The benefits of a ‘fee for service’ business model are many.  Product development consultancies meet a real need with established companies wanting to break the mold and innovate, as well as with young firms who need significant expertise early in their existence, but don’t have the resources or time to scale up internally.

I’ve compiled a partial list of both the benefits and drawbacks of working with a ‘fee for service’ business partner.  I’d love to hear other’s thoughts and experiences with these types of business models.  Send me a note with your ideas when you have a chance!

The benefits of working with a ‘fee for service’ consulting firm:

• A company who contracts out development work does not need to carry forward the cost of highly experienced staff after a program is complete.  Costs are variable allowing a business to refocus its scarce resources on the next area(s) needing investment (operations, marketing, sales etc).   This is especially important for venture funded businesses which have limited resources and as a result need to manage their burn rate of investor dollars.
• Speed to market – there is no better way to get to market quicker than by hiring an experienced product development firm who has a good track record of designing products in your chosen market.  An experienced consultancy should have the ability to quickly cut through all the ambient noise and get to the heart of a problem quickly.
• Consultancies offer the ability to tackle perplexing problems with a multidisciplinary team of experienced experts. If a company has done its homework, it will determine the skill sets it needs to commercialize its novel technology.  It will seek to understand if the consultancy it plans on working with has solved similar user experience and technical problems in the past.
• A company can access exactly the type of research, design and engineering disciplines they need….for a defined period of time.  Experts in user research, industrial design, engineering, software/firmware development, optics and physics can enter and exit a program as needed.
• All intellectual property created during the course of a development program is the property of the customer.  No sharing in downstream revenue, thus, no dilution of a company’s worth.  This is very important for young companies to consider, especially those who have not yet defined a clear valuation for their business.

The downside to ‘fee for service’ business models:

There are little to no ongoing incentives for a product development consulting firm to support its customer….and their products….after the device enters regular production (after a proper manufacturing transfer takes place and production quality is stable). At this point, the customer is largely on their own and they need to quickly scale up their business operation in order to meet the needs of market demand.  The way to offset this risk and keep the development firm ‘in the game’, is to find a development partner who is tied in some way to the manufacture of your product (either through their own manufacturing facility or by contracting to them to some type of a sustaining engineering contract).

Acquired knowledge that was uncovered/developed during the course of a program does not reside within the customer’s business.  The consultancy continues to grow in product/technology knowledge and the customer does not retain the ‘lions share’ of this type of information.  Of course the best way to overcome the knowledge gap is to continue to engage the consultancy on future assignments.

Good working relationships and positive team dynamics that were forged during a development effort are lost after the program is complete.  Project teams that were formed, working relationships and dependencies that were created, methodologies that were forged for solving problems and sifting through priorities all end when a project is complete.