Understanding outcome-based contracts

B�hm, Eva; Backhaus, Christof; Eggert, Andreas; Cummins, Tim

Abstract

Increasingly complex industrial services rely on outcome-based contracts (OBCs); however, there is a dearth of research in this area of growth. The present research examines the benefits, risks, and overall contract performance of OBCs when they are based on a payment for availability (aOBC) versus a payment for economic results (eOBCs) logic. We offer a conceptual model that not only takes the perspectives of both the buyer and the seller into account, but also the role of product innovativeness and market turbulence as potential moderators. Results obtained from a multi-industry survey among 259 buyers and sellers using OBCs in complex industrial services show that both buyers and sellers attach higher benefits to eOBCs as opposed to aOBCs. With regard to perceived risk and overall performance, both forms of OBCs are found to perform equally well, both from the buyer and the seller perspective. However, when technological turbulence is high, buyers perceive significantly more benefits, making eOBCs more attractive from the buyer’s perspective. In contrast, when product innovativeness is high, aOBCs emerge as the better option because of the sellers’ higher risk for eOBCs compared to aOBCs. In sum, these findings help managers to better decide which type of OBC promises to be most beneficial under the given contextual conditions.

Citation

Böhm, E., Backhaus, C., Eggert, A., & Cummins, T. (2016). Understanding outcome-based contracts. Journal of Strategic Contracting and Negotiation, 2(1-2), 128-149. https://doi.org/10.1177/2055563616669740

• Journal Article Type: Article
• Acceptance Date: Aug 3, 2016
• Online Publication Date: Oct 4, 2016
• Publication Date: 2016-03
• Deposit Date: Aug 19, 2020
• Journal: Journal of Strategic Contracting and Negotiation
• Print ISSN: 2055-5636
• Electronic ISSN: 2055-5644
• Publisher: SAGE Publications
• Peer Reviewed: Peer Reviewed
• Volume: 2
• Issue: 1-2
• Pages: 128-149
• DOI: https://doi.org/10.1177/2055563616669740
• Public URL: http://researchrepository.napier.ac.uk/Output/2673232