Measuring Performance of Emerging New Business Models through Product Servicization. Serguei Netessine

Transcription

1 Measuring Performance of Emerging New Business Models through Product Servicization Serguei Netessine 1

2 Is this servicization? 2

3 Servicization? 3

4 Servicization = Providing functionality rather than the product Servicization leasing/renting/subsription 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). 4

5 Key to servicization: performance contracting Supplier Time & material contract selling products Conflicting Incentives Material Products Buyer Service Provider Performance based Aligned Incentives Value of Services through Products Buyer Wants to increase TIME & MATERIAL CONTRACTS: Payment based on resources consumed in the service Wants to decrease Wants to increase PERFORMANCE-BASED CONTRACTS: Payment based on product usage (e.g., time or volume) Wants to increase Servicization performance-based contracting 5

6 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 6

7 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

8 Example: Better Place Factors affecting mass adoption of Electrical Vehicles Cost of Battery raises total cost of ownership of Electric Vehicles What is Better Place doing differently? Cost reduced by leasing batteries to customers and charging per mile usage Limited travel range due to limited battery capacity Install a network of charging and battery switching stations

9 The Business Model Battery -Leased by BP -Limited Range -Cost Customer -Payment Plan -Miles for Fixed Charge -Overage Charge Switching Station -Inventory of batteries -Service Level Electricity -Paid by BP All-inclusive price per kilometer driven. Charging Spots -Home or Work

10 Is servicization really better: what do we know? Department of Defense directive (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? 10

11 All customers are different and selfinterested In many practical examples, performancebased 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

12 Example: Rolls-Royce and Power-by-the-Hour 12

13 Rolls-Royce: the company overview 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 % of Rolls-Royce installed fleet (in value) covered by PBC, 41% by T&MC (2009) 13

14 Research Design 5 years of data ( ), 5 engine types, 3 airplane types, 62 customers (airline and nonairline) 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. Based on Guajardo et. al. Impact of performance-based contracting on product availability: empirical analysis, available at 14

15 Results: are there benefits of servicization? 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! 15

16 Summary Servicization is inseparable from performancebased 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!

17

18 Tell me about your experiences!