The Product Model in Outsourcing
By Marty Cagan and Josh Kerievsky
Marty’s Note:
This article continues the series probing the edges of the product model. In the last article we discussed what aspects of the product model apply to government agencies. Here, we explore the product model as it applies to outsourcing agencies.
My co-author for this article is Josh Kerievsky, the author of Joy of Agility, and the founder of Industrial Logic, which has provided various forms of delivery coaching and product engineering for many years.
Overview
Many people are likely very surprised to see me (Marty) write this article. That’s because it is no secret that I strongly encourage every company that is moving to the product model to stop outsourcing their core competencies. I have said countless times that literally the single most important thing are your empowered engineers, and that we need missionaries not mercenaries on our product teams.
So what gives?
The first thing to realize is that most of the time, these outsourcing agencies are not providing their services to companies in the product model. They are providing their services to just about everyone else.
There are countless companies that do not view technology as the core enabler of their business (whether they should or not is a different conversation), yet they absolutely recognize that they need technology-based solutions to run their business.
These companies face the classic build or buy decision for these systems, and when they know they lack the capabilities in-house, they look elsewhere for help. If you’ve ever wondered how Accenture could have USD $64B in 2023 revenue (and a market cap of over USD $200B), this is how.
The second thing to realize is that many of these outsourcing agencies have built real businesses building custom solutions for their clients, yet they see the differences in valuations between a professional services business, and a commercial product business, which causes many of these outsourcing agencies to at least consider, in addition to their client work, building commercial products.1
We have many friends at these outsourcing companies, and have given talks at many of these firms, and have even helped a few of them transform to the product model to increase their chances of success in building commercial products.
Helping an outsourcing agency transform to a commercial product company could be a potential future article, but that’s not what this article is about.2
The topic of this article is when an outsourcing company simply wants to do a better job in developing and delivering effective custom solutions for their clients.
Most of these firms genuinely want to provide the best service possible for their clients. But it’s a very tough business. Just like in feature team companies, the feature team could be very effective in delivering the output they’re asked to deliver, but if the client doesn’t get the results they had hoped for, they are not likely to be very happy.
By far, the single biggest complaint we hear from my friends working in outsourcing agencies is that their clients so often believe they know the specific solution they need, and they’re simply looking for someone to (quickly) build that.
If the outsourcing agency pushes back at all, and suggests that this solution might not work as well as the client hopes, all too often they are told “if you don’t want this contract, no problem as a dozen other firms will be happy to build what we tell them to.”
This is why the most successful of the outsourcing agencies necessarily get quite good at clearly spelling out the terms of the contract, and what will be delivered and when, and who will pay for any changes either during the project or after.
This is also why so few outsourcing firms will sign up to deliver outcomes. It’s not that they don’t want to. But if you’re contractually committed to delivering an outcome, yet you are also committed to delivering a specific solution, then you are almost certainly set up for failure.
All that said, there are outsourcing firms that have managed to apply the product model to fundamentally change these dynamics, and to truly and deeply partner with their clients to develop effective solutions and deliver real business results.
In this article, we want to discuss the unique challenges that outsourcing agencies face, and the techniques that can help you succeed.
The Core Challenges of Outsourcing
Trust and Client Collaboration
At the heart of the challenge is that when a client engages with a firm, they are usually looking for a specific solution. Maybe they are developing a new product, redesigning an app, or building a specific integration between key systems.
Just as stakeholders in a product company so often have specific solutions and roadmaps in mind, the same is true when a client seeks an outsourcing partner.
The issue of trust will show up in nearly every point we discuss below, but it starts with changing how the client and the outsourcing firm agree to work together.
The Statement of Work
In traditional client-outsourcer relationships, the client describes the work they need done in some form of detailed specification, and then they’re looking for a fixed price in order to build this.3
But the root of so many failed outsourcing projects is the misguided belief that this is how you get a good solution. Product model companies understand the inconvenient truth about product. Steve Jobs also discussed this “disease” in his must-watch Lost Interview.
There are countless horror stories of companies that paid outsourcing firms millions only to be disappointed in what they got in return. The client almost always blames the outsourcer, but in my experience, the fault is almost always with the client. Most of these horror stories do not become public because nobody looks good. But occasionally, especially when litigation is involved, the details become very public, as was the case with Hertz and Accenture.
So the first challenge you’ll need to overcome if you wish to apply the product model in an outsourcing context is that you need to instead frame your work as a collaboration designed to discover and deliver an effective solution that achieves the desired outcome.
The client does need to clearly articulate the problem(s) they need solved, and how success is measured. And then the client-outsourcer relationship becomes a very intense collaboration where the product team works to discover an effective solution, and then deliver that solution.
This form of engagement is essentially a time-and-materials contract. The client is in effect renting a product team, and every week, month, quarter, and year the client is able to assess the progress over the past period. Is the product team making good progress towards the necessary outcome? Is it time now to move the focus to an adjacent problem? If the client sees good progress, the contract usually continues. If not, perhaps the product is as good as it’s likely to get, or perhaps it’s time for a different team at a different outsourcing company, or maybe it’s time to bring this work in-house.
Realize that it’s common for finance people on the client side (e.g. procurement/purchasing staff) to initially resist such an arrangement. And it’s easy to understand why despite the track record, so many clients continue to believe they know what needs to be built.
But overcoming this resistance, and reframing the work, is the prerequisite to using the product model.
The Product Manager Role
Most of the time, the client is perfectly willing to delegate the responsibility for engineering to an outsourcing firm. They see an obvious need for help with the skills they believe they lack in-house.
The real issue is the product manager role.
In most cases, the client believes they are effectively the product manager (even if they don’t use that term or know what it means).
Most outsourcing firms do have someone like an engagement manager, but that role is very much a project manager role (analogous to a feature-team product manager).
Yet in order to work in the product model, the outsourcing firm needs the new competency which is an empowered product team product manager.
This role is essential, even if the client insists that they have the necessary product management staff. And including a true empowered product manager is just the start.
The next issue is that normally it takes around three months for an empowered product manager to come up to speed on a new product. Learning about (the client’s) users and customers, learning about (the client’s) data, learning about (the client’s) business viability constraints, and learning about (the client’s) market and industry.
From the client perspective, a three-month waiting period in order to get started is not very appealing, especially when they can see deliverables from engineers and designers coming almost immediately.
Which is why when applying the product model to outsourcing agencies, one of the key differences is that the product manager will need to pair up very closely with the client in order to effectively serve the role that’s needed.
Successful product managers in this context are skilled at this collaboration. They embrace the client’s problems to be solved (even if she sees other problems that potentially show even more promise). They are good about admitting what they don’t know, and knowing what they can’t know.
The dynamic is very much like a startup where there is a strong visionary founder, but that founder does not have the experience or time to serve as the product manager of the product team, so instead the product manager needs to collaborate closely with the founder to make sure the team is successfully delivering on the founder’s goals.
It’s especially important to point out that the product manager will need access to the client’s users, access to the client’s data on that usage, and access to the client’s various stakeholders (which is usually done through the client). Another example of the necessary trust.
The Product Design Role
Product design is of course absolutely critical to the product model, yet the challenge is that very often the client does not have these skills, and worse, they often don’t even realize they need to get help with these skills.
There are normally four possible scenarios when it comes to product design:
- The client has their own product designers.
- The client outsources the design work to a separate product design agency.
- The client hires an outsourcing agency that has both design and engineering capabilities.
- The client thinks the product design is applying a logo and color scheme.
Our preferred situation is when the client has their own product designers (1) or when the outsourcing agency has both design and engineering talent on staff (3). Unfortunately these are less common situations.
Sometimes, the client engages directly with a product design agency (2). If that agency is good (e.g. they understand the difference between product design and graphic design), then the next question will be whether they are also willing to embrace the product model, or are they expecting to simply help flesh out the specification for a fixed-price contract?
Unfortunately it’s most common that the client does not understand their need for product design (4), and they simply assume that the engineers will necessarily figure out a design as they begin implementing.4
As yet another example of the necessary trust, the outsourcing firm will need to discuss this topic with the client and ensure that one way or another, a professional product designer is involved, and able to collaborate directly with the engineering team on the product discovery work.
Project-Driven Engagements
If we assume the client company is not using the product model, it is very likely that they use project-based funding, and is unlikely to change this anytime soon.
In this case, one of the challenges is that while funding may be in terms of a project, we will need to reframe this work around outcomes. In the techniques for success below, we’ll discuss how we reframe projects so that we can focus on delivering the necessary outcomes, and not just shipping something that may or may not solve the problem.
Durable Product Teams
Another major challenge for outsourcing agencies is that even if they have done very well in the past for their client, but a year or so later the client wants to come back and continue the work, we may not have access to the same product team, or even if we do, the team may have worked on very different engagements in the meantime, and so much of the knowledge and momentum the earlier team had gained will have been lost.
This is why it is to everyone’s best interest to work to get the client to continue with the product work on an ongoing basis, even if the product team is smaller, constantly pushing on the desired outcomes and results for the client.
This is not always possible, but for important efforts (such as the mobile app for a company’s services used everyday by the company’s customers) this is where you want to leverage the trust you’ve built and strongly encourage the client to continue their efforts, with updated goals and business results every quarter.
Techniques for Success
The challenges described above are significant, but there are some powerful techniques that can help you deal with the challenges.
Note that many of these techniques are also described in the article on the product model in government agencies. That shouldn’t really be a surprise, as these are just two sides of the same coin. The government agencies are trying to learn how to engage with outsourcing agencies much more effectively, and the outsourcing agencies are trying to learn how to deliver more value for their clients.
Establishing Trust with Discovery Sprints and Shorter Engagements
Sometimes the client is open to the idea that maybe you could engage with them in more productive ways, but they don’t understand what this would look like, and they’re not willing to totally change how they work with you until they know this would work.
In this case, proposing a shorter engagement can be a good initial step.
There are two important forms of short engagements worth highlighting:
Discovery Sprints: A one-week discovery-only engagement can give the client a chance to put their toe in the water, without committing to anything too risky.
More generally, this is also a good technique to do at the start of each engagement. It can significantly reduce the time for the new product team to get up to speed, and for the product team and the client to build the necessary working relationship.
Just ensure that the client is embedded with the product team for the duration of the discovery sprint, as they dive deep into the problem and solution space.5
Quarterly Engagements: Beyond a one-week discovery sprint, another way to get clients more comfortable with this form of working relationship is to engage in a short, 3-6 month engagement.
This goes well beyond a one-week discovery sprint, and will enable the product team to build at least an initial product, without resorting to the problems of a fixed-price roadmap. The client and outsourced product team will learn how to collaborate, while evolving towards a desired solution.
The Persuasive Power of Prototypes
In conventional outsourcing models, the “single source of truth” is the specification of the work, as described in the contract.
Yet in agencies following the product model, discovering the precise solution we need is a key part of the necessary work, followed by building and delivering that solution.
In this environment, the primary tool for communication between the product team and the client are prototypes. In particular, high-fidelity user prototypes. Something realistic enough that the client can clearly see what is being proposed, and can start considering the business viability of this solution. Realize that Powerpoint decks and big documents won’t serve this need.
And just to clearly set expectations, for a typical 6-12 month outsourcing engagement, there would literally be on the order of 50 to 100 versions of the prototype. The prototype changes constantly (usually daily). While there are several forms of prototypes, the most common form, the high-fidelity user prototype described above, is created, and updated continuously, by the product designer.
If you’re thinking that this is not possible because it would take months just to do a single prototype (a very common belief from people that have never worked in the product model or seen it in action), then the first order of business is to get training on the product model.
Reframing Projects
In the outsourcing agency context, it is very common to find project-based funding. And further, it is very likely that the client is not nearly senior enough in their organization to have any chance of changing this.
So the real question is how to take project-based funding, and turn it into a successful outcome?
For this discussion, let’s assume the client has funding for a 6-12 month project to deliver a new and important outcome.
The reality is that in order to succeed, you are going to need literally dozens of iterations in discovery and delivery. What does this look like in practice?
Plan on creating prototypes in discovery and doing iterations of the prototypes ideally daily, but definitely no less than weekly, beginning immediately. Then, for delivery, plan on a continuous cadence of releases, again ideally daily, but no less than once every two weeks.
Within a few months you should have at least weekly discovery prototype iterations for the work that’s coming up, and at least bi-weekly delivery iterations (launched to progressively wider groups of users).
The discovery prototypes are being used to make sure what is being worked on will meet the client’s needs (by addressing the various viability concerns), and the delivery iterations are being used to test that the product is providing the necessary value to the client’s users, and providing data on where the product is still falling short, which informs the upcoming discovery work.
This is a highly abbreviated summary of the techniques used to discover and deliver a successful product, but it’s critical to reframe the 6-12 month project into this ongoing series of iterations for discovery and delivery.6
Continuously Evangelize Outcomes
It’s absolutely essential to continuously evangelize the outcomes that the product teams are focused on and making progress on.
In the example we described of a project funded for 6-12 months, few great products are done this quickly. You may have excellent results starting in the first few months, but most successful efforts go for many years,7 gaining more success and improved outcomes quarter after quarter.
This happens because the product manager of the outsourced agency team makes it very clear that the outcomes achieved are not an accident, and that this is what strong product teams do, and that they warrant continued enthusiasm and investment.
If the evangelizing stops, it’s only a matter of time before some other bright shiny thing comes along to capture the attention of the client.
Conclusion
Hopefully it’s clear that with some adaptation, and if you have the trust of the client and their willingness to change how you collaborate to come up with an effective solution, the product model can be used by outsourcing agencies that are building custom solutions for their clients.
Today there are several very impressive examples of custom solution companies that have applied this model to deliver truly innovative and effective solutions for very demanding clients, such as in the defense industry, applying machine learning and generative AI, and more.
- As a comparison, Oracle had about USD $50B in revenue in 2023 (less than Accenture) but they have a valuation of nearly $400B (about double Accenture).
↩︎ - We will say that because most outsourcing companies are necessarily very sales-driven, many of the challenges in transforming are similar to those faced by a typical sales-driven SaaS company trying to transform. It is a very big leap for the company’s leadership. ↩︎
- This is known as a fixed-scope, fixed-bid (or fixed-price) contract. The client usually expects that changes to the specification will cost extra, but they invariably underestimate this in their minds. ↩︎
- If this sounds fine to you, there is an old book that is unfortunately still very relevant that can help you understand what you’re missing: The Inmates Are Running The Asylum. ↩︎
- In many cases, it makes good business sense for the outsourcing agency to fund this discovery activity as a form of business development. ↩︎
- The books INSPIRED and JOY OF AGILITY go into depth on product discovery and delivery. ↩︎
- Product model companies think in terms of 7 years of ongoing investment in a product with continuously improving business results. Some products go much longer. It’s important to realize that it’s not 6 months and done. ↩︎