The New Landscape of Performance Based Contracts

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The New Landscape of Performance Based Contracts

• Professor Irene Ng
• Director, Centre for Service Research
• AIM (UK) Lead Service Fellow

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The traditional approach but for what purpose?
Services
Value Benefits
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So lets 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

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The co-creation of value
Propose
CO-CREATED VALUE that is higher than proposed
Unlock
Enhance
The nature of service value State-dependent In
the future Discounted
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A golf analogy
Building the value proposition is learning to
drive 250m in golf

• Not understanding service is when you did not
  practice your putts

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So what is service then?

• Its 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

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The brave new world of capability PERFORMANCE
Benefits/performance
SERVICE
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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?

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Performance based/Benefit based Contracting
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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?

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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
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Research Agenda for B2B Value co-creation
S4T EPSRC/Bae Systems Service Support Solutions
Strategy Transition

• Vt f(Vf, Vc)
• Discovering f
• Vff(A1, A2,.An) , Aaij Vcf(A1, A2,.An) ,
  Aaij
• Modeling the service capacity of Vf
• Pareto Optimal Contract
• C(Vt)C(f(Vf,Vc), Cvf(Vf), Cvc(Vc))
• ?C(Vt)/ ?Vt0, ?2C(Vt)/ ?Vt2 gt0
• Contract design
• Degree of substitutability of attribute-based
  resources from Vf and Vc to achieve pareto
  optimality

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)
AIM research (ESRC Industry funded)
Contract Price Contract Mechanism
Design Attribute sensitivity to price Contract
Profit for firm Max p ? P(Vt)-C(Vt)-C(Vc)
Partners Lloyds, NHS, BAE Systems, NLB, Rolls
Royce, BT (in discussion), Harmonic, HWC
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Thank you