When companies outsource IT work, they almost always pay for it one of two ways. You either get billed hourly until the project is complete, or you pay a fixed price for the entire project.
The best approach depends on the nature of the work – and on how your business works. If you pay hourly for time and materials, you’d be tempted to think you can keep costs under control by managing the scale of the project. Plus, the contract may be written in a way that seems to limit how many hours for which the consultant can bill you.
On the other hand, paying a fixed price means you can transfer risk to the vendor to ensure they finish the work on time and without excessive use of human resources. Or so you’d think.
But I argue that neither is really the right way to pay for IT services – at least not from your perspective as the customer. Either way, it’s really you who bears all the risk and will end up overpaying when things inevitably don’t go “as planned.” If you go with an hourly rate, the consultant won’t have a real financial or contractual commitment to a great outcome – they’ll just want to maximize their billable hours. A fixed price means their incentive is to minimize consultants’ time spent on the project (something we’re very good at, when we want to be).
Regardless of the type of contract, there is very little risk on the part of the consulting company. No matter the outcome, the customer pays as long as the minimal contractual obligations are delivered in a timely manner.
That’s Absurd. There’s got to be a better way.
And there is. Instead of focusing procurement and contracts on the process of implementing new software – in-scope deliverables, milestones, hours, and various assumptions – write contracts that focus on the outcome of the work. In other words, nothing matters but the quantitative and qualitative results, or the outcomes that are delivered over time.
Of course you need scope and deliverables defined, but do they matter as much they used to? Could you find through the course of a project that different deliverables are needed to achieve the outcome? Or that some of the deliverables are a distraction from the primary results you are trying to drive?
If the outcome is the focus and it is clearly defined and committed to, wouldn’t you rather have a more agile and adaptive contract structure that gives responsibility to the consultants who have all the experience and expertise?
Driving business outcomes is, after all, the whole point of the software solutions that IT services firms implement, manage, and optimize. The outcome-based service model is an idea that’s growing fast in our business, as the Technology Services Industry Association (TSIA) has noted. But the idea of holding your IT services firm accountable for the actual achievement of those outcomes is still pretty unusual.
So hear me out.
The key to creating an outcome-based IT contract is to write clear definitions of measurable results for which the consultant will be accountable. Those results could range from adoption rates of the new software tool, to a measurable impact on compliance, operational cost or customer experience.
By accepting such a contract, your IT services partner begins to share the risk of the project, rather than simply getting the reward.
Focusing on outcomes also changes how you shop for an IT consultant. Whether your partner would even consider such an arrangement is a good question to ask when you’re in the process of vetting them. A firm with a demonstrable record of delivering real results for clients should not be intimidated by the prospect of outcomes-based accountability or flexibility.
In fact, we’re seeing the shift to outcome-based IT consulting accelerate. The world is moving from a model where an IT firm supports a particular aspect of an IT deployment – such as providing access to a particular technology, or supporting training for the technology – to a model where the consultant is paid to solve a particular IT challenge for the client. In other words, to create the ideal outcome for the client.
As this TSIA article points out, one big benefit of this model is that it asks the supplier to bundle whatever products and services are necessary to deliver for the client’s needs. That masks the complexity of a project from the customer, and instead commits the supplier to a clear-cut solution.
Adopting a new technology is almost always a challenge for any organization. We’re convinced that the outcome-based model offers a better way to deliver IT, and have developed an outcome-based approach that’s truly unique in the industry. Feel free to reach out to start a conversation about the outcomes you want to achieve.