Tech Services Engagement Types & Pricing

Technology services and consulting companies engage with their customers in varied ways. There is no right or wrong approach to sales and account management as long as the service provider positively impacts their customer’s business and derives healthy revenue and gross margins.

The different engagement types and pricing mechanisms we list below are not exhaustive but can be a great starting point when considering alternatives to price relationships or projects. These are sorted by the highest potential/risk for the service provider on top, flowing down to the lowest potential/risk.

• Joint Ventures (JVs): A JV occurs when the customer and service provider enter a new market or create a new product in partnership. The project involves shared risks and rewards. For example, the service provider may access a share of the revenue or profits of the new initiative but is not guaranteed any income unless the business derives that revenue or profits.
  
  
• Outcome-Based Pricing: For simplicity purposes, we assume a project starts as a Fixed Price project or a T&M project with additional accelerators or penalties embedded in it. For example, the fixed-price project has a value of $1,000,000 with a 10% bonus if finished within 6 months rather than the original estimate of 9 months. Or hourly rates for a project are defined as $150/hour, and this rate per hour scales down if the new features created do not have better user engagement metrics than the existing user engagement metrics the overall product has.
  
  
• Fixed-Price / Fixed-Fee: This is a typical pricing mechanism when the project scope is defined, and the service provider can attach a price to deliver those features to the customer. For example, developing an internal mobile app for logistics company drivers, where the customer shared the fixed scope and the service provider is comfortable providing the total price for developing the product. Change orders start to play a role in these types of projects when scope changes occur along the way (scope creep).
  
  
• Fixed Price per Story Point: In this case, the customer wants to have strong visibility on features delivered while embracing an agile development methodology. The service provider and the customer agreeing on a value per story point implies that each side will have the flexibility to scale up or down teams to reach the customer’s target development velocity. It is relevant to price this unit appropriately so that the service provider can hit their target gross margins, with the revenue volatility this will generate along the way.
  
  
• Fixed Price per Sprint: As we move on to a more agile delivery model and the project is structured into epics and sprints, the customer may want to have visibility into their costs and get closer to estimating the features delivered. A fixed price per sprint sizes up the team involved in each sprint and defines a price for the efforts in the sprint. The nuance here is for the customer and service provider to agree on efforts per story point so that there is consensus on how many story points team members can absorb during the sprint.
  
  
• T&M Project Work: This is the traditional time-and-materials engagement type, with the service provider responsible for the project’s outcomes. The team will probably include multiple roles to deliver the full extent of the product or business impact the customer seeks.
  
  
• T&M Staff Augmentation: In this case, the service provider’s team works on the customer’s project without ownership of the full extent of the project. Teams and individuals are added to the customer project to accelerate the customer’s goals. In many cases, the customer interviews team members to approve them. Billing is traditionally time-based (hourly, daily, monthly, etc.).
  
  
• Managed Services: Sometimes referred to as a bucket of hours purchased, the customer uses those hours or loses access. The MS approach is used for support projects, maintenance, etc., and is typically priced at a monthly fee.