Outcome Sourcing in the Outcome Economy

The US Department of Defense (DoD) is moving toward a form of outcome sourcing. They refer to it as performance-based logistics (PBL) programs or power by the hour. In aircraft maintenance, for example, their traditional approach is to specify the parts needed and the required service levels (parts availability). However, what the DoD really wants is not parts, but planes that are ready and able to fly when needed. Their PBL contracts specify aircraft uptime requirements, rather than spare parts availability levels—and make the manufacturer responsible for that uptime. As a result, aircraft manufacturers have a much more direct financial incentive to make their airplanes and parts more reliable and easier to maintain.

Improving uptime provides a more reliable service at a lower cost. This reduces the number of planes the DoD has to buy, inventory levels, service personnel, and a host of other costs. The following are some of the lessons learned in these PBL contracts:

• PBL contracts can take more time and effort to write than traditional contracts. As the buyer, you need to ensure that you are in agreement on the definition of what performance you want and how specifically it will be measured during the life of the contract. You need to thoroughly think through all the scenarios and how you want to be served.
  
  
• Resist the ingrained approaches and people's tendency to dictate how the job will be done.
  
  
• Create long-term business arrangements that will stand the test of time be flexible in creating mutually beneficial outcomes.
  
  
• To make it work for both parties, you may need to share some risk with suppliers.
  
  
• Specifying outcomes in no way decreases your (the buyer's) responsibility for managing the relationship. It can actually increase your responsibility.

Specifying Desired Outcomes

Specifying desired outcomes provides more flexibility to suppliers. It allows suppliers to bid on a specified outcome, rather than a buyer-specified solution, resulting in better solutions for the buyer. For example, take the case of a multibillion dollar, highly diversified conglomerate (retail, construction, food, transportation, forest products) moving past specifying the equipment for their plants, and instead specifying the outcomes they want and process improvements they expect from their suppliers. They have packaging machines that apply plastic film to their lumber products. Instead of specifying the characteristics of the machine, they specify to the suppliers the rate of application and performance of the wrapped product. To enable their suppliers to serve them better, this company also allows suppliers to come in and look at the way their machines are running. By allowing suppliers to bid on providing that specified outcome, rather than a buyer-specified solution, the supplier has a lot more freedom in finding the best way to meet those needs. This also represents a major change in how the buyer's engineers think about and specify the problem.

SOURCE:http://www.technologyevaluation.com/research/articles/outcome-sourcing-in-the-outcome-economy-18341/