Jason Mlicki (00:01.651)
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 every instantly essentially personalized pricing where people would be giving get would get a different price for the same trip based on who they are and and and when they travel. so my I have a question. So my question, I’m thinking about putting surge pricing in for Rattleback.

I was thinking like I could do like charge like you know ten thousand dollars an hour on Christmas Day. I’m I’m available on Christmas Day and then and then like you know in the middle of summer, maybe it’s like I don’t know, seventy bucks an hour or something, like you know, when everybody’s on vacation, you know, you know, you know, spur demand. What do you think? You think I should think I should give it a try?

Jeff McKay (00:51.636)
I I think you should. I think that’s another brilliant idea of yours. So I think you should roll with it starting tomorrow. Set that up. Yeah. Yeah.

Jason Mlicki (00:53.067)
Ha ha ha

Jason Mlicki (00:59.531)
Starting now. Okay. Maybe maybe I’ll I may maybe I can make an app and you can just request me like, you know, by the minute, just like Uber. How’s that sound?

Jeff McKay (01:09.42)
Yeah. Yeah, I think that sounds good.

Jason Mlicki (01:11.499)
All right, well, we can float this by our guests and see maybe because I I have a hunch that Lori and Kirsten are going to say that’s a terrible idea. So all right, so we have two great guests today. We’re we’re talking about value-based pricing, which is not a subject that we have ever shied away from. We really we love this topic. We’ve talked about it a number of times. So but with us today we have Lori Williams, who is a board advisor and a three-time CEO of multiple IT services firms.

Former senior leader at Apiro, all things come back to the Apiro Mafia. and a lot of her advisory work right now is largely around sort of the the shift, the AI shift occurring in the IT services space. So welcome, Laurie.

Lori (01:53.986)
Thank you. Great to be here.

Jason Mlicki (01:55.953)
And then Kirsten Prost is with us, who is a vice president at Terracera. I to say, Kirsten, you are a former consultant turned service services firm investor at Terracera. So helping I guess, make investments and advice and advise portras would probably be the best way to frame that. Am I right?

Kirsten Prost (02:15.45)
That’s exactly right. Excited to be here and chat about chat about value-based pricing.

Jason Mlicki (02:22.644)
Yeah. Thank you for joining us. and you’ve you both have been doing a lot of on this topic lately, which I really appreciate appreciate. so I I thought we should start with some level setting. I made I may I made a joke about surge surge-based pricing, and and Lori, I think you’ll probably be quick to point this out. Like, what I suggested is actually just an iteration of time and materials-based pricing, and a really bad one, by the way. Like 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.

cycle or something. But time and 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 what’s just kind of level set how you know the the ways you can price in a services firm.

Lori (03:08.545)
Yeah, I think I this is the topic that comes up quite a bit because people throw around the terms, you know, outcome-based pricing, value-based pricing, and 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, is very tactical in many ways. but it also is the way that the majority of services firms have have and still do price.

we’ll talk about that a little bit later, but that’s under a lot of pressure right now because of of just AI and and some of the expectations that customers have and and the the task consolidation, if you will, the AI is bringing to the table. the second category, the second type is what you know you typically call traditional fixed fee, which is I’m gonna come in and do this thing for you. it’s gonna be a fixed cost to you.

And we’re gonna define what the scope is up front. and you’re gonna get defined outputs. you’re selling scope based for a defined price. That is more common and in and I actually think that a lot of the folks today that are saying they’re selling outcome-based pricing are in that category. It’s certainly an evolution beyond time and materials. but the the real kind of nirvana, if you will, is when you can get to outcome-based or or value-based pricing.

And that is r is is I’m selling results. I’m selling you know compression time on the ability to solve a ticket in a call center or cost savings on migration of an infrastructure, but something that really has defined value back to a customer. and I think that is ultimately what people lean towards when they talk about value and outcome base, but it’s it’s not

It is definitely the PhD level of of that type of delivery for most services organizations.

Jason Mlicki (05:07.56)
What’s your sense of the spectrum here in terms of where firms are? I mean, I imagine a lot of firms are at multiple places at the same time, right? They’ve got engagements in every different pricing bucket, but but high level, where do you think the IT services community is in terms of their pricing model, right?

Lori (05:25.505)
I still think the majority are time and materials plus maybe some fixed fee for repeatable offerings. I do see more people leaning in to saying they’re doing outcome-based pricing, but and as we talk about how to implement that as we get into the restless conversation, I think a lot of that is is more marketing than it is actual delivery. I’m gonna cut to the chase right now early in the call.

Jason Mlicki (05:48.298)
Marketing ruins everything.

Jeff McKay (05:49.718)
You gotta love those marketers.

Kirsten Prost (05:52.963)
Sure.

Lori (05:55.138)
Yeah.

Jason Mlicki (05:55.203)
Jeff, we got a duck for cover, buddy.

Jeff McKay (05:57.401)
Yeah. Hey, it all starts with marketing, right?

Lori (05:58.67)
Also I do think it yeah, I I do think Jeff it it varies based on the segment of of services. I think there are certain segments of marketing being one that probably lean itself a bit more towards towards being able to do outcome based. I think the more technical you get from an engineering perspective, I think the harder it gets.

Jason Mlicki (06:19.188)
Feel like there’s a supply and demand curve to all of this in that like 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 and I think it’s my my 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 talented to go around historically.

And there’s really no time materials has no risk, right? I mean, that’s kind of the essence of this, is that there’s little 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?

Lori (07:06.229)
I think that’s exactly right. I mean, I I think time and materials often does get perceived by a customer as sort of the time and materials not to exceed. So it kind of by accident becomes a 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’re talking about surge pricing earlier. I do think that there is surge pricing in in IT services.

Jason Mlicki (07:30.42)
Mm-hmm.

Lori (07:30.546)
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 the fixed fee side. it’s just not quite as I I guess as as direct as you might see with the Uber and and and some indoor da DoorDash in their deliver early fee, which I question whether or not that really does anything. but but yeah, I so I do think that there is some of that in.

Jason Mlicki (08:00.912)
surge pricing the way it’s framed always upsets customers which is why I don’t I I think it’s so ineffective, right? I mean if they find out they’re paying more for the 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. but somehow the the the framework, the frame of reference on Surge seems terrible. So it’s 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. okay, let’s talk about y you pointed out a couple shifts that need to that need to happen. because it’s one thing to say, hey, we’re gonna price this way. It’s another thing to actually do it. Like it’s not like it’s easy to implement. So just talk talk us through that. Like what what would i i if I said as a firm, if I’m struggling with this and I’m we wanna get out of time materials and we really wanna get to the we want to get to the nirvana, as you said.

Jeff McKay (08:32.834)
Well done.

Jason Mlicki (08:59.88)
What do I have to do differently? What what sh what changes do I need to make in my firm to get there?

Lori (09:05.185)
Yeah, I I can talk at the high level and and Kirsten actually has worked on this with one of the portfolio companies and Tresera 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 s actual service offerings, not just, you know, scope definitions with a long list of activities, but

But really starting to formalize the things that you do repeatedly for customers and create an offering around that, create and tools, automations and those pieces. But thinking about it more as a product, I realize I I’ve been doing this a while and productization of services has always been sort of the third rail. I mean, how many pro services companies have disappeared because they try to productize? I think that the that that shift is is is is changed. that

We’ve seen a big shift in the need for product for services companies to productize. that’s the first shift. Projects to product, product like productization. The second is from deliverables to outcomes. Deliverables is, you know, obviously you look at a statement of work, you’ve got a list of things that you’re gonna do for the customer. outcomes are I’m gonna do these things for the customer and they’re gonna 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 better, and you have to invest in those relationships in in in more of a long-term way. And, you know, to be honest, customers have to understand what they want as well and and their business. I mean, there’s definitely more risk in in that because it becomes more subjective. And I think that that’s one of the hardest things to to to measure and to manage is

is the customer actually getting the value that was projected at the beginning of the engagement?

Jeff McKay (11:00.706)
Lori, can I ask you a silly question? And 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 their 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?

Lori (11:48.19)
I think it’s a great question. I think it’s where the risk is, right? I I don’t I don’t believe that every type of project a services company does can be can move to outcome-based pricing. I do think that there are situations when you have so many at bats and a certain solving problem solving, certain, you know, as you go to solve a certain problem that you can create repeatability, IP,

the the ability to understand and kind of lead the customer through the problem in in in very informed ways that allow you to get there. so there are some tangible things. Like for instance, if if I’m able to 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, is, is possible.

I think that there are other situations that it’s just not ever gonna be. They’re too subjective. And so to your question like with HubSpot, that I think the difference with HubSpot is they’re providing a product for many customers with many different scenarios. In the services situation, you are it’s a one-to-one, right? So, yes, you may be coming in with your body of knowledge on 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 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.

Kirsten Prost (13:24.739)
Yeah, I would say just using an example from one of our portfolio companies that’s an implementer of Salesforce’s CRM. So historically I would say the outcome used to be just implement the software and walk away. And as long 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 the their their

doing a percent holdback 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 10, 20, 30% of contract value. So that’s how in a traditional SAS seat-based license model, their tying outcomes

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 and customer success.

Jason Mlicki (14:37.96)
I d another example that came to mind for me, Jeff, was I I think in the AEC industry I’ve heard that some 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 than the agreed upon schedule, then obviously that reduces all the frustration and gridlock of the citizens re citizenry. So you there’s incentives for that. So there’s sort of like that that’s another way that you know. I I I think I

One thing I want to comment on too is that I don’t know if it’s I don’t think that it’s necessar getting to outcomes based pricing isn’t necessarily guaranteeing the outcome, right? It’s i sometimes it’s just being incented to help achieve the outcome and and being rewarded if the outcome occurs. am I right about that, Laurie, or am I or Kirk Kirsten, or am I saying that wrong?

Kirsten Prost (15:30.649)
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 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. The the outcome is just not always as quantifiable numerically to the customer. So I think that’s exactly right, Jason.

Jason Mlicki (16:31.198)
Well let let’s lean into that, Kirsten. Let’s lean into the what makes this hard. I I think that’s important, you know, because I I do think that’s a great one. It’s a good example where it’s like, you know, if you were a cash cost reduction firm, it’s very clear what the what the value to be created is. It’s 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 is that? What’s the val how do you drive the value there? So 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? Like what what makes it hard?

Lori (17:09.869)
think when you think about actually putting this and implementing this and putting operationalizing it there’s sort of five categories of things that I think make it difficult. The first is scoping. you know scoping is sort of a dark art and in services anyway and I think that it 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 is expecting and how you’re going 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 have to under you really have to build a strong relationship with your customer. And you know the one and done projects that I think are hard to do this way. Customers that you have a long-term relationship, you understand their environment, 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 it 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 then you’re gonna 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 a a project and a services firm, when it’s all people, every time the project is done by a different group of people, it’s gonna be d done differently, even if the problem is the same to start with. So you really wanna look for things that you can create repeatable IP to and for.

that will allow you to protect your own risk and and and also automate things, move things along faster. and then finally that we already talked about this with the product mindset. this is all about how you manage your customer through the prop 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 gonna be able to do this. So these are five of the things.

Jason Mlicki (19:12.48)
yeah.

Lori (19:28.954)
Kirsten, I know that you’ve been working with a couple of Tercera companies and have seen some of their challenges as well.

Kirsten Prost (19:34.851)
Yeah, maybe

One comment from the cheap seats being an investor, not an operator. So LLMs, I think, have made it easy for everyone to become an expert at the surface 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.

With a deck sometimes that looks better than the person can present it in the room. And there’s 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.

Jason Mlicki (20:48.99)
faux experts, I called them when it when AI first emerged. You just have people showing up as an expert on anything because you could you 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 I’m not so sure. I mean, I think it’s pretty hard. so Jeff, I cut you off. What were you gonna say?

Jeff McKay (21:09.426)
No, I d it I was smirking. I wasn’t gonna say anything. Yeah. because that is the risk. you can’t get out over your skis. I love that example. Thank you, Kirsten.

Lori (21:15.975)
You’ve never seen that happen, have you? Yeah.

Kirsten Prost (21:29.657)
Yeah, and I think to pick on this scoping point too, we looked at a few years ago a full lifecycle 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. 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 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 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.

Lori (22:53.789)
That’s exactly right. One of the things I also have seen work in these situations is doing a a scope gate in a project. So even if you in the sales process maybe do a bit of abbreviated scoping initiative and in a and come to terms on what to do, get a contract in place, the very first gate in a project in this in a fixed fee or outcome based project should be a a scope gate to confirm, 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.

Jeff McKay (23:31.702)
And do you find that clients are cool with that?

Lori (23:36.098)
With this scope gate, I think that when it’s presented properly, yes, because it actually protects them as as much as it protects the the services firm. I do think that that it does have to be explained though. I mean, it’s not intended to be, you know, a way of of getting out of commitments that have been made. It’s it’s really more a way of just clarifying, but it all goes back to how it’s position.

Jeff McKay (24:02.37)
Yeah. And it goes back and reinforces your important point about how the sales process and client relationships need to be deep.

Lori (24:14.103)
need to be deep and the the continuity between sales and delivery is paramount. you which in very large services companies I think is hard. but if you don’t have someone that was involved in the selling process also involved in some way in the delivery process, you’re gonna end up with a bunch of of misinterpreted expectations.

Kirsten Prost (24:36.387)
Yeah, maybe that’s Lori, you you bring up an interesting point there and curious, Lori, 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 two 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 our portfolio companies, but curious if anybody else has seen that.

Jeff McKay (25:32.365)
Yeah, we did a episode related to this subject about the evolving thinker seller doer model and how that’s gonna be the new AI equipped person. and we we it was Tony Stark of Iron Man Fame that we held out as kind of the the what that looks like.

For them. But I’m so I’m seeing that a lot, right? And the smaller firms have an advantage in that because so much of them are kind of founder-led and they they they get all the dimensions of 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.

Lori (26:24.833)
Yeah, I think, you know, one of the hot trends right now is to talk about FDEs, which of course came from the Pal Palantir model and really pulling forward the the the implementation team, if you will, this product company, but pulling forward the implementation team all throughout the the lifecycle of the customer. You know, I 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 I think that that model kind of reversing a little bit in the services space, but the you know, I’ve been a part and led a number of 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.

Jason Mlicki (27:15.972)
okay, what’s but well let’s let’s go there because you’re kind of you’re leading us into into what it takes to be successful here. So so so really one of those things could be bringing delivery forward, making sure that delivery is involved in the sale more. I mean, I I I was gonna add to that some good advice I got years ago, which is very difficult to implement in a in a in a very small firm, is to separate pricing from sales, basically. So

Don’t let the person that’s the front, the sales engineer, the lead person trying to sell the deal establish the price because they’re incented essentially to underprice because they want to get a deal done, and or to just misprice because they’re there or quite frankly to rush price, right? You know, you talked about scope gates. Well, if you if you’re you’re 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 but I’m stealing the fund. So talk to us. What what what else does it take to be successful, to make this work? What what are some some keys to success? What what do you think firms need to do?

Lori (28:26.559)
Yeah, you’re starting with an important one, which is the it’s the fundamentals. you know, I one you’re talking about kind of 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 has as delivered margin. You can watch the leakage there and figure out kind of it’s a lot easier to manage. again, I’m speaking more from from a a services company perspective, not a customer perspective, but

I do think that allows you to have fundamentals in place. but it the fundamentals in outcome-based pricing do they’re stressed a little bit more. I mean, you’ve got to have you’re carrying more risk. And so you’ve gotta have really good portfolio level visibility in what’s happening in your projects. your finance team gets more stressed because revenue forecasting is 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,

I’ve got these kickers based on performance. How do you forecast for that? Right. And so some of the boring things, the operational things, actually that not boring to me, these are things that I really enjoy doing, but the some of those things do become become a lot more important and you have to rethink them. I think so. Fundamentals are one. I think I already talked a lot about offering frameworks and repeatability and the tooling behind that, not just making it a you know markitecture 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 we’re going to do this thing for multiple customers. Let’s form some automation. So 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 in enablement is just so critical. This you can’t just, you know, wallpaper over I’m now gonna be all outcome based. everybody in your organization is impacted in this, all the way from your salespeople, you the way you market sale, to the way you you manage customers and the way you build deliverables, the way your your your

Lori (30:48.755)
you know, consultants, your hands on consultants are engaged. I’ll even the back office with with finance and people teams and others. And this is it’s a significant change in organization. So I think change in enablement is is really key.

Jason Mlicki (31:03.144)
That one really hit home for me because I w the first time I ever proposed an outcome based pricing engagement, you know, where it was, and 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 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 do 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? Like I have no idea what I’m supposed to put into this and what I’m supposed to stop. I’m like, well 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 had no, I had I, you I I I was classic fat you know leader, right? Like, sell it and figure it out later. You know, like and so anyway, that one hit home for me. And I I do think that

You talked about this earlier, this idea that like your your project managers or your client services leads, they’re accustomed to managing a scope of work, but not accustomed to managing an outcome. And they don’t know how to do that.

Lori (32:10.349)
And leading the customer to the outcome because sometimes the issues are within the customer environment. you know, I I remember a number of years ago, I was running a services organization and a company and we were deploying we we were deploying an an imaging solution back in the day when people did that. And it

We had set these expectations for adoption and it wasn’t getting adopted. And and you know, and it 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. If 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 understanding incentives. Like I was talking to an organization the other day about and this get kind of, you know, leading into to some of the pitfalls, but they’re incenting people in utilization. Well

You’re not real you you you end up with lost productivity when you incent on on only on utilization. And so I I do think you really have to peel back the the the layer of the onions a bit to understand what’s going on underneath underneath the cover.

Jason Mlicki (33:43.255)
Jeff, pause for a sec. Thirty-three minutes. Do we have time to talk about the pitfalls? Can we? Okay. Let’s let’s keep going then, ’cause w w why don’t you why don’t you tear up off that, Jeff? You you’re probably better at picking on utilization than I am.

Yeah. Yeah, yeah. Not not a fan, but anyway, okay.

Lori (34:05.367)
Such an emotional topic.

Jeff McKay (34:13.518)
I’m I’m sorry, I was writing down. What did you say, Jason?

Jason Mlicki (34:16.338)
I want you to I want you to tear up to to to lead us into the reasons firms fail.

Jeff McKay (34:21.878)
Okay. All right.

Jason Mlicki (34:23.238)
Off of the utilization comment, so

Jeff McKay (34:26.666)
Okay.

So Laurie, utilizations, holy grail of professional services. and you’re saying get rid of it, right?

Lori (34:41.069)
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 organization is solely incented on utilization, whether that be group or individual, you are gonna have lost productivity gains because i there’s no incentive for people to I you know, certainly they will have the goodness of their heart, but there’s no ins real incentive for people to

Identify productivity gains and the engagements that they do. And so I think you have to look at something beyond utilization. You know, of course, margin as delivered margin on 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 incentive.

Jeff McKay (35:29.602)
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 that get in the way of of being successful here?

Lori (35:50.382)
Yeah, I think there are a couple. I already talked about the project manager shift in they they need to think beyond project reporting and project statusing and really be able to lead customers through the problems you’re trying to solve. I one of the things I’m hearing a lot right now, and I talked to a couple of companies last week that are talking about, you know, 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. when customers want their problems solved, they

you know, you can only control what your team is doing. You can’t necessarily control the environment within the customer or their expectations. And so I think that’s a really delicate one to work through. even if 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 is a is a real real trick. And then ultimately d we did talk about the change issues as well. And

You Kirsten, I know you’ve seen this with one of the the Tresera portfolio companies that has gone I think they’re eighty very high percentage of outcome based pricing now. curious if there were other things that that you’ve seen with them.

Kirsten Prost (37:27.181)
Yeah, 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 fix 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 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 one of the third pieces that I think is really interesting on the IP front is standard language in their SOWs allows them to substitute human over. sorry. Can you s

Lori (38:36.429)
I think we lost her.

Jason Mlicki (38:39.198)
We lost you for a sec, so

Lori (38:39.391)
Yeah, we we lost you on the word standard.

Kirsten Prost (38:42.777)
Okay, sorry. and then the 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 move their overall gross margins up materially and greatly improve the profitability of the company. So this AI adoption and shift to outcome basic and fixed fee is not going to be the death of the organization. It’s actually a a tailwind which is awesome to see.

Jason Mlicki (39:41.107)
Yeah, I get the sense like in the in my head, I I’m trying to visualize this, but but I feel like when you think about a time of materials model, there’s there’s sort of a ceiling usually on the margin. and that ceiling 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. And so you have to it seems to me that

Part of the shift comes down to sort of a 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 am I describing that well or am I missing the mark?

Lori (40:31.809)
think you’re dead on. It it does come from the risk perspective come down to portfolio management. So understanding that you’re gonna, just like your investment portfolio, you’re gonna have some wins and you’re gonna have some losses and you need to manage that accordingly. but I also think the the second thing around that is theoretically you have a lot more flexibility in how you deliver. you, you know, don’t necessarily have to have exactly the right the same number of people to to Kirsten’s point.

it gives you carte blanche to to use IP, assuming that it’s, you know, obviously vetted from a compliance standpoint, but all you have more levers at your disposal to deliver it, as opposed to here’s my list of exactly who’s going to be involved in the project and exactly how many hours. And so I think when you combine the the two pieces, it it does 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 have struggle with that level of visibility in their portfolio.

Jason Mlicki (41:35.4)
Yeah, that makes sense. All right, two final questions for each of you. all right, so what’s your one key piece of advice? You know, so if if I’m a firm leader and I’m trying to make this shift, we’ve been selling T and forever and we wanna get to outcomes based pricing, what what’s the what’s the what’s your best advice? One key thing.

Kirsten Prost (41:57.126)
Lori, do you want to go to go? Okay. so Jason, you you joked in Jess at the beginning of the podcast about surge pricing for for 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.

Lori (41:57.525)
Kirsten, I’ll let you go. No, I’ll let you go first.

Jason Mlicki (42:05.812)
Yeah.

Kirsten Prost (42:25.967)
go back to the drawing board and try something new. We’re most firms are in the experimentation process and the worst thing you can do is just nothing. So start somewhere.

Jason Mlicki (42:36.884)
Great advice.

Lori (42:37.217)
Yeah, and I’ll tee off of that and then and add one more thing. But 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 the things that are most predictable. the 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 all put all kind of buzz out there in in the market and and talk about how you’re doing it in in a in a really you know exciting way. But if you are not preparing your delivery and operational organization to fulfill that way, you’re gonna end up with a not great experience.

Jason Mlicki (43:29.236)
Yeah, that’s fabulous advice. Both of those are are I think are great advice. Okay, so final question, much simpler. Jeff always asks this question. How can listeners reach you if they want to reach you?

Lori (43:44.737)
You can hit me on LinkedIn, I’m Laurie Williams. easy to find there, or email at Laurie L Williams at gmail dot com.

Kirsten Prost (43:54.145)
And you can find me on LinkedIn. I think I’m the only Kirsten roast.

Jason Mlicki (43:59.686)
nice.

Lori (44:02.721)
That’s a great fact.

Jason Mlicki (44:04.266)
Jeff McKay (44:05.015)
Yeah.

Jason Mlicki (44:08.67)
Jeff, can you close us out? I’m getting a lot of background noise. I’m gonna I wanna go to mute so in case you have to in case it picks up the mic picks it up.

Jeff McKay (44:15.512)
Well, this has been excellent. We’ve 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 to talk about it is over. The time to act is now.

Lori (45:10.571)
Agreed.

Jason Mlicki (45:11.583)
Yeah, I loved it. Thank you so much for coming on. It was great. It was great. All right. Thanks.

Lori (45:14.967)
Thanks for having us. A lot of fun.

Kirsten Prost (45:17.807)
Thank you.