Organizations traditionally pay for outsourced IT work in one of two ways, by the hour for time and materials, or by way of a fixed price for the entire project. There are assumed advantages in each of these scenarios – paying hourly allows you to control costs by managing project scale, and paying a fixed price allows you to ensure the vendor finishes on time and without excessive use of human resources. In each of these scenarios, however, it is you who assumes all the risk and will end up overpaying when the project inevitably doesn’t proceed “as planned.”
Paying hourly means your consultants are incentivized to maximize their billable hours, without a real financial or contractual commitment to delivering a great outcome. Paying a fixed price means your consultants are incentivized to minimize their time on the project. In both scenarios, your consultants possess very little risk, and so long as they deliver the minimal contractual obligations in a timely manner, you’re responsible for paying them.
Have you considered why consulting companies promote these two (and only two) options?
By focusing procurement and contracts on the process of implementing new software (in-scope deliverables, milestones, hours, and various assumptions), you’re losing sight of what really matters – the outcomes. You didn’t purchase a new piece of software to implement a new piece of software, but to achieve business outcomes. By focusing on procurement and contracts on outcomes, you significantly increase the likelihood you’ll achieve them.
In our experience, customers that shift their focus and commitments away from a strict laundry list of deliverables to bigger picture results allows for a more agile and adaptive contract structure that holds consultants accountable for delivering outcomes. An effective outcome-based contract clearly defines measurable results for which your consultants will be accountable, such as an adoption rate for the new software tool, measurable impact on compliance, operational cost, or customer experience. (If your consultants are uncomfortable with an outcome-based contract that requires accountability, you probably shouldn’t hire them.
What really matters in your next project?