Shifting to Value-Based Pricing the Right Way with Lori Williams and Kirsten Prost

Speaker A: Foreign.

Speaker B: You're listening to Rattle and Pedal Divergent thoughts on marketing and growing professional services firms. Your hosts are Jason Malicki and Jeff mckay.

Speaker C: So, Jeff, everywhere I look these days, it seems like value based pricing keeps popping up in my face. Even this morning I had the Today show on and they were talking about surge pricing in Uber and Lyft. And actually they're also talking about very interestingly, essentially personalized pricing where people would be giving would get a different price for the same trip based on who they are and when they travel. So, Mike, I have a question. I'm thinking about putting surge pricing in for Rattleback. I was thinking, like, I could do, I could charge like, you know, $10,000 an hour on Christmas day. I'm available on Christmas day. And then like, you know, in the middle of summer, maybe it's like, I don't know, 70 bucks an hour or something. Like, you know, when everybody's on vacation, you know, spur demand. We think. You think I should. Think I should give it a try?

Speaker D: I think you should. I think that's another brilliant idea of yours. So I think you should roll with it. Starting tomorrow, Starting now.

Speaker A: Set that up.

Speaker D: Yeah.

Speaker E: Okay.

Speaker C: Maybe I could make an app and you can just request me like, you know, by the minute, just like Uber. How's that? Sou.

Speaker D: Yeah, Yeah, I think that sounds good.

Speaker C: All right, well, we can float this by our guests and see maybe. I have a hunch that Laurie and Kirsten are going to say that's a terrible idea. All right, so we have two great guests today. We're talking about value based pricing, which is not a subject that we have ever shied away from. We love this topic. We've talked about it a number of times. But with us today, we have Laurie Williams, who is a board advisor and a three time CEO of multiple IT services firms. Former senior leader at Appirio. All things come back to the Appirio mafia. And a lot of her advisory work right now is largely around the AI shift occurring in the IT services space. So welcome Laurie.

Speaker D: Thank you.

Speaker A: Great to be here.

Speaker C: And then Kirsten Prost is with us, who is a vice president at Tercera, I like to say. Kirsten, you are a former consultant turned services firm investor at Tercera, so helping, I guess, make investments and advise portfolios would probably be the best way to frame.

Speaker E: Am I right? That's exactly right. Excited to be here and chat about value based pricing.

Speaker C: Ah, thank you for joining us. Um, you both have been doing a lot on this topic lately, which I really appreciate I thought we should start with some level setting. I made a joke about surge based pricing and Laurie, I think you'll probably be quick to point this out. What I suggested is actually just an iteration of time and materials based pricing and a really bad one by the way. It would be a terrible, at least I think it would be a terrible idea just to float your hourly rate up and down based on the seasonality of the cycle or something. But time materials is one way of pricing. Let's talk us through some of the other options that firms have or should be considering and maybe let's just kind of level set the ways you can price in a services firm.

Speaker A: Yeah, I think this is the topic that comes up quite a bit because people throw around the terms outcome based pricing, value based pricing and I think that fixed price, all those things start to kind of munch together a little bit and I really put it in three buckets. There's traditional time and material which is I am priced by the number of hours that I'm selling. That is very tangible. It's very tactical in many ways. Uh, but it also is the way that majority of services firms have, have and still do. Prize. We'll talk about that a little bit later but that's under a lot of pressure right now because of, of just AI, uh and, and some of the uh, expectations that customers have and, and the, the the task, uh, consolidation if you will. The AI is bringing to the table the second category. Uh, the second type is what you typically call traditional fixed fee which is I'm going to come in and do this thing for you. It's going to be a fixed cost to you and we're going to define what the scope is up front and you're going to get defined outputs. Uh, you're selling scope uh based for a defined price that is um, more common. And I actually think that a lot of the folks today that are saying they're selling outcome based pricing are in that category industry. It's certainly an evolution beyond time and materials. Um, but the real uh, kind of nirvana if you will is when you can get to outcome based or value based pricing. And that is I'm selling results, I'm selling uh, uh compression time on uh, the ability to solve a ticket in a call center or cost, uh, savings on migration of an infrastructure, uh, but something that really has defined value back to a customer. And I think that is ultimately uh, what people lean towards when they talk about value and outcome based. But it is definitely uh, the PhD level of that type of delivery for most services organizations.

Speaker C: What's your sense of the spectrum here in terms of where firms are? I imagine a lot of firms are at multiple places at the same time.

Speaker A: Right.

Speaker C: They've got engagements in every different pricing bucket. But high level. Where do you think the IT services community is in terms of their pricing model right now?

Speaker A: I still think the majority are time and materials, plus maybe some ah, fixed fee for repeatable offerings. Um, I do see more people leaning into saying they're doing outcome based pricing. But as we talk about uh, how to implement that as we get into the rest of this conversation, I think a lot of that is more marketing than it is actual delivery. I'm going to cut to the chase right now. Early in the call.

Speaker C: Jeff, we got a duck for cover buddy. Hey, it all starts.

Speaker A: Yeah, I do think Jeff, uh, it varies based on the segment of um, services. I think there are certain segments like marketing being one, um, that probably lean itself a bit more towards being able to do outcome based. I think the more technical you get, um, from an engineering perspective, I think the harder it gets.

Speaker C: I feel like there's a supply and demand curve to all of this in that marketing firms, myself included, jumped away from time and materials forever ago. Like that was something that you got out of as fast as you could. And I think it's. My oversimplification of it is I think it's because there's more marketing firms than anybody could possibly need and in the IT services world like they've clung to time and materials forever. And I think it's mainly because there's not enough IT talent to go around historically and there's really no time and materials has no risk. Right. I mean that's kind of the essence of this is that there's practically zero risk in a time materials pricing model and there's a fair amount of risk in an outcomes model and there's probably some mid level risk on a outputs model. Right? I mean am I fair in saying that or am I lying?

Speaker A: I think that's exactly right. I mean I think time and materials often um, does get perceived by a customer as sort of the time and materials not to exceed. So it kind of by accident becomes fixed fee, but it all comes down to how you manage the customer through it. The one thing I would say about this is you were talking about surge pricing earlier. I do think that there is surge pricing in IT services. Um, there are when you have skills that are rarer than others and you've got, you know, more demand than you've got supply you can, you know, certainly drive, whether it be hourly or even on, on the fixed fee side, um, it's just not quite as uh, I guess as, as direct as you might see with the Uber and uh, and, and some indoor doordash and their deliver early fee, which I question whether or not that really does anything, but. Yeah, so I do think that there is some of that in there.

Speaker C: I think surge pricing, the way it's framed always upsets customers, which is why I think it's so ineffective. Right. I mean if they find out they're paying more for what they perceive as the same thing, even though that's kind of what value based pricing is supposed to be. The essence of it is you're pricing the customer, not the project. Um, but somehow the framework, the frame of reference on surge seems terrible. So um, a stick instead of a carrot as they say in the marketing world. Hey, there you go Jeff. Carrots and sticks, your favorite. You love it.

Speaker D: I hope that

Speaker C: um, okay, let's talk about. You pointed out a couple shifts that need to happen. Um, because it's one thing to say, hey, we're going to price this way, it's another thing to actually do it. It's not like it's easy to implement. So just talk us through that. If I said as a firm, if I'm struggling with this and I'm, we want to get out of time materials and we really want to get to the, we want to get to the nirvana as you said, what do I have to do differently? What changes do I need to make in my firm to get there?

Speaker A: Yeah, I can talk at a high level and Kirsten actually has worked on this with uh, one of the portfolio companies at Tercera as well and I think can add some good examples. But at a high level I see two major shifts. One is you're moving from projects to productization. What that means to me is you need to think about repeatability, you need to think about uh, actual service offerings, not just you know, scope definitions with a long list of activities, but really starting to formalize the things that you do repeatedly for customers and create an offering around that. Create uh, and tools, automations and uh, those pieces. But thinking about it more as a product. I realize I've been doing this a while and productization uh, of services has always been sort of the third rail. I mean how many uh, services companies have disappeared because they try to prioritize? I think that shift has changed, um, that we've seen a big shift in uh, the need for services companies to productize. That's the first shift projects to product product like productization. The second is from deliverables to outcomes deliverables. Obviously you look at a statement of work, you've got a list of things that you're going to do for the customer. Outcomes are I'm going to do these things for the customer and they're going to yield X result for their business. In order to make that shift, you really have to understand your customers better, you have to understand the space and you have to um, invest in those relationships in more of a long term way. And to be honest, customers have to understand what they want as well in their business. I mean there's definitely more risk in that because it becomes more subjective. And I think that that's one of the hardest things to measure and to manage. Is the customer actually getting the value that was um, projected at the beginning of the engagement?

Speaker D: Lori, can I ask you a silly question? Uh, people listening may laugh at this, but the productization of services makes perfect sense to me. But how do you make the jump to getting paid for an outcome? Because HubSpot for example, who has productized they're offering is not guaranteeing outcomes with their software. How can you ask a professional services firm to guarantee an outcome on a product in air quotes that a product firm isn't even willing to guarantee? What's the difference?

Speaker A: I think it's a great question. I think it's where the risk is, right? I don't believe that every type of project a services company does can move to outcome based pricing. I do think that there are situations when you have so many at bats at a certain solving problem, uh, solving, uh, certain, you know, as you go to solve a certain problem that you can create, uh, repeatability, I.P. the ability to understand and kind of lead the customer through the problem in very informed ways that allow you to get there. So there are some tangible things. Like for instance, if I'm able to um, migrate somebody's infrastructure and prove over a period of time during that engagement that they're gonna save money, that's pretty tangible. Anything that actually ties back to numbers I think is possible. I think that there are uh, other situations that it's just not ever gonna be. They're too subjective. And so to your question, like with HubSpot, I think the difference with HubSpot is they're providing a product for many customers with many different scenarios. And the services situation you are, it's a one to one, right? So yes, you may be coming in with your uh, body of knowled solving a problem and addressing a situation with a customer but you are working with them directly to solve that problem with the work that you do. And so I think it's a little bit more controllable. There's still plenty of risk in it though. So I don't think it's a dumb question at all.

Speaker E: Yeah, I would say just using an example from one of our portfolio companies that's an implementer of um, Salesforce's CRM. So historically I would say the outcome used to be just implement the software and walk away and as long as as the client signs off on the requirements, you're done. One way this particular portfolio company is tying outcomes in for their customers is they're doing a percent hold back of the total contract value. And until the customer signs off on yes we have X number of employees that have fully adopted and are using these seats we're not getting paid that ah, 10, 20, 30% of contract value. So that's how in a traditional SaaS, um, seat based license model they're tying outcomes um, to adoption of the software. And then the software vendor Salesforce is also incentivized because they're getting paid when the seats start being used. So it's a nice tie in between the systems integrator and software vendor and customer success.

Speaker C: Another example that came to mind for me Jeff was I think in the AEC industry I've heard that some uh, of the major road infrastructure work that's done there are incentive bonuses for time completion. Right. So if they can complete it faster than the agreed upon schedule then obviously that reduces all the frustration and gridlock and citizenry. So there's incentives for that. So there's sort of like that's another way that uh, you know I think one thing I want to comment on too is that I don't think that it's necessary. Getting to outcomes based pricing isn't necessarily guaranteeing the outcome. Right. It's sometimes it's just being incented to help achieve the outcome and being rewarded if the outcome occurs. Am I right about that Lori, or am I Kirsten or am I saying that wrong?

Speaker E: Yeah, I think that's spot on and in some, Lori mentioned it earlier. I think it is harder or can be harder for software systems implementation firms versus like more traditional management consulting firms. Just using some examples there's a, ah, firm that does cost management consulting. So they'll come in and analyze your spend across IT procurement, all these different categories and then they're just taking A straight percentage of whatever they save you and it's relatively low risk for them as long as they can save you a certain amount of money. That is harder to do in a scenario when the end product you're giving is a successful software implementation that the outcome is just not always as quantifiable um, numerically to the customer. So I think that's exactly right.

Speaker C: Jason, let's lean into that. Kirsten, let's lean into the. What makes this hard. I think that's important, you know, because I do think that's a great one. A good example where it's like, you know, if you were a cash cost reduction firm, it's very clear what the value to be created is. It's blunt savings and you're taking a percentage of the savings. A little fuzzier when it's like we want to get Salesforce installed and we want X adoption. What's about, how do you derive the value there? So just I guess maybe walk us through some of. Because Jeff points out a good point. Like it's like how do you do this? What makes it hard?

Speaker A: I think when you think about um, actually putting this and implementing this and putting operationalizing it. Sort of five categories of things that I think make it difficult. First is scoping. Scoping is sort of a dark and services anyway and I think that it uh, is not often as disciplined as it needs to be. But if you want to do this well you really need to be able to scope what the problem is and what the customer is expecting and how you're going to solve that problem in a way that everybody can agree with. So the first thing is you have to really double down on your scoping efforts. The second is the sales process. You really have to build a strong relationship with your customer and, and the one and done projects I think are hard to do this way. Customers that you have a long term relationship, you understand their environment, uh, you understand the dynamics, it is easier to share that risk with them and your sales folks. This is true solutions. Literally solution selling third category and one that I don't think it's talked about enough is just the delivery, visibility and fundamentals of you can package this all you want as outcome based pricing, you can have an offering. But if your delivery organization isn't ready to manage customers this way and you're not able as a business to actually manage the operational side, then you're going to have problems. And I think a lot of it does require a shift in the DNA of companies to do that. The fourth area is repeatability. You know, anytime you're doing, uh, a project in a services firm, when it's all people, every time the project is done by a different group of people, it's going to be done differently, even if the problem was the same to start with. So you really want to look for things that you can create repeatable IP to and for, uh, that will allow you to protect, uh, your own risk and also automate things, move things along faster. And then finally, we already talked about this with the product mindset. This uh, is all about how you manage your customer through the problem, understanding their business, not just the technology. I mean, I come from more of a technology services world and if you don't understand a customer's business, you're not going to be able to do this. So these are five of the things. Kirsten, I know that you've been working with, uh, a couple of tercera companies and have seen some of their challenges as well.

Speaker E: Yeah, maybe one comment from the cheap seats. Being an investor, not an operator. So LLMs, um, I think have made it easy for everyone to become an expert at, ah, the service level in everything. So we have one portfolio company that's been using some of these tools along with some of their proprietary data to create really slick pitch materials. And so they're able to show up, um, with a deck sometimes that looks better than the person can present it in the room. And, uh, there can be a disconnect to Lori's point in the sales process when you have material that looks great and you have somebody that doesn't have the next level of understanding of that material, and that can create huge problems when you're trying to win mandates. So that's just one example in the sales process of something that needs to be figured out to make sure that you're presenting material that your delivery folks actually have a nuanced understanding of and can deliver, which is just an interesting thing that AI has created, an interesting challenge that was never there before.

Speaker B: You're listening to Rattle and Pedal Divergent thoughts on growing your professional services firm. Your hosts are Jason Malicki, principal of Rattleback, the marketing agency for professional services firms, and Jeff McKay, former CMO and founder of strategy consultancy Prudent Petal. If you find this podcast helpful, please help us by telling a friend and rating us on itunes. Thank you. Now back to Jason and Jim

Speaker C: O Experts I called them. When AI first emerged, you just have people showing up as an expert on anything because it could kind of make you look like one early on. I Like to think clients are savvy enough to see through that now, but I'm not so sure. I think it's pretty hard. Jeff, I cut you off. What were you gonna say?

Speaker D: No, I was smirking.

Speaker B: Um,

Speaker A: uh, you've never seen that happen, have you?

Speaker D: Yeah, because that is the risk you can't get out over your skis. Uh, I love that example. Thank you, Kirsten.

Speaker E: Yeah, and I think um, to pick on the scoping point too, we looked at a few years ago a full lifecycle, um, software development firm that did everything from strategy and design through build and then QA and delivered a full product to the end customer. And they serve clients like Goldman Sachs. Uh, so they were doing mission critical revenue generating work. And what was really interesting about this firm is almost everything they did was fixed fee. And they recognized project margins in excess of uh, 60%, which at the time for custom software development where every project is bespoke, was unheard of. And they did it in a few different ways. But I think one of the keys to their success is they invested in Immersion and Discovery Workshop before selling any fixed fee engagement, which they ate the cost of. But then that helped them accurately cost out these seven figure plus fixed fee engagements. So I think if you can make up uh, the margin on the back end, then maybe doing the scoping and discovery for free or for low cost can be tremendously valuable as well.

Speaker A: I think that's exactly right. One of the things I also have seen work um, in these situations is doing a scope gate in a project. So even if you in the sales process maybe uh, do a bit of abbreviated scoping initiative and come to terms on what to do, get a contract in place, the very first gate in a project, in a fixed fee or outcome based project should be a scope gate, the component. Okay, we've actually validated, we've had a chance to spend more time understanding what the problem is and what the reality is. I think that also is a really good safety valve for these types of projects.

Speaker D: And do you find that clients are

Speaker A: cool with that, with this scope gate? I think that when it's presented properly, yes, because it actually protects them as much as it protects the services firm. I do think that uh, it does have to be explained though. I mean it's not intended to be a way of, of getting out of commitments that have been made. It's really more a way of just clarifying. But um, it all goes back to how it's positioned.

Speaker D: Yeah, and it goes back and reinforces your um, important point. About how the sales process and client relationships need to be deep.

Speaker A: Need to be deep and the continuity between sales and delivery is paramount. Which in very large services companies I think is hard. But if you don't have someone that was involved in the selling process process also involved in some way in the delivery process, you're going to end up with a bunch of misinterpreted, um, expectations.

Speaker E: Yeah, maybe that's. Ah, Laura, you bring up an interesting point there and curious Laurie if you've seen it, or Jason or Jeff if you've seen it. But with a couple of our portfolio companies, so there's always been this traditional sales solution architect role which are the technical folks that are aligned to sales and helping sell the solution to the customer. We've actually had now 2 of our portfolio companies essentially eliminate that role in their organizations and the traditional solution architects that are sitting within delivery are now sitting across both delivery and sales and helping bridge that gap between sales and delivery and making sure what's scoped and sold to the customer is actually what's delivered. So it can be a bit uncomfortable because you're making delivery people start to wear a bit of a sales hat too. But it's an interesting blurring of the lines between the two organizations that two out of two I've seen with their portfolio companies. But curious if anybody else has seen that.

Speaker D: We did a episode related to this subject about the evolving thinker, seller doer model and how that's going to be the new AI equipped um, person. Um, it was Tony Stark of Ironman fame that we held out as kind of uh, what that looks like for him. But I'm seeing that a lot the smaller firms have an advantage in that because so much of them are founder led and they get all the dimensions of the solution. It's not scalable so you have to expand it out to other people in the organization. But I'm definitely seeing that.

Speaker A: Yeah, I think, you know, one of the hot trends right now is to talk about FTEs, which of course came from the Palantir model and really pulling forward the implementation team, if you own this product company, but pulling forward the implementation team, um, all throughout the lifecycle of the customer. You know, I started my career as a sales engineer and that, you know, we were involved in both selling software but also sticking around with the customer and making sure that it got implemented way back in the day. And um, I think that that model kind of reversing a little bit in the services space. But I've been a part and led A number of services organizations and in my experience those that have more delivery involved in the selling process tend to be more successful with long term customer relationships.

Speaker C: Okay, let's go there because you're leading us into what it takes to be successful here. So really one of those things could be bringing delivery forward, making sure that delivery is involved in the sale more. I mean, uh, I was going to add to that some good advice I got years ago, which is very difficult to implement in a very small firm, is to separate pricing from sales basically. So don't let the person that's the front sales engineer, the lead person trying to sell the deal establishment, the price because they're incented essentially to under price because they want to get a deal done or to just misprice because, or quite frankly to rush price. Right. You talked about scope gates. Well if you're getting compensated to get deals done, then you don't have a lot of patience to sit around and try to figure out the right scope. You want to get the deal done. And so separating pricing from that is super valuable. So talk to us, what else does it take to be successful, to make this work? What are some keys to success?

Speaker A: Uh, you're starting with an important one which is it's the fundamentals you're talking about, uh, pricing. I do think a model that I've seen work really well has been where sales is incented based on as sold margin and delivery obviously has as deliver margin. You can watch the leakage there and figure out kind of it's a lot easier to manage. Um, again I'm speaking more from a services, uh, company perspective, not a customer perspective. But I do think that allows you to have fundamentals in place. But the fundamentals in outcome based pricing do, they're stressed a little bit more. I mean you've got to have, uh, you're carrying more risk and so you've got to have really good portfolio level visibility in what's happening in your projects. Your finance team gets more stress because revenue forecasting is hard, harder when you're doing percent complete. When you're doing percent complete, that's hard enough. But when you're doing it percent complete, plus uh, I've got these kickers based on performance. How do you forecast for that?

Speaker D: Right.

Speaker A: And so some of the boring things, um, the operational things, actually not boring to me, these are things that I really enjoy doing. But the uh, some of those things do become a lot more important and you have to rethink them. So fundamentals are one I think I already Talked a lot about offering framework frameworks and repeatability and the tooling behind that. Not just making it a, you know, architecture brochure, but literally having a playbook for each of your offerings and IP things that are repeatable to help you de risk and really force that discipline of uh, we're going to do this thing for multiple customers, let's form some automation. Customers are going to expect that in the world of AI anyway. But let's let not fragmented automation but let's have a central way of doing this, standard way of doing this. And then finally, and I know this is a topic that comes up in every change in an organization, but change and enablement is just so critical. You can't just wallpaper over. I'm um, now going to be all outcome based. Everybody in your organization is impacted in this, all the way from your salespeople, the way you market sales, um, to the way you uh, manage customers and the way you build deliverables, the way your consultants, your hands on consultants are engaged only in the back office with finance and people teams and others. And it's a significant change in organization. So I think change enablement is really key.

Speaker C: That one really hit home for me because the first time I ever proposed an outcome based pricing engagement where it was, this was a very, very early stage effort seven, eight, ten years ago, it was a pretty open ended proposal that I put together to do this work for an outcomes engagement. And the client services lead I had at the time looked at me and he was like, Jason, I have literally no idea how you want me to manage this project. He's like, when there's a scope, I know what you're asking me to do. He's like, but I don't have, what do you want me to do? I have no idea what I'm supposed to put into this. And when I'm supposed to stop, I'm like will you stop when you get to the outcome? And he's looking at me like that's the silliest thing I've ever heard in my life. And so it hit home only because I was terrible at it. I was classic leader, right? Like uh, sell it and figure it out later. Uh, so anyway, that one hit home for me. I do think that you talked about this earlier, this idea that your project managers, your client service leads, they're accustomed to managing a scope of work, they're not accustomed to managing an outcome and they don't know how to do that

Speaker A: and leading the customer to the outcome because sometimes the issues are within the customer environment. You know, I remember a number of years ago, I was running a services organization and a company. We were deploying an imaging solution back in the day when people did that, and we had set these expectations for adoption and it wasn't getting adopted. And, you know, the obvious questions came back, well, is it too slow or is it, you know, too difficult to use? When we actually peeled back the layers, the reason that it wasn't getting adopted had nothing to do with the technology. It was because people's office space was being allocated based on how many file cabinets they had. And because of that, people didn't want to give up. They didn't want to image because it meant they had to get rid of their file cabinets. So they got rid of their file cabinets, their, their division or their department would end up with less office space. And I know that sounds like a really silly example, but it does go back to, uh, understanding incentives. Like, I was talking to an organization the other day about kind of, you know, leading into some of the pitfalls, but they're incenting people in utilization. Well, you're not real. You end up with lost productivity when you incent on, on only on utilization. And so I do think you really have to peel back the layer of the onions a bit to understand what's going on underneath the COVID So, Laurie,

Speaker D: utilization is holy grail of, uh, professional services. And you're saying get rid of it, right?

Speaker A: I'm not saying get rid of it. I mean, it's still a fundamental metric, and you have to watch it. What I'm saying is that if your delivery, delivery organization is solely incented on utilization, whether that be group or individual, you are going to have lost, uh, productivity gains, um, because there's no incentive for people to, you know, certainly they will have the goodness of their heart, but there's no real incentive for people to identify productivity gains in the engagements that they do. So I think you have to look at something beyond utilization. You, uh, know, of course, margin as delivered, margin on product projects is a great one, but you can't, you know, the math is math, and you still have to understand how your people are being utilized as an organization. It's more how you incent them.

Speaker D: Yeah. So, you know, in my experience, and I've been in professional services for, gosh, 30 years now, and change is the most difficult thing that you see in these, these firms. What are other pitfalls, Pitfalls that get in the way of being successful here?

Speaker A: Yeah, I think there are a couple. Um, I already talked about the project manager shift in. They need to think beyond project reporting and project statusing and really be able to lead customers through problems you're trying to solve. One of the things I'm hearing a lot right now, and I talked to a couple companies last week that are, are talking about how much they've AI enabled their delivery process. But when you look at their gross margin, it's not showing up. So it tells me that there's lost productivity gains in there. And so I think it kind of goes back a little bit to utilization. But in general, really thinking about how you formalize the delivery structure around these offerings that you're building for outcome based pricing, I think that's an important one. One of the hardest though is the customer expectation gap gap. When customers want their problem solved, you can only control what your team is doing. You can't necessarily control the environment within the customer or uh, their expectations. And so I think that's a really delicate one to work through. Even if, uh, everybody has the best of intentions, you can't solve political problems for your customers. So I think being able to gracefully navigate that is a really real, real trick. And then ultimately we did talk about the change issues as well. You know, Kirsten, I know you've seen this, um, with uh, one of the, the Tercera portfolio companies that has gone, I think they're 80 very high percentage of outcome based pricing now. Curious if there were other things that, that you've seen with them.

Speaker E: Yeah, um, they're doing a couple things that are working well, the first of which Lori has hit on this point. But before they moved anything to fixed fee outcome based pricing, they made sure that they had the visibility to be able to track these projects and see how they were trending. So they laid the foundation. And then hitting on the sales pillar, they took something from what accounting firms have been doing for a while, which is this technology surcharge, and added it to all of their contracts, which helps cover some of their tool usage and any additional overhead. And they made that uh, standard in the sow, made it easy for sales to sell, and then also made it so that the sales teams were compensated and commissioned off that to incentivize them to sell this technology charge. And then the third thing that I think is interesting is standard in their sows, which hits on the IP pillar is they have the ability to substitute human labor with digital labor. So as they are proactively monitoring their engagements and seeing how margins are trending, they're able to make shifts in human labor or digital labor to make sure that they're still making the margin that they anticipated on the project. So tying those things together have helped them, um, move their overall gross margins up, uh, materially and greatly improve the profitability of the company. So this AI adoption and shift to outcome based and fixed fee is not going to be the death of the organization. It's actually a tailwind, which is awesome to see.

Speaker C: I get the sense like in my head I'm trying to visualize this, but I feel like when you think about a time and materials model, there's sort of a ceiling usually on the margin, uh, and it's pretty stable. Like your margin is probably pretty stable. At the other end of an outcome based model, there's probably a much wider variation on what the margin could be, but the margin could be phenomenal. So you have to uh, it seems to me that part of the shift comes down to sort of a comfortability with more risk than maybe some firms are used to. They're used to an incredible amount of stability and this new reality is going to force them to get outside their comfort zones a little bit. Am I describing that well or am I missing the mark?

Speaker A: I think you're dead on. It does come from the risk perspective, come down to portfolio management understanding that you're going to, just like your investment portfolio, you're going to have some wins and you're going to have some losses and you need to manage that accordingly. But I also think the second thing around that is theoretically you have a lot more flexibility in how you deliver. You don't necessarily have to have exactly the same number of people. To Kirsten's point, it gives you carte blanche to use ip, assuming that it's obviously vetted from a compliance standpoint, but you have more levers at your disposal to deliver it as opposed to here's my list of executives who's going to be involved in the project and exactly how many hours. And so I think when you combine the two pieces, um, it does give you a way of managing that risk a bit more. But you've got to have full visibility in your portfolio. And I do think a lot of certainly growing services companies, uh, have struggled with that level of visibility in their portfolio.

Speaker C: Yeah, that makes sense. All right, two final questions for each of you. So what's your one key piece of advice? If I'm a firm leader and I'm trying to make this shift, we've been selling T and M forever and we want to get to outcomes based pricing, what's your best advice? One key thing, Lori, do you want

Speaker A: to let you go? I'll let you go first.

Speaker E: Okay. Um, so Jason, uh, you joked and Jess at the beginning of the podcast about surge pricing for Rattle and Pedal. But in all seriousness, I think don't get overwhelmed. Don't think you have to do it all at once. Just start somewhere. Experiment with a project or two, make sure you're tracking it, and if you're getting the desired results, then roll that out through other projects, other service lines, and if not, go back to the drawing board and try something new. Where most firms are in the experimentation process and the worst thing you can do is just nothing. So start somewhere.

Speaker C: That's great. I like.

Speaker B: Yeah.

Speaker A: Uh, and I'll tee off of that and then add one more thing. But, uh, the one thing, the place I would tell you to start is go look at your as delivered margin of your projects. Look for trends either in vertical or customer type or solution type and start there. Start with the things that are most predictable. The advice I would give though is this isn't just sales positioning. This does impact your entire organization. So you can sell it, you can create an offering, you can put all kind of buzz out there, you can in the market and talk about how you're doing it in a really exciting way. But if you are not preparing your delivery and operational organization to fulfill that way, you're going to end up with a not great experience.

Speaker C: That's fabulous advice. Both of those, I think, are great advice. Okay, so final question. Uh, much simpler. Jeff always asks this question. How can listeners reach you? If they want to reach you, you

Speaker A: can hit me on LinkedIn. I'm Lori Williams. Um, easy to find there. Or email@lorilwilliamsmail.com and you can find me on LinkedIn.

Speaker E: I think I'm the only Kirsten Roast.

Speaker C: Oh, nice.

Speaker A: That's a great fact.

Speaker D: Well, this has been excellent. We've flirted with this topic for years, but I think this episode has covered the how to in the best way that we have covered this subject so far. And the thing that's so great about it is, you know, Kirsten, you have portfolio companies that are actually doing this. You're incenting them to do it. And Laura, you bring the operational experience to this to say, hey, here's where it's going to fail and here's what you need to do to be successful. I think this is an episode that people should listen to more than once because this is invaluable and this change is coming. It's coming. So it's the time to talk about it is over. The time to act is now.

Speaker A: Agreed.

Speaker C: Yeah. I loved it. Thank you so much for coming on. It was great. It was great.

Speaker A: Thanks for having us. A lot of fun.

Speaker C: All right.

Speaker E: Thank you.

Speaker C: Thanks.

Speaker B: Thank you for listening to Rattle and Pedal Divergent thoughts on marketing and growing professional services firms. Find content related to this episode@rattleandpedal.com Rattle and Petal is also available on itunes and Stitcher.