Investigating risks of outcome-based service contracts from a provider’s perspective

Outcome-based contracts (OBC) refer to agreements between providers and customers where providers are paid based on the outcomes they deliver to customers. OBCs have become common for manufacturing firms that are servitising, especially those firms providing advanced services focusing on availability and capability. Whilst many authors acknowledge the importance of understanding risks in OBCs from a provider’s perspective, there are relatively few in depth extant studies. To address this gap in the literature, we conducted 24 interviews with 11 companies to explore risks and risk factors in OBCs from the provider’s perspective. The case studies reveal that the two major risk categories in OBCs are commercial risk regarding the contract negotiations and contract decisions at the contracting stage, and operational risk regarding the implementation and the delivery of OBCs. Our study identifies 23 risk factors that can lead to commercial risk and operational risk in five dimensions: (i) complexity and (ii) d...

[1]  Doroteya Vladimirova.  Made to serve. How manufacturers can compete through servitization and product-service systems , 2015 .

[2]  A. Darker,et al.  TOTAL QUALITY CONTROL , 1987 .

[3]  K. Ishikawa.  What is total quality control the japanese way , 2002 .

[4]  Markku Tuominen,et al.  Risk analysis and assessment in network environments: A dyadic case study , 2002 .

[5]  P. Hopkin.  Fundamentals of Risk Management: Understanding, Evaluating and Implementing Effective Risk Management , 2010 .

[6]  Irene C. L. Ng,et al.  Outcome-based contracts as a driver for systems thinking and service-dominant logic in service science: evidence from the defence industry , 2009 .

[7]  Nils Fearnley,et al.  Estimation and Implementation of Optimal Performance-Based Subsidies in Norwegian Intercity Rail Transport , 2003 .

[8]  D. Hensher,et al.  Contracting regimes for bus services: What have we learnt after 20 years? , 2010 .

[9]  Jean Hartley,et al.  Case study research , 2004 .

[10]  Finn Wynstra,et al.  Performance-based contracting: a literature review and future research directions , 2015 .

[11]  Christopher A. Voss,et al.  Case research in operations management , 2002 .

[12]  Tim Baines,et al.  The servitization of manufacturing: A review of literature and reflection on future challenges , 2009 .

[13]  John Ahmet Erkoyuncu,et al.  An innovative uncertainty management framework to support contracting for product-service availability , 2014 .

[14]  Giuditta Pezzotta,et al.  Product-Service Systems Engineering: State of the art and research challenges , 2012, Comput. Ind..

[15]  A. Neely.  Exploring the financial consequences of the servitization of manufacturing , 2008 .

[16]  C. Raddats,et al.  Services growth options for B2B product-centric businesses , 2010 .

[17]  Will Ozier,et al.  Risk Analysis and Assessment , 2000 .

[18]  Ronald Gleich,et al.  Benefits and uncertainties of performance‐based contracting in manufacturing industries , 2010 .

[19]  N. Caldwell,et al.  Delivering Integrated Solutions in the Public Sector: The Unbundling Paradox , 2012 .

[20]  Irene C. L. Ng,et al.  Identifying risk and its impact on contracting through a benefit based-model framework in business to business contracting: case of the defence industry , 2009 .

[21]  I. Ng,et al.  Identifying Risk and its Impact on Contracting Through a Benefit Based-Model Framework in Business to Business contracting : Case of the defence industry , 2009 .

[22]  Alberto Sols,et al.  Defining the Fundamental Framework of an Effective Performance-Based Logistics (PBL) Contract , 2007 .

[23]  Serguei Netessine,et al.  Performance Contracting in After-Sales Service Supply Chains , 2007, Manag. Sci..

[24]  Serguei Netessine,et al.  Impact of Performance-Based Contracting on Product Reliability: An Empirical Analysis , 2011, Manag. Sci..

[25]  Michael Essig,et al.  A providers’ perspective on supplier relationships in performance-based contracting , 2013 .