Last month, I talked to a founder who had spent $180,000 on a mobile app. The app was delivered on time. It matched the specifications exactly. And it failed completely.
Not because of bugs. Not because of bad design. The product team at his development agency built precisely what he asked for. The problem was that what he asked for was wrong. He had made assumptions about his users that turned out to be false. By the time he realized this, his runway was nearly gone.
Here is what struck me about the conversation: the agency knew. They had seen the warning signs during user testing. They noticed that the onboarding flow confused people. They watched the analytics show a 70% drop-off in the first session. But they kept building. They delivered the features on the roadmap, collected their monthly payments, and moved on to the next client.
When I asked why they did not raise a flag, the founder shrugged. “They got paid either way.”
This is not a story about a bad agency. The people who built his app were talented. They wrote clean code and met their deadlines. The problem was structural. The agency billed by the hour. Their revenue depended on how much time they spent, not on whether the product succeeded. They had no financial reason to tell the founder he was building the wrong thing. In fact, telling him might have reduced their billable hours.
This pattern shows up everywhere. Marketing agencies that run campaigns without questioning whether the strategy makes sense. Consultants who deliver lengthy reports that sit unread. Contractors who complete projects that create more problems than they solve. The vendor gets paid. The client absorbs the loss.
The default structure of most vendor relationships creates this outcome. It is not malice. It is incentives. And until you understand how to spot and fix misaligned incentives, you will keep paying for work that does not move your business forward.
The Hidden Structure of Most Vendor Relationships
Most vendor relationships follow the same basic structure: you pay for time, and they give you effort.
This seems fair. An accountant bills you for the hours spent on your books. A marketing agency charges a monthly retainer for managing your campaigns. A development shop quotes you based on estimated hours to build your product. You pay for what you use.
The problem is that time and results are not the same thing.
When you pay for time, your vendor’s incentive is to spend more of it. Not maliciously. Not even consciously. But the structure of the relationship rewards them for taking longer, not for getting you to your goal faster.
Consider how this plays out in practice. A consultant bills $300 per hour. If they solve your problem in five hours, they earn $1,500. If they take twenty hours, they earn $6,000. The consultant might genuinely want to help you. But the structure of the relationship punishes efficiency.
This is not speculation. Researchers at the University of Utah studied real estate agents and found that agents sell their own homes at a 4.5% premium compared to their clients’ homes. Same agents. Same skills. Same market. The difference was incentives. When selling a client’s home, agents benefit from closing quickly and moving to the next commission. When selling their own home, they benefit from waiting for the best offer. The structure of the relationship changed their behavior.
The same dynamic appears across industries.
Marketing agencies on retainer have little reason to reduce your ad spend, even if a smaller budget would perform better. Their revenue is tied to managing your money, not to your return on investment. Some agencies even earn a percentage of your media spend, which means they make more when you spend more.
Law firms billing hourly have no incentive to resolve your case quickly. Every email, every call, every revision adds to the bill. The partner who settles a dispute in two weeks earns less than the partner who stretches it to two months.
Development agencies charging by the hour have no reason to challenge your roadmap. If you want to build ten features, they will build ten features. More features mean more billable hours. Whether those features find users is your problem, not theirs.
The pattern is consistent. Time-based billing separates your vendor’s success from your own. They get paid whether your campaign converts, your lawsuit settles, your product finds users, or not.
Most vendors are not trying to exploit you. They are responding rationally to the incentives in front of them. A marketing manager at an agency wants to do good work. But when their bonus depends on client retention and billable hours, not on client revenue growth, their behavior follows the incentive.
This is what economists call the principal-agent problem. You (the principal) hire someone (the agent) to act on your behalf. But the agent has their own interests, and those interests may not align with yours. Without careful design, the relationship drifts toward serving the agent’s goals, not yours.
The solution is not to find more virtuous vendors. Virtue does not survive bad incentives. The solution is to restructure the relationship so that your vendor’s success depends on your success.
What This Actually Costs You
The obvious cost of misaligned vendor relationships is money. You pay for work that does not deliver results. But the hidden costs are often larger.
The first hidden cost is your time.
When a vendor is not invested in your outcome, you become the project manager. You write detailed specifications because you cannot trust them to ask the right questions. You review every deliverable because you cannot assume quality. You sit in status meetings that exist to justify billable hours rather than to solve problems.
I talk to founders every week who describe this experience. They hired an agency to free up their time. Instead, they spend ten hours a week managing the agency. They became the connective tissue between strategy and execution, translating business goals into task lists because no one else would.
This is time you are not spending with customers. Not closing sales. Not fundraising. Not thinking about the next product iteration. The vendor relationship that was supposed to accelerate your business is now slowing it down.
The second hidden cost is opportunity.
Projects that drag on for months consume resources that could go elsewhere. A website redesign that takes six months instead of six weeks delays your product launch. A marketing campaign that runs on autopilot for a year without optimization burns budget that could fund experiments. Every week a vendor spends on the wrong approach is a week you are not spending on the right one.
The Dun & Bradstreet Barometer of Global Outsourcing found that 20 to 25 percent of outsourcing relationships fail within two years. Half fail within five years. These failures rarely happen because of incompetence. They happen because the structure of the relationship made success unlikely from the start.
The third hidden cost is trust.
Every project that disappoints erodes your confidence in external partners. After a few bad experiences, you start to believe that outsourcing does not work. That you need to build everything in-house. That vendors are unreliable by nature.
This belief is expensive. Building internal teams takes time and capital. Managing those teams takes attention. And for many businesses, the right answer is not more employees. It is better vendor relationships.
The fourth hidden cost is building the wrong thing.
This is the founder I mentioned at the start. He spent $180,000 on a product that did not work. The agency delivered exactly what he specified. But specifications are guesses. They are hypotheses about what users want. Without a vendor who challenges those hypotheses, you learn nothing until it is too late.
When your vendor bills for hours, they have no incentive to tell you that your idea might be wrong. Questioning the roadmap reduces scope. Suggesting experiments delays the build. Recommending a smaller MVP cuts billable time. Even well-intentioned vendors stay quiet because the structure of the relationship rewards execution, not judgment.
Why This Problem Is Getting Worse
Fifteen years ago, execution was expensive. Building software required specialized skills that were scarce and costly. Running a marketing campaign required tools and expertise that most businesses did not have in-house. The value of vendors was their ability to do things you could not do yourself.
That world is disappearing.
AI is compressing the cost of execution across nearly every category of digital work. Code that took a developer a week now takes a day with AI assistance. Designs that required a senior designer can be drafted by junior staff using generative tools. Content that demanded writers and editors can be produced at scale with the right prompts.
This shift changes what matters in a vendor relationship.
When execution is expensive, you pay for the doing. When execution is cheap, you pay for the thinking. The value moves from “can you build this?” to “should we build this?” and “what should we build next?”
Most vendor relationships are still structured for the old world. They bill for hours spent coding, designing, writing, and managing. They get paid for output, not for outcomes. But if AI makes output cheaper every year, the value of an output-focused vendor declines every year.
The vendors who thrive in this environment are the ones who help you figure out what to do, not just how to do it. They challenge your assumptions. They run experiments. They tell you when your roadmap is wrong. They are accountable for results, not just deliverables.
This makes incentive alignment more important than ever.
A vendor billing hourly has no reason to use AI to finish faster. Efficiency reduces their revenue. They might adopt AI tools internally to protect their margins, but they will not pass the speed gains to you. The structure of the relationship punishes them for being more productive.
A vendor billing for outcomes has the opposite incentive. If they can deliver results in half the time using AI, they keep the efficiency gain. Their margin improves. Your cost stays the same. Both parties win.
The gap between these two models will widen as AI improves. Hourly vendors will compete on price, racing each other to the bottom as execution becomes commoditized. Outcome-based vendors will compete on insight, charging for their ability to solve the right problems.
The question for you is which side of that divide your vendors are on.
If your marketing agency bills for hours managing campaigns, ask what happens when AI automates 80 percent of that management. Do they charge you less? Or do they keep billing the same rate for less work?
If your development partner bills for hours, ask what happens when AI accelerates their delivery. Do you get more value per dollar? Or do they slow down to fill the time?
The vendors who answer these questions honestly are the ones worth keeping. The ones who avoid them are optimizing for their own survival, not your success.
What “Skin in the Game” Actually Looks Like
The phrase “skin in the game” gets thrown around loosely. Every vendor claims to be invested in your success. Few structure their business to prove it.
Real skin in the game means financial consequences. Your vendor earns more when you succeed and less when you fail. Their incentives are mathematically aligned with yours, not just rhetorically aligned.
Here is what that looks like in practice.
Fixed-price with guarantees. The vendor agrees to deliver a defined outcome for a fixed price. If they take longer than expected, they absorb the cost. If they fail to deliver, you pay nothing or receive a refund.
This model forces the vendor to think carefully before committing. They cannot agree to every project. They have to assess whether they can actually deliver. And once they commit, they have every reason to work efficiently.
At , we use this model for Sprint Zero, a four-week engagement that delivers technical architecture, a design system, a product roadmap, and a working prototype. The price is fixed. If we do not deliver all four outcomes, the client does not pay. This is not a marketing promise. It is how the contract works.
Outcome-based pricing. The vendor charges based on results, not effort. A marketing agency earns a percentage of revenue generated. A lead generation firm charges per qualified lead. A development partner prices sprints based on business milestones, not story points.
This model requires clear metrics and honest measurement. Both parties need to agree on what success looks like before the work begins. But when it works, it transforms the relationship. The vendor becomes a partner with a stake in your outcome.
Performance bonuses and penalties. The base fee covers costs, and a bonus kicks in when targets are exceeded. Or the fee is reduced if targets are missed. This hybrid approach balances risk between both parties.
Equity or revenue share. In some cases, vendors take a percentage of the business itself. This is common in startup studios and venture-backed agencies. The vendor invests their time in exchange for upside.
Each model has tradeoffs. Fixed-price works well for defined scopes but can create tension when requirements change. Outcome-based pricing works well for measurable results but is harder to apply to creative or strategic work. Equity works well for early-stage companies but dilutes your ownership.
The right model depends on your situation. But any model that ties your vendor’s revenue to your results is better than one that does not.
What to look for:
Vendors with skin in the game behave differently before you sign. They ask harder questions. They push back on your assumptions. They want to understand your business model, your customers, your metrics. They cannot afford to take on projects they cannot win.
They also behave differently during the engagement. They surface problems early instead of hiding them. They suggest changes to the scope when the original plan is not working. They care about what happens after launch, not just about delivering the build.
What to avoid:
Be skeptical of vendors who claim alignment without structural proof. “We treat your business like our own” is a nice sentiment. It is not a contract term. If their revenue does not depend on your results, the sentiment will fade when incentives conflict.
Be skeptical of performance pricing that only applies to easy wins. Some agencies offer performance bonuses on metrics they control, like impressions or clicks, rather than metrics that matter, like revenue or retention. This is the appearance of alignment without the reality.
Be skeptical of guarantees with too many escape clauses. A money-back guarantee that requires you to prove the vendor was negligent is not a guarantee. Read the terms carefully.
Questions to Ask Before You Hire Anyone
Before you sign a contract with any vendor, ask these questions. The answers will reveal whether their incentives align with yours.
“How do you make money on this engagement?”
This is the most important question. You want to understand the mechanics of their business model, not just the price they quoted.
If they make more money when you succeed, that is a good sign. If they make the same money regardless of outcome, the relationship is transactional. If they make more money when the project drags on, you have a structural problem.
“What happens if this takes longer than expected?”
Listen carefully to the answer. Do they absorb the cost? Do you absorb the cost? Is there a shared arrangement?
Vendors who absorb overruns have an incentive to scope carefully and work efficiently. Vendors who pass overruns to you have an incentive to underestimate timelines to win the deal.
“Have you ever fired a client or walked away from a project?”
Vendors with skin in the game cannot afford to work on projects that are likely to fail. They say no to bad fits. They walk away from clients who will not let them do their best work.
If a vendor says yes to every project, they are probably billing for time, not outcomes. They do not need to be selective because they get paid either way.
“What would make you tell us to stop or change direction?”
This question tests whether the vendor sees themselves as an executor or a partner. An executor builds what you ask for. A partner tells you when what you are asking for is wrong.
You want a vendor who will push back. Who will flag when the data suggests a different approach. Who will recommend killing a feature that is not working. If they have no financial stake in your success, they have no reason to have these hard conversations.
“How do you measure success for this engagement?”
The metrics a vendor tracks reveal their priorities. If they track hours worked and deliverables completed, they are optimizing for output. If they track your business metrics, such as revenue, conversion, retention, or user growth, they are optimizing for outcomes.
Ask to see how they reported success to past clients. Look at whether those reports focus on activity or impact.
“Can you share references from clients where things went wrong?”
Every vendor has failures. The question is how they handle them. Did they take responsibility? Did they adjust their approach? Did they refund fees or continue working until the problem was solved?
A vendor who only offers glowing references is either cherry-picking or has not done enough work to encounter real challenges.
Red flags to watch for:
Vague answers to direct questions about pricing structure. Reluctance to commit to any form of guarantee. References only from projects where the client defined every detail. A sales process focused on capabilities rather than your specific goals. Contracts that make scope changes expensive and contentious.
Finding Vendors Who Share Your Risk
The vendors you work with are not good or bad. They are responding to incentives. When those incentives reward time spent rather than results delivered, you get vendors who optimize for activity. When incentives reward outcomes, you get partners who optimize for your success.
Most businesses accept the default structure. They hire agencies on retainer. They pay consultants by the hour. They contract developers by the hour. And then they wonder why projects drag, why results disappoint, why they spend so much time managing the people who were supposed to save them time.
The alternative is to restructure the relationship from the start. Choose vendors who charge for outcomes, not hours. Look for guarantees that have real teeth. Ask the hard questions before you sign. Build relationships where your vendor’s success depends on your success.
This matters more now than it did five years ago. AI is making execution cheaper every month. The value of a vendor who just follows instructions is declining. The value of a vendor who helps you figure out what instructions to give is increasing.
At Wednesday, we charge per sprint, not per hour. We offer a money-back guarantee on our first engagement. We turn down projects where we do not believe we can deliver results. This is not because we are more virtuous than other agencies. It is because we structured our business so that we only succeed when our clients succeed.
You do not have to work with us. But you should work with someone who has skin in the game. The structure of the relationship matters more than the promises made during the sales process. Find vendors whose incentives match yours, and the rest tends to take care of itself.
