The way most companies bid on digital projects doesn’t work. Rather than assign a flat fee and set list of tasks at the beginning of a project—when you know very little—embrace the ‘Cone of Uncertainty’ and collaborate to build something better, faster, cheaper instead.
The model of estimating a flat fee for a fixed scope on complex digital projects sets all parties up for potential failure. While project stakeholders may have a clear understanding of desired outcomes at project start, no one can possibly know every project detail at the outset. You shouldn’t even try. Instead, through a detailed discovery process, project stakeholders build consensus through collaboration until the path forward becomes clear. In project management parlance, this time between project negotiation and a better understanding of exact specifications is what is referred to as the Cone of Uncertainty and if not handled properly it can wreak havoc on your projects.
A Broken Process
Agencies that take on fixed bid-fixed scope projects get frustrated because when out-of-scope requests arise, no matter how great the idea, they have to push back to adhere to budget or timeline. Clients get frustrated when told new ideas that could potentially elevate final product quality will incur additional costs or delay target deadlines. In these situations, the freedom of both client and agency to collaborate on the best potential outcomes is limited. This is one of many reasons why RFPs are problematic.
Time and again, we compromise creativity and quality in the name of staying true to contractual commitments. This constraint means agencies build mediocre products that only minimally satisfy their clients’ needs and typically aren’t portfolio-worthy. Worse, many clients are still stuck in a set it and forget it mindset and don’t try to improve these products once launched. This wastes valuable opportunities to reach target goals faster. Why not strive for the best possible outcomes from the start? Is it possible to embrace a collaborative, creative approach while maintaining deadlines and budgets?
It is, if both client and agency are willing to take on some risk.
The Cone of Uncertainty
Since budgets and timelines are based on specific project elements, clients write exhaustive RFPs that outline as many project variables as possible. Digital agencies (or any service provider working on large projects, for that matter) compensate by estimating high up front. This negotiation is a time and resource-intensive process that generally yields inaccurate results, as the bidding agency often quotes as much as four times what an actual implementation will cost.
The cone of uncertainty concept originated pre-internet, in 1950s engineering and construction management, but it applies to today’s digital projects. Its basic premise is that any project has a diminishing range of uncertainty during its life cycle.
Unfortunately in the case of many digital projects, all financial and contractual negotiations are completed upfront, during the period of highest uncertainty. And that’s too bad.
While detailed specs are helpful, committing to every task, feature and design requirement up front restricts freedom to build a better product. In reality, once everyone rolls up their sleeves and dives into the project, great ideas arise. Discovery workshops lead to brilliant new feature requests. UX sessions lead to customer insights that perhaps weren’t considered during the negotiation process. But the two parties have already agreed to their terms.
Culture of ‘No’
This fixed bid-fixed scope approach also sets up a project culture based on negativity rather than an aspirational one based on trust and mutual respect. By constantly trying to maintain scope, budget, and legal obligations, the contracted agency has no choice but to gently rebuff most requests that weren’t discussed up front. Sure, you can put all the new ideas into a ‘phase two’ list for later implementation, but what if some of those ideas were of such high value that they fundamentally change the project’s potential for success? Why not embrace the cone of uncertainty instead and just admit you don’t know everything? Both parties can re-prioritize features and budget, then move forward together to pursue something of higher value to all. Unfortunately that’s not how many projects work.
If you embrace all the great ideas that arise as you learn more you also have to embrace a shifting scope. The cone of uncertainty dictates this. Otherwise, you’ll have an elephant-sized project that balloons in scope yet shrinks in profitability. Plus, relationships will become strained every time new ideas are met with “sorry.”
Embracing the Cone of Uncertainty With Agile
We have been writing about agile methods for several years now and employ them whenever possible. They’re not a perfect fit for every project, but work well on those of larger scope. Agile methods dictate breaking projects into small, manageable chunks with built-in mechanisms for feedback and collaboration through ongoing user research and testing.
To mitigate risk and embrace the cone of uncertainty, agile firms weigh variability and commit to working on the highest value deliverables first rather than making promises up front. These high-value deliverables solve the biggest problems first and leave lesser challenges to later in the project, when timeline and budget might be tighter.
More importantly, an agile project requires that business relationships be based on mutual trust and commitment to providing the best solution possible. It requires that parties commit to:
- Regular communication about timing, budget, feedback, etc.
- Ongoing hands-on collaboration
- The freedom to extend or stop the project when it makes most sense
Making Agile Work in Business
In his book Scrum: The Art of Doing Twice the Work in Half the Time, Jeff Sutherland tells the story of a software company that nails this. (Scrum is an iterative and incremental agile software development framework for managing product development.) In Sutherland’s story, the software firm and client both come out winners. Project details were as follows:
- Software firm provides a project estimate, clearly stating that they embrace all its unknowns and that those unknowns could affect timing and deliverables.
- The firm will use agile methods to focus on highest value deliverables first. These deliverables will be provided in agreed upon increments that drive billing.
- The client can cancel the project at any time for a kill fee that represents a small percentage of the overall project.
In Sutherland’s story, the firm’s estimate stated that the project would likely take 20 months. By focusing on highest value deliverables, the firm delivered what the client needed in only four months, so the client stopped the project. The client saved significant amounts of money by doing this, and though the software team only worked a small portion of what they anticipated, their firm received a project kill fee of 20%, which increased their profit margin and opened up the team’s schedule to pursue other projects. Everybody won.
Go Forth and Be Agile!
Companies that embrace these practices will form longer-term client relationships because budget, timing and expectations are managed, but neither party is making promises that they ultimately cannot keep. Clients get higher quality digital solutions faster. Users are happy. Digital agencies better manage profitability. Trust is maintained. And it’s a glorious day. If you want to learn more about moving toward agile processes, read our post How to Transition from Waterfall to Agile Methods. Better yet, download our agile white paper below.
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