Contracting for Computer Services A Case Study for

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Contracting for Computer Services: A Case Study for Systems & SW Engineers For USC CS-510 November 17, 2008 UPDATED 1. 2. 3. 4. 5. When IT goes All Wrong! Why Systems Fail? Known Risks: Business, Technology & Contract Purpose of “Fair” Contracts & Your Part in It? Introduce the Case & Assignments Warren S. Reid, Managing Director WSR Consulting Group, LLC PH: 818/986 -8832 Fax: 818/986 -7955 E-mail: wsreid@wsrcg. com Website: www. wsrcg. com Blog: blog. wsrcg. com © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 1

IT Industry Continues to Struggle Chaos Report (Standish Group) 2004 Challenged (on average): Time Overruns: 84% $$ Overruns: 56% Rqmts delivery: ~67% © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 2

When IT Goes All Wrong n n FBI Terror/Crime Sys $170 MM – mismanagement, poor planning, design changes Student Loan Interest – Lost $8 mm interest in sw calc. n n n UK Pension Sys Crash – 80, 000 pub n ICI – Chem Industry Giant – inabil to fulfill n UK Air Traffic Control – sys down – cancel/delays hit 200 K passengers n n n MESDAQ – day 1; yrs later halts w upgrade errors n n London Stock Exchange – on last tax n n day, cap gains issues n Barclays – small piece of hw brings down whole bank sys for 18 hrs – 5 mm cust can do nothing $3. 8 bb Hosp Sys in trouble (3/07) Another Mars explorer (4/07) NA Blackberrys down – 4 hrs (4/07) $38 bb – “Oops! Techie Wipes Out $38 B Fund”: Keystroke mistake deletes data for Alaska’s oil-funded account (3/20/07)” serv couldn’t pay checks cust orders due to botched impl re BPR – Customers defect --39% Stock value wiped out (2004 -08) LAUSD; Giant Sanitation Company Singapore Higher Education Hospitals (missing/incorrect data; death) State Highway Patrol Pizza, Pizza; Soft Drink Co U. S. government student (privacy) Outsourcing to India Major NA bank: millions of accts thrown – poor sw tests; 2 wks to fix; but mo probs w email phish; > $100 mm to fix © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 3

It’s the Same in Every Case! “He Said … She Said” # Category He Said (Customer)… She Said (Vend’r, Integ, Consult, OS)… 1 Feasible Sys doesn’t work; Not what wanted U chgd mind; Don’t know want/need 2 Capable Limited functionality U changed scope 3 Compatible Sys failed in field U d/not do req’d Biz Proc Reengineer 4 Credible SW, services & expertise oversold U conducted ref checks/ due diligence 5 Usable No one can use it! Poor training “Right staff” never did train/refresh 6 Stable Sys is “fundamentally flawed” Only 2 more months to test/fix probs 7 Culpable Never told us that/poor advice! U d/not follow recs; Bad decis-makers 8 Reliable Sys is full of bugs Bad data conver/i’faces; Always bugs! 9 Responsible U failed as Sys Integ. Proj. Mgr. No! U failed as Sys Integ. Proj. Mgr. 10 Available Un-qual/stable/commit Ee, PM, SC Un-qual/-stable/-commit staff, PM, SC 11 Suitable Quit good PM & SDLC meth; Risk up Unwilling 2 comply w prom/need meth Oftentimes, BOTH sides are right & contribute to failure – but at different % s © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 4

Risks Known B 4 Project Starts n n People/Resource Risks n Turnover, culture, x-comm. n Top Mgt Commit; Proj Champ n Partner; Ref. Chks/Ref’s Refs Requirements Risks n Poor Project Charter n n n n n C – Correctness I – Integrity A – Available Project under- or mis-estimated SEI-CMMi level; ETC &EVM Stds Sched, $$, estimates, change control Not enough time for testing n Shortcuts to SDLC on the fly n I’faces, Data Convers’n n Unclear Leadership – SIPM n Incompl, Misunderst, Gallop Security; Privacy Client, Depts, Users, IT, Vend, O/S consults, attys, custs, analyst, mkt “expectations” Process Risks n n Technology n HW, SW, Net, D/B, I’net, n Project & Tech Mgmt Risks n Product & Other Risks n n Tool avail? mature? train? use? n n Performance, testedness & readiness -abilities (scale, use, test, port, maint) Competent T/O proc, supt, maint? compet; economy; org; regulatory © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 5

What Can Possibly Be Misunderstood? ! Everything! n n People are different People have different: n n n n Objectives; Goals; exp/educ/expertise, cultural biases Styles of understanding and communicating Abilities, talents, logic, creativity Understanding of priorities Fears: spoken and unspoken Understanding of what is subjective v objective Implied/understood unspoken (needs, reqts, sizzle) What won’t be misunderstood? © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 6

What Can Possibly Be Misunderstood? ! Everything! “We Thought … Contract Says” # Category What the Contract Says What They Understood: Cust/Prov 1 Suitable? System description Bounds scope; Uber-theme 2 What Works? Functional Requirements … as per specs dated ____? 3 How Well? Performance Reqmts Scal-? Port-? Avail-? Maint-? Use-? SMART? 4 Who Does what? Roles & Responsibilities RM? Dispute escal/resol? HR reqts? 5 How We Do It? Conduct of Project WBS, est, staff, delivs, PM, SDLC, bugs 6 Just for Me? Custom Programming Services Config, SDLC, PM, est, test, I’face, maint-? 7 U Prove it 1 st! Sys. Integ; I’facing; Testing; Convert Results NOT Resources; “Success” def 8 Min Reqmts Acceptance Testing Process Who? How? When? Where? Criteria? 9 More Min Reqs Key Delivs: QA; Train; Doc; Sys Works Exist? Depth? Maintainable? S/O proc 10 & Tomorrow? Maint, upgrades, fixes, enhancem’ts T/Over stds? Work stds? LTCO? Metrics 11 $$ = Mouth? All proposals/work-prod/proms up to K “Parole evidence” rule; 4 corners only 12 Go-Live ALL Systems Go! What’s acceptable? Checklist? Vote? 13 Other Key Issues Costs/Pymts; ADR; TERMination; Renew; Title; There’s more to the Sys than a sys (SOS): $$ limits; penalties; ownership; holdbacks; X-hire; Site prep; Install hw, sw, nw, BPR; confid; $ protect; Liability limits/exclusions remedies; limits of liab; privacy; hot sites © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 7

Why Are Contracts (K) So Important, & Why Must YOU Know About Them? n n n Caveat: Clear & explicit delineation of Party rights, obligations & expectations Requires ID, negotiation, appreciation others’ views, beliefs & objectives BEFORE deal Generally produces much better : n n n “Standard K form” favors V/large Ks; used as sub for good mgt/K activ K language often incomplete & ambig; drafters gone; shelf death working relationship during sane & emergengy/surprise moments prospect of proj success ($, Sch, F&F, QA, SH, Risk; C serv, mkt share) Must be a living document – able/willing to adapt to changes n Best K team knows: risks alloc, finan. resp, strong sense of VALUE, law skill So, Best Team has: CXO, CFO, biz domain & tech eng/consult, lawyer n Matters of: Facts, Law, Evidence, Risk, Technology n © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 8

THINKING OUTSIDE YOUR SYSTEMS ENGINEERING BOX: Contracting for Computer Services © 2008 Warren S. Reid All Rights Reserved For CS-510 class Contract terms “It’s Your Bid” concerns [“invest as little as poss up front] Sys/Pro Cover “Auction Bid” Concerns: “We really need this deal; But startup…do absol min work nec to GL, recoup, profit” * Auction logic reqts: run auctions, keep track bids (time? legit amt? mo? * Mod SW to work w IYB biz model (resp for i’face? ; convert? Balance 2 sys; audit * Sys. Desc * Funct Rqts * Prj. Timetabl * Cust Servs * PM, SDLC * Personnel * Sys Int. Test * Accept Test * Warranty * Reqmts * Auction * Who resp for Overall sys? ; Thumbs web des/prog; all graphics; desg * Performance * “-ibilities” * 99% Uptime; if not met 3 days in mo, $1 k/hr penalty; if prob for AB, then AB arrange hotsite BU if down/unavail on I’net any reason Availability; scalability; portability security; privacy; backup-R&R Compliance w international regs; COCOM; Usability; maintainability; * S*M*A*R*T metrics? How each defined? Measured? What period of time? * EXCLUSIVE REMEDY: 97% avail guarantee/month; work diligently * * 1 * Penalties; 1 st time forgiveness? ; contributory negligence? SWAT Team? * Internet downtime penalty is immediate cutover backup site * What will this all cost AB; can AB use for other custs; How AB to recover $? Quality & provisions of Tech Support/help desk/ACD, etc. Rules on fixing non-conforming code Auct rules: w/draw sale/bid? Goods not comply; cheats, bad S/buyers? Whole system performance; end 2 end? Heavy Equipment: $5 $150 K+ period 2 Measures home/auct pgs; sellr/buy setup; prod desc/pics; site nav; put bids * upgrades; descr media; item maint/warranty hist; seller/buyer setup/history/score: i’faces; acceptable bugs; auditable; bill/collect * Auction input: start/end dates; min bid; bid sep? * Site fully oper’al w/i 6 mos inc 1 mon test – NOT 1 day mo(? ) * AB extreme busy; auct site very popular; busy signing up new cust * Ability to request/approve staff/account manager changes * Ee 6 mo no hire/solicit: longer of aft TT leaves or K w AB ends * Accept Def/Crit; test/bug fix procs; IYB testers/test scenarios * Cust sw NEVER wks as design, so need time (prob 30 days) to test * Interface Maint: 1 off maint who pays? * Help desk; MTBF; Time to fix; criticality; escalation trail; error log; defect t/a metrics; etc. ): 3% of what due fm sell: 3% of est + 3% of 50% of actual sale $ >est; Not fixed fee * Scope– In? Out; Uber-theme; $/sched of changes in/out? * TT’s sw/design is OK now; but any sig chgs to sw/des s/b paid for & c/cause >6 mos to GL; if TT left, need as good subst else >6 mos * Push 6 mos 9 mos in case big $ deal comes; Try to get K extension to deadline if IYB causes us mo wk than anticipated * Bid collection/edit/validate; rept auction progress; Declare winner * Sellers month cum? Hist of aucns/sellers/buyers; comment section? * Acceptance criteria; ranking of errors; testing approach; coverage * Want no hire/solicit if TT leaves or IYB decides to grow IT dept * Core Product enhance (who pays? ); in Maint? ; must IYB upgrade? to bring back to 97% on 30 days notice, $100/each day<97% * Warranties * Conversion & * Error * * * Indemnify 3 * Title Rights * License * Ownership * Usage *Confident * Code; Design; Algorithms; Trade Secrets * Interfaces; Data; History; Sellers; Buyers * Buyout at end * Code; changes; TT designs and related code by AB * Interfaces; Data; History; Sellers; Buyers * “We own all rights to sw we dev for them. ” Won’t jump ship! * Project $ & * Contract * Non-conform timelines/code; Specif remeds/damages; liquidated dam * 5 yrs w renew opt’n 5 more yrs w same terms xcept 3 4% fm sales * If we breach any reason, AB can only sue for damages UNLESS * We pay for mods; hw; staff; % oh, etc. IYB bills & collects; Get Other Support Services 4 5 Payment Sched * Renew Opts * Term/End * Liab Limits * Warranties capt/resol sys, p/proc, responsibils * Train; Doc (K) Breach, * Terminat’n fall $10 K behind in payment owed to AB; If pay in 30 days, K cont; if we fail, AB can mod SW to NOT take new auctions – but aucts in progress on day 30 continue. Once all pending conclude, AB can shut down site. * * Qual & provision of tech support/help desk/ACD, T/A time to fix, etc. Rules: priority; sched; in/out scope; W/As, escal fix un-conform code Paying for Tom Thumbs changes and rewrites(? ) ID root cause of reptd anomalies (RTime? ); follow up/resolution staff paid

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 n n "Its. Your. Bid. com" ("IYB") well-funded Internet start-up IYB's biz model: create site for online aucts of new/used heavy indus equip Id’d "Auction. Bid. 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: n Here, not paid flat fee/tranx, but get 3% Total Amt IYB to receive/C/tranx n n AB gets 3% whether or not C ever pays IYB Also diff, how IYB paid by its Cs: n n n n 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. © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 18

What is an Applications Service Provider? (ASP) n ASP Model n n n Common ASP features: n n n 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: n n n n ASP provides computer serv to custs over network Custom client sys can also I’face to sys. ASPs grown w costs of special sw > $$ range of S/M-size cos. (’ 03 -’ 08 $4 bb 10 bb) W. ASPs, sw complex/$$ less; upgrade/dist sw to end users <; maint current, 24 x 7 suppt 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: n n n 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 © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 19

Its. Your. Bid. com From: To: Re: Date: MEMORANDUM [1] Ted Gearhead, Head of MIS Gearhead, Warren S. Reid, CEO Deal with Auction. Bid. com March 13, 2008 _____________________________________ Warren: I evaluated all proposals, think Auction. Bid. 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. 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. The basic structure of the relationship looks pretty straightforward. AB has a sw package that permits website like ours to run aucts. For normal auct site, like e. Bay, 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 any things you want me to pass on to them, let me know. © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 20

Its. Your. Bid. com MEMORANDUM [2] From: Ted Gearhead, Head of MIS Gearhead, To: Warren S. Reid, CEO Re: Deal with Auction. Bid. com Date: March 13, 2008 ______________________________________ Ted. Thanks for useful memo. I agree w everything you say but have contract concerns. 1. Getting the site operational. n n n 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 Go. Live. Need sched to ensure, NMW, AB gets us fully up in 6 mos -- incl 1 mo test; Not 1 day more! We clear? 2. Payments to AB n n n 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 10 d aft get check. If no paid in 90/or at all, still owe AB 3%, t/be paid on 90 th day. These are big corps & govt) so no-pay risk small. 3. Tommy Thumb n 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 n n n Website avail =lifeblood; NEED 99% uptime SLA/any 24 hrs. If unmet any 3 days/mo, AB pays $1 K/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 2 am – 3 am PST 5. Term & Termination n 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 >$10 K, 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 © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 21

Auction. Bid. com MEMORANDUM [3] To: Michael King, CEO From: Connie Coder, VP, Business Development Re: Contract with Its. Your. Bid. com Date: March 13, 2008 _________________________________ Michael: n After long time, Its. Your. Bid. 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 n IYB diff biz model; s/wk well for large $$ S vs our clients who charge S a flat fee (or % of SP), and pay us fixed, per auction fee. They need signif mods to our core sw. n #s look good: 3% of est min (IYB gets 10%); plus 3% of SP over est (IYB get 50%) is signif more money than usual fixed $5. 00 fee/auction charge. If S est is $10 K but sells for $14 K, IYB gets 10% of $10 K = $1 K PLUS 50% of $4 k = $2 k for $3 k total. We get 3% of $3 k = $90. n Some equip may sell for tens of thousands of dollars, so our cut will be several thousand dollars n We give IYB 90 days to pay bc they bill S (too large $$ for credit cards). We get paid whether IYB gets paid or not! n We do mods at our expense. S/not be large $$ amt. We I’face w sw being devel by IYB for basic website nav n 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 n 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. n 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 © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 22

Auction. Bid. com MEMORANDUM [4] To: Connie Coder, VP, Business Development From: Michael King, CEO Re: Contract with Its. Your. Bid. com Date: March 13, 2008 ____________________________ Connie: Thanks for the memo. I am quite excited about this relationship. n Competit >ever; all start auct site. Impacted Rev. New Ks < rev. Bad econ. We REALLY need this deal. n I like IYB’s biz mod; we hv chance to make lot more $ w less tranx; IYB startup – concern re long haul fin stab. Must terminate if IYB gets in serious financ probs. IYB Pres says they flush, but worry nonetheless. n Cost lot $ mod sw for IYB; MUST recoup $ + make profit. Thus, we do absol min work nec get site up/run n If potent’l deal w $ upfront, we delay IYB wk ; Push 6 mo 9 w lang for mo if IYB changes incr work >plan n They want 100% guarantee uptime; unrealistic; sell large equip – some downtime no big deal. Get 97% w less penalties and w limited remedies (we try diligently to fix…) n 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: $5 K/mo or we can terminate K. Give them impetus to mkt website n We own ALL rights to sw we develop. At K end, we keep sw… so they don’t move to another auction hosting service. K s/be min 5 yrs to insure we recoup sw invest, w option 5 more years either party can exercise. If renewed, want % incr fm 3 6% n If IYB files Bankruptcy or doesn’t pay by payment due date , want K termination rights on 30 days notice. Complete pending auct, NO new ones last 30 day per. I know you meet w our attys this Saturday. Let me know of any other issues that they think are important. © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 23

QUESTIONS/COMMENTS WSR CONSULTING GROUP, LLC Warren S. Reid, Managing Director PH: 818/986 -8832 Fax: 818/986 -7955 E-mail: wsreid@wsrcg. com Website: www. wsrcg. com Blog: blog. wsrcg. com © 2006 -2008 Warren S. Reid All Rights Reserved This model will change and be updated over time 26