The New Landscape of Performance Based Contracts

Professor Irene NgDirector, Centre for Service Research

AIM (UK) Lead Service Fellow

The traditional approach – but for what purpose?

Services

Value = Value = BenefitsBenefitsValue = Value = BenefitsBenefits

So let’s look at this logically

We buy products to obtain benefits

What are the benefits

How do we get the benefits?

What is the role of the firm? The customer?

The ‘product’ mentality of organizations

The co-creation of value

CO-CREATEDVALUE that ishigher than

proposed

Propose

Enhance

Unlock

The nature of

service value

State-dependent

In the future

Discounted

The nature of

service value

State-dependent

In the future

Discounted

A golf analogy

Not understanding service is when you did not practice your putts

Building the value proposition is learning to drive 250m in golf

So what is service then?

It’s making sure your customer co-creates the fullest benefits you intended to provide with your value proposition, and often even higher value than that proposed

Competition & Innovation occurs on 2 fronts:– Providing a higher value proposition – Co-creating the highest value with the

customer

The brave new world of capability – PERFORMANCE

SERVICE

Benefits/performance

The brave new world of capability – goods and service

Thinking about capability in this context is thinking about:– Delivering on benefits (What does this mean?

Revenues on the basis of benefits)– Empowerment of the organization (who is

responsible?)– Impact on current processes and systems (how do

we deal with customer involvement in co-creation?)– How much the organization is holding back service

because of existing understanding of capability?

Performance based/Benefit based Contracting

Effectiveness & efficiency issues in the new business model: new risks

Analogy

Two questions – first, are the processes, systems, behaviours and

activities that were useful in the traditional business model just as effective in the new business model?

– Second, are the processes, systems, behaviours and activities that were useful in the traditional business model just as efficient in the new business model?

10

Benefit based Framework for Value Co-creation & Innovation

Ng, Irene C. L., Lei Guo, James Scott and Nick Yip (2008), “Towards a Benefit-based Framework for Understanding B2B Services and its impact on Contract and Capability”, Proceedings of the 10th International Research Seminar in Services Management, 27-30 May 2008, La Londe, France

Ng, Irene C. L., Lei Guo, James Scott and Nick Yip (2008), “Towards a Benefit-based Framework for Understanding B2B Services and its impact on Contract and Capability”, Proceedings of the 10th International Research Seminar in Services Management, 27-30 May 2008, La Londe, France

Research Agenda for B2B Value co-creation

Vt = f(Vf, Vc)

– Discovering f

Vf=f(A1, A2,….An) , A[aij]; Vc=f(A1, A2,….An) , A[aij]

– Modeling the service capacity of Vf

Pareto Optimal Contract

– C(Vt)=C(f(Vf,Vc), Cvf(Vf), Cvc(Vc))

– ∂C(Vt)/ ∂Vt=0, ∂2C(Vt)/ ∂Vt2 >0

Contract design

– Degree of substitutability of attribute-based resources from Vf and Vc to achieve pareto optimality

Contract PriceContract Mechanism Design

Attribute sensitivity to priceContract Profit for firm

Max {π І P(Vt)-[C(Vt)-C(Vc)]}

AIM research (ESRC & Industry

funded)

AIM research (ESRC & Industry

funded)

S4T: EPSRC/Bae Systems Service Support Solutions: Strategy &

Transition

S4T: EPSRC/Bae Systems Service Support Solutions: Strategy &

Transition

Laura Smith and Irene C L Ng (2008), “End-to-End Revenue Management of Amorphous Service Capacity: The Case of Handle With Care, 17th Frontiers in Services, 2-5 Oct 2008, Washington D.C (best practitioner paper nominee)

Laura Smith and Irene C L Ng (2008), “End-to-End Revenue Management of Amorphous Service Capacity: The Case of Handle With Care, 17th Frontiers in Services, 2-5 Oct 2008, Washington D.C (best practitioner paper nominee)

Partners

Lloyds, NHS, BAE Systems, NLB, Rolls Royce, BT (in discussion),

Harmonic, HWC

Partners

Lloyds, NHS, BAE Systems, NLB, Rolls Royce, BT (in discussion),

Harmonic, HWC

Thank you