Answering the Question of Value

October 2, 2014

We are an Agile shop. Our build process for projects revolves around sprints, typically four-week time boxes with one week for planning, two weeks for development and one week for user acceptance testing. In our experience, four weeks is magic. It’s the perfect amount of time first for planning, then for building and finally for structuring feedback. The process is flexible but organized. It facilitates iteration and provides a clear framework for feedback.
More on that another day. Today let’s talk about invoicing.
Beyond changing our development process to better reflect how we work, we have also adapted our billing practice to better reflect the value we provide. We have been evolving our development process for years, fine-tuning how we work to be more effective. What we have not changed much over the years is our billing model, at least not until about 18 months ago when we recognized a fundamental reality and compelling opportunity.
Choosing a billing model isn’t simply a matter of picking how we are going to get paid. It isn’t just mechanics. The way we bill directly reflects — should directly reflect — the way we create value. Until we get that right, the business side of what we is obstructing our ability to create value, rather than strengthening it. Here's how we used to address billing and how we learned to do it better.

How We Used to Do Things

We used to bill a fixed price for virtually all projects, with time and materials occasionally thrown in for less well defined elements. The process started with thorough scope discovery. Our entire project team contributed to estimation, similar to a process Lullabot outlined in their own blog. We documented all deliverables in a detailed pricing table, each with its own line item. This deliverables list served as a master record for scope. We included a step in each project we called simply “scope review” where we compared new requests against the original scope and created change orders based on the gaps. Clients always knew that step was coming and it provided a consistent framework for addressing scope creep. Simple enough.
But unlike our process, fixed price billing wasn’t very flexible. Even with a built-in step for scope review and adjustment, the approach was rigid. It framed change in unavoidably negative terms for both us and the clients. Change orders are cumbersome. They slow down the process. They are naturally something clients try to avoid, and I don’t blame them. Honestly, we tried just as hard to avoid them, often at the expense of margins. For us fixed pricing didn’t work very well.

Recognizing the Important Question

I know of shops that have great success working purely on a time and materials basis. I know of others strongly opposed to tracking time at all, advocating value pricing. What I came to realize recently is that both approaches to pricing, when done well, are just two different answers to the same important question: “How do you create value?”
The shops I know of who most successfully operate on a time and materials basis are selling their expertise and bandwidth in the form of their time. The essential promise they make has little to do with the final product and everything to do with the simple, clear promise about how they will spend their time. Sure, they have plenty of solid work to show and success stories about what they have built. That just isn’t how they are measuring, or promising, value. They are measuring their value in terms of their time.
Similarly, the shops I know of who successfully operate on value pricing are answering the same question of value, just differently. For them, the product — or more accurately, the idea of the product — is how they are measuring value. The projected impact that the final product will have on a client’s revenue, reputation or influence is the way that these shops measure and bill for their value.
The question is the same: "How do you create value?”

Finding the Right Answer

Over the past year-and-a-half we have shifted our billing practice to better reflect the way we create value. For us, that has led to a third option beyond hourly or fixed fees.
For projects, we choose not to measure our value in terms of the billable hour or our understanding of the final product. Rather, we measure our value by the way we work: four-week Agile sprints. Each sprint focuses on a concrete list of user stories and delivers tested, functional software. During discovery we draft a narrative that outlines the number of sprints we expect a project to require, always recommending at least one sprint for contingency. Sprints can be adjusted, added or removed to address changes — without constantly revisiting scope or issuing change orders.
Sprint pricing reflects our process: flexible but organized. It provides a means for showing a total project price without being rigid, and it naturally accommodates change. For our clients, it reinforces the promise we make about how we create value. For us, it provides clear business targets and a simple, measurable construct for billing the value we create.

Further Reading

Process

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