Arbeitsbericht Nr. 89

Buse, Christian / Freiling, Jörg / Weissenfels, Sven: Turning Product Business into Service Business: Performance Contracting as a Challenge of SME Customer/Supplier Networks

Arbeitsberichte des Institut für Unternehmensführung, Ruhr-Universität Bochum, 89(2001)

Abstract

Especially in industrial markets very often the business is traditionally focused upon a tangible core, such as a machine or a plant, whereas services are more or less treated as add-on features in technology driven offerings. As hardware elements are becoming more and more exchangeable in competition, the suppliers put more emphasis on services in their marketing management. Nevertheless, the activities often lack a sense of strategic direction, which causes a proliferation of services. Among other shortcomings, the necessity to understand the business no longer as a "product business" but in the way of a "service business", integrating the customer into the process of providing an individual solution with lots of customized features in the whole product bundle, is neglected so far.

The concept of performance contracting strictly refers to this point. As a transaction design performance contracting implies that customers and suppliers establish a contract-based relationship as a framework for several transactions following up. The customer does not buy complex equipment. Instead, the supplier respectively the supplying network provide(s) the infrastructure for the customer for a long time and the customer only has to pay for performance. Turning fixed into variable costs, the availability of a certain capacity, the opportunity of permanent revamping according to the technological state of the art, and the closeness to the customer are substantial reasons why customers prefer contracting solutions in mechanical and plant engineering. Based on a case study dealing with a customer/supplier network, consisting predominantly of small & medium-sized enterprises, the pro's and con's of performance contracting as a means of turning product into service business will be introduced in this paper.

The emergence of contracting solutions is analyzed in terms of economic theory. Corresponding to the very nature of these arrangements, in particular the transaction cost approach, the resource dependence approach, the resource-based view, and the theories of entrepreneurship represent a promising background in order to analyze performance contracting in theoretical terms. As all the four theories offer specific insights, they are compared in order to understand their particular view on the emergence and the problems of performance contracting. The results of the theoretical analysis are confronted with the first results of contracting arrangements in business practice.