A Guide to the Outcome-Based Service Model & How to Make the Transition

Technology is transforming the world of field service. By linking the fast-growing universe of connected devices, the Internet of Things has supercharged our ability to optimize practically everything.

• Service technicians are better equipped to respond instantly to issues, to proactively address maintenance needs, and more.
• Customers have enhanced capabilities and data to evaluate both their service needs, and how they define success.

A report by Microsoft suggests that some 94% of businesses are now using IoT devices for applications that include improving predictive maintenance, efficiency and productivity.

Now that technology has empowered businesses to shift focus from decreasing downtime to optimizing uptime, the way service agreements are structured has shifted as well. In this new age of field service offerings, the outcome-based service model has become the preferred partnership between customers and service teams.

THE MOVE TO OUTCOME-BASED SERVICE: Which Training Format is Right for Your Organization? >>

To maximize customer success and the value of an outcome-based agreement for the service organization, one must first understand how the new contract structure works, its many benefits, and how to implement this model.

What is an Outcome-Based Service Model?

The driving ideology behind an outcome-based service model is that companies are selling business outcomes rather than just products. In more sophisticated terms, outcome-based service is “a new business model of outcome-based contracts where the firm is tasked to achieve outcomes of equipment as a service contract instead of the traditional maintenance, repair and overhaul activities,” according to Industrial Marketing Management.

Essentially, the service provider and the customer mutually agree on specific outcomes that are measurable and attainable, and designed to ensure customer success. This service dynamic is therefore a win-win – customers get the outcomes they want, and service providers know exactly what is expected of them.

To land on a mutually agreed upon outcome, service providers must first understand what the customer’s business success metrics are. Some common success KPIs for manufacturing include:

• Delivery Time
• Cycle Time
• Throughput
• Overall Equipment Effectiveness
• Production Downtime vs. Operating Time
• Net Operating Profit
• Unit Contribution Margin
• And More

The client’s barometer for success and the final outcome they want to achieve varies from company to company. Many companies will be forthcoming with their exact success indicators, but sometimes the companies themselves are unsure or need help determining the most valuable KPIs. Field service teams, when equipped with special insights and service tools, can help companies identify those metrics.

With an outcome-based service partnership, service shifts from a “break-fix model” — where service teams are called to fix machinery, system failures, part malfunctions, etc. — to instead work proactively to help customers achieve their goals, optimize their efficiency, and realize a return on their investment.

3 Hallmarks of an Outcome-Based Service Model

Companies that shift from the traditional model to an outcome-based service model display three distinct characteristics that demonstrate improved speed, accuracy, optimization, and advancement. The common hallmarks are:

1. Improved efficiency
2. Enhanced innovation
3. Transformed business objectives and service outcomes

Traditional vs. Emerging Model

All service is based on three things: input, output, and outcome. However, a fundamental difference between the traditional and emerging service delivery models hinges on several key factors — who owns the service delivery and what the service priorities are.

The traditional model of service puts the focus of service contracts on the delivery of products and sets a specific time for break-fixes — charging for things like labor, number of visits, or the fixed cost of a project. In this model, the customer owns the service delivery.

In the emerging outcome-based model, the focus of service shifts to the customer’s positive business outcomes. Here, the provider owns the service delivery, tools, and resources required and provides service until an agreed-upon outcome is reached. As a result, the customer gets the exact services they require to be successful.

Outcome-Based Service Utilization Statistics

Outcome-based service is not a brand-new phenomenon, and businesses across industries and continents are finding great success with this new partnership. In fact, adoption of this model is increasing, and this trend is projected to continue for years to come. AIM Consulting cites some eye-opening statistics that illustrate proliferation of outcome-based service:

• One-third of global manufacturing firms use outcome-based service.
• In the U.S., 60% of manufacturing firms are now using outcome-based service.
• 40% of U.K.-based manufacturing firms have moved to primarily selling outcomes versus products.

Benefits & Challenges of an Outcome-Based Service Model

According to Delphi Technologies study examining the benefits of moving to outcome-based service, surveyed OEMs believed they could achieve of 5-10% annual growth in services revenue; while customers who adopted this approach experienced significant cost reductions of 25-30%.

The marked improvement triggered by outcome-based service is widespread across industries. A ServiceMax by GE Digital survey of management officials in a variety of industrial verticals reported that they believe that making the shift will “significantly enhance” their operations across the board. The following percentage of survey participants responded favorably, by industry:

• Oil and gas: 71%
• Energy: 55%
• Manufacturing: 53%
• Medical: 53%
• Telecommunications: 51%
• Distribution, logistics, and transportation: 39%
• Other: 49%

Challenges of Outcome-Based Service and How to Address Them

With any change, there will always be pushback and hurdles to overcome. While the adoption of outcome-based service is largely successful, the few negative reports highlight two unique struggles.

First, service providers and their customers sometimes don’t agree on what the outcome of the contract should be. They also struggle to identify actionable and measurable success metrics. Because decision-makers work across all areas of the operation – CEOs, CMOs, product managers, etc. – they all have very different ideas of what success really is.

In our experience with clients that work in an outcome-based service environment, measurable success metrics are determined by the most senior service executive from the supplier side working with his/her counterpart from the customer side. These high-level metrics are then cascaded down the levels of the organization so everyone involved in service, from both the customer and the supplier sides, is aligned on the success metrics and how to impact them.

For example, one equipment service supplier was implementing outcome-based contracts with a large customer. They agreed that equipment uptime, whether for new installations or existing equipment, was the most important metric for the customer – this was the easy part.

More challenging was working out a contract specifying targets and minimum performance levels that were both reasonable and possible for the supplier and for the customer.

Second, service providers and customers encounter issues with shifting to a new model and adopting the new mindset and culture required of outcome-based service. It is human nature to be averse to change, but with proper service training that teaches new interpersonal skills and customer relationship tools, adoption becomes a much more seamless process.

In the case of the equipment service supplier mentioned above, this change in mindset and way of discussing the new agreements was significant. The customer was accustomed to getting most of what he demanded simply because he was such a large customer. And the supplier initially treated these discussions as an exercise in resistance, holding out for the least demanding targets. Both sides started the discussion as simply another form of negotiation.

However, once the executive for the supplier changed his approach to identifying working “conditions” that were both reasonable and sustainable (i.e. possible for the supplier to deliver without jeopardizing their own business), the two sides were able to come together on an outcome-based agreement that was acceptable and workable for both sides.

The key message from this example for companies (suppliers and customers) who are moving to an outcome-based approach is to understand and accept that these contracts should not be thought of as “negotiated” in the traditional sense. Instead they need to be worked out using a collaborative discussion in which the goal is to reach a balanced outcome.

Benefits of Outcome-Based Service

Despite these speed bumps, the benefits of outcome-based service typically far outweigh the negatives that come with adopting new processes. Benefits of transitioning to this model include:

• Outcome-based service increases trust and improves relationships with customers, keeping them from switching to competitors. When customers feel that their service provider is invested in seeing them achieve their goals, they are more likely to utilize them going forward. And when service providers continually meet and exceed expectations, customers are more likely to recommend them to others as well.
• The point of sale is no longer the end of a transaction, but the beginning of a customer relationship. When the customer has new equipment deployments or machinery upgrades to make, odds are good they will turn to the trusted provider that helped them succeed the first time around. And when the service team takes the time to learn about the customer’s real needs, they are taking the first step toward a long-term relationship with that company.
• Outcome-based service creates a high revenue potential for manufacturers. Because the initial contract is just the beginning of the customer/service provider relationship, repeat service contracts, project-based service, and future outcome agreements present multiple opportunities for the service provider to generate new revenues.
• This style of agreement also simplifies operations for the service department. The outcome of the service agreement is predetermined, there are no surprise visit requests, urgent calls or angry customers to interact with. Instead, the service team is working in tandem with the customer to achieve an ultimate goal and help both parties succeed.

How to Transition to an Outcome-Based Service Model

Because outcome-based service agreements are a partnership, there are certain steps each party should take to ensure the smoothest possible transition. Afterward, both the service team and the customer will be grateful that they A) made the switch to outcome-based, and B) took the time before switching to lay the foundation needed for success.

Customer-centric transition prep steps:

1. Create service level agreements based on metrics such as uptime or response time to eliminate ambiguity.
2. Put in place change management actions for the transition. Having a clear point of contact keeps things streamlined and helps make the entire process smoother.
3. Ensure proactive support from both supplier and customer – moving from break-fix to uptime. This will help customers feel that the service team is equally invested in achieving goals.

Service team-centric transition prep steps:

1. Assess where the organization is currently and where you want to go in terms of service performance and quality. While outcome-based service focuses on each customer’s goals, the service team should have set outcomes they want to achieve as well.
2. Gain participation of the right stakeholders. Thought leaders within the company have major sway, as do leaders on each service team. If service providers can get buy-in from these groups, the rest of the organization is likely to follow suit.
3. Undergo a customer relationship training program OR retraining of your service team. You can’t just flip a switch and make the change. The engineers and technicians will perform better and adopt change more quickly if they feel they have been given the tools they need to do their jobs well.

The biggest catalyst for outcome-based service success is taking the time to train service technicians and engineers on how to effectively communicate with and foster a trusting relationship with customers. This training helps service companies identify up front service outcomes and metrics, the two pillars of outcome-based agreements.

At Global Partners Training, we help our clients create relationships that are a true partnership. Our training programs teach engineers how to interact with customers, leverage their knowledge of their customers’ needs, and create outcomes that both parties are happy with. Contact our experts to get more information about our proven field service training programs.