Upfront Payments Are Dead: Long Live Outcome-Based Software Development

Then, just a few months later, the project is complete, yet the finished product is well below your expectations. What do you do? Pay more for “additional extras?” Try to rectify the issues on your own? Turn to a new team to develop the software you’ve already paid for?

Project Management Institute (PMI) Pulse of the Profession 2024 data confirms that poor cost performance is the primary reason for project failure. So if you’re in this situation, you’re not alone.

Fortunately, there’s a simple way to avoid this horror scenario: outcome-based software development. But what is it? And how can it deliver better results while controlling costs? Let’s take a look.

What Is Outcome-Based Software Development?

In the old days, you’d agree on the project scope, and the software developers would provide you with a quote. But as you may know, the road to development success can take quite a few twists and turns. That competitive quote you were given at the start of the process is now nowhere near the final bill you’re facing.

We’ve seen this scenario many times at Digineat, which is why we offer an outcome-based solution. You don’t pay for our time – you pay for pre-agreed outcomes.

For example, if your new business app cuts staffing costs by a certain amount, we initiate the charge. Whether the metric is sales or user satisfaction, you pay for the results, not the work itself.

Save for the ability to pay for software development based on results, this approach offers some seriously impressive benefits. Here are just a few of them.

Developers Are Incentivized to Deliver Results

Both fixed-price and hourly software development models offer few natural incentives to deliver quality and cost-effectiveness.

If you have a fixed-price agreement in place, the developer is incentivized to do everything possible to protect their profit margin. And in the case of the hourly arrangement, keeping the meter running makes perfect sense.

Neither of these approaches places you in control of the software development process. That’s why we prefer a third option.

But imagine a scenario in which a large percentage of the developer’s compensation is based on results. Maybe your goal is increased revenue. Perhaps you want software that can cut your business’s operating expenses.

With outcome-based software development, you only pay the agreed amounts when the results are in the bag!

No More Scope Creep

As much as we’d love one, software development doesn’t involve a crystal ball. As developers, we face a myriad of challenges and obstacles once we begin the process.

Yes, we define every screen, API endpoint, and edge case – but no one can be sure the initial scope is the right one until the product is in the hands of the user.

And what happens if the market shifts during the development process? The original vision may have been perfect at the time, but it may be obsolete at the time of launch.

Every pivot triggers a painful change-request process – with the potential for legal back-and-forth and extra invoices.

With outcome-based development, the scope is a little more generalized; it touches on specific features but remains primarily focused on the required outcomes.

The scope of every software development project is subject to regular change. It’s only right that the agreement between you and the developer does the same.

Predictable Budgets That Make Sense

Let’s get this out of the way now: There’s no such thing as a fixed-price promise in software development. Change requests are inevitable. And when they land on your desk, the overall cost of your project creeps up.

In our experience, changing course is an inevitable part of the process. In fact, it’s advantageous, as altering course when required empowers us to deliver the best possible solution.

Rather than breaking the bank with a large upfront payment, outcome-based development allows you to fund your project through a series of short “runways.”

The developer and the client agree on short development phases in advance – each with a maximum spend. When the results of each “runway” are evident, the money is released. So, you don’t have to pay for the next phase of the project until you’re happy with the last.

A 2023 study by the Cutter Consortium analyzed more than 500 software contracts. It found that outcome-based and stage-gated models reduced average cost overruns by 67% compared to fixed-price contracts. The speed of the process was increased by an average of 20%.

Focused on ROI – Not Just Features

If your software developer is throwing more and more features at your project, ask yourself why.

Do they enhance the user experience or deliver your objectives? Features for the sake of features increase software development pricing and prolong lead times – without necessarily delivering value.

Think about what pays the bills: sales, savings, efficiencies, and enhanced user experience. Don’t think in terms of features; think in terms of the return each feature delivers.

A 2023 study from the IEEE/ACM International Conference on Automated Software Engineering exemplifies the point. The take-home finding? Outcome-oriented prioritization adopted by agile software development teams delivers up to 35% more business value than feature-based alternatives.

Faster Iteration – Learning Is Part of the Journey

Fixed-price projects can end up costing way more than the initial quote. It’s just the nature of the beast. Every project involves a learning process. As developers, we can’t predict every change to market conditions or foresee what users will say about the launched product.

Here’s an example to think about. You’ve paid a fixed price for a fintech software solution, but your users tell you that they prefer to use the software on the go, rather than at their desk. You now have to ask the developer for changes. But that work wasn’t in the initial scope. A confrontation brews.

But with outcome-based pricing, the goal is locked. In this instance, the goal may have been to maximize sign-ups or customer experience. How you get there remains open. If testing demonstrates that users aren’t entirely happy, the development team can pivot immediately.

Instead of improving every quarter, your software takes a huge leap forward every week. And that’s a recipe for cost-effective software development.

Talk to the Experts About Outcome-Based Software Development

State-of-the-art software development tools can only get you so far. Without the right approach to pricing, your project may never hit the heights you know it’s capable of.

Talk to our experienced team about outcome-based software development methods, and make sure every penny you spend delivers value.