Challenges, Mitigation and Benefits of Outcome-based Contracts in Small and Medium-sized Machine Manufacturers: A Qualitative Exploratory Study

Abstract

Outcome-based contracts (OBCs) offer machine outcomes while maintaining machine ownership with the manufacturer. To this end, the scientific literature lacks systematic studies on sharing insights from the perspective of small and medium-sized enterprise (SME) machine manufacturers (MMs) while implementing OBCs. We interviewed four SME MMs that have successfully offered OBCs. Further, we use exploratory multiple-qualitative case study research. We identified that SME MMs face various challenges, such as ownership of expensive machines, the long payback period of OBCs, protection of IP, the need for constant innovation, and delivering the required performance while offering OBCs. Further, we identified that SME MMs have identified ways to mitigate these challenges, such as involving third parties to own the machine and ensuring earnings by including separate contracts for other activities such as installation, maintenance, training of the employees working on machines, and logistics, to overcome the challenge of the long payback period of OBCs. Additionally, we identified various SME MM-related benefits from OBCs, such as entering competitive markets, optimizing the cost of operating the machine, novel efficient ways of selling and marketing machines, avoiding money laundering and legal issues, and reducing investment through recycling the machine and its components that SME MMs have while offering OBCs. We share insights into how SME MMs offer OBCs, which typically involve significant risks, by empirically studying the challenges, mitigation of challenges, and benefits of offering OBCs.

Keywords

• product-service systems
• outcome-based contracts
• servitization
• small and medium-sized enterprises
• manufacturing