The document discusses various payment methods for product development, including hiring employees, using freelancers, or outsourcing to product development companies (PDCs). It highlights that larger companies can employ full-time staff, while smaller companies often benefit more from freelancers or PDCs, which offer flexibility and expertise without the burden of permanent costs. Additionally, it mentions multiple payment structures for PDCs, such as fixed price, hourly rates, and equity, as well as a growing trend toward design-and-build models.

1. Different Ways to Pay for Product
Development. By Steve Owens

2. There are many more ways to pay for product
development than you may realize, including not
paying for it at all.
What is right for your situation will depend on your
exact circumstances. You may wish to review the
following before starting your next product
development project

3. #1 Employees:
Most of us are familiar with this method: hire the
engineers and technicians that you need to do
the work and pay them a salary.
This works well for large companies who can
attract top talent and have the scale to afford
large specialized teams of experts along with the
leadership and management infrastructure
necessary to keep product development running
effectively.

4. Smaller companies almost never benefit from this
model as they struggle to attract talent, have
difficulty keeping all of the staff busy, and struggle
with low productivity with less specialized and/or
smaller teams.
This method is rarely a good choice since small
companies have less scale to leverage development
cost.

5. #2 Freelancers:
Freelancers can be an effective way to manage
the gaps in your technical team. They almost
always work at an hourly rate that is often less
than the total cost of a full-time employee and
many of them are experts in their field.

6. Mid-size companies use them effectively to augment
areas of specialization that do not warrant hiring a
full-time person, especially if these companies have
effective management structures in place that allows
the freelancers to focus on the technical challenges.

7. Small companies of ten or fewer make the mistake
of using these specialists as system designers and
suffer from the “if you're a hammer, everything
looks like a nail” syndrome.
Without management and processes in place, it is
hard to utilize this category effectively. It is not
uncommon for small companies who utilize this
strategy to do the wrong thing really well.

8. #3 Outsourced:
These companies (including Finish Line PDS)
provide complete product development
teams, with management, processes,
reference designs, etc.
Product Development Companies (PDCs)
work best with small companies (<$100M in
annual revenue) that can’t afford, or don’t
need, a permanent team—their product
cycles are measured in years, not months.

9. PDCs do not work well for large companies with
existing teams and their own effective processes
unless the company suspects the specific project is
significantly disruptive of the status quo. Large
groups can suffer from NIH (Not Invented Here)
syndrome and often have a vested investment in the
current technology to the point of dismissing the
“next thing.”

10. This is why Walmart, with its enormous
investment in physical stores, will be put out of
business by Amazon, who, by using innovative
online retailing, was free from investing in
physical stores.

11. There are three different ways to pay a PDC:
Fixed Price: Requirements are agreed to and
the PDC provides a fixed bid for these
requirements. Most PDCs will not do fixed
priced bidding because of the destructive
dynamics set up by this type of contract. Once
the contract is signed, the PDC must keep
within the budget at all costs, and the client
wants as much as he can talk the PDC into.

12. The focus becomes less about the potential ROI,
and more about who will be burdened with
what cost and how to justify such action. The
result is more energy spent on negotiation and
less on product enhancement.
In theory, this method works well; in practice it
destroys the relationship. There can be
exceptions if the project is broken down into
very small steps and each step is taken one at a
time.

13. Per Hour:
This is the most common method when working
with a PDC. A good faith estimate is given for each
phase of the project, the PDC keeps good records of
each engineer's time, and each engineer is billed at
a rate commensurate with their skill level.
If you need your PDC to become a true team
member—someone who will provide value beyond
just performing a task—this is one of the best
options. It combines the best of having employees
without the fixed cost commitment.

14. Equity:
Some PDCs will exchange equity for work
done. This can be an effective method for a
startup that is pre series A, and needs an MVP in
order to complete a series A round.
Typically, this takes the form of a note with interest
and unpriced warrants to compensate for the risk.

15. Design & Build: This method is starting to gain
popularity—especially with smaller companies.
Instead of paying for development, you simply buy
the product you need; the design is built into the
purchase price. This can be a win-win in many cases
as the client simplifies their purchasing decision and
the product development team simplifies
“management of the customer.”

16. The PDC will own the IP, subject to certain
warrants and performance clauses, but this
ownership also creates an incentive to create a
product that out sells anything else on the
market. I predict that the world will largely move
toward this model exclusively.

17. Combination: Of course, any combination of these
methods can be used. In fact, it is rare for us to see any
one of these methods used exclusively on any one
project.
Small companies typically have a few engineers in-
house to focus on the core technologies, use a few
freelancers now and then to fill in gaps, and use a PDC
to roll everything into a controlled Master Book with
the proper controls and documentation necessary for
effective manufacturing and sustaining.

18. Thank you! Steve Owens
After 15+ years and 1,000 projects, we have
developed a great set of tools to help improve
product development and are happy to share
these with you. You can find them here
https://www.finishlinepds.com/tools