1 / 24

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

williamnwilliams
Download Presentation

Proposal Feasibility Study using Stochastic Risk Model

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  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

More Related