Tech Services Outcome-based Engagements

Professional services firms have typically used effort-based models, such as time-and-materials or fixed-scope arrangements like fixed-price/fixed-fee projects. We wrote a prior piece on technology services engagement models and pricing in the following link:  https://elaxtra.com/insights/technology-services-engagement-models-and-pricing-strategies. Recent AI advancements have prompted greater interest from services firms and their customers in novel pricing strategies and engagement types, including outcome-based pricing.

Outcome-based pricing links the customer’s cost to the business outcomes delivered. In this model, the provider’s revenue will be tightly or loosely-linked to the customer’s business objectives and business metrics. The provider’s revenue could be negative if initial investments are not recovered during the length of the project, or positive if performance bonuses or upside payments are achieved.

Outcome-based pricing can take several forms, depending on the agreement between provider and customer. These models align with customer objectives and allow providers to capture additional value. Examples include:

• Performance-based bonuses awarded for meeting predefined business metrics within a set timeframe, such as a fixed payment for reaching a user adoption target after a new feature launch.
• Rate adjustments based on performance milestones, with increases when objectives are met and decreases if they are not achieved within the agreed period.
• Penalties or clawbacks applied if project delivery extends beyond critical business dates.
• Fixed-fee pricing per transaction or occurrence, similar to transactional software or service models, instead of time-and-materials or feature-based pricing.

Agreeing on the customer’s business metrics can also be a challenging effort given some customers will want to keep their key business data close to their chest and not open up the information to external vendors, complicating a full implementation of outcome-based pricing models. A true partnership between provider and customer can set the stage for these types of win-win relationships.

As service providers adopt AI internally (affecting productivity, billing rates, and cost structures) and customers deploy AI capabilities across their organizations (influencing software usage, internal processes, and workforce productivity), additional pricing model variations may continue to emerge.

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.