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

Jingchen Hou · Andy D. Neely

101 citations0/0 files storedInternational Journal of Production Research

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Service and Product Innovation Sustainable Supply Chain Management Outsourcing and Supply Chain Management

Abstract

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) dynamism regarding the context of OBCs, (iii) capability, (iv) alignment and (v) dependency regarding the stakeholders of OBCs. The paper explores the links between these risk factors and commercial and operational risk. In doing so, the paper provides a framework for understanding risk in OBCs.

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References

2002Case research in operations management 1985What is total quality control the japanese way 2009The servitization of manufacturing 2008Exploring the financial consequences of the servitization of manufacturing 2007Performance Contracting in After-Sales Service Supply Chains 2010Fundamentals of Risk Management: Understanding, Evaluating and Implementing Effective Risk Management 2012Product–Service Systems Engineering: State of the art and research challenges 2009Outcome-based contracts as a driver for systems thinking and service-dominant logic in service science: Evidence from the defence industry

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