In mids of increasing competition, many industrial manufacturer are innovating their business models. Shifting from selling products to selling outcome-based contracts (OBCs) is one of the most popular ways to innovate manufacturers´ business models. In OBCs, the manufacturer is paid not according to its product or service, but based on the outcome which customer achieves by using manufacturer´s product or service (Ng et al., 2013).
Studies report that shift to OBC may increase manufacturers´ revenue streams up to 20-30% due to incased ability to offer advanced services (Parida et al., 2014). However, delivering on OBC is challenging and requires manufacturers to manage their collaboration with their customers (Ng & Nudurupati, 2010). Most of the companies fail to shift to OBC due to planning and navigation challenges which occur when the companies try to shift to OBC business model.
To help manufacturers implement OBCs succesfully, one of the key partners in the DigiProcess -project, Luleå University of Technology, has developed a transitioning model (Sjödin, et al, 2020) to help industrial manufacturers to shift their business models to OBC business models (Image 1). The model describes in three steps how the industrial business model innovation process unfolds.
Image 1: OBC transitioning model
The model emphasizes that manufacturers need to engage in business model innovation processes together with their customers to shift to OBC successfully. Suppliers´and customers´ value creation (how value is created) and value capture (how value is determined and distributed) processes have to be closely integrated to ensure a successful shift and they have to be taken into account in each part of the shifting process.
In the first phase, “Defining the value proposition”, the partners work together to define the value proposition for the OBC. In this phase, value creation opportunities are identified and the value distribution approach is agreed between the partners.
In the second phase, “Designing value provision”, the partners' design value provision, which focuses on designing the offering and ensuring appropriate value capturing model before signing the contract. In this phase, value offering is designed and profit formula is negotiated between the partners.
In the third phase, “Delivering value-in-use”, the partners focus on activities that are performed by partners in the coming years after signing the contract. In this phase, value creation processes are refined and incentive structure is regulated between the partners.
By following these phases, the partners can ensure that value is created and captured simultaneously throughout the OBC business model innovation process. The model emphasizes that the partners make conscious efforts to align value creation and value capture, and re-align and continuously innovate the business model with ongoing changes in the environment.
Together with other tools developed throughout DigiProcess -project, the model can help SMEs and industry partners in collaboration and co-operation.
Project Researcher, University of Oulu/MicroENTRE
Ng, I. C., Ding, D. X., & Yip, N. (2013). Outcome-based contracts as new business model: The role of partnership and value-driven relational assets. Industrial Marketing Management, 42(5), 730-743.
Ng, I.C.L., & Nudurupati, S. (2010). Outcome-based service contracts in the defence industry: Mitigating the challenges. Journal of Service Management, 21 (5), 656-674.
Parida, V., Sjödin, D. R., Wincent, J., & Kohtamäki, M. (2014). Mastering the transition to product-service provision: Insights into business models, learning activities, and capabilities. Research-Technology Management, 57(3), 44-52.
Sjödin, D., Parida, V., Jovanovic, M. and Visnjic, I. (2020), Value Creation and Value Capture Alignment in Business Model Innovation: A Process View on Outcome‐Based Business Models. Journal of Product Innovation Management. doi:10.1111/jpim.12516