February Paper on 'Investigating risks of outcome-based service contracts from a provider's perspective' by Jingchen Hou and Andy Neely
Investigating risks of outcome-based service contracts from a provider's perspective
Increasingly servitized companies use outcome-based contracts (OBCs) or performance-based contracts (PBCs) to provide advanced services such as availability or capability. These agreements often incorporate gain share and pain share mechanisms, and service providers are paid based on the outcomes of the total solutions or the outcomes of customer value in a continual use situation. However, the service providers of OBCs are concerned about the fact that there is usually a risk transfer from the customers to the providers, and more risks are introduced to the service providers. This research aims to unpack and analyse risks of OBCs from the providers’ perspective. In this paper, we differentiate commercial risk at the contract negotiation stage and operational risk at the contract implementation stage, and identify twenty-three risk factors that lead to commercial risk and / or operational risk in OBCs. These risk factors are then categorized in five dimensions and their contributions to commercial risk and operational risk are evaluated respectively. The five dimensions are complexity and dynamism regarding the context, and capability, alignment and dependency regarding the stakeholders. By proposing the risk framework of OBCs, this paper provides guidance for risk management for practitioners who use outcome-based contracts for the service provision.