Case study: Functional point analysis at Euroclear

IT departments should force suppliers to use functional point analysis (FPA) to price application development projects. Cliff Saran reports on how a financial...

IT departments should force suppliers to use functional point analysis (FPA) to price application development projects. Cliff Saran reports on how a financial service company is using the method to control project budgets

Functional point analysis is a methodology that project managers can use to measure how much a software development project will cost, based on a set of standard metrics that were first defined by IBM in 1979. FPA identifies the functional components of an application and quantifies the size and complexity of each one.

Euroclear, which provides back-office services for bond, equity, derivative and fund transactions, has used FPA within its negotiation process for offshore application development projects with European outsourcers.

Speaking at the Gartner Symposium, Laurent Fayet, head of the IT project analysis office at Euroclear, said, "We want to agree a fixed-price contract for a fixed scope of work."

This is an important consideration given that the company used 150,000 man-days of application development and infrastructure services in 2010.

Offshore outsourcing is used either in the design or testing phase of an application development project or for a full project from business requirements through to testing.

"You need to understand the budgeting tool used by the supplier to avoid price increases," said Fayet. The company found several problem areas when negotiating with suppliers on offshore development work, including:

• Misinterpretation of requirements - leading to scope changes

• Lack of transparency of supplier proposals

• Supplier tools are proprietary and therefore difficult to benchmark

• There is too much room for interpretation, which gives the supplier opportunities to increase prices

• Suppliers do not assess the complexity and size of the project properly

• Unit prices for work are not meaningful

By forcing the supplier to use FPA, Fayet said Euroclear had been able to get an independent measure of the budget for a given piece of offshore development work.

FPA also enables Euroclear to make comparisons and benchmark different suppliers. Because it is a transparent process, said Fayet, "it allows us to lock the vendor into the deliverables, rather than vendors controlling a captive client".

A further benefit for Euroclear is that FPA enables the company to monitor long-term productivity improvements, in terms of the application development process. Fayet said the supplier sets a productivity index which defines the number of man-days required to deliver one function point. But he warned, "They [the suppliers] don't necessarily like to do this because it brings transparency to the pricing process."

Euroclear is asking suppliers to use FPA during the business case and design phase of a project. Although he was unwilling to put a value on the savings achieved from FPA, Fayet said, "On fixed-price contracts, we had no way to prove that something was out of scope before FPA. In the futures, we expect to see fewer change requests, and as a consequence the project costs should be lower."

But using FPA is not easy. It is not widely known and it is difficult to measure complexity in an application development project. Fayet said internal staff needed to understand how to measure function points in an application project. Another drawback is large variations between the vendors' measurements and those produced by the internal team. Although FPA is suitable for the waterfall and Prince 2 application development projects, Fayet said it was more difficult to do with agile methodologies.

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