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Intro

When engaging a technology consulting firm, you are typically faced with a decision of Fixed Price or Time and Materials for the pricing arrangement.  What is a poor soul to do? Or for that matter, an adequately funded soul, or even a richly funded soul? Fixed Price is often preferred because either you or your procurement department like knowing the price is set and won’t change.  Others prefer T&M because they want to control the direction and quality of the services.

There is a third approach, Agile Scrum, which many find to be the optimum choice.

Break It Down

Let’s break it down to the attributes that ultimately customers really want for consulting engagements.  Ideally, they want a solution delivered with a predictable, manageable, pricing model.  They want it delivered on time. They want the functionality they expected at the time of purchase or came to expect over time.  And they want it at or under the proposed budget (the price). Let’s look at each pricing model in a bit more detail.

Fixed Price

Fixed price contracts stipulate contractual deliverables.  In theory, the consulting firm, (in procurement terms, the vendor) holds all the risk since the final bill is the fixed price fee, regardless of the number of hours performed.  On paper this might sound pretty appealing to a customer. However, when you take into account the quality, the time, and the details under the proverbial hood of the deliverables, the customer still has some risk.  Often times the customer does not get what they really want because they did not fully know their “true wants” upfront.  The true wants tend to emerge over time as they see the solution come together.

Ultimately, Fixed Price often winds up being more expensive relative to other approaches because additional design effort is needed to lock down the contractual specifications, or the customer might have originally committed to features that ultimately were not required, or they had to buy additional features discovered during the project via change orders.  As a result, there is the potential to develop an adversarial relationship between vendor and customer.  The vendor is trying to deliver the project at or under his/her internal project cost structure, while the customer is trying to get everything they expected (or have come to expect during the project).

No side is at fault, it is just the nature of the arrangement. Over the years, I have seen this type of arrangement work out well for both sides, or just for one side, or in some cases, not work out very well for either side – the customer did not get what he/she desired, and the vendor lost money trying to satisfy the customer.

Time and Materials

Next, let’s look at the other end of the spectrum, the Time and Materials (or Time and Expense) pricing model.  In simple terms, their partner (vendor) provides the professional skills for as long as it takes to complete the project or for as long as the customer desires those professional services to continue.  Depending on the context of the contract, in the purest sense of T&M, the customer directs the consulting staffs’ work effort.  Stated another way, the customer is responsible for project management and telling the consultants what they are expected to do.

In other arrangements, the vendor manages the project plan in a similar way to how they would do it if a fixed price, but the final bill is calculated by the actual number of hours worked, which could be higher or lower than the original proposal estimate.  From the customer’s perspective, if viewed through a lens with a risk tint:  there are no contractual deliverables, the client holds all the risk, the billing meter “keeps spinning”, and the vendor is perceived as having no incentive to complete the project efficiently.

Comparing Pricing

Let’s compare the theoretical pricing calculus of Fixed Price vs T&M.  Assume the same project staff, including a project manager, and the same work plan for both approaches.  If the T&M estimation is $1, the Fixed Price would typically be calculated by taking that T&M price and adding a contingency (an insurance component) to accommodate some reasonable risk for issues that come up in the course of delivery.

For argument’s sake, let’s assume that contingency factor is 15% (it varies based on the complexity and duration of the project).  So, if the T&M project’s estimate is $1, the Fixed Price fee would be $1.15.  The customer has to decide to either roll the dice and go with the T&M (he holds the risk), or buy the insurance and chose the Fixed Price with a 15% uplift.  A simple analogy is you are getting in a taxi at the airport and need to get to downtown. Do you prefer the flat fee with the uplift or take your chances with traffic and the integrity of the driver to take the best route in order to potentially save some money?

Comparing the Third Approach

But don’t fret!  As I hinted at the beginning, there is a third approach.  To continue the taxi metaphor, what if you had the following in hand during your ride:  the estimated cost of the trip based on current conditions, a map of the planned route and alternative routes, and a view of the meter displaying cost of trip to date.  With this data in hand, along with your wise and trustworthy taxi driver (consultant), you can work together to assess the current path and cost.  Together you can decide what is the best path to get you downtown within your time and budget constraints.

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Why We Use Agile Scrum

This third approach is Agile Scrum.  ThreeWill uses Agile Scrum to design, build, and price our customer solutions.  Our repeat customers love the predictability.  Our new customers appreciate it early in their evaluation cycle of our proposals due to our transparency of the detail in our methodology, and the clarity in how we estimate and price the corresponding level of effort.  We leverage the modeling techniques of Steve McConnell to derive a high, low, and expected case for the level of effort and ultimately the price.

I won’t go into the finer details of Agile Scrum here, (please check out ThreeWill.com or your personal favorite source for more Agile Scrum detail) but the Agile approach allows us to focus on delivering the highest business value in the shortest time.  ThreeWill breaks down the project into smaller two-week cycles (called sprints) where the highest priority requirements are brought into scope and tangible deliverables are outlined and developed.  Working software is produced during each sprint so that the customer can determine at the end of each sprint whether to stop development because the goal has been reached or continue development to add additional features.  The upfront project estimated price is the framework that governs not only the entire project but each individual cycle.  A characteristic project for ThreeWill is approximately 6-8 sprints. In summary, customers find their spend is optimized with this Agile approach.

So, the next time you engage a consulting partner, consider the advantages of Agile Scrum.  Please feel free to leave your comments/thoughts below.

 

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