As a start up you should focus on your business & product idea and would like to outsource your product development initiative. This is commonsense and possibly the reason why the outsourcing industry is as big as it is today.

As a start-up, the number of challenges which a business & product idea faces is high, you really don’t need additional ambiguity in the initial stages of your business. It is critical to choose the right partner & engagement model for product development, failing which, the odds of your product idea seeing the light of the day is limited.

Given the initial product development need, I have seen a lot of start-up organizations choosing a complete off-shore engagement and many a times a Fixed Price (FP) model of engagement for their product development needs. While both off shoring and FP engagements have substantial benefits, if not managed rightly this strategy will back fire and have long lasting impact.

Let me speak about why a FP engagement might not be the right model for new product development — The biggest and most important reason is that the Scope, Functionality and Feature Set might not be right first time and will need iterations based on what customer needs/feedback is. Any new product development will need ratification of the idea and take in customer feedback — this is an iterative process and hence difficult to get the feature set right first time.

In the initial stages of product development there will be ambiguity in terms of scope and functionality. I would surely say that it is impossible to get all the scope and functionality right first time and the ambiguity is normal. There will be a real need to iterate and ensure what is being developed is inline with what the customer needs.

However, in a FP initiative the development partner will be looking for clear scope/functionality/requirements and might not be very flexible with changing scope as this will lead to re-work. While there are ways of tackling changing scope by trading off scope items to manage budget, this needs focused management. In case of changing scope and requirements, there is a constant need to analyze change, assess impact and manage effort, cost and timelines. This adds complexity to the engagement and will also create friction between teams due to constant negotiation on scope/requirements and change requests. So why should a new product development initiative go through the pain of a FP engagement model and have to deal with the challenge of very hard negotiation?

I strongly believe that a Time & Material (T&M) or Retainer Engagement is a good model for new product development — This assures availability of people for a pre-determined time frame and they can work on product development. Reducing the noise on account of scope management and its impact to project cost/schedule is a critical advantage which cannot be overlooked. This will would give the team enough time to focus on key aspects of the business like investors, customers and sales.

In case organizations would still like to use FP model for their product development, here are some of the questions you will need to ask yourself:

• How mature is your product idea? Higher the maturity, lesser the uncertainty.
• Do you have good clarity in terms of initial scope, functionality — Do you have creatives and proof of concepts which provide this clarity? It would be good to work out your Minimum Viable Product (MVP) to get clarity. (Read my blog on MVP)
• How flexible are you with cost and timelines when scope changes? Will you be looking at explanation for each line item of change?
• How mature is the partner team and their processes?
• How much of product development experience does the partner have?

Summary: While there are definite advantages in Outsourcing and Fixed Price engagements, these need to be reviewed in the context of new product development. For Fixed Price projects, the customer teams needs to have supreme clarity in terms of requirements and needs to be open in terms of accepting change and the subsequent impact to cost/schedule. It might be prudent to consider a flexible model of engagement like Time & Material or Retained team to make the whole feedback loop between Customer and Development partner smooth.