The age-old habit of paying providers for only their time does little to motivate them to do anything other than jack up the hours. To overcome the disincentives from squeezing providers on hourly rates, tech leaders add layers of contract terms for penalties, controls, and oversight, yet still bear the brunt of the blame when a project goes south. The problem has only compounded now that AI-powered delivery reduces the time to complete a project by double digits. To be successful in this complex technology-infused world, adopt a new service provider pricing paradigm to:
Pay for the equipment, not just the people. You can pay someone to till your field with a horse and plow and wait three days until it’s done. Or you can pay someone with a tractor to do it in an hour. You need that field done by lunchtime, so you’ll pay for the tractor, not just the farmer. You pay for the job. The same is true with today’s professional and technology services. Providers bring the equipment — software accelerators, AI-powered delivery and operating platforms, small language models, and knowledge assets — to do their work faster, with better quality, and as a solution rather than a team. Just as you do when buying AI-powered software, the other ingredient in project success, pay for the tractor (see Figure)! There’s a bonus: The provider is now motivated to build better and better tractors. Both parties will win.
Build incentives into the pricing structure to motivate investment in success. Shared outcomes, performance-based pricing, and even fixed prices with clear requirements create shared incentives. Among services decision-makers using performance-based pricing, the number one benefit is that it motivates the provider to do better work. And it importantly pushes firms to have more internal alignment to get things done. Changing the pricing model from time and materials also elevates the relationship from vendor-to-squeeze to partner-to-optimize.
Keep cost in its proper place as just one factor in supplier success. Hammering a supplier on price will only drive a race to the bottom on quality. Instead, use the commercial terms as one component of a contract that aligns partners with your goals, then manage the work so you never have to pull the contract out of the drawer. To make this real, transparency, trust, and active management are vital. Sourcing and procurement teams can’t do this on their own; it’s a full business commitment to get the most value from a partner.
And, no, AI agents are not digital labor. Let’s bust this myth right now. It doesn’t matter that software companies and some service providers pitch AI agents as “digital labor” with the implication that they will replace people and should be priced like a person. AI is a tractor, not a farmer, and never in the history of the world has an accountant reported equipment on the labor line item. It’s equipment, regardless of how it’s priced. Sure, buy the solution, rent the agentic platform by the hour, pay for the outcome or output, but don’t call it a person or think of it as a human equivalent. It’s the wrong metaphor to understand AI.
