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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

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The New Landscape of Performance Based Contracts

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  1. The New Landscape of Performance Based Contracts Professor Irene Ng Director, Centre for Service Research AIM (UK) Lead Service Fellow

  2. The traditional approach – but for what purpose? Services Value = Benefits

  3. 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

  4. 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

  5. Not understanding service is when you did not practice your putts A golf analogy Building the value proposition is learning to drive 250m in golf

  6. 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

  7. The brave new world of capability – PERFORMANCE Benefits/performance SERVICE

  8. 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?

  9. Performance based/Benefit based Contracting

  10. 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?

  11. 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

  12. Research Agenda for B2B Value co-creation S4T: EPSRC/Bae Systems Service Support Solutions: Strategy & Transition • 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 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 {πІ P(Vt)-[C(Vt)-C(Vc)]} Partners Lloyds, NHS, BAE Systems, NLB, Rolls Royce, BT (in discussion), Harmonic, HWC

  13. Thank you

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