measuring performance of emerging new business models ... · dod service contracts must be...
TRANSCRIPT
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Measuring Performance of Emerging New Business Models through Product Servicization
Serguei Netessine
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Is this servicization?
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Servicization?
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Servicization =
Providing functionality rather than the product
• Under servicization, payments should be tied to product
usage or peformance.
• Under servicization, various contingencies are included in
the price (e.g., repairs, obsolescence, theft, consumables).
Servicization ≠ leasing/renting/subsription
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Key to servicization: performance contracting
Buyer
Material
Products
Supplier
Wants to
increase
Wants to
decrease
Time & material contract
– selling products
Conflicting Incentives
Value of Services
through Products
Service
Provider Buyer
Wants to
increase
Wants to
increase
Performance based
Aligned Incentives
TIME & MATERIAL CONTRACTS:Payment based on resources
consumed in the service
PERFORMANCE-BASED CONTRACTS:
Payment based on product usage (e.g., time or volume)
5Servicization performance-based contracting
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Example: Evolution at Bombardier Transportation Services
Ad-hoc price per part
Guaranteed price per X years
Consignment stock
Including obsolescence
Price per km/All inclusive
Example: selling service at CAT logistics
• Pay per amount of earth moved from point A to point B.
A B
Payment = distance amount of earth rate
Example: Better Place
Cost of Battery raises
total cost of ownership
of Electric Vehicles
Limited travel range due
to limited battery
capacity
Cost reduced by leasing
batteries to customers
and charging per mile
usage
Install a network of
charging and battery
switching stations
Factors affecting mass adoption of Electrical Vehicles
What is Better Place doing differently?
The Business Model
Electricity
Customer
Charging Spots
Battery
-Leased by BP-Limited Range-Cost
-Inventory of batteries-Service Level
-Payment Plan-Miles for Fixed Charge-Overage Charge
-Paid by BP -Home or Work
Switching Station
All-inclusive price per
kilometer driven.
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Is servicization really better: what do we know?
• Department of Defense directive 5000.1 (2003): all DoD service contracts must be performance-based.– Support: some anecdotal data from pilot programs.
• Government Accountability Office (2005): No evidence of performance improvement under PBC due to lack of data.
• A survey by SAP/Aviation Week: 329 executives in the A&D industry (2008). – Do you have evidence of higher performance on past or
current PBC programs? 33% - YES, 36% - NO, 32% - Too early to tell.
• Bottom-line: evidence is inconclusive… Why?
All customers are different and self-interested
• In many practical examples, performance-based contracts are offered alongside with traditional, non-performance contracts.
• Customers decide for themselves which contract they want.
• Performance-based contract is like a health insurance: you know exactly how much money you will spend when you get sick.
• And who buys insurance? Sick people…
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Example: Rolls-Royce and Power-by-the-Hour
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Rolls-Royce: the company overview
Rolls-Royce is a world-leading provider of power systems
and services with four business units (civil aerospace,
defense aerospace, marine and energy)
The company had revenues of £10.1 billion in 2009, of
which about half came from services revenues
It has a broad customer base comprising more than 600
airlines, 4,000 corporate and utility aircraft and helicopter
operators, 160 armed forces, more than 2,000 marine
customers and energy customers in nearly 120 countries
Employs over 38,000 skilled people in offices,
manufacturing and service facilities in 50 countries
Invested £864 million in research and development in
2009
59% of Rolls-Royce installed fleet (in value) covered
by PBC, 41% by T&MC (2009)
Rolls-Royce: the company overview
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Research Design
• 5 years of data (2002-2007), 5 engine types, 3 airplane types, 62 customers (airline and non-airline) around the world.
• Data on engine removals (1076 total removals), some planned and some unplanned.
• 79% of engines covered by PBC contracts, 21% are covered by T&M contracts.
• Econometric (regression) analysis of engine reliability under PBC vs. T&M contracts.
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Based on Guajardo et. al. “Impact of performance-based contracting on product availability: empirical analysis”,
available at http://www.netessine.com.
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Results: are there benefits of servicization?
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Attempt 1: compare reliability of engines under PBC and
under T&MC (while controlling for engine/airplane/customer
characteristics): no significant differences.
Attempt 2: realize that customers with low reliability of
engines are more likely to sign up for PBC contracts and
compare again.
If one accounts for customer self-selection, there is positive
and significant effect of Performance Based Contract on
engine reliability (35% increase on average).
Without accounting for this self-selection it might seem that
servicization does not work!
Summary
• Servicization is inseparable from performance-based contracting.
• Intuitively, servicization is a “good thing” but proving this is not easy: more studies are needed.
• The problem is that customers differ in their utilization of equipment, environment in which they operate etc. and select contracts accordingly.
• Performance measurement needs to take this into account!
Tell me about your experiences!