneurial idea that happens to be expressed via a Web application

• The new tech entrepreneur is less likely to be able to build their own technology

• Agile is the only development methodology that can fulfill the needs of the early stage innovator.

A New Venture Model• Most innovative and successful businesses are holistic

recombinations of proven patterns in a novel way – Starting with a cool widget makes the outcome essentially

random– Discontinuous innovation puts fund at risk

• Instead: • Start with an idea to create value in a market & a business founder• Start with business design conversations• Marry to development resources, bring them into the conversation• Iterate through the process of building the parts of the business and

figuring out how they fit together. • Repeat at portfolio level: build an self-reinforcing ecosystem, not a

one-off firm

Thank you

Part I• The Classical techno-economic paradigm a la

Perez• Reshaping paradigms a la Hagel, Brown and

Davison• Implications for Software• Relentless innovation• The myth of the shiny new toy• The myth of separating contracts from

operations

Links

• The Lean Startup• Alistair Cockburn’s collection of software cont

ract descriptions• Agile Contracts working group