Outcome based Service Delivery Model
What would it look like when a Loyalty Service provider gets paid based on % increase in business outcomes like Customer retention and NPS?
Imagine a world where we pay and get paid for end outcomes and not the means to achieve it.
But historically service providers have been charging for services like number of headcounts, effort (in hours/days) or a project (in fixed cost model) but with changing times this whole model has evolved (rather still evolving) and it is slowly becoming more common to charge the outcome.
Now this is not any different in loyalty business. Companies have been existing which provide services along with product IPs and have been charging only for input (resources, tools etc.) and in some cases they are being measured in Output (in terms of Quality).
But have you heard or read about a service company charging based on business outcomes like “Customer satisfaction, “Customer retention”, “Revenue” or “Cross/Up Sell”?
Outcome based model
In an IT Production Support the charging model in case of output based would be based on number of tickets fixed rather than on number of resources of time (hours/days) invested.
Time-and-materials contracts remain the most common outsourcing model in the industry, particularly offshore. The issue with traditional outsourcing models is that the focus is on input rather than output.
For example — In a private hospital, Doctors get incentives for prescribing patients with medicines & tests and procedures but not for healthy patients.
All outcome based model will have the following fundamental characteristics:
- Business outcome benefiting Customer rather than activities and tasks of service provider.
- Innovation in process to achieve the outcome — like automation.
- Use of quantifiable performance standards which are part of agreed outcome.
Rewards, Penalty and risks are included in Pricing and Procurement model.
These characteristics or traits of an outcome based contract are actually interdependent — Business outcome has to benefit the end user which is pre-agreed, Service provider nurtures innovation to achieve the same, these outcomes should be measurable against agreed outcome and ultimately based on performance the fee is paid.
Let’s looks at a very classic case study of the usage of Outcome based model in Airline industry. This is one of the best examples of adoption and operationalizing outcome based model probably much before we started talking about it in IT industry.
Rolls Royce ‘Power by the Hour®’ is one of the best case studies of an outcome based business model. Traditionally Rolls Royce used to charge its customers based on support and maintenance of engines in commercial jetliners which was directly linked to number of technicians, fixing parts and effort to do support and periodic maintenance. More than 15 years ago, Rolls Royce transformed its model to outcome and instead of charging customers for inputs and services like repairs, maintenance and the provision of spare parts, customers paid a fee per hour based on the number of hours of flying time for an engine. Rolls Royce understood that by focusing on end Customers expectations which means flying on time without any disruptions would lead to better value for the airline and also for themselves.
This contractual structure has since become the de facto standard in commercial aviation industry.
Let me quote another example of pricing for Outcome based model.
A Leader in Tech product and services company which has products for revenue and billing product employs a leakage based pricing rather than fixed cost of product or T&M based pricing model. If Customer has Outcome of stopping 10Million USD leakage annually, the price quoted for the product by Service provider could be a % of the actual stopped leakage with a minimum threshold.
So it is something that is really creating a win-win situation for both service providers and the end business.
Hurdles to Adoption of Outcome based model
The adoption is like the long winding staircase which seems to have no end state. Despite the benefits to both service provider and customer, the outcome based model is still not prevalent. Two basic reasons are quantification and agreement on Outcome by both Service provider and Customer. And the other reason is the mind set or cultural shift that is needed from both parties.
Challenges in definition (qualification & quantification)
Definition of desired Outcome — “Outcome” itself is understood differently by Customers at different levels.
- For a CEO — revenue generated and operational ease might be an Outcome.
- For a CMO — insights and change into Customer’s motivations, intentions and behaviors might be an outcome.
- For a Product/Project Manager — quality metrics, number of tickets resolved, number of CR’s developed might be an Outcome.
Unlike traditional model, Outcome based model does not detail operational or technical specifications or tasks of individuals. Rather defines business outcome. Balance needs to be maintained where Customer is able to define Outcome appropriately which is measureable and is acceptable to service provider. And high level of risk understanding needs to be specified as Service provider will resist from taking on the Customer Business risks as part of outcome.
Quantification of Outcome should be measurable, clear, realistic and achievable. And the metrics which is used to measure the outcome should also be clear, achievable and agreeable.
If the Outcome cannot be measured than performance cannot be assessed and managed and a lot of disputes and dissatisfaction is inevitable between Service provider and the Customer.
Some more simple examples of Outcome definition which we would have experienced or had a chance to engage in…
Apartment maintenance contract might specify that floors must be clean, free of marks, scratches and dirt, and have consistent finish, instead of specifying that the contractor must strip the floor, replace the tiles/wood and re-tile or rewax the floors periodically.
Company looking for transport services for its personnel may require that a vehicle is ready for use, or a person is picked up, within a certain number of minutes of an agreed time, rather than the company requiring a set number of vehicles to be leased or made available and drivers and their assistants.
The biggest hurdle for adoption if the mind set or rather the cultural shift that is needed from the traditional approach to Outcome based.
- Relinquish control of people and process to Service provider.
- Both the stakeholders should be able to quantify risk of the engagement and move towards agreed common goals.
Prescribing Outcome based delivery Model in Software/Services industry
Business Outcomes
- Zero/Negligible System Interruption in Business processes and Customer Self Service applications
- Software Development Cost Reduction
- Enhanced Customer experience
Operations Outcomes
- Transparency: Consumption must be transparent, which is essential for determining the total cost of ownership and accurate chargeback.
- Flexibility: Costs must be variable and aligned with the IT application portfolio and changing usage patterns driven by the business strategy.
- Predictability: The cost of introducing new services must be clearly outlined, and there must be an easy and intuitive way to ensure that future costs are at least as competitive as current ones.
Conclusion
If I get headache I want to pay the price for clearing my headache and not the medicine. It sounds like Win-Win as long as Outcome is defined and agreed.
In the current financial state Customers are increasingly putting pressure to extract more value for ever reducing price point from their service providers. And service providers are in constant pressure to deliver results and remain competitive through automation and innovation — this is why adoption of outcome based contracting is becoming more popular.
The journey till now has been like an evolution for service providers and it continues to challenge its very basis of existence — Revenue and Customer Satisfaction.
