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 CO-CREATED VALUE that is higher than proposed Propose Enhance Unlock The nature of service value State-dependent In the future Discounted The nature of service value State-dependent In the future Discounted

5. A golf analogy Not understanding service is when you did not practice your putts 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 SERVICE Benefits/performance

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? 10

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 V t = f(V f, V c ) –Discovering f V f =f(A 1, A 2,….A n ), A[a ij ]; V c =f(A 1, A 2,….A n ), A[a ij ] –Modeling the service capacity of V f Pareto Optimal Contract –C(V t )=C(f(V f,V c ), C vf (V f ), C vc (V c )) –∂C(V t )/ ∂V t =0, ∂ 2 C(V t )/ ∂V t 2 >0 Contract design –Degree of substitutability of attribute-based resources from V f and V c to achieve pareto optimality Contract Price Contract Mechanism Design Attribute sensitivity to price Contract Profit for firm Max {π І P(V t )-[C(V t )-C(V c )]} AIM research (ESRC & Industry funded) S4T: EPSRC/Bae Systems Service Support Solutions: Strategy & Transition Laura Smith and Irene C L Ng (2008), “End-to-End Revenue Management of Amorphous Service Capacity: The Case of Handle With Care, 17 th Frontiers in Services, 2-5 Oct 2008, Washington D.C (best practitioner paper nominee) Partners Lloyds, NHS, BAE Systems, NLB, Rolls Royce, BT (in discussion), Harmonic, HWC Partners Lloyds, NHS, BAE Systems, NLB, Rolls Royce, BT (in discussion), Harmonic, HWC

13. Thank you