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

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  • Jingchen Hou
  • Andy Neely

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.

Suggested Citation

  • Jingchen Hou & Andy Neely, 2018. "Investigating risks of outcome-based service contracts from a provider’s perspective," International Journal of Production Research, Taylor & Francis Journals, vol. 56(6), pages 2103-2115, March.
    • Handle: RePEc:taf:tprsxx:v:56:y:2018:i:6:p:2103-2115
    DOI: 10.1080/00207543.2017.1319089
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    Citations

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    Cited by:

    1. Grubic, Tonci & Jennions, Ian, 2018. "Do outcome-based contracts exist? The investigation of power-by-the-hour and similar result-oriented cases," International Journal of Production Economics, Elsevier, vol. 206(C), pages 209-219.
    2. Jackson, Canek & Pascual, Rodrigo & Mac Cawley, Alejandro & Godoy, Sergio, 2023. "Product–service system negotiation in aircraft lease contracts with option of disagreement," Journal of Air Transport Management, Elsevier, vol. 107(C).
    3. Mario Fargnoli & Nicolas Haber & Massimo Tronci, 2022. "Case Study Research to Foster the Optimization of Supply Chain Management through the PSS Approach," Sustainability, MDPI, vol. 14(4), pages 1-19, February.
    4. Qin, Xuwei & Shao, Lusheng & Jiang, Zhong-Zhong, 2020. "Contract design for equipment after-sales service with business interruption insurance," European Journal of Operational Research, Elsevier, vol. 284(1), pages 176-187.
    5. David Hidalgo-Carvajal & Ruth Carrasco-Gallego & Gustavo Morales-Alonso, 2021. "From Goods to Services and from Linear to Circular: The Role of Servitization’s Challenges and Drivers in the Shifting Process," Sustainability, MDPI, vol. 13(8), pages 1-26, April.
    6. Kohtamäki, Marko & Parida, Vinit & Oghazi, Pejvak & Gebauer, Heiko & Baines, Tim, 2019. "Digital servitization business models in ecosystems: A theory of the firm," Journal of Business Research, Elsevier, vol. 104(C), pages 380-392.
    7. Jackson, Canek & Pascual, Rodrigo, 2021. "Joint pricing and maintenance strategies in availability-based product-service systems under different overhaul conditions," Reliability Engineering and System Safety, Elsevier, vol. 216(C).
    8. Mar’atus Sholihah & Tatsuru Maezono & Yuya Mitake & Yoshiki Shimomura, 2019. "PSS Strategic Alignment: Linking Service Transition Strategy with PSS Business Model," Sustainability, MDPI, vol. 11(22), pages 1-30, November.
    9. Li, Dong & Mishra, Nishant, 2021. "Engaging suppliers for reliability improvement under outcome-based compensations," Omega, Elsevier, vol. 102(C).
    10. Korkeamäki, Lauri & Kohtamäki, Marko & Parida, Vinit, 2021. "Worth the risk? The profit impact of outcome-based service offerings for manufacturing firms," Journal of Business Research, Elsevier, vol. 131(C), pages 92-102.
    11. Martin Schymanietz & Julia M. Jonas & Kathrin M. Möslein, 2022. "Exploring data-driven service innovation—aligning perspectives in research and practice," Journal of Business Economics, Springer, vol. 92(7), pages 1167-1205, September.

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