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The most important thing for any client to understand when looking to engage with an agency partner, is the motivations of that agency. The business model of an agency is based on the amount of time they bill out their staff. They want to work on projects where every hour of their team’s time can be utilized, in most cases billed to another company in order to make profit and grow. They typically don’t have recurring revenue, so if their team is working and the hours are not being billed, they start losing money. An agency will avoid this, no matter the cost, because if they don’t they will go out of business.
This can be a problem for clients looking for professional services, because their incentive is to get something done for a fixed price. This makes logical sense on the surface, as they typically have budgets or limited resources for their projects.
This becomes problematic for the agency model because the reality is that no one can say precisely how much effort will be required to complete a project. So if an agency cannot guarantee the amount of hours to bill, what happens if they need more time? How do they go about communicating this to the client? For agencies, if they can’t bill for work that they are doing then it hurts their bottom-line and impacts them from taking on new engagements to cover their downside because they still have to run payroll, pay rent, and other fixed and variable costs. Much like their clients, agencies cannot operate at a loss for too long and must eventually start making profits. Agencies that struggle with maintaining a profitable business model are eventually faced with closing their doors, unless they can fund their operations by other means.
So what the agency does is inflate the price anytime they give a quote. Inexperienced agencies add small buffers and end up running into a bad situation which they will inevitably make the client’s problem, because they have no choice. They never properly forecasted various unknowns during the course of the engagement. Other agencies will add a significant buffer to ensure that even if it goes way over, they are covered. In this case, the client might end up paying $50k for what was really a $30k result.
As the experts, agencies should be able to estimate within a reasonable error margin, but that doesn't always mean it will happen that way. Being an expert does not mean they know everything they will need to do, it just means they know a lot more than you, which ironically is why we should listen to them.
Many “experts” in all industries deal with this problem, from Fortune 500 companies to government projects, so it’s no surprise that your agency of choice is liable to the same risk. For example, let’s look at NASA and SpaceX, despite them having rocket scientists and subject matter experts from all fields, they still blow up rockets until their margin of errors goes down to a point where it’s acceptable and they have a successful launch. Fundamentally when it comes to software development, anybody who claims that they can accurately estimate everything from start to end by only having a concept in mind is full of nonsense.
What we can derive from this is that soliciting services is not similar to buying a product; it is similar to investing in one. There are unknowns and you need to have a plan for managing risk, the same way an investor does. The fixed bid option remains a good option for smaller scale projects where cost takes higher precedence over the quality of the result. An example of a good smaller scale project is a decent marketing website in the $50K range.
However if the quality of the result “and getting it right” is the priority, you have to allow the agency to provide an estimate on time & materials (T&M), or a resource allocation model. This way you are more empowered to actually manage your risk and can evaluate what your dollars are actually bringing you, because every dollar will be applied to the end result and not risk wasted overhead costs. This is most often the best option in the agile, competitive world of ever-changing tech that we live in.
Here’s a simple way to determine whether the quality or the cost is more important to you. If you’re requesting a lot of changes, the cost will go up. If you’re not willing to pay for this, then the cost is more important. A simple question we ask our clients is, “are you willing to sacrifice on your budget or timeline?”
In a perfect world, every agency would be transparent and ethical but at a certain point you have to trust that they will deliver on their promises. This risk can be mitigated by getting references, reviewing case studies, making sure their culture and values are aligned with yours, when the sales team comes and pitches make sure that the “A-team” who is going to be working with you be involved in the sales meetings. Also, working with smaller teams instead of large management consultant like Deloitte, Accenture, PwC, and others ensures that the team has empathy towards your problems and is involved from Day 1 of the engagement. Focus on values, and validate your agency of choice. Make sure you trust them and incentivize them to operate in good faith as they almost always will because it’s such a positive situation for them to be in. Not trusting an agency is no reason to complicate things and put your business at risk with a model not suited for your needs.
At Crowdlinker, we do fixed bids on occasion. It’s always when the project is literally something we have done before, where there is nothing in question. It usually does not involve design work on our end, and yes, we inflate the price to accommodate the risk based on our data. In several cases, our clients had gone with a cheaper option elsewhere and months later trusted us with fixing the problems the other agency left, having wasted precious time and money.
Our aim however is to sit on the same side of the table with companies that are looking to bring successful products into the market. The best way we can do that is to act as if we are an in-house team to our client, which from a costing perspective is comparable to having us on payroll. In other words, a resource based allocation model. It’s the best guarantee you can get when it comes to scaling your product growth. It’s important to note, that people are our asset, our know-how is the value add at the end of the day. Just like how you or anybody hires lawyers, accountants, and bankers to take care of your matters.
Hiring staff requires you to have overhead, management, training and experience, all of which could take years to acquire, and a host of other factors you are probably already aware of running a people organization. If you truly want the best results, working with an agency should always be thought of as a temporary extension of your internal team, as opposed to the purchase of a fixed result.
If you want to learn more about how our resource based allocation model works, contact us today.
