Why We Do Value Based Quotes

Alex Bartlow
2012-02-21

Most of our quotes do not focus on the time it takes us to complete a project. Those that do often only include time-boxes for research, or other tasks where the value from the out-set is unknown. We instead choose to base our quotes on the value that our services provide to our customers. While this comes as a shock to some, we believe that this is the most ethical and efficient way to provide value to your organization. There are several reasons why, which we will outline below.

Linking Compensation to (Correct) Results

Paying for time is one of the oldest, most familiar metrics to most of our clients (and ourselves, for that matter). As such, most clients have horror-stories of a developer that billed full-time for weeks, and then showed up with a incorrect and buggy product. There are only two resolutions to this situation at this point. One is to continue paying a consultant who is obviously incapable of understanding the true nature of a project, or who is unable to execute successfully on the concept. In all-to-common occasions, both are the case. This outcome is not fair to the client.

The other resolution is to expect the developer to fix the mistakes, often at significant expense, at no or reduced cost. This is unfair to the developer; after all, they have agreed beforehand that their time is worth a certain hourly rate, and now, contrary to the agreement (not to mention the contract) the value of their time has been reduced. At best, this will result in shoddy work, and at worst, an abandoned project.

The only good outcome to this scenario is to avoid it altogether. By attaching a price-tag to a specific deliverable, one that meets all of the functional and non-functional requirements outlined in the contract, this dilemma is avoided. The consultant will deliver what was required, and the client will receive what they paid for, or pay nothing at all.

Providing for ‘Intangibles’

Many clients have a project that will not directly affect the bottom-line. Instead, these projects are geared to improve their branding, increase customer satisfaction, or some other result that is important to reputation of the business, but will not in the short term result in more profit. Many projects for non-profit organizations fall into this category, since by definition a non-profit organization does not have a profit motive.

Providing our services based on the value of these contributions allows us to match fees to the true value of these services, on a natural sliding scale that grows or shrinks with the outcome required. Will a new dispatching system for emergency services create more profit? No. But the value is high, and the world is a better place because of it. Our fee structure accounts for such scenarios. For examples like this, we are content to offer a lower quote, since people will actually benefit for items like this more than they would another social location-based app for their smartphone.

Reducing Risk

If a project, due to technical difficulties or political blockages takes longer than expected, it will cost more under the hourly paradigm. These events are what led to the downfall of the waterfall paradigm in software engineering and estimation, because overruns become expensive, and the cost baloons.

With a value-based approach, these items are of no worry to the developer or the client. More time spent of a project does not result in increased cost, which has been agreed upon from the outset to be static. As such, developers are motivated to get the job done, not to run the clock. This often results in deliverables being ahead-of-schedule, something that is not likely under the hourly paradigm, since the developer has no financial incentive to increase efficiency! A value-based paradigm reduces risk, and increases integrity.

Accounting For Scope Creep.

Uttering the phrase “scope creep” is the easiest way to get a project manager to shudder. While seeing the project progress, a client will often change their minds about the direction of the project, leading to change in the specification, and under an hourly paradigm, more billable hours. Under a value-based paradigm, these are normal and expected events that will shape the perception of the best way to create value for a customer.

Since the cost is fixed on the value returned, seeing the project develop empowers clients to drop items that, as it turns out, do not create value, and instead focus on improving the return-on-investment. This creates a better working relationship with the consultant, since the extra dimension of billable time has been removed. All that matters are the results for the customer.

Increasing Efficiency

We touched upon this in an earlier section, but it bears explanation here. Under an hourly paradigm, each line of code written is an additional use of time, and as such an asset for the consultant. However, lines of code are liabilities for a customer, that must be carefully maintained, preserved, understood, and changed at additional cost. This places the developer in competition with the customer.

In addition, the hourly consultant has no incentive to keep up-to-date on time-saving and quality-driving developments like improved tools or methodologies. In fact, to do so would be to sacrifice their livelihood. By contrast, a value based consultant can be counted on to ensure they are always on the cutting edge of technology, and is delivering a solution that is in the best interests of her customer. Because of this, value-based consultants are more efficient, better prepared, and orders of magnitudes more efficient than someone who has an incentive to roll solutions from scratch on every project. Value can be created in minutes by leveraging an existing library, instead of hours by developing an error-prone one from scratch.

Conclusion

Value based quotes and projects increase the relationship of the developer and the customer, and encourage the developer to do everything possible for the benefit of the customer. If this sounds like a better way to do things, please get a hold of us for your next project.

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