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Effects of Social Capital on Risks Taken by Suppliers in Outcome-Based Contracts

PhD Research by Jingchen Hou.

On the journey of servitization, services provided are moving from basic services to advanced services where capabilities are delivered. In this circumstance, outcome-based contracts (OBC) are increasingly used. Two important issues in OBC are risk and relationship (social capital).

An outcome-based contract refers to an agreement between the supplier and the customer that the supplier gets paid based on the outcomes of total solutions or the outcomes of customer value in a continual use situation.

Two approaches to deliver outcome-based contracts are first, the supplier-customer binary approach and second, the alliance / joint venture approach.

JH Fig1 Supplier Binary Approach
Figure 1. Effects of social capital on risks of outcome-based contracts with a supplier-customer binary approach from the supplier's perspective

In the supplier-customer binary approach, two major risk categories are commercial risk regarding the contracting of OBC, and operational risk regarding the implementation of OBC. Eighteen risk factors in six categories are identified to be the influencing factors. Social capital can prevent and mitigate risks to a certain extent.

JH Fig1 alliance approach
Fig 2. Risk and social capital building blocks in outcome-based contracts with an alliance approach

In the alliance or joint venture approach, three major risk categories are commercial risk regarding the commercial solutions among partners, operational risk regarding the operations of the alliance, and social capital risk regarding the construction of social capital in the alliance. The three risks mutually influence each other.

JH Fig1 risk management process
Figure 3. A risk management process for outcome-based contracts

Outputs:

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