Outcome based Services

Outcome Based Services and Performance Based Contracting – A Briefing for Managers

Outcome based services and performance contracting are increasingly gaining traction, though the practice in some industries goes back a really long time. The concept can have significant benefits for customers, even an entire industry or the economy by aligning incentives and creating “win / wins”, however things are less clear for suppliers.  In order to be successful a company must change its business model and operating system and therefore must undertake substantial initial investment and, probably, accept permanently higher overhead. To be justified the model needs to scale. Customers however require choice -an adequate number of suppliers providing services under the new model- before they change what and how they buy. A “chicken-and-egg” problem ensues. So in industries without “facilitators” (organizations with oversized influence), suppliers need to proceed carefully so that on the one hand they don’t overextend and on the other they don’t fall behind when their industry transitions. To achieve that they must prioritize systematically and target their efforts initially at those markets, industries and customers that offer the best chance for quickly reaching critical mass. But a correct strategy is a necessary but not sufficient condition for success. Suppliers must get other things right as well, including how to design offerings and contracts, engage and influence customers, achieve buy-in from personnel, manage risks and determine pricing and revenue patterns.

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