Contracting's New Era: An AI-Powered Paradigm Shift for Engaging and Paying Service Providers

Today’s issue was guest-authored by MBO Partners’ CTO, Fernando Cardenas

ChatGPT and other large language model (LLM)-based AI technologies have and will continue to experience remarkable adoption because they enable users and organizations to drive successful business outcomes, faster.

I believe this trend will challenge the traditional approach to contractor compensation: moving the norm from trading money for time to trading money for business results.

An Outcomes-based Approach to Projects and Services

As the value of contractor deliverables stays constant while the amount of time to produce deliverables drops, I see businesses switching to an outcome-based approach to compensating third-party vendors for their services.

Imagine a deliverable that used to take eight hours to complete which, with the help of AI tools, now only takes two. A contractor being compensated on a traditional time-and-materials basis would be penalized for implementing new technologies into her workflow and improving her efficiency.

In the past, this kind of change has been iterative - a new software tool here, a better workflow there. AI is disrupting productivity, and that disruption will necessitate a new approach to compensation.

Instead of the standard practice of billing on a per-hour basis, I expect we will see more results- and outcomes-based approaches, where services are paid for based on the objectives achieved, quality of work delivered, and time saved to get the benefit of the result by service providers.

In a world where faster time to market can positively drive cash flow (top-line and/or bottom-line), increases in productivity can create an outsized benefit compared to the old way of doing things.? How much would you pay to complete a critical project sooner, or have an answer to a vexing question this week instead of next month?

As AI adoption reaches critical mass, this shift in billing will cause massive disruptions to professional services firms (particularly those in the legal and consulting fields) and for independent workers. Everything from pricing to service agreements will need to be revisited and (in the case of large enterprises) likely renegotiated.

A New Era of Contracting Terms

Furthermore, disclosures and stipulations regarding the use of AI tools by subcontractors and additional, client-specific limitations on the use of those same tools may eventually become the order of the day.

LLM-based solutions increasingly depend on learning from their input data on a day-to-day basis. Therefore, there is a risk that an enterprise’s proprietary data could be inadvertently incorporated into a public-facing tool through poor subcontractor AI controls.

In the same way that clients often require background checks and information about the people accessing their systems and data, enterprises engaging contractors who employ AI tools will want control and visibility into where and how their data is being used.? Without these controls, inadvertent proprietary data leakage could occur, and competitors stand to benefit from leaked knowledge.? Even more frustrating, the enterprise that lost data might never know it happened given the opacity of LLM’s algorithms.

As more skilled workers become available in the marketplace, I also expect we will see more enterprises employing and limiting use of their data to proprietary LLMs, where they maintain end-to-end control and can enhance their intellectual property.? Companies like Iterate.ai (https://www.iterate.ai/ ) are leading the charge in this arena.

Preparing for What Comes Next

AI tools provide service providers with the opportunity to be more efficient than ever before, resulting in changes to how clients purchase services.

I think it’s crucial for businesses to start thinking now about how they compensate and contract with third-party vendors to remain competitive in a world where AI tools are the norm.

Trending Topics:

• The U.S. Federal Trade Commission (FTC) recently approved a landmark ruling banning noncompete agreements in the U.S.

• The White House has announced the creation of four new Workforce Hubs to ensure U.S. workers have access to jobs created by the U.S. government’s “Investing in America” agenda.

• U.S. workers making less than USD 58,656 will become eligible for overtime pay as the U.S. Department of Labor has increased the Fair Labor Standards Act's (FLSA) annual salary-level threshold from $35,568 to $58,656 as of Jan. 1, 2025. The overtime ruling will also be implemented in two phases.

• Even though white-collar hiring has stalled across the U.S., the labor market continues to remain strong as the national unemployment rate is still below 4%.

• In a CNBC ?survey of over 5,000 U.S. workers, it was discovered that 47% of Gen Z workers feel disengaged in work. This generation of workers were also found to be dissatisfied with their current roles, most of which are entry-level.?