All about project-based tech services

Let's take a deep dive into one of the tech consulting/services business models we discussed previously. Namely, the Agency B.

Here's a refresher: You are building an agency that doesn't do Resource Augmentation or Placement. You bid on projects, you execute, and then you do a retainer contract to provide on-going maintenance or not, depending on the nature of the project.

Your profit, of course, is in your pricing model. What options do you have for pricing?

1. Time & Materials (T&M): You charge per hour and the materials involved (subscriptions for tools, cloud charges etc.).
2. Fixed Price (FP): You charge a fixed price for the entire project. Usually done after a thorough analysis of the work involved. Cutting "Scope Creep" becomes a priority.
3. FP + T&M: You charge fixed price for the MVP or first phase or delivery, then for any addition to the scope, you charge by time & materials.

If you're doing T&M, you embed your profit into your hourly rate. That is, if you have 3 resources working on a project and you're paying each, say, $15/hr, then your agency rate should be somewhat above the cumulative $45/hr (most agencies charge in the range $50-150/hr in Pakistan).

FP is a bit harder to nail down because technical projects nearly always blow up -- the requirements are never really fixed, and even when they are, Murphy's Law applies. A good way to do reasonable FP is to have lengthy discussions with the client at the start of the project to fix the scope and then sign an agreement which says nothing more will be added to the scope without re-negotiation.

If you do FP, your profit is in how fast and durably you can execute. Of course, FP itself has to come from some fundamental calculation of resources involved, then some buffer, and then ... not profit, because at that point that singular amount could get big enough to dissuade the client from engaging further ($50/hr isn't as daunting as $8000/mo -- or better known as "Scope Insensitivity").

There are several arguments for and against each pricing model. For example, the argument against hourly billing might be that it incentivizes you to be lazy. And for an agency, it's an added problem because if you have two hires each at $15/hr, the less productive of the two is more profitable for you. Dilemma.

The argument against FP is obvious: Murphy's Law.

The choice for which pricing model to go with depends on your past experience, the nature of the project, and your team. If you have done similar work in the past, then FP might make more sense, since you can be confident in your ability to deliver fast. But at the same time, if you're charging hourly for a project you have no experience with, there's the danger of over-charging the client which can really break the trust. Whatever the decision, you must know the pros and cons and proceed accordingly.

So, how big is the upside here?

That's a tricky question. Because first of all, there isn't any obvious reason for outsourcing your tech to a third-party (you). In the long run, in-house developers are always more flexible, cheaper, and more productive. So, why would anyone even give you work?

Well, as it happens, certain industries are likely to rely on third parties, for example, public health sector, public transport, or any industry that lacks the infrastructure to have an R&D or software team in-house. Moreover, some startups or SMEs may also prefer to outsource their tech completely if they are not planning to have an in-house team.

For companies or enterprises that can afford an in-house team, your only entry point is as specialists who can provide consultation on something very specific. But be prepared to sign lengthy NDAs and Confidentiality agreements because nobody likes their work stolen.

As you can tell, the Business Development for this kind of agency has a very narrow domain to play in. You have to qualify the leads by asking not just "do they need my services?" but also "are they okay with outsourcing?".

Regardless of all that, there have been cases of successful agencies that scaled to 7-digits in a couple of years with this model. However, be advised that landing enterprise level projects with this model only works for certain industries and you might not be able to get your foot in the door without some heavy networking or connections (that's actually always true for enterprises but the friction is a bit higher here).

Here's a criterion for why you should consider this kind of business model for your agency:

1. You specialize in a niche.
2. You have a lot of experience and know-how of the niche.
3. You want to tie your profit to your branding and proprietary technology and/or processes. Not to the number of heads in your company.
4. You want to build productized services around the most common pain points in your niche (this also applies for the other business model but here it's a bit more likely).
5. You have social currency with your "Ideal Customer Profiles" a.k.a they trust you.
6. Your main source of leads is freelance networks like Fiverr or Upwork where this model already applies.

If you're in Pakistan though, this business model maybe a tad bit harder to implement due to the trust deficit. Public institutions in Pakistan are notorious for underpaying and unless you already have pre-built solutions for their needs, it might not be a profitable transaction for you to begin with (shoutout to that one dude in the Passport Office pitching end-to-end automation to the Assistant Director -- I don't know who you are, but I applaud your courage).

If you're pitching to public institutions abroad, well, good luck trying to convince them. Your most likely leads, outside of the freelance networks, are startups or SMEs that have been recently funded and are headed by business minded people who don't have an in-house team and most likely don't want to manage one because they don't know anything about it.

Anyways, these are my two rupees (cent is a luxury) about this model. Hope you found my findings (lol) useful.