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Value, Variety and Viability: New Business Models for Co-Creation in Outcome-based Contracts

I. Ng,G. Briscoe

Published 2012 in International Journal of Service Science Management Engineering and Technology

ABSTRACT

While manufacturing in the past century has been essential to wealth creation, developed economies are gradually becoming service-oriented (Ramirez, 1999). Research recommends that manufacturers should diversify into providing services to remain viable, aiming to facilitate equipment use for customer outcomes rather than just transferring the ownership of equipment ( Neely, 2008; Baines et al, 2007). This means that the value proposition of the manufacturer changes from exchange value obtained from equipment provision, to value-in-use, obtained from the outcomes of equipment use. Outcome-based contracts such as Rolls-Royce’s “Power-by-the hour ®”, exemplifies such a change in value proposition, as the firm is paid not according to its service activities such as material and repairs, but based on the outcome of such activities in continual use situations i.e. the number of hours of engine in the air. This change in business model requires firm-customer relationships to be embedded in the processes and interactions of collaborative value-creating activities, ie value co-creation. Therefore, cooperation between the firm and its customer is a partnership that requires a “mutual and synergistic pooling of resources and capabilities and a substantial degree of co-mingling between partners in terms of people, systems, skills etc. in order to attain their objectives” (Madhok & Tallman, 1998).

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