As technology continues transforming businesses' operations, understanding the various engagement models in the professional services sector becomes increasingly essential for top business impact. Companies face a range of options when partnering with service providers, and the right choice can make all the difference in achieving desired outcomes. Whether through joint ventures, fixed-price projects, or time-and-materials agreements, each model carries its benefits and risks.
In this article, we’ll break down the most common engagement types in technology services, shedding light on how they impact revenue generation and overall business success.
Partnering for Success: Joint Ventures (JVs)
The riskiest yet potentially most rewarding engagement model for tech services providers is a joint venture (JV). In this arrangement, the service provider collaborates with a client to develop a product or solution, typically in exchange for future revenue participation or equity. This model is particularly relevant when a service provider invests resources in building a platform or technology for a specific industry, expecting a significant upside once the product generates revenue.
While JVs can lead to substantial returns, they are uncertain, as the service provider assumes technical and financial risks upfront. Their success hinges on solid market demand and the ability of both parties to collaborate effectively toward a shared goal.
Defined Outcomes: Fixed Price Projects (FP)
In a fixed price (FP) project, the services provider and the client agree on a predefined price for delivering a custom solution, typically with clear milestones and payments based on progress. This model appeals to clients who may lack in-house technical expertise and wish to outsource the development process with minimal involvement and a defined price tag.
For service providers, FP projects can be lucrative if they efficiently manage scope and avoid scope creep. However, this model can quickly erode margins without proper project management. Service providers with deep experience in specific domains are better equipped to handle FP engagements, ensuring cost control and client satisfaction.
Agile Flexibility: Fixed Price per Sprint (FPPS) and Fixed Price per Story Point (FPPSP)
In agile development, where work is organized into time-boxed iterations known as sprints, the fixed price per sprint (FPPS) model is gaining popularity. Service providers charge a set fee for a defined sprint, offering their customers predictable costs while retaining flexibility in project scope.
A similar model, fixed price per story point (FPPSP), allows providers to price work based on the estimated effort required to complete specific features within a sprint. These models are particularly well-suited for clients comfortable with the iterative nature of agile development. This approach provides cost transparency while allowing for ongoing adjustments to the project’s scope and priorities.
Flexibility and Control: Time and Materials (T&M)
Time and materials (T&M) is the most commonly used engagement model in tech services. Under T&M, the client is billed based on the time and effort the service provider’s team expends, with rates typically varying based on seniority and skill level. This approach offers maximum flexibility for clients, enabling them to adjust the scope of work as needed without being locked into a fixed contract.
T&M engagements represent the lowest risk for service providers, who are compensated for their team's time regardless of project outcomes. Clients, meanwhile, benefit from the ability to adapt their requirements dynamically without incurring penalties or delays.
Elaxtra Advisors is an M&A and value-creation advisory firm that assists institutional investors, private equity-owned platforms, and strategic acquirers invest and create value in worldwide technology services companies. Please contact us to explore potential partnerships.