What is time & material model and when it applies
A simple definition of “Time & Material” Model is that the purchaser exchange “material” with a service provider’s certain quantity of “daily rate”. The material could be a bunch of document which contains advanced management process, intellectual property, a piece of software or one side of well painted wall. The daily rate could vary from £20 to £8000 depends on how precious of the service.
This business model applies when scope, specification and implementation plans of a project are not easy to define at the outset, Time & Material Model becomes an attractive option. Under this model, you pay as per use of the hourly development efforts, making it the most flexible of the three models. [From http://www.continuum-systems.com/price-timeandmaterial.htm
]. Time & Material business model is developed for long-term projects, where the total effort cannot be estimated in advance and the scope of work can vary during the implementation. [From: http://www.qarea.com/outsourcing-services/pda-time-and-material.php
If compared with Fixed price model, which is ideal for projects with a detailed technical specification, Time&Material model is the best for scalable projects. This business model is highly efficient in case the project is hard to predict in terms of time and creative effort and in case the development process needs control and improvement upon each iteration. Thus, it allows for cancellation at virtually any stage of the development project[From: http://www.qarea.com/outsourcing-services/pda-time-and-material.php
Corporation old procurement process
So Fixed price model is suitable for purchasing of a physical product or something that has fixed scope or feature. While Time & material model is suitable for purchasing of service or something without explicit feature during the contract negotiation stage. If you have a look at most of the corporation procurement process it is not difficult for you to find comprehensive and decent process for fixed price procurement which is for purchasing of a physical facility, a car or PCs. The problem comes along when corporations plan to purchase service such as consulting service or customized software. As they do not have a process that specialized service purchasing, they tended to use the existing one. So things started going completely wrong.
They just do not fit!
Think of that you plan to spend money on something which you have no idea what it is or you only know part of it. How could you decide how much you need pay for it. Decision should only be made with necessary concrete information you require. Clearly, there is no enough information for anyone to make a correct decision. Old software procurement model aligns with the old business model.
Low technology –> Business not change so much –> Fix scope/feature –> Fixed price model –> Waterfall software development model
I believe that you know how fast and unbelievable the technology and business grow. It is almost not possible to oversee and predict how your business look like in 24 months of time. So business requires a suitable model for software development service
High technology –> Business change very fast –> Scope can not be fixed or predicted –> Time & material model –> Agile, adaptive software development model
Change is inevitable
The world is not odd. Software development industry has grown from design and development of fixed feature product into customized enterprise application in order to provide better service and survive. So it is much more than just producing a physical product. It is service now. If you disagree, I will encourage you to give me one single example that there was no change of requirement in the development of any large scale enterprise application. I bet you can not. Requirement change is inevitable because business is changing. If your business does not change but others does, it is clear that you won’t be able to survive. Also there is no way to predict or imagine the change of requirement. So you need a more flexible and adaptive business model for this kind of procurement.
Probably you have already figure out the solution. Let me recap
- Upgrade your corporation procurement guideline and process with Time & material model of service purchasing in it.
- Develop or recruit professionals to manage Time & material project. It does require special expertise.
- The key of applying this model is risk management and contractor performance management
If you still use the old procurement model for service purchasing, you will definitely experience argument, displeasure and waste of investment. So why not change it?