International Journal of Production Economics 192 (2017) 169181

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Int. J. Production Economics

journal homepage: www.elsevier.com/locate/ijpe

What brings the value to outcome-based contract providers? Value drivers MARK
in outcome business models

Ivanka Visnjica, Marin Jovanovicb,c, , Andy Neelyd, Mats Engwallb
a
Department of Operations, Innovation and Data Sciences, ESADE Business School, Ramon Llull University, Av. Pedralbes, 60-62, 08034 Barcelona, Spain
b
Department of Industrial Economics and Management, KTH Royal Institute of Technology, Lindstedtsvgen 30, SE-100 44 Stockholm, Sweden
c
Department of Industrial Engineering, Business Administration and Statistics, Universidad Politcnica de Madrid, c/ Jos Gutirrez Abascal, 2, 28006
Madrid, Spain
d
Department of Engineering, Institute of Manufacturing, University of Cambridge, 17 Charles Babbage Road, Cambridge CB3 0FS, UK

A R T I C L E I N F O A BS T RAC T

Keywords: Outcome-based contracts (OBCs) are frequently seen as the most advanced level of service oering that product
Servitization rms oer. To deliver OBCs, product rms have to shift from the traditional product business model (PBM) to
Outcome-based contracts (OBCs) adopting an outcome business model (OBM). This constitutes a major change that rearranges their activity
Outcome business models (OBMs) system and therefore profoundly changes their value-creation process. The literature tells us little about what
Value drivers
this change entails and the key value drivers that OBC providers focus on as they adopt outcome business
models. To tackle this topic, we study four global capital equipment manufacturers that recently started to oer
highly advanced forms of OBC: Bombardier, Caterpillar, Hitachi and Rolls Royce. We learn that, apart from
recognized value drivers, such as eciency, novelty, lock-in and complementarity, OBC providers draw value
from what we have labelled accountability value. Second, the value drivers are more diverse in OBMs than in
traditional PBMs. Third, while in PBMs there is a trade-o between value drivers, in OBMs value drivers are
mutually reinforcing, as they create a synergistic interplay. At the same time, however, rms are exposed to
some sources of value loss as they start providing OBCs and shift to OBMs. We contribute to the literature by
connecting the OBM literature with the broader value-creation literature and identifying (specic) value drivers
as they appear in the OBM context, as well as the relationships among them.

1. Introduction
Incumbent rms increasingly face strong competition, from either
low-cost disruptors or disruptors from other sectors that rely on new or
dierent technologies and/or business models (Markides, 2015; Teece,
2010; Tongur and Engwall, 2014). In order to adapt their business
models (Saebi et al., 2016), rms choose either to move towards the
disruptor by providing low-cost or technologically advanced products
and services, or to move away from the competition by trying to
create more or better value for their customers through the provision of
additional services that help to better satisfy their customers needs
(Cusumano et al., 2015; Raja et al., 2013; Wise and Baumgartner,
1999).
Some product companies have taken this shift to services
(Kowalkowski et al., 2015; Ulaga and Loveland, 2014) to its most
advanced form the provision of outcome-based service contracts
(Kindstrm, 2010; Ng et al., 2013; Visnjic Kastalli et al., 2013). The
outcome-based contracts include guaranteeing to deliver specic out-
comes required by the customer and often involve combining diverse
products and services to deliver the outcome (Cusumano et al., 2015).
Rolls Royce epitomized the outcome strategy, rst through its Power
by the Hour contracts and then through its Total Care contracts.
Under these types of contract manufacturers of airplane engines (e.g.
Rolls Royce or GE) guarantee the availability and reliability of the
engines (Neely, 2009).
Once this change in oering occurs, a major change in the business
model (Amit and Zott, 2001; Zott et al., 2011) from product business
model (PBM) to outcome business model (OBM) is triggered (Ng
et al., 2013). Referring to the previous example, once a manufacturer
decides to guarantee the availability and reliability of the engine, the
responsibility for the delivery of all the products and services necessary
to guarantee engine availability/reliability falls to the manufacturer.
The engine manufacturer will not only coordinate all the necessary
activities but may also change how these outcomes are achieved by
changing some of the activities or the entity responsible for delivering
them (Davies et al., 2007; Ng et al., 2009).

Corresponding author.
E-mail addresses: ivanka.visnjic@esade.edu (I. Visnjic), marin.jovanovic@indek.kth.se (M. Jovanovic), adn1000@cam.ac.uk (A. Neely), mats.engwall@indek.kth.se (M. Engwall).

http://dx.doi.org/10.1016/j.ijpe.2016.12.008
Received 10 December 2015; Received in revised form 29 September 2016; Accepted 2 December 2016
Available online 14 December 2016
0925-5273/ 2016 Elsevier B.V. All rights reserved.
I. Visnjic et al.
Once a change in the business model occurs, this ultimately changes
the drivers of value creation (Maine et al., 2012; Normann and
Ramirez, 1998). Although the literature identies value-creating activ-
ities (Ng et al., 2012), value drivers in outcome business models remain
under-explored. Furthermore, it remains unclear whether there are any
trade-os among OBM value drivers. For instance, in the case of PBMs,
rms may get stuck in the middle by pursuing an eciency-centred
business model that aims to reduce transaction costs, together with a
novelty-centred business model that refers to new ways of conducting
economic exchanges among various participants. It is unclear whether
rms that adopt OBMs should also focus on one source of value or
whether they could embrace various sources of value. In line with these
assertions, our study has been guided by the following research
questions: What are the drivers of value creation in outcome business
models? and What are the interdependencies among value drivers in
outcome business models?
We studied the value drivers of highly advanced outcome-based
contract providers Rolls-Royce, Caterpillar, Bombardier
Transportation and Hitachi Rail as they adopted outcome business
models. Initially, we found that some drivers of eciency, which are
commonly associated with PBMs, seem to be less present in OBMs.
Furthermore, we found that OBM sources of value are more diverse in
comparison to PBMs. In addition, we uncovered a new value driver
accountability value that is created by taking over the risk of
delivering outcomes from the customer and monitoring the responsible
parties/stakeholders within the productservice system (PSS) (Cova
and Salle, 2008). Finally, unlike in PBMs, where there is a trade-o
between dierent value drivers (e.g. novelty and eciency), in OBMs
these value drivers are synergistic. Nevertheless, we found that some
value drivers may represent sources of not only value gain but also
value loss.
We contribute to the business models and value-creation literature
by specifying the implications for value creation as a rm adopts an
OBM. First, we contribute to the OBM literature by identifying specic
value drivers that are at work in the OBM context. We directly build on
Ng et al. (2013), who look at factors of OBMs and their impact on rm
performance by specifying the changes in the activity systems that
occur during the OBM shift and the resulting changes in the value-
creation process and drivers of value. Second, we contribute to the
business model and value-creation literature more broadly by initiating
the conversation on OBMs. While Amit and Zott (2001) look at value
creation in e-business business models, we explore the specicities of
the drivers of value creation that they presented in the context of
OBMs. In addition to contextualizing existing value drivers, we identify
an additional category of accountability value that has not been
recognized by the previous literature. Furthermore, while the earlier
literature looks at these value drivers in isolation, we also observe the
interplay among them. Since we nd a synergetic congruence between
dierent drivers of value creation in the context of OBMs, the study
extends an early eort to challenge the well-established perspective on
the trade-o between eciency and novelty in the context of OBMs.
Finally, our framework provides managers with a check list of
dierent sources of value gain, as well as sources of loss.
2. Literature review
2.1. The shift to outcome-based contracts and the associated change
with outcome business models
The phenomenon of servitization has gained signicant attention in
academia during the last decade (Baines et al., 2016; Eloranta and
Turunen, 2015; Neely, 2009), as product providers have increasingly
added services to their product portfolio (Santamara et al., 2012). The
motivation for servitization lies in the nancial opportunities that
services oer; as products started becoming less protable, down-
stream service activities increasingly provided attractive prot margins
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International Journal of Production Economics 192 (2017) 169181
(Cohen et al., 2006; Raddats et al., 2016; Wise and Baumgartner,
1999). Consequently, product providers began progressively moving
from a basic service oering (e.g. maintenance services) to advanced
services, such as outcome-based contracts (Caldwell and Howard,
2014; Kim et al., 2007; Ng et al., 2013).
Outcome-based contracts (OBC) focus on specication and evalua-
tion of outputs or outcomes rather than required inputs, activities or
processes (Selviaridis and Wynstra, 2015). Cusumano et al. (2015)
named these services substituting services, as they essentially replace
the product with a service. These advanced services help rms to
strengthen relationships, lock out competitors and grow revenue and
prot (Baines and Lightfoot, 2013; Story et al., 2016). Advanced
services are common in the context of industrial durable goods
manufacturing, as well as software (Ng et al., 2009), since they help
dierentiate rms market oerings (Fang et al., 2008) and tackle the
adverse eects of the industry lifecycle (Cusumano et al., 2015; Suarez
et al., 2013).
At the same time, product rms often face diculties in creating
capabilities to deliver such advanced services (Story et al., 2016).
Gebauer and Kowalkowski (2012) underlined that the shift to advanced
services requires an organization-level change (Kindstrm and
Kowalkowski, 2015; Vendrell-Herrero et al., 2014). More specically,
researchers argue that product rms need to profoundly change their
business models in order to deliver advanced services (Kindstrm and
Kowalkowski, 2014). Considering the magnitude of change in the
product providers business model, we lack sucient understanding
of how product providers create and capture value once they shift to
outcome business models (Ng et al., 2013). In the following section, we
will review the literature on business models and value creation in
general, in order to derive more specic research questions.
2.2. Business model archetypes and the value drivers that underpin
them
Business models can be conceptualized as activity system cong-
urations (Amit and Zott, 2001). The most established activity system
conguration is the value chain, which encompasses the full range of
activities required to bring a product or service from input (e.g. raw
materials) to delivery to the nal customer (Kaplinksy and Morris,
2001). Porter (1985) was among the rst to recognize the importance
of the value chain and to discuss the value drivers of this conguration.
Stabell and Fjeldstad (1998) broadened the study on types of business
model by contrasting value chains with other types of activity system
that seemed to have dierent structures and value-creation processes.
This exercise allowed them to isolate two other archetypes: the value
network and the value shop. The characteristics of the value network
have been studied extensively and the literature clearly establishes
dierent design characteristics of value networks relative to value
chains. For instance, Christensen and Rosenbloom (1995) assessed the
characteristic of value networks needed for the commercial success of
innovation. Overall, the value network creates value by facilitating a
network relationship using a mediating technology often referred to as
a platform (Stabell and Fjeldstad, 1998). The network literature has
thoroughly studied how the design characteristics of the networks, as
well as the position of the focal rm within the network, impact their
performance (Ritter et al., 2004). Adjacent literature on the alliances
and other inter-organizational relationships went deeper to explore the
eect that the choice of a specic relationship mode has on rm
performance (Parmigiani and Rivera-Santos, 2011).
While the value chain and value network have been thoroughly
studied, the value shop has received far less attention (Stabell and
Fjeldstad, 1998). The value shop creates value by mobilizing resources
and activities to resolve a particular customer problem, whereby the
problem to be solved determines the intensity of the shops activities
(Stabell and Fjeldstad, 1998). For instance, the outsourcing of complex
professional services has become a well-known approach to reducing
I. Visnjic et al.
costs, as well as increasing exibility and economies of scope (Ellram
et al., 2008). Indeed, the shift from PBM to OBM can be seen as one
version of a shift from value chain to value shop.
Understanding the dierences in activity system congurations
helps to reveal dierences in the drivers of value creation (Amit and
Zott, 2001). Value drivers or sources of value creation (used
interchangeably in this paper) refer to any factor that enhances the
total created value by the business model (Amit and Zott, 2001;
Brandenburger and Stuart, 1996). Amit and Zott looked at the activity
systems of e-businesses to identify four distinct (groups of) value
drivers in business models: eciency, complementarities, lock-in and
novelty. Building on a diverse theoretical background, they conceptua-
lized these four value drivers as follows. The eciency value driver
concerns the value created by an activity system change that reduces
the transaction cost (Williamson, 1975). For instance, group-buying
platforms leverage on the eciency value driver by demanding
accumulation and quantity discounts (Anand and Aron, 2003). The
complementarity value driver concerns the value created by super-
additivity or synergy between dierent services; complementarity
value could be accomplished by connecting activities vertically (e.g.
product and after-sales services) or horizontally (e.g. one-stop shop-
ping) (Amit and Zott, 2001). For example, the complementarity value
driver is displayed when the customer obtains benets through the
simultaneous use of two or more services or saving time (e.g. shopping
mall) (Ye et al., 2012). The lock-in value driver concerns the value
gained by maintained customer loyalty (e.g. bonus points and loyalty
programmes) that results in customers engaging in repeated transac-
tions (Amit and Zott, 2001). Similarly, telecom operators use multi-
service oers to generate the lock-in eect through conveniences such
as unied billing. Finally, the novelty value driver concerns value
generated by entirely new solutions to existing problems. This
Schumpeterian growth, in eect, creates new superior value by destroy-
ing the existing (inferior) value-creation logics (Schumpeter, 1942).
More recent examples of interplay between business models and
technological innovations (Baden-Fuller and Haeiger, 2013) include
services such as ride-sharing platforms (e.g. Uber and Lyft), crowd-
sourcing markets (e.g. Gigwalk and TaskRabbit) and accommodation-
sharing systems (e.g. AirBnB and Flipkey) (Gawer and Cusumano,
2014).
Distinct business models rely on dierent value drivers (Lepak
et al., 2007; Normann and Ramirez, 1998; Teece, 2010). The value
chain lends itself well to generating eciency, namely economies of
scale, as one of the leading drivers of value creation. While value chains
are often associated with product business models, some service
business models may rely on the value chain logic and reap the benets
from similar value drivers. For instance, Jovanovic et al. (2016) found
that product providers tend to achieve eciency gains by oering basic
service oerings (e.g. spare parts). On the contrary, the value network
focuses on activities associated with establishing and maintaining links
between actors and activities associated with maintaining and running
the infrastructure; their preferential position enables them to reap
complementarity and to lock in value in the form of network eects
(Stabell and Fjeldstad, 1998). Finally, business models with the value
shop logic aim to solve customers problems, which are usually complex
and unique and require a lot of feedback-loop interactions with the
client (Stabell and Fjeldstad, 1998). Consequently, value shops are
rarely supported by the sequential/linearly connected activities and
require more customization. As a result of this need for customization,
arguably they benet less from eciency gains. The impact of the other
value drivers in this context is less known.
2.3. The shift to the outcome business model and the expected
implications for the value drivers
Given the fundamental transformation of the activity system and
value-creation process that occurs when rms move from PBM to
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International Journal of Production Economics 192 (2017) 169181
OBM, it is reasonable to expect that, in the context of outcome-based
contracts, value drivers will be dierent to those that exist in PBMs.
Indeed, Bowen et al. (1989) were the rst to stress the reluctance of a
product rms management to accept service-specic values (e.g. to
acknowledge heterogeneity and exibility), since these values could
contradict traditional manufacturing goals and practices, such as
standardization and eciency. For instance, complementarity as a
value driver may be expected in the context of the OBC/OBM, since
total value created by combining products and services exceeds the
value that would be generated in isolation (Shankar et al., 2009). In
such a product+service context, value-searching and benet-combin-
ing are important value drivers (Priem et al., 2012). For example, OBC
providers can create economies of scope in use, as customers only
have to deal with one productservice provider and can therefore save
a lot of time that way (Visnjic et al., 2016).
While these contributions help to identify the issue, it stays unclear
for a product provider what sources of value are signicant for the shift
to OBM. Furthermore, it is unclear in the OBM literature and, more
broadly, in the value-creation literature, how dierent value drivers
interact. Although Zott et al. (2011) claimed that sources of value can
be mutually reinforcing; that is, the presence of each value driver can
enhance the eectiveness of any other value driver, the empirical
evidence is limited. Moreover, there is a lack of knowledge of the
interdependencies between dierent value drivers in general, and in
OBMs specically. Consequently, this study focuses on the following
research question: What are the drivers of value creation in outcome
business models? and What are the interdependencies among value
drivers in outcome business models?
3. Method
3.1. Research design
The explanatory nature of our research questions prompted us to
conduct comparative multiple inductive case studies (Eisenhardt and
Graebner, 2007). Following the induction approach, we opted for
theoretical sampling (Glaser and Strauss, 1967). We decided to study
the OBM value drivers in the context of industrial goods manufactur-
ing, given that this context has been identied in the literature as a
setting in which the shift to outcomes occurs frequently and takes the
most advanced forms (Neely, 2009). Within these sectors, we focused
specically on the companies that were distinctive in terms of length,
scope or complexity of the outcomes that they oered. We wanted to
study advanced or ambitious outcome providers, as they were more
likely to encounter a more diverse set of value drivers. As we wanted to
isolate value drivers that are generalizable across the industries, we
selected two dierent industries. To enhance our ability to compare
and contrast the companies, we selected two companies for each
industry (Flyvbjerg, 2006). Following this direct replication strategy
(Yin, 1994), we selected two outcome providers from the train sector,
Hitachi Rail and Bombardier, and two outcome providers from the
engineering goods sector, Caterpillar and Rolls Royce. Our case
selection was deliberate and representative (Yin, 1994), since these
companies epitomized OBCs and advanced service contracts in general.
Below we provide the OBC contracts for each of these rms in order to
illustrate our data set:
Bombardier Transportation is the rail equipment division of
Bombardier Inc. It is one of the world's largest companies in rail
vehicle and equipment manufacturing. Traditionally, manufacturers
would sell trains with reliability commitments for the warranty
period of two years. Over the years, they have evolved towards
oering long-term maintenance contracts for ve years and longer,
which would include guaranteeing certain performance attributes,
such as availability and reliability of the trains.
Hitachi Rail is one of the worlds leading railway manufacturer,
I. Visnjic et al. International Journal of Production Economics 192 (2017) 169181

providing a full range of products and services for rail operators.
Hitachi Rail used to sell trains to leasing companies and rail
operators. Over the years, Hitachi Rail has moved towards multi-
year ( > 20 years), outcome-based contracts whereby the trains are
owned and nanced by Hitachi Rail and the operator pays a daily
usage charge. These contracts have an element of performance
regime (e.g. availability, reliability and cleanliness) with associated
penalties, in case the performance is not reached.
Caterpillar is the worlds leading manufacturer of construction and
mining equipment, diesel and natural gas engines, industrial
turbines and dieselelectric locomotives. Caterpillar has had a
longstanding history of oering every piece of an aftermarket
logistics chain through its dealer network. Recently, it also shifted
to oering OBCs; specically, Caterpillar would guarantee costs per
operating hour of equipment. These hourly charges include all
maintenance and repair activity, as well as a guarantee that if the
clients equipment is not available Caterpillar will provide replace-
ment equipment (eectively an insurance policy).
Rolls Royce is an engineering company focused on the design,
manufacture and support of a range of products and services for civil
and defence aviation, oil and gas, energy and nuclear, marine and
power systems. Rolls Royce became famous by oering a cost-
eective, risk-mitigated engine maintenance OBC plan, which covers
operational, maintenance and administrative support and risk,
known as Total Care.
3.2. Data collection
The research process evolved over several phases, starting with data
collection and then analysis and validation, during the four-year period
(Pentland, 1999; Pettigrew, 1990). In the data-collection phase, we
triangulated data from semi-structured interviews with archival data,
such as company reports, nancial data and historical records. We also
used company visits and observations, including participation at
management meetings, where the management would discuss progress
on the outcome-based service design and delivery. We conducted 25
interviews, targeting mainly top management, project managers and
informants who had a comprehensive picture of the entire business
model orchestrated towards meeting the requirements of the OBC. We
organized multiple seminars and conferences to discuss emerging
ndings with case company representatives. These sessions enabled
us to link the constructs from the literature with the terminology used
by the informants (Fontana and Frey, 1998). We focused in particular
on the value drivers that rms encountered and employed as they
shifted to OBMs. We used probes asking additional clarifying
questions to gain further insights where appropriate. Table1.
3.3. Data analysis
We began the analysis by having two individual researchers per-
form detailed within-case analysis following a write-up of detailed

Table 1
Data sources.

Type Workshop purpose Period Representatives from participating companies

Internal Caterpillar Hitachi Rolls Royce Bombardier

Call Research preparation call Mar10 x

1-d workshop Research question setting workshop Jul10 x
1-d workshop Data collection preparation workshop Dec10 x
1-d workshop Within case results dissemination Apr11 x x x
3-d conference Result disemination & validation- part 1 Sep11 x x x x x
3-d conference Result disemination & validation- part 2 Sep12 x x x x x

Type Organizational level* Period Representatives from participating companies

Caterpillar Hitachi Rolls Royce Bombardier

F2F interview, site visit General Manager Dec10 x

F2F interview, site visit Business Analysis Director Dec10 x
Phone interview Business Development Director Dec10 x
F2F interview, site visit Service Manager Jan11 x
F2F interview Maintanance Manager Apr11 x
F2F interview, site visit Data Analytics Manager Jun11 x
F2F interview, site visit Maintanance Manager Jun11 x
F2F interview, site visit Data Analyst Jun11 x
F2F interview, site visit Service Manager Jun11 x
F2F interview Managing Director Sep11 x
F2F interview, site visit Division Manager Sep11 x
F2F interview Director Sep11 x
F2F Interview Strategy Manager Sep11 x
F2F Interview Vice President Dec11 x
F2F interview Service Business Operations Sep12 x
F2F interview Product Support Operations Jan14 x
F2F interview Digital & Technology Director Jan14 x x
F2F interview Service Manager Mar14 x
F2F Interview Global Service Solutions and Customer Experience May14 x
F2F Interview Dealer Service and Support Oct14 x
F2F Interview Business Development Director Nov14 x
F2F Interview Operations Executive Nov14 x
F2F Interview Services Executive Nov14 x
F2F interview Global Head of Customer and Product Training Nov14 x
F2F interview Director of Customer Experience Mar15 x

*Titles have been generalized to disguise the interviewees. We distinguished among President, Director and Manager levels. We gave a couple of discriptive categories (e.g. service or
maintanance) to describe better responsibilities of the interviewees

172
I. Visnjic et al.
descriptions for each case case histories. Within-case analysis
performed by two individual researchers was chosen in order to take
into account the richness of the contextual data and to gain greater
condence in the research ndings. To avoid any bias in relation to the
status of informants, we decided to cross-analyze the data so that the
respondents position in the rm remained anonymous (Miller et al.,
1997). After we had analyzed each case (see detailed explanation
below), we conducted a cross-case analysis to identify the patterns that
were shared across the cases. We selected two cases at a time and
compared them to uncover dierences; we repeated this until all four
cases had been considered. While there were nuances in the exact
examples and the extent to which each of the constructs was supported
in the data, we managed to identify all second-order categories in all
four cases (see illustrative quotes in Table 2).
Table 2
Illustrative quotes.
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International Journal of Production Economics 192 (2017) 169181
To analyze the cases, we employed coding techniques suggested by
Corbin and Strauss (1990). Specically, we created the list of rst-order
codes for each of the four cases using the case histories. Afterwards, we
grouped the rst-order codes into specic aggregate dimensions
identied in the literature. We borrowed from Amit and Zott (2001),
the following aggregate dimensions: novelty, lock-in, complementari-
ties and eciency. For instance, rst-order codes, such as quotes on
increased interoperability between products and services following the
new productservice design or a focus on the shared value between
rm and customer, were both initially grouped under the aggregate
dimension of complementarity.
One set of rst-order constructs could not have been matched to the
existing literature constructs. Specically, our respondents had sub-
stantial insights related to the accountability that product rms started
(continued on next page)
I. Visnjic et al.
Table 2 (continued)
to take on for a particular outcome, and these insights did not t any of
the aforementioned categories. For instance, one of the respondents
retold an incident in which, having failed to deliver on the availability
level that had been pre-agreed and guaranteed, the product rm had to
pay hefty penalties to the customer. None of the constructs that we
received from the prior literature captured the benets and challenges
related to risk. Thus, we followed the grounded theory approach and,
by examining commonalities among the rst-order codes, we devel-
oped a new dimension that we have labelled accountability value. This
label was chosen because all rst-order codes that we identied related
to the accountability for certain outcomes and had consequences (e.g.
penalties) if that outcome were not fullled.
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International Journal of Production Economics 192 (2017) 169181
(continued on next page)
After we sorted all the rst-order codes into ve aggregate
categories, we subdivided the rst-order codes within a particular
dimension into distinct subgroups second-order categories. We chose
this approach because we noticed nuances within the aggregate
dimensions that were of interest to service and operation scholars
and practitioners. Referring to the rst example in this section,
increased interoperability of new productservice design and better
shared value are indeed both related to the complementarity. However,
the former is specically related to the value that is created when
jointly managing the existing parts of the solution (productservice
system), while the latter is specically related to the search for an
entirely new solution that follows the focus on joint outcome. Using
I. Visnjic et al. International Journal of Production Economics 192 (2017) 169181

Table 2 (continued)

this approach, we managed to distil concrete OBM-specic drivers
belonging to ve aggregate dimensions (see Fig. 1). After the coding
was nished, we analyzed our categories once again, seeking traces of
variance across the cases that came from dierent industries as well as
cases within the industry. While the examples did have context-specic
characteristics (e.g. some aspects of outcome contracts or activity
systems were rail or defense specic), we noted no theoretically
signicant variance. Stated dierently, our categories were capturing
the value drivers across our sample fairly equally.

Fig. 1. First-order codes, second-order categories and dimensions.

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I. Visnjic et al.
3.4. Findings
In what follows, we will introduce each of the OBM value drivers.
We suggest the acronym CLEAN (complementarity, lock-in, eciency,
accountability and novelty) as shorthand for the aggregate categories of
the value drivers for capital equipment manufacturers. The section
below uses the appropriate examples to illustrate our concepts.
4. Complementarity value drivers
4.1. Productservice system interoperability
Broadening the scope of the outcome implies that the rm will
provide a larger system of related products and services. Managing
a broad productservice system introduces the possibility of
increasing interoperability between products and services. There
is scope to manage the interdependencies between the provision of
products and services, such as leveraging existing product knowl-
edge for service design and delivery. In the words of a Hitachi
service manager: The key thing is that because we are the
builder (product manufacturer) we've got access to all of the
information And also, in most cases the guy that actually
designed it. So if there is a problem we've got the ability to x it
quickly. And then because we've also intrinsically built the main-
tainability element into it we understand that, and we can cost for
it. We also have access to spare parts, directly.
A Caterpillar project manager also explained that governing the
entire productservice system creates a unique opportunity to deal
with interoperability between the product and service elements of the
system. In his words: We try to explain to [the] client that we do the
whole entire chain from initial cataloguing of the CAT [spare] part,
initial setup, inventory management, systems, purchasing, customer
services, literally, ordering, expediting, loss analysis, service loss
analysis, availability checks, inventory returns, right the way through
to warehousing and shipment to the client with all of the return
lengths of all that. So every piece of an aftermarket logistics chain we
do as [a] company.
4.2. Focus on shared value
Besides interoperability, the shift to outcome-based contracts
allows for a focus on shared value by various stakeholders in the
ecosystem. Specically, shared value is created by thinking in terms of
the objective that needs to be accomplished and taking a fresh look at
the system that accomplishes this objective rather than optimizing on
the level of a specic product or service. One informant from Rolls
Royce shared his viewpoint on the matter: You get that group of
stakeholders to buy into this aligned set of objectives. And then what
you can do is start looking through those and say: How can we
operationalize them; how can we measure them?
Conversely, a Bombardier service manager highlighted the issue
that can exist when there is no focus on shared value: You end up with
these big industry meetings and I've been to lots of them now, where
you got sometimes 30 or 40 people in the room from all these dierent
companies, you've got the owners, the operators, you've got third-
party maintainers, third party suppliers, [] they try and get
towards [a] consensus about something we could do, but as soon as
you suggest something new immediately everyone starts thinking
what's my commercial interest []. Resolving these conicts of
interest productively on behalf of the customer creates substantial
value.
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International Journal of Production Economics 192 (2017) 169181
5. Lock-in value drivers
5.1. Long-haul investment value
In the transactional service context, rms struggle to justify
context-specic upfront investments. Often the challenge is that the
return on investment cannot be guaranteed or the price that the
company would charge to recoup the investment would not be
economical. The outcome-based contract allows for the product rm
to have exclusivity in the provision of products and services over a
longer time frame, thereby securing revenue and protecting against
market uncertainty. This, in turn, allows the product rm to make
upfront investments that will ensure better service delivery over the
time frame of the contract. One informant from Rolls Royce said: We
realized the potential of that service business because its a guaran-
teed long-term revenue stream that came to balance our long business
cycles. Similarly, a Hitachi executive explained: Deals are normally
twenty-ve to thirty years so you have got a return for them on their
asset. You know we have a guaranteed revenue stream for twenty-ve
to thirty years as well.
Caterpillar, for instance, uses long-haul security to invest in
prognostic and diagnostic technologies because the data it collects
through remote monitoring allows it to optimize production in its
customer operations and thereby to create value. As a project manager
at Caterpillar illustrated: We dont look to one or two-year projects,
because, again, theres usually quite a lot of set-up, particularly if
youre involved in a system, or a major warehouse. So the return on a
short-term contract is just its not viable usually for ourselves, or the
client [] thats why we want the contract to be more wider-ranging,
more relationship-based and delivery on an overall service [] so I
think if youre doing everything, the clients locked.
5.2. Delivery value loss
There are downsides associated with long-term contracts, however.
After signing of the contract and reaching the contract delivery phase,
the provider may nd that it is unable to deliver the agreed-upon
outcome and can therefore be subject to delivery penalties. Several
factors may contribute to this situation. The initial cost estimate may
have been unrealistic or poorly performed. Assumptions about the
functioning of the productservice system may have been wrong. Thus,
while market uncertainty is reduced through outcome-based contracts,
the provider faces a new form of uncertainty delivery uncertainty. A
Hitachi project manager illustrated the challenges associated with
anticipating factors over long business horizons. He explained: The
trouble is, a lot of that is not that easy. Things come along that you
dont expect. Things change. Other peoples margins change. They put
their prices up. And, you have to, then, redistribute your cost prole.
One of the train manufacturers we studied faced an issue related to
delivery uncertainty once they moved from ad hoc repair service to a
train availability guarantee service. In the new regime, the maintenance
schedule needed to be changed from a reactive to a proactive manner.
At the time that the train availability contract was signed, the
assumption was that the shift from reactive to proactive maintenance
would be smooth. Once the change was initiated, however, issues with
worker shifts began to emerge, introducing hold-ups. The promised
train availability target was missed as a result. Consequently, the train
manufacturer had to cover the penalties associated with failure to meet
the target.
6. Eciency value drivers
6.1. Economies of scale and scope
Managing a broad productservice system allows for economies of
scale and scope. Providers can realize economies of scale and scope by
I. Visnjic et al.
cross-leveraging resources and capabilities across products and ser-
vices. All products and services share the resources and capabilities
related to the customer relationship and knowledge. In addition,
products and services that are related from a technological perspective
could leverage technological knowledge. A Rolls Royce manager, for
example, said: If we are managing very complex systems throughout
whole life, then everything you do, whether it's design, or mainte-
nance, or supply chain, all these things need to be balanced and driven
through the same processes [] it is a bundle and the business as a
whole is protable the individual parts wouldnt stand on their
own. Similarly, a Caterpillar executive explained the companys
position: All the clients have similar issues and they [have] not
necessarily got the critical mass to build their own business.
6.2. Eliminating friction
Managing a broad productservice system helps to minimize the
risk of conicts, disruptions and delays. The provider can also make the
system function more seamlessly, save time and reduce the risk of
malfunction by managing the handovers from the product and service
teams. Furthermore, organizational interfaces and potential frictions
and tensions between the product and service organizations can be
managed within one organization. In the rail sector, for example,
stakeholders take more responsibility because this forces Hitachi to
align internally. Our informant said: They [the banks] are less
competitive [than Hitachi] in terms of leasing. That's what prompted
moving to the Public Private Partnership (PPP) model. Hitachi owns
the trains and has access to better funds than the banks. And because
Hitachi also maintain the trains, the banks get comfortable because
they see that their asset is being looked after properly. The incentives
are rightly organized in the PPP model and the banks know that
Hitachi has the incentives to maintain the trains correctly. In
addition, a Bombardier manager also stressed the need for an
integrated process approach, [] we have got some top-down
planning going on here, and the message coming through, again,
says about customer needs, not product features, so seamless ex-
change of informational data. A Caterpillar project manager also
explained: There are certain pieces of data that t together really
well. If you try and take one of them away and give it to a <
competitor > and keep the rest to yourself, it [is] probably not going
to work very well because, the connectivity between those groups is
so high. You could separate them, but the communication in lines
would be complicated, probably it wouldnt work.
7. Accountability value
7.1. Managing and eliminating risk
An outcome business model means that the provider will charge for
the performance delivered rather than the productservice system that
delivers the performance. The informant from Caterpillar explained the
value that this creates for the client and the remuneration that the
company gets: [The] client is literally buying that service capability
and because were doing it on a performance basis, we carry the risk,
the client pays the bill. As a result of doing this, the provider is
eectively accepting the risk related to the performance of the product
service system. A Rolls Royce manager explained: We will import this
much risk because we know we can mitigate it and manage it. A
Bombardier service manager stressed: Obviously there are risks
associated with it and it is managing the risks that make[s] it work
or not.
Hitachi Rails project manager argued that managing and mitigat-
ing risk related to performance becomes a crucial capability of the
manufacturing rm that steps into the provision of outcome-based
contracts. He explained: You try to take a long perspective again on
your supply chain and mediating and using data to manage the risk,
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International Journal of Production Economics 192 (2017) 169181
the whole chunk of risk that basically becomes pretty much one of the
core competencies of the complex service suppliers, because it's all
about providing services as an outcome rather than as a process,
providing performance, guaranteeing for the performance, extending
the lifetimes of the services.
7.2. Internalizing Unmanageable Risk
The hidden challenge in formulating the OBC oering and putting a
price on its value lies in assessing environmental (external) reasons for
why the outcome may not be reached. It was mentioned that one of the
main advantages of having a system view is the accountability of a
single company for the outcome and internalization of all the depen-
dencies so that they could be managed. However, while providers can
internalize the internal interdependencies relatively easily (e.g. be-
tween products and services), they may be left with external depen-
dencies, especially with the customer, whereby the delivery of the
productservice system now depends on the customers actions or
resources. Dependencies on a customers actions can prevent the
provider from delivering the guaranteed outcome, which in turn has
consequences in the form of penalties. At the design stage of the
contract, providers need to be careful to identify these dependencies
and to make sure that actions that are required from each of the
stakeholders are identied and stipulated in the contract. As well as
customer dependencies, rms often enter into partnering agreements
with other contractors to pool their capabilities to deliver the required
outcomes. So the lead provider often called the prime contractor
also needs to identify these partner dependencies and how they may
aect the outcome delivery. A Bombardier informant also added: We
will join in and then help you (client) minimize your delay impact; we
will take some risk[s] on the spare[s] supply and all this sort of thing,
and the data will help with all this. Now, as time has gone on, there've
been problems because we haven't got full control of the spares risk.
In the process of delivery, it may become apparent that the
assumptions made either explicitly or implicitly during the contract-
ing phase are wrong in practice. The provider may nd that it lacks
the capabilities needed to provide the services and/or that its processes
and organizational interfaces may be too complex. This may at times
result in a temporary failure to meet the required outcome and
necessitate the need for additional investments to improve the perfor-
mance of the productservice system. Rolls Royce provided a good
illustration of the context specicity of outcome-based performance:
Availability is everything! And then when you start saying: OK, well,
how are we going to measure that? They realize its reliability. The
value of availability changes. All value is instrumental for something
else; you can only really analyze it within something else, a specic
decision context [] a bit like youre playing football or something
youd be looking at whats going on in the eld all the time, and youd
be changing the position of the players and responding to the
situation.
8. Novelty value drivers
8.1. Customer-driven innovations
One of the major value-creation opportunities following the shift to
OBMs lies in distilling customer preferences into tangible output
requirements and developing the specic output. In a typical new
product-development process, launching and selling the product
represents the end of the innovation. In case of the OBM, the signing
of the contract represents only the beginning of the innovation, as
opportunities for value creation emerge during the operation of the
productservice activity system. The provider can identify opportu-
nities to learn about the delivery of the product or service that can be
leveraged in the delivery of the current service and/or the design of
future contracts. Furthermore, the provider generates knowledge about
I. Visnjic et al.
the customer and its operations that can be leveraged to strengthen the
relationship and generate re-sell opportunities for new product and
service oerings.
At Caterpillar, this learning perspective was built into the way that
Caterpillar builds long-term relationships with its customers. It starts
with smaller OBC contracts that are centred on its core capability (e.g.
supply chain management of spare parts) and then grows the oering
that requires responsibility for other service activities that are less
central to Caterpillars expertise. One manager said: Now we do lots of
other, what we call, value-added services that the client used to do
and is capable of doing but they say, Its not core competency. Now,
they say, lets consider releasing that to someone else and if its viable
for both parties, they can then get back to concentrating on their core
competency.
Not only do manufacturers create value by taking the burden away
from their customers and instead oering them a solution, but they can
also grow that solution beyond what the customer initially expected by
leveraging learnings from the end-to-end solution delivery.
8.2. Data-driven innovations
Data allows for new ways to optimize complex systems that under-
pin OBC contracts. Our Rolls Royce informant explained: I suppose
looking back, Rolls Royce became totally data-driven if we are
managing very complex systems whole life, then everything you do,
whether it is design, or maintenance, or supply chain, all these things
need to be balanced and driven through the same processes. For
example, looking for patterns of normal and divergent behaviour is one
of the rst steps in predictable maintenance analysis. As one of our
informants from Bombardier explained: When visualizing the data,
you very quickly see where youve got something thats out of order.
So we do this normality modeling, where we dont know exactly what
were looking for, but across a eet we can establish normal
behaviour and departures.
Additionally, building algorithms to recognize and automate such
patterns is at the core of data-driven value. Automated data is used to
take mitigation actions if they spot system degradation in order to
avoid penalties. Representatives from Bombardier elaborated how they
use signals produced by engines to detect system degradation and
related issues: Engines cause a lot of problems on diesel eets etc.
some of these have very good signals, that enable us to see system
degradation and provide some warnings. Finally, data is becoming
extremely useful in uncovering contextual factors that inuence the
operation of products. One Bombardier project manager used an
example from the monitoring of the breaking system to illustrate this
point: If you've got the driver that goes full throttle and then stamps
on the brakes, he wears the asset down. So, there's a big scope for
training and monitoring the drivers and that's where data becomes
crucial.
8.3. Emergent innovations
Outcome-based contracts may also act as a catalyst for entirely
unexpected innovations. Both Bombardier and Rolls Royce developed
more sophisticated monitoring services based on their investment in
monitoring centres during the initial outcome delivery. Bombardier
contemplated a move to in-train services for passengers, while Hitachi
Rail began to consider extending its outcome-based contract to cover
energy-eciency performance. Caterpillar also sought to develop
services to help minimize fuel burn for its customers. This idea was
generated only after the initial OBC began to be developed.
Enabling room for trial and error is a prerequisite for innovation.
One Bombardier project manager, explaining the complex nature
between improvisation and best practice, elaborated on challenges to
value creation that existed before outcome contracts: Because every
contract was isolated and so each project manager was responsible
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International Journal of Production Economics 192 (2017) 169181
for his P & L, you couldn't take a balanced view across the whole thing
and say, yeah, I will try experimenting here, and you're not going to
have your ears slapped because you haven't made your prot, if you
done what we've asked you to do and we learned some good lessons
from it. Thus, a strategic trajectory for innovation has to be set,
allowing room for some experimental slack throughout the projects.
9. Value drivers interplay
Besides the specic nature of the individual value drivers, the data
revealed insights regarding the interplay between value drivers. In
particular, we found synergetic eects between eciency and novelty,
accountability and eciency, lock-in and eciency.
To begin with, contrary to the traditional productmarket strate-
gies, eciency and novelty value drivers were found to be synergetic
rather than discordant. For instance, data analytics (one of the novelty
value drivers) can provide visibility over the functioning of the entire
system and therefore allow companies to reduce friction. Caterpillar
and its dealers provide an excellent example. As outcome-based
contracts, guaranteeing uptime and availability and/or xed costs per
operating hour have become more popular, Caterpillar and its dealers
have been increasingly capturing data on machine performance in
order to optimize asset utilization. However, this also helped the
company to reduce the through-life cost of assets to its customers
and to make predictions about potential future maintenance require-
ments (eciency value driver). It has expanded its business into
oering eet optimization and jobsite solutions, helping customers
not only to manage their eets but also to innovate their own products.
The closer Caterpillar and its dealers get to their customers, the better
able they are to understand their latent needs and to develop new,
advanced-technology-enabled solutions.
Furthermore, there are synergies between complementarity and
novelty value drivers, as well as complementarity and eciency value
drivers. Direct interaction with the users of products and services
generates insights that are used not only to improve products and
services or to make new products and services (novelty value driver),
but also to make these innovations more compatible and interoperable
(complementarity value driver). Caterpillar dealers are now using data
that comes from machines operating in the quarry to identify ways in
which production can be optimized. Using GPS location data, for
example, coupled with load and weight data, it is possible to see which
trucks are idle while carrying a full load their GPS position does not
change, but the weight of materials in the truck bed shows that they are
fully loaded. This lack of movement while fully loaded represents a
production ineciency, which can be eliminated by better scheduling
and coordination. Insights such as this allow Caterpillar dealers to
advise their customers on how to improve the eciency and coordina-
tion of their operations, thereby reducing the cost per tonne of earth
extracted. If two machines, for example, are going to arrive at the
crusher at the same time, the dealer can divert one machine to dump
the full load of materials elsewhere, instruct the second to take its load
to the crusher and therefore avoid a bottleneck building up at the
crusher.
Accountability and eciency value drivers were also synergistic.
The providers actions related to optimization and eciency are
directly linked to its accountability. Rolls Royce illustrated this value
interplay with an interesting example: What we went to was a sort of
power by the hour arrangement whereby we would undertake to
keep their spare engine pool topped up with a specic number of
engines. Now, arguably, we took the risk and the responsibility for
managing the overhaul cycle, so we could get the engines o the
runway, have a look at them Oh well, this ones easy! Lets do that
one rst! So we can use that one to ll up the pool, and then this ones
going to take a little bit longer, we need that part, so lets go and order
it now so that we could actually start organizing these properly and
take charge of it and do it in an ecient way..
I. Visnjic et al.
Fig. 2. Value drivers in outcome business model: C-L-E-A-N.
At the same time, lock-in and accountability value drivers ex-
hibited negative interaction. For instance, individuals at the customer
or stakeholder organization may lack incentives to cooperate with the
provider and perform the actions needed for the provider to be able to
do their job properly. The provider may face diculties in identifying
and monitoring these issues, and even once they have been identied,
they may face diculties in reinforcing the required actions or
preventing undesired actions. Thus, while the provider may have
managed to lock in the client, it is now also locked into a contract
whereby it cannot deliver properly and may face penalties for action (or
inaction) that is not within its control. An example of such dependen-
cies is seen in Caterpillar. While Caterpillar and the dealers oer job
site solutions optimizing production at the quarry or the mine they
are dependent on their customers sta to execute these optimization
plans. For example, while Caterpillar provides the machines, the
operators of the machines are often on their customers payroll, so
Caterpillar does not directly control the scheduling of its work, training
or adherence to production plans. If the customers sta do not
maintain their side of the bargain, Caterpillar and the dealers cannot
deliver the outcomes as promised. In Fig. 2, we represent the drivers
and their relationships.
10. Discussion and conclusion
Our research eorts were guided by the question: What are the
drivers of value creation for OBM and what are the interdependencies
among them? By addressing the changes in activity systems that occur
during the OBM shift as well as the resulting changes in the value-
creation process and drivers of value, the study suggest that outcome
providers create value with a diverse set of value drivers, which exceed
value drivers that underpin the traditional linear value-chain logic
(Porter, 1985). In the context of outcome business models, value
drivers are similar to e-businesses in that they encompass comple-
mentarity, novelty, eciency and lock-in categories (Amit and Zott,
2001). While these four categories are shared, study distilled specic
value drivers within these categories that vary between e-business and
OBM. Besides contextualizing these four value-driver categories to
OBMs, our ndings underscore the importance of an additional
category which we conceptualize as accountability value.
Accountability value aects OBM by internalizing uncertainties
(Erkoyuncu et al., 2011) both foreseeable and unforeseeable, sourced
inside and outside the boundaries of anticipated product-service
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International Journal of Production Economics 192 (2017) 169181
system, and plays a major role in making the OBM protable in a long
run.
Furthermore, our study provides a unique context in which use
value or consumer benet experienced are extremely important
(Priem, 2007). Insights and experiences gained through the use
environment are fruitful sources of innovations if properly channelled
through the productservice system (Jovanovic et al., 2016). Thus,
OBCs constitute an excellent example of the continuous value co-
creation between customers, providers, and stakeholders (Lusch and
Vargo, 2014). Apart from being source of innovation, insights into the
customers operations and business model may result in stronger
relationships, trust and lock-in (Baines and Lightfoot, 2013; Gebauer
and Kowalkowski, 2012). In turn, such value-searching processes (Ye
et al., 2012) add value to the overall value-creating system of the OBM
(Ng et al., 2013).
In addition, identifying synergies between novelty, eciency and
complementarity represents another contribution, especially concern-
ing the value of data-driven innovations. Following the fourth emerging
digital transformation of industry, information technology promises to
become an ever-more important enabler for OBCs by providing the
necessary information to manage costs and risks, as well as ensuring
ecient customization processes (Coreynen et al., 2015; Vendrell-
Herrero et al., 2016). In contrast with traditional PBMs, whereby
variability is costly because it requires variation in physical parts, new
business models such as OBMs can leverage smart data to enable low-
cost variability (Marsh, 2012; Porter and Heppelmann, 2015).
However, our study also addresses some of the complexities of
OBMs. First, there exist sources of value loss alongside sources of value
gain, as well as trade-os between some value drivers. Although lock-in
value is inherent in signing a service agreement, ndings suggest that
lock-in can be a value loss driver as well. It is common for certain
resource requirements and dependencies to appear that were not
foreseeable at the contracting stage (Erkoyuncu et al., 2013).
Secondly, the complexity behind the accountability driver should not
be underestimated. Since outcome-based contracts are customer-
specic, one-of-a-kind providers cannot draw a perfect picture of the
whole productservice system in advance, which can incur value losses
similar to those related to the lock-in. Both value losses appear as a
result of delivery uncertainty and unanticipated and novel circum-
stances. The use of trust and customer relationship, rather than
contractual battles, is crucial to nding the best way forward. Finally,
while past research addresses these value drivers in isolation, current
study reveals the interplay among them. Although Zott et al. (2011)
stress that complementarity, novelty, eciency and lock-in can be
mutually reinforcing, this study is one of the rst to provide empirical
support for such an argument.
In addition, this research also has practical implications for top and
middle management of manufacturing companies that are turning
towards services and outcome-based contracts. As rms move towards
OBCs, the suggested framework can enable them to identify value
drivers with the potential to tap into, as well as possible sources of
value loss to watch out for. Furthermore, our framework provides a
more granular overview of value drivers, not merely high-level cate-
gories. As such, it is easier to operationalize. For instance, a manu-
facturer that aspires to move towards OBM can cross-check a potential
OBC with the list of value drivers and value loss factors in order to
identify which of them it can be covered. Conversely, it can use the
value driver list to come up with an OBC that optimizes the value
drivers or rene the OBC to amplify value drivers and attenuate sources
of value loss. In short, as some of the sources of value and value loss
are, neither quantiable, nor even visible upfront, it is important for
decision-makers to have a check list of dierent sources of value and
sources of loss.
While relying on the case studies allowed us to obtain ne-grained
insights with respect to the value drivers, the research reported in this
paper has some limitations. Still, the identied pattern was general to
I. Visnjic et al. International Journal of Production Economics 192 (2017) 169181

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