Engagement and pricing models in the new digital era of IT partnerships

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In this episode of IT Leadership Insights, our host and expert discuss how customers can work with IT service providers through different engagement and pricing models.

Our guest, Craig Kritzinger, talks about the advantages and disadvantages of various engagement and pricing models, and how to fit them into what the customer expects. The episode ends with Craig’s tips for companies that consider moving towards partnering with an IT provider.

Our Guests: 

Craig Kritzinger is an experienced Technology Leader with a keen interest helping to build highly performant cross-functional technology teams leveraging in-house and nearshore resources. He has a specific focus on creating, scaling and running SaaS technology platforms. Chief Technology Officer at the Independent Data Consultants in UK.

Michał Grela is Future Processing’s Relationship Manager, working within the marketing department to establish and nurture relationships with prospective customers and expand the company’s network of contacts. He strongly believes that business is about people and that, at the end of the day, it’s all about Human-to-Human rather than Business-to-Business.

The transcript of the episode

Michał Grela (MG): Hi, my name is Michal Grela and I’d like to welcome you to another episode of IT Leadership Insights by Future Processing. Today we’re going to talk about engagement models in IT partnerships. Historically, customers approach IT companies in order to simply hire bumps on seats or do the traditional old school outsourcing so-called “body leasing”. Nevertheless, today the industry moved and developed towards more partnership-based approach. I can honestly say that today only law and creativity limits companies where it comes to different ways of working together with IT partners. Today my guest is Craig who’s probably done all of the possible options when it comes to engagement models with IT companies. Would you be so kind and tell something more about yourself, Craig?

Craig Kritzinger (CK): My background in IT started about 20 odd years ago as a software developer. After that I’ve gone through the various different roles, working my way through leadership and eventually ending up today as the CTO of a consultancy in the UK.

MG: Thanks, it’s great to have you here in this cozy library. I hope that we have a very interesting conversation. We’re going to talk about different engagement models. And of course there’s plenty of them including body shopping, hybrid teams, onshore, offshore, body leasing, nearshoring, offshoring, fixed price, time and materials. Numerous opportunities. A part of being operationally agile, is to also give customers this flexibility when it comes to choosing the right engagement model. Of course, everybody perceives these models to some extent differently, and there’s definitely this clutter or bias when it comes to understanding and some terms are used interchangeably. How would you describe the engagement model, what’s it all about?

CK: Okay, for me the crux of the engagement model is the basis on which the two parties are working together. Trying to understand exactly where the lines of responsibility lie, who’s got the authority to make certain decisions? What that might mean from a pricing perspective which is obviously a piece of the engagement model. A big piece is the working together, the authorities, the responsibility levels.

MG: This is the governance as well?

CK: Absolutely, yeah. How we’re gonna prove the deliveries? How frequently we might be engaging with each other on checking progress, et cetera.

MG: I recall that you have a long history of working with FP on different projects with different customers and also using different engagement models. At FP of course, we also try to fit the model to what the customer expects. You can of course start with some development teams, if you need engineering. You can move towards some bespoke solutions using the whole projects for building the whole projects and of course add consultancy on top of it. There’s plenty of options obviously. What did you cover?

CK: It’s a question that’s more easily asked than answered. All of those different models that you touched on earlier, we’ve used over the years. All of them and maybe even some more. We even invented models along the way. When we first engaged with FP, which is about eight years ago now, the first one was “an outsourced nearshore outsource team”. Probably in our mind originally was a sort of body leasing or body shops model.

MG: The old school.

CK: The old school model. But what we liked about FP was the idea that there were people already. It wasn’t special recruitment. It was people who were part of the FP culture already. I like to use that term nearshoring rather than outsourcing because for me it’s that extension of a team.

MG: There’s more value in it.

CK: Absolutely.

MG: But you also covered different worlds.

CK: We did. As we progressed over the time, we built that team out. We had some specific projects that we needed to deliver. We’ve used a fixed price model on occasion. There was a time when we used “painshare gainshare”, which was something we worked on together to work out. And then I’ve also used a number of other FP specialist team members in a consultancy capacity.

MG: You’ve mentioned “painshare gainshare” but before we get into the sexy stuff, let’s start with more basics. You’ re mentioned that you work with FP and of course with presumably different other IT providers on a time and material basis.

CK: Yeah.

MG: Can you tell us something more about t e advantages and disadvantages of this sort of engagement model? When it’s the right fit?

CK: Sure. For me the time and materials model fundamentally works when it’s less clear what the outcomes and needs might be. You know you need resources, but you’re unable in advance to perhaps specify all of the requirements in detail and reach a contractual agreement as to what the delivery outcome might be.

MG: So there’s a level of uncertainty?

CK: Exactly. That’s where the time and materials model might work perfectly because essentially it puts the control in the client’s hands in terms of saying what they need from day-to-day. Budgetary wise they’ll just need to commit to paying whatever that might need for. You might not have the certainty of budget.

MG: When the scope is sort of being changed dynamically, maybe that’s the right fit.

CK: Absolutely.

MG: Is it something that you, as a customer, would go for first time outsourcing or is it maybe too high level of entry when it comes to this uncertainty?

CK: Well, I think it really depends on what the customer know about their project and how much preparatory work they’ve done in advance. If you’ve got a strong in-house business analysis function, et cetera, and you’re able to define some really well-defined requirements and so on, then you don’t need to go time and materials. If you’re trying to hit the ground running, you’ve come up with an idea, you get a team in place pretty quickly and you just wanna progress then time and materials makes absolute sense. I tend to probably quite often start with time and materials but, for myself, I tend to run those as a nearshoring hybrid team. It can make a lot of sense as a starting point.

MG: You’ve also said that putting additional work at the very beginning of a project with business analysts, the UX, UI designers on board is good for, as I understood, the fixed price model.

CK: Yes, absolutely. If you were able to do that work in advance, now you could use an outsource partner to help you do that. You could do an initial time and materials piece where you delve into your requirements. You leverage the business analysis or project management capabilities, define the requirements and once you know exactly what the requirements are, you could go into a fixed price model. Both parties are then very clear what they require and what the outcome looks like. The suppliers can estimate pretty well and they can hang their hat on how long it’ll take them to deliver it. A key advantage in that fixed price model means that the client has got certainty of budget. What you’d expect the supplier to do is to normally put a little bit of contingency or a premium on their price.

MG: That’s what I was about to ask you, because in fixed price models that’s, well, you can expect that there must be a bit of a margin.

CK: Absolutely. But as a client, it’s worth paying that extra margin for the certainty in budget. As opposed to the alternative in a time and materials model where I don’t have certainty of budget.

MG: So if there’s no benefit or added outcome at the end of the day, then what’s the point? But you’ve also mentioned hybrid teams. What do you mean by that?

CK: Sure, it’s a phrase that I tend to use. I’m not sure if I picked it up from someone else or whether I invented it at some point.

MG: It rings a bell. So that might be in the industry frankly. Have you invented it?

CK: Maybe I invented it. But the hybrid team is where we’re running in terms of the UK or the client. Myself in this example in the UK. I’ve got my team members there and I run them as a hybrid agile team together with the nearshore team. Maybe Future Processing in an example. You might have developers and QAs basically sitting on both sides of the table. A key advantage in terms of the hybrid team for me is again you can get up and running much quicker ’cause you’ve got a core team who already knows the business domain. They know the current technology. You’re essentially supplementing that team with additional nearshore resources. They’re running their scrum processes together. They’re on the stand-ups together, so knowledge transfers very quickly. And it also starts to engender more trust between the two organisations. You understand what the implications of delivery are.

MG: Sounds like a right fit for a company that has a small IT team in-house and is not keen on expanding that a lot but is in need of scale or skills.

CK: Exactly. For me the reasons you might wanna expand using a hybrid team is that you’ve got that core competency. You need to scale it very quickly ’cause you’ve won some contract or something. You go to the nearshore partner, you supplement your team and it gets access to skills that might be in short supply where you’re based. You get the flexibility and once the project is delivered you might be able to flex the size of the team again. Another key advantage is that if you’re an organisation whose key portion of IT processes is about building intellectual property internally, there’s that advantage as well. Your core team can continue to maintain your intellectual property with this expanded capability. When investors start looking at your organisation and say “well hold on, you’ve outsourced all of your development” you still got your core team who can own your IPs.

MG: Plus with the nearshore there’s also disadvantage of, you know, sharing the time zone, easy travel, work together, do some pre-programming and et cetera.

CK: Well, that’s exactly why I tend to prefer a nearshoring model rather than a conventional sort of outsource. I can hop on plane and two hours later I’m at the location or any member of my team. Obviously the same is true in reverse. We can get members of the team traveling over to the UK. Maybe you’re having joint client workshops, et cetera.

MG: At the beginning of our conversation, you’ve mentioned this particular way of operations called “painshare gainshare”. Could you describe that one?

CK: “Painshare gainshare” is where both parties have got something to win and lose based on the success or not of the delivery. So where might it work? You as a client, you might have an idea for a new product that’s may be aligned to your existing product, but you don’t have enough budget to be able to deliver the project in it’s entirety.

MG: I can imagine.

CK: Finding an outsource partner who’s willing to contribute towards the cost of that may be, by some sort of a discount structure, against the normal rate, et cetera. Can make a difference to achieving that budget. The idea is that once the product sells, the outsource partner shares in the benefit. You’re basically paying them in arrears when the product eventually is commercially successful. It will require both organisations to wholeheartedly believe in the product, believe in the fact that it does have commercial opportunities. You are leveraging the supplier’s client base and selling your product to your supplier’s client base. It’s not always a casual discount investment that’s going in. The other facet there is it does need parties who believe in each other as well and aren’t commercially greedy and wanting everything to themselves. They’re willing to share the benefits.

MG: That’s the very important part and there’s a significant amount of risk involved which is shared. It can be a win-win situation. The very important part you’ve mentioned is that there’s this specific relation that needs to be a foundation of this sort of engagement model. How do you get there with an IT partner? How do you go from negotiating fixed price/time and materials to “let’s do something together”? How can you build that sort of relation?

CK: It takes some time. I think the key thing is the “gainshare painshare” is only really going to work where there is existing trust in place. You’ve probably had an existing relationship, either it’s been that nearshoring or a fixed price relationship, where both of you have learned how the other business operates. You’ve both got some of that business domain knowledge and understanding the market factors related to this product. I wouldn’t expect a “gainshare painshare” model to work as a brand new relationship. You might have repeat two or three years in.

MG: Well it sounds like something that both the buying and the supplying party should move towards, as a nice goal to achieve. It sounds also like something that’s on the very opposite to what we started with, with the traditional body leasing, outstaffing, augmenting. There’s these two approaches and I’m keen on understanding your point of view. Can you also see that the industry is moving toward more human-centric ways of corporations? From simply transaction-based to more partnership-based? From low value to high value? Is it that black and white?

CK: There seems to still be a lot of organizations who are doing the traditional sort of body leasing.

MG: Which is not nothing bad of course.

CK: I think it’ll work for certain organizations. It depends on what you’re looking for. If you’re an organisation that wants ultimate control of the individuals who will be working for you you wanna make sort of the CV-based decision on, you know “these are the skill sets I wanted I wanna be seeing the CVs and I wanna approve all the hiring and I want full control of what the salaries, et cetera”, then the body leasing model tends to work. You’re paying an admin fee to essentially have a remote HR/recruitment function. On the flip side for me, there is having an organisation that culturally is building up an identity within their team, people who know how to work together. You don’t have to build the team relationships after hiring the people. You’re essentially getting teams of people who know how to work together. They’ve got established practices. There’s sort of a great culture and so on. For me,there’s a big one in that because, fundamentally, having high-performing teams takes time. It doesn’t just happen instantly from hiring

MG: Overnight..

CK: 10 bodies and suddenly they’re a good team.

MG: So from your perspective, an expert whose bread and butter is definitely outsourcing in different engagement models, what would be your top three tips for a company that’s considering moving towards partnering with an IT provider when it comes to engagement models?

CK: I think the key thing is to start with is to understand to you from a budgetary perspective? Is it having a definitive budget or are you a bit more flexible and you need to hit the ground running first? You need to also think about how do you see this culturally in terms of your organisation. Do you see this truly as a partnership or is it just a supplier where you just gonna specify “I want X, Y, Z” and they’ve just got to deliver. You need to think through those different questions and then go and choose an IT partner who matches those characteristics. So budget and how you wish to engage with them. What do you want? Do you want a collaborative approach or you just want them to do what you say? Et cetera.

MG: Thank you. I really enjoyed that one. That was very interesting and very informative. Thank you our viewers for watching this episode of IT Leadership Insights by Future Processing. If you found it useful, please don’t hesitate to like it and share it and please do drop us a note if you’d like to have a different topic covered in another episode of IT Leadership Insights. Thank you.