Insights Article

Trading Hours for Outcomes

An Intact Explainer

Jesse White
March 9, 2024
March 9, 2024

When ordering food from a restaurant, you don’t pay your bill based on how many steps the chef took to cook your food or how many minutes the waiter spent serving you. You pay for the meal itself—its taste, presentation, and your overall experience at the restaurant. This outcome-focused model incentivizes the restaurant staff to provide quick, attentive, and high-quality service. After all, better service means happier customers who tip more generously.

Something different happens in the enterprise world, though. When contracting technology partners, many businesses and federal agencies still cling to an outdated inputs-based approach, where vendors get paid for the amount of time or resources spent rather than the value created for a client.

Increasingly, however, forward-looking service providers are challenging the status quo through a new paradigm: outcome-based agreements.

What exactly constitutes an ‘outcome’ in this context? It’s more than a technical achievement—it’s about meeting the core expectations of those footing the bill—be it a board, a capital committee, or Congress. Outcomes are tangible results like enhanced productivity, improved customer experience, or elevated profit margins. They are the true north stars guiding every decision and investment.

But despite how important they are, the focus on outcomes often gets lost in the traditional inputs-based model. McKinsey reports that about 70% of digital transformations falter when the end goal isn’t clear. At Intact, we understand this pitfall all too well. That’s why we insist on a clear definition of outcomes before embarking on any project. If the destination isn’t clear, we don’t start the journey.

The Burden of Today’s Inputs-Based Model

The dominant contracting models in IT essentially boil down to variations on an inputs-based theme. Whether labeled as time-and-materials (T&M) or fee-for-service (FFS), most arrangements involve paying vendors based on allocated resources, staff hours, or completing prescribed activities.

For example, under a standard T&M structure, clients pay an agreed hourly rate for labor and reimburse their vendors for any expenses they incur. The more hours logged or additional supplies the vendor uses, the more the client owes―regardless of whether those hours or supplies actually contributed to achieving the desired outcome. Assuming a desired outcome was even defined.

Similarly, FFS agreements specify set fees for particular services rendered, such as $X for completing Y task. The focus rests on delivering prescribed assignments rather than achieving real-world impacts.

This inputs fixation has become the default option, with both buyers and sellers accustoming themselves to the model. And because sector leaders continue operating this way, innovation stagnates as new players conform to compete. Without external pressure or crisis forcing reassessment, questioning the status quo rarely occurs to either party.

And What’s Wrong With That?

To understand the downsides of input-focused IT contracts, think of a taxi ride. In a standard metered cab, the fare is determined by time spent in transit and distance traveled. So essentially, the passenger pays the driver to perform an activity—to operate the vehicle.

This payment model contains no inherent incentive for the cab driver to take the most optimal route to the destination. Whether due to traffic, construction detours, or intentionally dragging your ride along a longer path, the meter ticks steadily regardless. And the longer the ride, the more the driver earns—achieving the actual outcome of arriving efficiently is secondary.

The IT equivalent are T&M agreements. Under T&M, service providers get compensated according to hours logged rather than results achieved. Just as the taxi driver earns more from a longer ride independent of progress to the destination, T&M actually incentivizes vendor inefficiency. The more hours dedicated, the greater the fees accumulated. Quick completion risks revenue loss even if the project satisfies objectives.

FFS contracts seem on their face to address this by tying pay to predefined assignments. But once a vendor checks the to-do list, they get paid regardless of whether adoption, user satisfaction or other tangible benefits actually materialized. 

In essence, charging for activity over outcomes undercuts the potential for larger shared success for short-sighted financial gain. Sellers focus on maximizing billable deliverables instead of optimizing end solutions. Limited accountability lets organizations continue operating inefficiently while still profiting. Ultimately everyone loses—buyers waste funds for minimal mission progress and vendors erode their trust by allocating resources in a self-serving way. Just as a taxi passenger stranded miles from their destination fumes at their driver’s nonchalance, clients stew (if they are aware it’s happening) as vendors milk contracts without advancing real needs.

There must be a better way—one that aligns interests around achieving results rather than rewarding mere activity.

What is an Outcome-Based Agreement?

An outcome-based agreement ties partner compensation directly to achieving specific, measurable results rather than just delivering a service. It fosters alignment by basing payment on success, not effort alone.

For example, a traditional software implementation company traditionally hired to build an app may charge an hourly rate for development work, paid incrementally regardless of whether the final product met the client’s expectations. But under an outcome-based agreement, the partner only receives full payment if the completed app hits mutually agreed performance metrics—like a certain number of downloads, user retention rate, or revenue target.

This approach marks a pivotal shift from paying for activity inputs to paying for impacts and effectiveness. Outcome-based agreements transform vendor relationships from mere service transactions to shared success partnerships.

Outcome-based agreements represent a significant departure from tradition, so overhauling entrenched norms won’t happen overnight. But the status quo is no match for the increasing wave of innovation. Savvy leaders in various sectors are aware of the inevitable change—one not solely focused on effort and activity, but on achieving tangible impacts that drive organizations forward. The future of partnerships is outcome-based.