Making Outcomes-Based Contracting Work With Facts Introduction by Amit Anand, Robert Asen & Vijay Anand of Cognizant Using metrics to develop effective results-based contracts Managing outcome based application contracts requires a combination of scope management, pricing, and, above all, quality. As suppliers and clients evolve the relationship, the need for clear facts dominates conversations. The premise of outcomes-based contracting is that hours (and indeed rate) are inputs to the ADM process (not outputs), and that structures that measure programming results are now both possible and achievable. Outcomes-based structures bring the original intent of software to the forefront—creating successful results. While many companies have shifted from input-based to output-based contracting, forward-thinking IT leaders are also taking steps to define a sustainable outcomes-based relationship with their ADM suppliers. Outcomes-based contracts focus on how the delivered product adds value, while inputand output-based contracts focus on the resources and the activities needed to deliver the outcome, respectively.

1. Drive Business Excellence with
Outcomes-Based Contracting
The OBC Toolkit

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Introduction
by Amit Anand, Robert Asen, and Vijay Anand of Cognizant
It is one thing to hear about trends, but it’s another to see them in action every day.
At Cognizant, we have the opportunity to observe firsthand the steady shift of ADM
objectives from being IT-centric to sales- and marketing-centric. Whether it is maintaining
a monolithic backend system, restructuring a services platform, or developing a new
mobile app, our clients’ requirements are tied more closely than ever to business goals.
Redefining the supplier and buyer relationship based on the impact of the software to
business, rather than its direct output is a natural progression for the ADM outsourcing
industry. Does the enhanced backend system provide more stability for users? Does
the new services platform help prepare the company for digital business? Does the new
mobile app provide secure financial transactions?
Outcome-based relationships are still new amongst ADM suppliers and buyers. A
spectrum of constructs has been defined in the past few years; some were even put into
practice. There were two observable common elements in the more viable constructs:
1. Significant benefits to both the suppliers and buyers
2. Measurements that can be objectively, accurately, and repeatedly taken
Typically, the benefits are numerous. Buyers receive more timely deliverables and at higher
quality, and suppliers can better resource their staff and optimize for profit. However,
most constructs lacked clearly defined critical success factors.
In this paper, CAST puts forth several viable frameworks for measuring outcome-based
contracting relationships. We believe that clearly defining deliverables is a worthwhile
effort, and provides a linchpin for a truly viable outcome-based construct. We hope you
find this paper to be as insightful as we do.
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Table of Contents
1.1 Introduction 2
1.2 Making Outcomes-Based Contracting Work 4
1.3 Using Facts In An Outcomes-Based Engagement 6
2.1 Outcomes For New Work 7
3.1 Outcomes for Maintenance 9
4.1 Business Outcomes 10
5.1 Automated Metrics in the Toolkit 10
6.1 Conclusion 11
6.2 About CAST 12
6.3 Authors 13
6.4 Reviewers 14
6.5 About Cognizant 15

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Making Outcomes-based
Contracting Work
Using metrics to develop effective results-based contracts
Managing outcome based application contracts requires a combination of scope manage-
ment, pricing, and, above all, quality. As suppliers and clients evolve the relationship, the
need for clear facts dominates conversations.
The premise of outcomes-based contracting is that hours (and indeed rate) are inputs to
the ADM process (not outputs), and that structures that measure programming results are
now both possible and achievable. Outcomes-based structures bring the original intent of
software to the forefront—creating successful results. While many companies have shifted
from input-based to output-based contracting, forward-thinking IT leaders are also taking
steps to define a sustainable outcomes-based relationship with their ADM suppliers.
Outcomes-based contracts focus on how the delivered product adds value, while input-
and output-based contracts focus on the resources and the activities needed to deliver the
outcome, respectively.
THE CASE
FOR CHANGE
60% of all software
projects are considered
failures with larger
project more likely to
fail. 57% of CIOs favor
OBC
Source: Consortium for IT
Software Quality, “60% software
projects fail (one of 2),” http://
it-cisq.org/wp-content/
uploads/2015/02/CISQ-Seminar-
2014-9-17-HERB-KRASNER-The-
State-of-Software-Process-and-
Quality-in-the-State-of-TX.pdf
1.2

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In an outcomes-based relationship, the buyer’s focus is purely on the quality and the
impact of the deliverables. They will seek to answer questions such as:
• How resilient and efficient is the delivered product, and how will it
impact my business operations?
• How secure is the new code? Does it increase my risk of exposure to
breaches?
• Does the deliverable make my overall software landscape more complex,
making it harder for me to deliver future enhancements quickly?
• How has the relationship with my supplier changed over time?
Outcome-oriented IT leaders care very little (or not at all) about how many man hours were
used in delivering the product, what development method was used, or the lines of code written.
A successful outcomes-based contract has three components.
I. Outcome
The first component is the objectives or desired results. Outcomes should be IT-related
(e.g., Add field to report) or strategically motivated (e.g., reduce security vulnerability).
Other outcomes can be more tactical, such as creating a low-complexity application that
can react more quickly to business and market demands.
II. Quality
Every piece of code changed, added, or deleted from an application can represent an
increase or decrease in risk/quality. Some are tangible in nature, such as non-compliance
with regulations or an accidental bypass of firewall policies. Others are related to the

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stability of the software, such as poorly written code that causes the software to be less
stable, perform slower, and exposes vulnerabilities in application architecture.
III. Pricing for the Result
Pricing for OBC is based on the result, and not the process. It requires a balance between
knowing the value of the outcome and allowing the supplier sufficient flexibility to achieve
the goal without interference. Each outcome based activity should be tracked and used
as feedback to the next activity. For IT-based outcomes, there are specific metrics around
Cost/FP that can serve as a guide. Pricing should be for the outcome at the quality level
demanded. It should not be accepted until the results meet those specifications. Quality
and fit-to-purpose are the suppliers concern.
In a nutshell, the goal of an outcomes-based arrangement is for each party (client and
supplier) to focus on what matters to them. Clients seek functionality at a price and
acceptable quality level, while suppliers seek profit and the ability to manage revenue.
An outcomes based relationship is one where the process is managed by the supplier, who
gets compensated for “successful” delivery. Success is assessed in three ways: conformance
to specification (outcome), quality of the deliverable, and its impact to wider business
objectives. The following OBC Toolkit describes how to objectively measure the success of
an outcomes-based deliverable.
Using Facts In An Outcomes-
Based Engagement
Moving to an outcomes-based contract is not a complex activity, but it requires careful
planning of how the new delivery model will affect the business of IT. Many of these
changes will be obvious and clearly beneficial, while others are more subtle; all will help
make the ADM process more effective regardless of the sourcing decision.
Making Quality the keystone for success: The Metrics Toolkit
Measurement of the current state gives IT organizations the basis for improvement. A
benchmark provides important information around the state of the portfolio, the program
or the process. For any metric that has an industry-standard definition, benchmarking
should be used. In any outcomes-based relationship, it is important to understand the
current state of software quality. In application development standards from the Consor-
tium for IT Software Quality (CISQ), ISO, IEEE and MITRE are commonly referenced.
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Outcomes For New Work
The completion of an outcomes-based packet is only one dimension of meeting the IT
deliverable. The other dimension is quality.
New Work Scope Measurement Examples
New Work Risk Measurement Examples
These metrics are suggested as they drive decisions around risk. It is essential that as the
outcomes-based process is rolled out, software does not degrade. The metrics above pro-
vide the essentials for managing new development in an outcomes based framework.
2.1
METRIC USE FORMULA
Function Points A standardized quantification of business
functionality in software measures
complexity and results of the delivered
product
Number of Function Points Enhanced and
Added by Work Packet
Storyboard / Script
/ Function Delivery
Ratio
Number or amount of work delivered
compared to the work scoped by the
agreed-upon pricing
METRIC USE FORMULA
Number of New
Critical Violations
Introduced
The most critical violations of industry
best practices measure the over risk of the
application after integrating modified or
added code.
Risk per Function
Point
Evaluate risks (e.g., defects, or best practice
violations) within the delivered product
Change in User
Impact
Measures the impact of new deliverables
to user experience and satisfaction based
on application Robustness and Efficiency
Where:
Eff stands for efficiency score
n = release number
Structural /
Architectural
Security
Measures the impact of new deliverables
to application security
Where:
Sec stands for security score
n = release number

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In a leading US-based financial services
firm, internal IT leaders struggled with
frequent outages, sluggish performance,
and an inability to keep up with competi-
tors’ relentless pace of new enhancements.
IT leaders found it hard to articulate de-
sired outcomes. Further, without the right
technology-based solution, it was impossi-
ble to measure the deliverables from their
four application development suppliers.
Suppliers were becoming increasingly
frustrated with the lack of clarity from
their client, other than the anecdotal
claims of subpar deliverables and a push
to drive down post-production incidents.
A Clear Answer
Internal IT leaders used CAST’s indus-
try-standard metrics to define two mea-
sures of risk: (a) critical violations per
function point, and (b) application Ro-
bustness; both were measured before test-
ing and production. For the top business
critical applications, they defined a thresh-
old for each of the two measures by collect-
ing baseline data over six months. Then,
suppliers were invited to participate in a
voluntary program that lasted for three
months before the new outcome-based
contracts were implemented.
In the new relationship, the testing team
rejected code that did not meet the risk
thresholds, and application owners reject-
ed the project if function points delivered
according to CAST were not consistent
with initial estimates.
The suppliers could deliver the project in
any way they chose, but were not com-
pensated for their work until the testing
team and application owners approved.
Valuable Change
The improvement in application quality
was quickly evident. While some sup-
pliers resisted the new way, they became
committed once they saw the results of
suppliers who embraced it. Production
incidents declined as early during the vol-
untary trial period. With CAST’s help to
pinpoint where the riskiest problems re-
sided, IT leaders were able to clearly de-
scribe how quality should be improved,
and their suppliers were able to focus on
the right areas.
AN OUTCOME-BASED CASE STUDY

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Outcomes for Maintenance
When the outcomes to be measured are for code maintenance or existing work, the rate of
change can be used. The same basic metrics expanded to cover the change rate.
Maintenance Work Scope Measurement Examples
Maintenance Work Risk Measurement Examples
Some of these metrics can be used in SLA, Risk / Gain and other output based contracts.
Consistent with the current best practices for contracting, these require benchmarking
and a change rate.
3.1
METRIC USE FORMULA
Function Points A standardized quantification of business
functionality in software measures
complexity and results of the delivered
product
Number of Function Points Enhanced or
Deleted by Work Packet
Storyboard / Script
/ Function Delivery
Ratio
Number or amount of work delivered
compared to the work scoped by the
agreed-upon pricing
METRIC USE FORMULA
Number of New
Critical Violations
Introduced
The most critical violations of industry
best practices measure the over risk of the
application after integrating modified or
added code.
Risk per Function
Point
Evaluates risks (e.g., defects, or best practice
violations) within the delivered product
Change in User
Impact
Measures the impact of new deliverables
to user experience and satisfaction based
on application Robustness and Efficiency
Where:
Eff stands for efficiency score
n = release number
Structural /
Architectural
Security
Measures the impact of new deliverables
to application security
Where:
Sec stands for security score
n = release number
Change in
Application
Complexity
Measures how the new deliverables
have contributed or detracted from the
application’s ability to agilely respond to
business demands in terms of application
Changeability and Transferability
Where:
Chg stands for changeability score
n = release number

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Business Outcomes
While not strictly within the IT scope, there is no question that IT contributes to business
-based outcomes. The metrics toolkit can support business-based outcomes as well.
Business Outcomes Measurement Examples
These examples show how the OBC toolkit can support both IT and, indirectly, non-
IT business outcomes. While most suppliers will not agree to results that they do not
completely control, the link between business and IT outcomes are what makes IT more
effective.
Automated Metrics InTheToolkit
Metrics are essential in the process and there really is no reasonable alternative to auto-
mated collection. Automation provides a consistent, deterministic view of the data. In
the study cited above, Capers Jones suggests that both manual and automated estimating
processes work reasonably well for less than 250 function points but that automated esti-
mating processes based on function points provides a much greater level of accuracy.
• Clearly Define Work Packets –Retool estimating process to define
manageable work packages. Create an estimating process that is both fair and
achievable. Involve the supplier in this process as they will have templates for
4.1
5.1
OUTCOME METRIC EXAMPLE
Increase Agility to
Meet Business &
Market Demands
CAST Changeability measures the amount
of bad coding and architectural practices
that makes it difficult and unnecessarily
time consuming to enhance software
Remove unneeded complexity and bad
coding practices to prepare for acceleration
of business demands.
Increase Customer
Satisfaction
CAST Robustness, Efficiency, and Security
measures how users experience the
application
Reduce application downtime caused
by software defects, a frequently logged
complaint by users.
Reduce average
time to make
changes to a
module
Improvement in changeability metric Modularize, eliminate dead code
Reduce Invoice
production time
by 20%
Invoice Production (Run times) Improve performance on each program to
reduce time.

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estimation that can be quite helpful. This helps reduce risk by inspecting the
work as the project progresses.
• Business value estimation - Business value should be assessed for each work
packet. This will not only help justify the investment in the change but also
help prioritize the work packets. As each one is standalone, the work packets
can be re-arranged. Priority should always be given to the high value work.
• The project plan – Using the work packet process, the functionality to be
delivered can now be planned as a series of packet releases. This is also the best
time to confirm value to the business and measurement.
Conclusion
Moving to an outcomes-based relationship with your ADM supplier can dramatically
change the IT’s image within an company. An ADM outcome based contract increases
enhancement frequency to the business, improves throughput for IT, and provides nev-
er-before freedom to manage its bottom line to the supplier. Language independent,
standards-based, transparent and highly predictable, OBCs can bring support and devel-
opment costs down while delivering the functionality your business needs. This activity
has a few basic rules for success:
a) Focus on the functionality, not the hours
b) Use the estimating process to improve predictability
c) Specifications are critical, design for smaller efforts
d) Quality is not an option, it is a delivery requirement
e) Learn and repeat
IT has long looked for a results-based approach to application development. Out-
comes-based ADM pricing models provide an opportunity to move beyond a straight
hours-based contract, into a structure that will prevent business failure and the devalua-
tion of IT.
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About CAST
CAST (Euronext: CAS) is the world leader in software analysis and measurement, with
unique technology that introduces fact-based transparency into application development
and sourcing, transforming it into a management discipline. More than 250 companies
across all industry sectors globally, one-third of them listed on the Global 2000, rely on
CAST to prevent business disruption while reducing their hard IT costs and software risk.
CAST is an integral part of software delivery and maintenance at the world’s leading IT
service providers such as IBM and Capgemini.
Founded in 1990, CAST serves IT-intensive enterprises worldwide with offices in North
America, Europe and India.
www.castsoftware.com
contact@castsoftware.com
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Authors
Bill Dickenson is an independent consultant with
Strategy On The Web , and former VP of Appli-
cation Management Services for IBM, who brings
decades of experience in application development,
maintenance and integrated operations. Profession-
al experience with multiple industry verticals at
IBM, PwC, CSC, and DuPont in operations, new
business development and executive leadership.
John is responsible for evangelizing CAST’s messag-
ing and creating meaningful content for colleagues
and clients. He is keenly interested in helping com-
panies take advantage of innovative technologies in
practical ways. Before CAST, John was a product
marketer at INTTRA, a global shipping platform.
He held various marketing and product manage-
ment roles at Maersk Line, the largest shipping
company on the planet. John obtained his MBA
from Rutgers, and Bachelors in Supply Chain Man-
agement from Syracuse University.
6.3
Bill Dickenson
President
Strategy on theWeb
John Chang
Director,WorldwideProductMarketing
CAST Software

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Robert Asen leads Cognizant Business Consulting’s
Strategic Services practice in North America, focus-
ing on cross-industry management and technolo-
gy strategy. During his 25-year career, Rob’s client
service has focused on CIO advisory, post-merger
business and technology integration, business/IT
alignment and operating model transformation. He
holds BS and MS degrees from the State University
of New York at Albany. Rob can be reached at Rob-
ert.Asen@cognizant.com
Vijay Anand is an Assistant Vice President with
Cognizant Business Consulting’s Platform Envi-
sion & Strategy team as part Delivery Excellence.
He has 18+ years of experience in advising clients
on continuous & industrialized delivery, nonlin-
ear based commercial model transformation, and
productivity improvement in ADM. Vijay holds a
MBA from Thunderbird at Arizona State Universi-
ty, U.S and an undergraduate degree in Computer
Engineering. He can be reached at Vijay.anand2@
cognizant.com
Amit Anand is a Senior Director within Cognizant
Business Consulting’s Banking and Financial Ser-
vices Practice. He has 13-plus years of experience in
successfully leading and managing large IT trans-
formation and operating model initiatives for vari-
ous clients. Amit holds a bachelor’s degree from the
IIT Delhi and an MBA from the Indian School of
Business, Hyderabad. He can be reached at Amit.
Anand@cognizant.com.
Robert Asen
VicePresident,StrategicServices
Cognizant Business Consulting
Vijay Anand
AssistantVicePresidentwith
PlatformEnvision&Strategy
Cognizant Business Consulting
Amit Anand
SeniorDirector,
BankingandFinancialServices
Cognizant Business Consulting
Reviewers
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About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consult-
ing, and business process outsourcing services, dedicated to helping the world’s leading
companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cog-
nizant combines a passion for client satisfaction, technology innovation, deep industry and
business process expertise, and a global, collaborative workforce that embodies the future
of work. With over 100 development and delivery centers worldwide and approximately
218,000 employees as of June 30, 2015, Cognizant is a member of the NASDAQ-100,
the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top
performing and fastest growing companies in the world.
Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.
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