Fee for service models can be very lucrative for suppliers, at least in the short term, but create conflicting interests, warp incentives and increase costs. Accordingly it makes sense to define outcome based services which are compensated on the basis of the value created as “value based services” and to distinguish them from the conventional model of “fee for service”. in the sense that the outcome represents value as perceived by the customer, whereas the activity is perceived as cost.
By necessity therefore the supplier’s compensation for the outcome must be somehow value based, i.e. For customers, outcomes must represent value that is often subjective, but, at the same time, must be quantified. The change from an “activity provider” to an “outcomes provider” transforms the supplier’s risk profile (the supplier assumes outcome risk rather than just operational and technical risk), requires a better understanding of the customer’s business, changes in processes and integration with the customer’s own. However pure play service providers can and do also sell “outcomes”, as when an energy services company contracts to provide ambient climate, defined by temperature and moisture while reducing energy consumption -rather than heat and cooling by the kWh, or when a maintenance provider makes an agreement on the basis of Overall Equipment Effectiveness (OEE) and a budget constraint for a plant -rather than selling “spares and repairs” or a preventive maintenance program. OEMs often bundle products and services into solutions (product-service systems) to produce the outcome, Rolls Royce’s “power-by-the-hour” being the prime example. Within the general servitization buzz the talk is a lot about transitions to outcome or performance based services, where a supplier contracts with a customer for outcomes -not activities- and gets paid accordingly.
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