Transcript The New Landscape of Performance Based Contracts
The New Landscape of Performance Based Contracts
Professor Irene Ng Director, Centre for Service Research AIM (UK) Lead Service Fellow
The traditional approach – but for what purpose?
Services
Value = Benefits
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-CREATED VALUE that is
higher
than proposed Unlock Enhance
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
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
Benefits/performance
SERVICE
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?
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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,
2008, La Londe, France 27-30 May
Research Agenda for B2B Value co-creation
V t = f(V f , V c ) – Discovering f V f =f(A 1 , A 2 ,….A
n ) , A[a ij ]; V c =f(A 1 , A 2 ,….A
n ) , A[a ij ] – Modeling the service capacity of V f Pareto Optimal Contract – C(V t )=C(f(V f ,V c ), C vf (V f ), C vc (V c )) – ∂C(V t )/ ∂V t =0, ∂ 2 C(V t )/ ∂V t 2 >0 Contract design 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,
17 th Frontiers in Services
, 2-5 Oct 2008, Washington D.C (best practitioner paper nominee) – Degree of substitutability of attribute-based resources from V f pareto optimality and V c to achieve Contract Price Contract Mechanism Design AIM research (ESRC & Industry funded) Attribute sensitivity to price Contract Profit for firm Max { π І P(V t )-[C(V t )-C(V c )]} Partners Lloyds, NHS, BAE Systems, NLB, Rolls Royce, BT (in discussion), Harmonic, HWC