Strategic Issues [Billing Models]

Time and Material [T&M] Billing Model

  1. Historically most of the projects used Time and Material as a billing model for developing software systems.
  2. In T&M the longer the longetivity of the project , the more are the revenues for the software development company.
  3. If the previous point is true then "It is not a prudent business decision to finish the project as soon as possible when the revenues are directly dependent on the longetivity of the project".
  4. In this model for any mistakes committed in "Requirements Gathering, Analysis and Design of the system", the software company stands to gain and the customers used to pay for it.
  5. We have come across credible real life cases ,which makes us say with confidence that software development companies are not keen enough to solve these problems.
  6. Because of the above mentioned point "Customers today prefer Fixed Priced Billing Model".

Fixed Price Billing Model

  1. In the fixed price billing model, the customer asks different development companies to quote a fixed price for a project.
  2. Mostly the customer awards the project to the development company which bids the lowest fixed cost.
  3. Ask yourself "Does the development company do a complete analysis of the complexity of the proposed system before giving a fixed cost?".
  4. As yourself , When they struggle understand and estimate the complexity of the project in its entire lifetime, then do you feel they are capable enough to estimate the complexity within couple of months before the start of the project.
  5. Logic says "If the proposed fixed cost is derived without a complete analysis of the complexity of the system, then the proposed fixed cost will always be different from the actual cost"
  6. Unlike the T&M model, the customer stands to get benefited for any mistakes in the analysis and design of the system and development company might have to bear the losses for the same

Moving Ahead

  1. It seems highly unlikely that the customer will go back to the T&M model and Fixed Price Billing Model will continue to stay.
  2. Moving ahead, the profitability of a software development company will be greatly influenced by the fact "How Completely , Correctly and Quickly the Analysis and Design of the system is done?".
  3. Improper Analysis and Design will definitely result in a system not meeting the functional and non functional requirements of the system resulting in financial losses to the software development company.
  4. Our proposed services are designed to help the software development companies to analyze and design systems Completely , Correctly and Quickly to ensure system success and profitability.

Our experience shows that Human Limitations described in the previous section along with other associated technical problems can be solved with the appropriate usage of discipline, engineering best practices and tools , provided that the management of these software development companies wants to address these problems.

In the next section, I will also describe how these strategic issues have given birth to a whole host of behavioral issues which has complicated this problem to an extent that they just cannot solve the same even if they want to address the same in future.

The article "Requirements Engineering - A problem that no software development company want to solve" will describe real life instances which will point to the fact that software development companies are not really interested in solving this problem

Hemant Jha
Founder - VPlanSolutions
Researcher, Trainer