In an increasingly competitive global market, innovative industrial manufacturers are moving away from selling products and towards selling outcome-based services. Guaranteeing the outcome of a product or service, rather than just the product itself, is a bold move that requires a profound shift in how value is created, delivered and captured.
This alignment with customer outcomes brings a multitude of new variables into play and, with them, a lot more risk. New, different business models and delivery processes need to be considered and implemented, but there is a significant gap in knowledge for manufacturers seeking to lead in the diversification of the market.
Esade Associate Professor of Innovation Management Ivanka Visnjic and co-authors David Sjödin, Vinit Parida and Marin Jovanovic have addressed this gap with new research into the processes of business model innovation for outcome-based services in a B2B industrial setting.
In addition to contributing important literature to this currently under-researched area, the research provides a thorough understanding of the link between value creation, value capture and the interactions between provider and customer – with important implications for industrial managers.
Capture and creation go hand in hand
When it comes to outcomes, the value promised to the client (value creation) must be underpinned by the contract terms (value capture). For the provider, guaranteeing outcomes rather than product performance means shifting the focus from quality assurance to project support. Identifying the scope of a project and working closely with clients to understand their processes and required outcomes is essential from the start of negotiations.
And while it is important not to get mired in the finer details early on, understanding how the service will be delivered is a key requirement for successful business model innovation. The scope and the level of detail involved in the service may change as the contracting and delivery process develops, but the value creation and value capture must be considered simultaneously throughout.
A sales team that agrees to client requests before confirming that the operations team has the resources to deliver does not just wipe out profits – it can also destroy reputations.
Actively ensure alignment
When the terms have been agreed and the service is being delivered, managers must actively ensure that all elements of the business model are aligned throughout the process. It is not enough to simply check that the contract can be delivered on paper; managers need to make conscious and consistent efforts to align value creation and value capture during the delivery phase.
Strong leadership and methodical processes are required from the outset to ensure that roles are linked with the desired outcomes, with regular reviews conducted to ensure compliance. The slightest mistake in the design or implementation phase can result in a contract that fails to deliver value and is quickly discontinued. If the business model is misaligned at any point in the process, trust is lost, quickly followed by value.
Managers need to make conscious and consistent efforts to align value creation and value capture
The alignment of value creation and value capture is not simply a checklist of activities for each phase; it is a vital foundation for building a profitable customer-provider relationship.
Review and re-align
Ongoing changes in the business environment – social, political, environmental – can all drastically alter a business model. The relationship between provider and customer needs to look outwards as well as inwards, with one eye always on external events. Profitable relationships can quickly turn unprofitable as circumstances change.
Outcome-based services are not a tool for customers to shift responsibility to the provider and avoid the effort and time associated with good governance and performance delivery. They are an operational model that requires a strong customer-provider relationship, trust and a genuine sharing of risk and reward.
The shift from selling products to selling outcome-based services is a high-risk innovation – but it can come with high gains
Managers should regularly evaluate the business model to ensure that the greatest value is created and captured over the life of the relationship. It is not only about what is in the contract but how far the collaboration can be taken. How can we improve the relationships? What can create greater value? How can we ensure a fairer distribution of profits?
These are all questions that should be asked and discussed in regular meetings between the senior management and operational staff of both providers and customers.
The shift from selling products to selling outcome-based services is a high-risk innovation – but it can come with high gains. In opening up the business model, the provider and customer need to ensure they create and capture carefully re-defined value.
Navigating the process, with its constantly shifting roles and responsibilities, is a daunting task that is often at odds with the status quo of traditional business relationships. For the provider, products and spare parts switch from profits to costs, while the customer becomes much more dependent on the provider.
It is an ongoing process: the challenges, needs and requirements of each party constantly evolve and need to be regularly reviewed.
But, done carefully, it is a process that can vastly benefit both.
Original research article: Sjödin D, Parida V, Jovanovic M & Visnjic I. Value creation and value capture alignment in business model innovation: a process view on outcome‐based business models, Product Innovation Management, 37(2), 158-83 (2020)
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