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Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Advanced	
  services	
  – contracts	
  and	
  modelling
Aston	
  MBA	
  Programme
1	
  March	
  2016
Dr Shaun	
  West
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Objectives
By	
  the	
  end	
  of	
  the	
  class	
  you	
  will	
  understand	
  the	
  importance	
  of	
  contracts	
  and	
  models
What	
  do	
  you	
  know	
  about	
  service	
  contracts?
Critical	
  aspects	
  of	
  service	
  contracts
How	
  do	
  you	
  know	
  the	
  outcome	
  from	
  a	
  service	
  contract?
By	
  the	
  end	
  of	
  the	
  class	
  you	
  
will	
  understand	
  the	
  
importance	
  of	
  good	
  
contracts	
  and	
  why	
  you	
  
should	
  model	
  their	
  outcomes
Revenue	
  and	
  cost	
  models	
  for	
  advanced	
  services
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
WHAT	
  DO	
  YOU	
  KNOW	
  ABOUT	
  SERVICE	
  
CONTRACTS?
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
What	
  do	
  you	
  know	
  about	
  service	
  contracts?
Group	
  work
Please	
  work	
  in	
  groups	
  for	
  20	
  minutes	
  on	
  the	
  following
-­‐ Left	
  side	
  of	
  the	
  class	
  work	
  on	
  the	
  MAN	
  Trucks	
  
advanced	
  services	
  case
-­‐ Right	
  side	
  work	
  on	
  the	
  Hitachi	
  trains	
  advanced	
  
services	
  case
Be	
  ready	
  to	
  share	
  your	
  thoughts	
  with	
  the	
  rest	
  of	
  the	
  
class.
-­‐ What	
  are	
  your	
  top	
  10	
  issues	
  you	
  need	
  the	
  contract	
  to	
  
control	
  and	
  why?
-­‐ Describe	
  the	
  top	
  5	
  differences	
  between	
  service	
  
contracts	
  and	
  equipment	
  contracts.	
  It	
  might	
  help	
  if	
  
you	
  think	
  of	
  a	
  car:
-­‐ when	
  you	
  buy	
  a	
  car
-­‐ when	
  lease	
  a	
  car
-­‐ when	
  you	
  hire	
  a	
  care
-­‐ when	
  it	
  is	
  repaired
-­‐ when	
  it	
  is	
  serviced
-­‐ when	
  you	
  rent	
  a	
  car
-­‐ when	
  you	
  hire	
  a	
  taxi
-­‐ …
What	
  did	
  we	
  find	
  out?
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
What	
  forms	
  of	
  service	
  contact	
  exist?
Group	
  work
Please	
  work	
  in	
  groups	
  for	
  10	
  minutes	
  on	
  the	
  following
-­‐ Please	
  build	
  up	
  a	
  mind	
  map	
  showing	
  what	
  forms	
  of	
  
service	
  contact	
  could	
  exist?
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
What	
  forms	
  of	
  service	
  contact	
  exist?
Mind	
  map	
  of	
  service	
  contract	
  forms
-­‐ Who	
  do	
  we	
  sell	
  to?
-­‐ Why	
  do	
  they	
  they	
  buy?
Equipment
-­‐ Assume	
  services	
  are	
  for	
  equipment
Site	
  Services
O&M	
  Services
Spare	
  
parts
Asset
Mgt
Construction
Installation
Craft	
  labour
Service	
  shop
Commissioning
Tech	
  advice
Consulting
m-­‐
support
m-­‐
planned
O-­‐
support
O-­‐
optimisation
Trouble	
  
shooting
m-­‐
unplanned
Big	
  ”M”Process	
  
integration
Big	
  ”O”
Full	
  
"O&M”
Remote	
  
M&D
Strategic	
  
spares
Fleet	
  
mgt
Fleet	
  
optimisation
CMUs Consulting
Capital	
  
spares
Consumables
-­‐ What	
  are	
  their	
  outcomes?
-­‐ What	
  options	
  do	
  we	
  have	
  to	
  support	
  them?
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
What	
  forms	
  of	
  service	
  contract	
  exist?
From	
  one-­‐time	
  product	
  sales	
  to	
  advanced	
  service	
  contracts
Where	
  would	
  you	
  place:
-­‐ Transactional	
  product	
  sales
-­‐ Product	
  sales	
  with	
  discounts	
  and	
  volumes
-­‐ Installation	
  services
-­‐ Construction	
  contracts
-­‐ IT	
  service	
  contracts
-­‐ O&M	
  contracts
-­‐ Outsourced	
  logistics
-­‐ Tolling	
  agreements
Transactional Relationship
Nature of interaction
Product-orientation
Use-orientation
Outcome-orientation
ProductCustomerProcesses
Productservicesystems
Services
Not	
  all	
  advanced	
  services	
  require	
  a	
  long-­‐term	
  relationship
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
CRITICAL	
  ASPECTS	
  OF	
  SERVICE	
  CONTRACTS
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
What	
  are	
  contracts	
  for?
Group	
  work
-­‐ In	
  your	
  groups	
  create	
  in	
  15	
  minutes	
  why	
  we	
  need	
  
contract	
  and	
  what	
  they	
  help.
-­‐ We	
  will	
  then	
  spend	
  time	
  to	
  share	
  what	
  we	
  think	
  the	
  
contracts	
  are	
  actually	
  for	
  before	
  moving	
  on.
What	
  did	
  we	
  find	
  out?
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
The	
  contract	
  is	
  the	
  written	
  form	
  of	
  the	
  customer	
  value	
  proposition
Important	
  facts
-­‐ The	
  contract	
  is	
  not	
  the	
  small	
  print	
  nor	
  should	
  it	
  be	
  
left	
  in	
  the	
  drawer	
  to	
  be	
  forgotten
-­‐ The	
  contract	
  describes	
  the	
  obligations	
  of	
  all	
  parties
-­‐ The	
  optional	
  assumptions
-­‐ Communications	
  and	
  contract	
  governance
-­‐ The	
  contract	
  is	
  an	
  organic	
  document	
  that	
  evolves
What	
  did	
  we	
  find	
  out?
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Buyer-­‐Supplier	
  risks,	
  responsibilities	
  and	
  obligations
This	
  model	
  will	
  be	
  used	
  to	
  visualize	
  where	
  the	
  risks	
  lie	
  
SupplierBuyer
Issue
The	
  Buyer	
  has	
  
responsibility	
  and	
  
assumes	
  the	
  risks
There	
  is	
  some	
  risk	
  
transfer	
  to	
  the	
  supplier
The	
  Supplier	
  takes	
  full	
  
responsibility	
  and	
  risk
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Scope,	
  Covered	
  Units	
  and	
  Terminal	
  Points
The	
  greater	
  the	
  scope	
  provided	
  and	
  the	
  greater	
  the	
  integration	
  the	
  higher	
  the	
  supplier	
  risk
Issue
Parts
SupplierBuyer
Servcies
Little	
  ”m”
Condition	
  
monitoring
Upgrades
Operational	
  
support
Big”M”
Little	
  ”m”	
  plus	
  
upgrades
O&M
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Owner’s	
  Support	
  Obligations
The	
  obligations	
  are	
  part	
  required	
  and	
  in	
  part	
  to	
  facilitate	
  getting	
  the	
  work	
  done
Issue
Free	
  issue	
  
parts
SupplierBuyer
All	
  parts	
  
supplier	
  
issued
Supplier	
  
inventory	
  
management
Supplier:	
  to	
  
provide	
  all	
  
local	
  support
Buyer:	
  provide	
  
site	
  support	
  to	
  
facilitate	
  
working
Buyer:	
  to	
  
provide	
  all	
  
local	
  support
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Operating	
  Assumptions
Important	
  as	
  the	
  cost	
  model	
  is	
  based	
  on	
  specific	
  operational	
  assumptions
Issue
No	
  change	
  in	
  
assumptions	
  
allowed
Clear	
  operational	
  
assumptions	
  and	
  process	
  
to	
  allow	
  them	
  to	
  be	
  
updated
No	
  operational	
  
assumptions	
  given	
  
and	
  fixed	
  price
SupplierBuyer
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Monitoring	
  of	
  Performance	
  and	
  System	
  Conditions	
  
How	
  can	
  you	
  use	
  monitoring	
  and	
  diagnostics	
  systems	
  (iPhone	
  6	
  and	
  lockout…)	
  
Issue
System	
  used	
  only	
  
for	
  checking	
  on	
  
assumption	
  
breaches
Data	
  is	
  shared	
  
openly,	
  no	
  
advice
Advice	
  provided	
  on	
  
O&M	
  based	
  on	
  
monitoring	
  system	
  
SupplierBuyer
Joint	
  root	
  cause	
  
analysis
System	
  used	
  
for	
  billings
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Price,	
  Payment	
  and	
  Performance	
  Commitment
There	
  are	
  many,	
  many	
  ways	
  to	
  get	
  paid…
Issue
Cost	
  plus Fixed	
  price/	
  
fixed	
  scope
Tariff	
  based	
  
(pay	
  per	
  x)
SupplierBuyer
Consignment
Price	
  list
Target	
  price
Liquidated	
  
damages/	
  
bonuses	
  
Liquidated	
  
damages
Fixed	
  
escalation
Pay	
  per	
  
outcome
Governance	
  of	
  
performanceSupplier
currency Buyer
currency
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Term,	
  Termination	
  and	
  Suspension
What	
  is	
  important	
  for	
  your	
  customer	
  and	
  for	
  you?	
  You	
  cannot	
  force	
  a	
  relationship
Issue
Transactional
Long-­‐term	
  
(>12	
  years)
Undefined
SupplierBuyer
Multi-­‐year	
  
(<12	
  years)
Termination	
  at	
  
buyer’s	
  will
Termination	
  
for	
  material	
  
default
Termination	
  
with	
  fee
Termination	
  at	
  
supplier's	
  will
Suspension	
  of	
  
3-­‐6	
  months
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Liabilities	
  and	
  Warranties
The	
  project	
  should	
  never	
  risk	
  the	
  sustainability	
  of	
  your	
  business
Issue
12	
  months	
  
from	
  delivery
SupplierBuyer
Fix	
  first	
  
breaking	
  part
In/out	
  costs
Evergreen
Consequential	
  
material	
  damage
Consequential	
  
business	
  damage
12	
  months	
  
from	
  use
Post	
  service	
  
performance	
  
PO	
  value Contract	
  
value
Annual	
  contract	
  
value
Parent	
  Company	
  
guarantee
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Choice	
  of	
  Governing	
  Law	
  and	
  Dispute	
  Resolution
Will	
  English	
  Common	
  Law	
  work	
  in	
  the	
  country	
  you	
  are	
  working	
  in?
Issue
Supplier	
  Law English	
  Law Buyer	
  Law
SupplierBuyer
Independent	
  
arbitration
Court
Code	
  Law
German	
  
(Code)	
  Law
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Delivery,	
  Title	
  Transfer,	
  Repair	
  Services	
  Logistics	
  and	
  Inventory	
  Utilization
How	
  would	
  you	
  define	
  delivery	
  of	
  an	
  inspection	
  or	
  a	
  repair	
  service?
Issue
EXW
SupplierBuyer
DDP DDU EXW	
  +	
  logistics	
  
support
May	
  use	
  buyer’s	
  
inventory
Must	
  use	
  buyer’s	
  
inventory
Right	
  to	
  reject	
  
buyer’s	
  inventory
Logistics	
  support
Title	
  of	
  scrap	
  is	
  
with	
  supplier
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Site	
  Conditions,	
  Hazardous	
  Materials,	
  Health	
  and	
  Safety
The	
  supplier	
  must	
  be	
  able	
  to	
  walk	
  off	
  site	
  when	
  site	
  conditions	
  are	
  dangerous
Issue
Must	
  work	
  in	
  site	
  
conditions	
  given	
  
by	
  buyer
SupplierBuyer
Supplier	
  has	
  right	
  to	
  
declare	
  site	
  
conditions/materials	
  
as	
  dangerous
Country	
  risk
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Taxes	
  and	
  Duties
Even	
  with	
  EXW-­‐basis	
  there	
  are	
  taxes/duties	
  that	
  the	
  supplier	
  cannot	
  ignore
Issue
EXW-­‐basis
Permanent	
  site	
  
establishment
DDP-­‐basis
SupplierBuyer
Import/export	
  of	
  
temporary	
  tools
Withholding	
  
taxes
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Insurance	
  Coverage
The	
  Supplier	
  should	
  not	
  act	
  as	
  an	
  insurance	
  for	
  the	
  Buyer
Issue
Names	
  on	
  the	
  
Buyer’s	
  insurance	
  
policy
Damage	
  to	
  Buyer’s	
  
property	
  via	
  Gross	
  
Negligence
3rd Party	
  
Liability
SupplierBuyer
No	
  waiver	
  of	
  
Subrogation
Accidental	
  damage	
  
to	
  Buyer’s	
  property
Supplier	
  accepts	
  
care	
  and	
  custody
Deductible	
  with	
  
cap	
  for	
  accidental	
  
damage	
  of	
  Buyer’s	
  
property
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Indemnification	
  
Indemnification	
  is	
  very	
  technical	
  and	
  important	
  for	
  business	
  sustainability
Issue
The	
  Buyer	
  has	
  
responsibility	
  and	
  
assumes	
  the	
  risks	
  
– Supplier	
  is	
  
indemnified
Note:	
  It	
  is	
  not	
  possible	
  to	
  indemnification	
  for	
  ”Willful	
  Misconduct	
  or	
  Gross	
  Negligence” but	
  it	
  is	
  
possible	
  to	
  carve	
  out	
  what	
  is	
  ”Gross	
  Negligence”.	
  Cap	
  on	
  indemnity,	
  period	
  limit	
  for	
  claims.
The	
  Supplier	
  takes	
  full	
  
responsibility	
  and	
  risk	
  –
Buyer	
  is	
  indemnified
SupplierBuyer
The	
  Buyer	
  indemnifies	
  the	
  Suppler	
  
for	
  damage	
  away	
  from	
  the	
  
equipment	
  being	
  worked	
  on
The	
  Buyer	
  indemnifies	
  the	
  
Supplier	
  for	
  accidental	
  damage	
  
on	
  the	
  equipment	
  being	
  
worked	
  on	
  (or	
  provides	
  a	
  cap)
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Force	
  Majeure,	
  Excluded	
  Events,	
  Unforeseeable	
  Events	
  and	
  Compensation
Core	
  Article	
  in	
  a	
  multi-­‐year	
  contract	
  must	
  be	
  included	
  in	
  some	
  form
Issue
Both	
  clearly	
  defined Not	
  included
SupplierBuyer
Not	
  included
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Laws,	
  Codes	
  and	
  Standards
It	
  is	
  impossible	
  to	
  understand	
  what	
  will	
  happen	
  in	
  the	
  future	
  with	
  governments!
Issue
Costs	
  associated	
  
with	
  changes	
  in	
  
Laws,	
  Codes	
  or	
  
Standards	
  to	
  
Buyer’s	
  account
SupplierBuyer
Costs	
  associated	
  
with	
  changes	
  in	
  
Laws,	
  Codes	
  or	
  
Standards	
  to	
  
Supplier’s	
  account
Costs	
  associated	
  
with	
  changes	
  in	
  
Laws,	
  Codes	
  or	
  
Standards	
  in	
  
suppliers	
  
operational	
  
countries	
  to	
  
Supplier’s	
  account
Costs	
  associated	
  
with	
  changes	
  in	
  
Laws,	
  Codes	
  or	
  
Standards	
  in	
  
suppliers	
  
operational	
  
countries	
  to	
  
Buyer's	
  account
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Critical	
  aspects	
  of	
  service	
  contracts	
  
Critical	
  aspects	
  of	
  Service	
  Contracts	
  vs	
  EPC	
  Contract	
  “musts”
-­‐ Buyer-­‐Supplier	
  risks,	
  
responsibilities	
  and	
  obligations
-­‐ Scope,	
  Covered	
  Units	
  and	
  
Terminal	
  Points
-­‐ Owner’s	
  Support	
  Obligations
-­‐ Operating	
  Assumptions
-­‐ Monitoring	
  of	
  Performance	
  and	
  
System	
  Conditions	
  
-­‐ Price,	
  Payment	
  and	
  
Performance	
  Commitment
-­‐ Term,	
  Termination	
  and	
  
Suspension
-­‐ Liabilities	
  and	
  Warranties
-­‐ Choice	
  of	
  Governing	
  Law	
  and	
  
Dispute	
  Resolution
-­‐ Delivery,	
  Title	
  Transfer,	
  Repair	
  
Services	
  Logistics	
  and	
  Inventory	
  
Utilization
-­‐ Site	
  Conditions,	
  Hazardous	
  
Materials,	
  Health	
  and	
  Safety
-­‐ Taxes	
  and	
  Duties
-­‐ Insurance	
  Coverage
-­‐ Indemnification	
  
-­‐ Force	
  Majeure	
  and	
  Excluded	
  
Events
-­‐ Laws,	
  Codes	
  and	
  Standards
-­‐ Coming	
  into	
  force	
  – no	
  work	
  
before
-­‐ Warranties	
  &	
  Performance	
  
Guarantees	
  – definition,	
  period,	
  
exclusive	
  remedy	
  
-­‐ Indemnification	
  – exposure	
  to	
  
negligence,	
   capped,	
  limit	
  claim	
  
period
-­‐ Limitation	
  of	
  Liability	
  -­‐ on	
  all	
  
types	
  of	
  damages,	
  NO	
  
Consequential	
  Damages
-­‐ Force	
  Majeure	
  – unforeseeable	
  
events,	
  grant	
  time	
  and	
  costs
-­‐ Change	
  Order	
  provisions	
  – must	
  
be	
  compensated	
  (time	
  &	
  cost)
-­‐ Exclude	
  responsibility	
  for	
  Client	
  
responsibilities
-­‐ Intellectual	
  Property	
  protection
-­‐ Arbitration	
  Clause
-­‐ Deemed	
  Acceptance	
   of	
  work	
  /	
  
documents	
  after	
  specific	
  review	
  
period
-­‐ Rejection	
  – remedy	
  defined
Services EPC
“Law	
  is	
  not	
  common	
  sense	
  – No	
  oral	
  commitments;	
  No	
  unlimited	
  commitments	
  (time	
  or	
  scope)”
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
HOW	
  DO	
  YOU	
  KNOW	
  THE	
  OUTCOME	
  FROM	
  A	
  
SERVICE	
  CONTRACT?
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
How	
  do	
  you	
  measure	
  the	
  outcome	
  from	
  a	
  service	
  contract?
Group	
  work
Please	
  work	
  in	
  groups	
  for	
  20	
  minutes	
  on	
  the	
  following
-­‐ Left	
  side	
  of	
  the	
  class	
  work	
  on	
  the	
  MAN	
  Trucks	
  
advanced	
  services
-­‐ Right	
  side	
  work	
  on	
  the	
  Hitachi	
  trains	
  advanced	
  
services
Be	
  ready	
  to	
  share	
  your	
  thoughts	
  with	
  the	
  rest	
  of	
  the	
  
class.
-­‐ Describe	
  how	
  you	
  would	
  measure	
  the	
  effectiveness	
  
(client’s	
  view) of	
  an	
  advanced	
  service	
  contract
-­‐ Describe	
  how	
  you	
  would	
  measure	
  the	
  efficiency	
  
(supplier	
  view)	
  of	
  an	
  advanced	
  service	
  contract
What	
  did	
  we	
  find	
  out?
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
How	
  do	
  you	
  measure	
  the	
  outcome	
  from	
  a	
  service	
  contract?
Measuring	
  outcomes
Effectiveness	
  (in	
  the	
  view	
  of	
  the	
  Buyer)	
  
and	
  Efficiency	
  (in	
  the	
  view	
  of	
  the	
  
Supplier)	
  must	
  be	
  measured	
  
-­‐ Did	
  it	
  deliver	
  the	
  outcome	
  the	
  buyer	
  
was	
  expecting
-­‐ NPS	
  (or	
  other)
-­‐ Sales,	
  costs,	
  margins,	
  on	
  time	
  etc
-­‐ What	
  could	
  be	
  improved?
Closing)projects)with)impact))
40!
!
!
Figure!54!The!project!closeout!canvas!!
!
Measure	
  service	
  contract	
  outcomes	
  regularly	
  and	
  share	
  lessons
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
REVENUE	
  AND	
  COST	
  MODELS	
  FOR	
  ADVANCED	
  
SERVICES
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Revenue	
  and	
  cost	
  models	
  for	
  advanced	
  services
Let’s	
  look	
  at	
  the	
  business	
  model	
  canvas
Important	
  facts
-­‐ Costs	
  should	
  be	
  less	
  than	
  revenues	
  in	
  the	
  long	
  run
-­‐ Both	
  must	
  be	
  modelled
-­‐ Accounting	
  rules	
  have	
  important	
  impact	
  
-­‐ sales	
  recognition and	
  POC
-­‐ Often	
  risks	
  can	
  be	
  embedded
-­‐ exchange	
  rates,	
  escalation	
  and	
  are	
  not	
  well	
  
understood
What are the most important costs inherent in our business model?
Which Key Resources are most expensive?
Which Key Activities are most expensive?
Through which Channels do our Customer Segments
want to be reached?
How are we reaching them now?
How are our Channels integrated?
Which ones work best?
Which ones are most cost-efficient?
How are we integrating them with customer routines?
For what value are our customers really willing to pay?
For what do they currently pay?
How are they currently paying?
How would they prefer to pay?
How much does each Revenue Stream contribute to overall revenues?
For whom are we creating value?
Who are our most important customers?
What type of relationship does each of our Customer
Segments expect us to establish and maintain with them?
Which ones have we established?
How are they integrated with the rest of our business model?
How costly are they?
What value do we deliver to the customer?
Which one of our customer’s problems are we helping to solve?
What bundles of products and services are we offering to each Customer Segment?
Which customer needs are we satisfying?
What Key Activities do our Value Propositions require?
Our Distribution Channels?
Customer Relationships?
Revenue streams?
Who are our Key Partners?
Who are our key suppliers?
Which Key Resources are we acquiring from partners?
Which Key Activities do partners perform?
What Key Resources do our Value Propositions require?
Our Distribution Channels? Customer Relationships?
Revenue Streams?
Day Month Year
No.
This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported License.
To view a copy of this license, visit http://creativecommons.org/licenses/by-sa/3.0/
or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Revenue	
  and	
  cost	
  models	
  for	
  advanced	
  services
Group	
  work
In	
  your	
  groups	
  and	
  using	
  the	
  business	
  model	
  canvas	
  list	
  
the	
  cost	
  structures/revenue	
  streams	
  you	
  need	
  to	
  
understand.	
  
-­‐ How	
  could	
  you	
  model	
  the	
  costs	
  and	
  the	
  revenues?	
  
-­‐ What	
  is	
  the	
  difference	
  between	
  the	
  costs	
  and	
  
revenues?
-­‐ What	
  happens	
  when	
  costs	
  are	
  driven	
  differently	
  to	
  the	
  
revenues?
What	
  did	
  we	
  find	
  out?
What are the most important costs inherent in our business model?
Which Key Resources are most expensive?
Which Key Activities are most expensive?
Through which Channels do our Customer Segments
want to be reached?
How are we reaching them now?
How are our Channels integrated?
Which ones work best?
Which ones are most cost-efficient?
How are we integrating them with customer routines?
For what value are our customers really willing to pay?
For what do they currently pay?
How are they currently paying?
How would they prefer to pay?
How much does each Revenue Stream contribute to overall revenues?
For whom are we creating value?
Who are our most important customers?
What type of relationship does each of our Customer
Segments expect us to establish and maintain with them?
Which ones have we established?
How are they integrated with the rest of our business model?
How costly are they?
What value do we deliver to the customer?
Which one of our customer’s problems are we helping to solve?
What bundles of products and services are we offering to each Customer Segment?
Which customer needs are we satisfying?
What Key Activities do our Value Propositions require?
Our Distribution Channels?
Customer Relationships?
Revenue streams?
Who are our Key Partners?
Who are our key suppliers?
Which Key Resources are we acquiring from partners?
Which Key Activities do partners perform?
What Key Resources do our Value Propositions require?
Our Distribution Channels? Customer Relationships?
Revenue Streams?
No.
This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported License.
To view a copy of this license, visit http://creativecommons.org/licenses/by-sa/3.0/
or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Revenue	
  and	
  cost	
  models	
  for	
  advanced	
  services
Revenue	
  streams
The	
  revenues	
  streams	
  are	
  fees	
  in	
  the	
  contact,	
  some	
  fixed,	
  some	
  variable	
  some	
  performance	
  based
How are we reaching them now?
How are our Channels integrated?
Which ones work best?
Which ones are most cost-efficient?
How are we integrating them with customer routines?
For what value are our customers really willing to pay?
For what do they currently pay?
How are they currently paying?
How would they prefer to pay?
How much does each Revenue Stream contribute to overall revenues?
This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported License.
To view a copy of this license, visit http://creativecommons.org/licenses/by-sa/3.0/
or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.
Fixed
• Mobilisation
• Annual	
  fees
• Lump-­‐sum	
  fees
• Upgrades
• Monitoring
Variable
• Per	
  x	
  usage
Performance
• Bonuses
• Liquidated	
  
damages
Out	
  of	
  scope
• List	
  prices
• Lump	
  sum
• Time	
  and	
  
materials
• Waiting	
  time
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Revenue	
  and	
  cost	
  models	
  for	
  advanced	
  services
Cost	
  drivers
Costs	
  are	
  fixed,	
  variable,	
  not	
  all	
  costs	
  are	
  controllable
What are the most important costs inherent in our business model?
Which Key Resources are most expensive?
Which Key Activities are most expensive?
For what
For what
How are
How wou
How muc
Fixed
• Condition	
  
monitoring
• Project	
  
management
• Site	
  
management
• Mobilisation
Variable
• Parts
• Planned	
  
inspections
• Warranty
Performance
• Productivity	
  
improvements
• Escalation
• Bonuses
• Liquidated	
  
damages
• Management	
  
effort
Out	
  of	
  scope
• List	
  prices
• Lump	
  sum
• Time	
  and	
  
materials
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Revenue	
  and	
  cost	
  models	
  for	
  advanced	
  services
What	
  is	
  between	
  the	
  revenues	
  and	
  costs
-­‐ Accounting	
  rules,	
  sales	
  recognition	
  vs	
  cash
-­‐ Deferred	
  cash	
  flows
-­‐ Value	
  at	
  risk	
  calculations	
  for	
  performance	
  issues
-­‐ Cost	
  escalations	
  (inflation	
  adjustments)
-­‐ Project	
  Gross	
  Margin	
  vs	
  NPV
Accounting	
  rules	
  are	
  important	
  for	
  the	
  back	
  office,	
  for	
  the	
  front	
  office	
  good	
  project	
  management
What are the most important costs inherent in our business model?
Which Key Resources are most expensive?
Which Key Activities are most expensive?
Through which Channels do our Customer Segments
want to be reached?
How are we reaching them now?
How are our Channels integrated?
Which ones work best?
Which ones are most cost-efficient?
How are we integrating them with customer routines?
For what value are our customers really willing to pay?
For what do they currently pay?
How are they currently paying?
How would they prefer to pay?
How much does each Revenue Stream contribute to overall revenues?
For whom are we creating value?
Who are our most important customers?
What type of relationship does each of our Customer
Segments expect us to establish and maintain with them?
Which ones have we established?
How are they integrated with the rest of our business model?
How costly are they?
What value do we deliver to the customer?
Which one of our customer’s problems are we helping to solve?
What bundles of products and services are we offering to each Customer Segment?
Which customer needs are we satisfying?
What Key Activities do our Value Propositions require?
Our Distribution Channels?
Customer Relationships?
Revenue streams?
Who are our Key Partners?
Who are our key suppliers?
Which Key Resources are we acquiring from partners?
Which Key Activities do partners perform?
What Key Resources do our Value Propositions require?
Our Distribution Channels? Customer Relationships?
Revenue Streams?
No.
This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported License.
To view a copy of this license, visit http://creativecommons.org/licenses/by-sa/3.0/
or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.
Fixed
• Mobilisation
• Annual0fees
• Lump5sum0fees
• Upgrades
• Monitoring
Variable
• Per0x0usage
Performance
• Bonuses
• Liquidated0
damages
Out0of0scope
• List0prices
• Lump0sum
• Time0and0
materials
• Waiting0time
Fixed
• Condition*
monitoring
• Project*
management
• Site*
management
• Mobilisation
Variable
• Parts
• Planned*
inspections
• Warranty
Performance
• Productivity*
improvements
• Escalation
• Bonuses
• Liquidated*
damages
• Management*
effort
Out*of*scope
• List*prices
• Lump*sum
• Time*and*
materials
Risk…
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
CLOSING
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Closing
It	
  is	
  important	
  to	
  always	
  model	
  the	
  service	
  contract
You	
  have	
  an	
  understanding	
  of	
  what	
  is	
  in	
  a	
  service	
  contract
You	
  understand	
  the	
  critical	
  aspects	
  of	
  service	
  contracts
You	
  have	
  ways	
  to	
  assess	
  the	
  outcome	
  of	
  the	
  service	
  contract
You	
  now	
  understand	
  the	
  
importance	
  of	
  good	
  
contracts	
  for	
  advanced	
  
services	
  and	
  why	
  you	
  should	
  
model	
  them
You	
  understand	
  the	
  modelling	
  of	
  advanced	
  service	
  contacts
Service	
  Innovation	
  |	
  Dr	
  Shaun	
  West
Thanks	
  for	
  your	
  time!

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Advanced services - contracts and modelling

  • 1. Service  Innovation  |  Dr  Shaun  West Advanced  services  – contracts  and  modelling Aston  MBA  Programme 1  March  2016 Dr Shaun  West
  • 2. Service  Innovation  |  Dr  Shaun  West Objectives By  the  end  of  the  class  you  will  understand  the  importance  of  contracts  and  models What  do  you  know  about  service  contracts? Critical  aspects  of  service  contracts How  do  you  know  the  outcome  from  a  service  contract? By  the  end  of  the  class  you   will  understand  the   importance  of  good   contracts  and  why  you   should  model  their  outcomes Revenue  and  cost  models  for  advanced  services
  • 3. Service  Innovation  |  Dr  Shaun  West WHAT  DO  YOU  KNOW  ABOUT  SERVICE   CONTRACTS?
  • 4. Service  Innovation  |  Dr  Shaun  West What  do  you  know  about  service  contracts? Group  work Please  work  in  groups  for  20  minutes  on  the  following -­‐ Left  side  of  the  class  work  on  the  MAN  Trucks   advanced  services  case -­‐ Right  side  work  on  the  Hitachi  trains  advanced   services  case Be  ready  to  share  your  thoughts  with  the  rest  of  the   class. -­‐ What  are  your  top  10  issues  you  need  the  contract  to   control  and  why? -­‐ Describe  the  top  5  differences  between  service   contracts  and  equipment  contracts.  It  might  help  if   you  think  of  a  car: -­‐ when  you  buy  a  car -­‐ when  lease  a  car -­‐ when  you  hire  a  care -­‐ when  it  is  repaired -­‐ when  it  is  serviced -­‐ when  you  rent  a  car -­‐ when  you  hire  a  taxi -­‐ … What  did  we  find  out?
  • 5. Service  Innovation  |  Dr  Shaun  West What  forms  of  service  contact  exist? Group  work Please  work  in  groups  for  10  minutes  on  the  following -­‐ Please  build  up  a  mind  map  showing  what  forms  of   service  contact  could  exist?
  • 6. Service  Innovation  |  Dr  Shaun  West What  forms  of  service  contact  exist? Mind  map  of  service  contract  forms -­‐ Who  do  we  sell  to? -­‐ Why  do  they  they  buy? Equipment -­‐ Assume  services  are  for  equipment Site  Services O&M  Services Spare   parts Asset Mgt Construction Installation Craft  labour Service  shop Commissioning Tech  advice Consulting m-­‐ support m-­‐ planned O-­‐ support O-­‐ optimisation Trouble   shooting m-­‐ unplanned Big  ”M”Process   integration Big  ”O” Full   "O&M” Remote   M&D Strategic   spares Fleet   mgt Fleet   optimisation CMUs Consulting Capital   spares Consumables -­‐ What  are  their  outcomes? -­‐ What  options  do  we  have  to  support  them?
  • 7. Service  Innovation  |  Dr  Shaun  West What  forms  of  service  contract  exist? From  one-­‐time  product  sales  to  advanced  service  contracts Where  would  you  place: -­‐ Transactional  product  sales -­‐ Product  sales  with  discounts  and  volumes -­‐ Installation  services -­‐ Construction  contracts -­‐ IT  service  contracts -­‐ O&M  contracts -­‐ Outsourced  logistics -­‐ Tolling  agreements Transactional Relationship Nature of interaction Product-orientation Use-orientation Outcome-orientation ProductCustomerProcesses Productservicesystems Services Not  all  advanced  services  require  a  long-­‐term  relationship
  • 8. Service  Innovation  |  Dr  Shaun  West CRITICAL  ASPECTS  OF  SERVICE  CONTRACTS
  • 9. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   What  are  contracts  for? Group  work -­‐ In  your  groups  create  in  15  minutes  why  we  need   contract  and  what  they  help. -­‐ We  will  then  spend  time  to  share  what  we  think  the   contracts  are  actually  for  before  moving  on. What  did  we  find  out?
  • 10. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   The  contract  is  the  written  form  of  the  customer  value  proposition Important  facts -­‐ The  contract  is  not  the  small  print  nor  should  it  be   left  in  the  drawer  to  be  forgotten -­‐ The  contract  describes  the  obligations  of  all  parties -­‐ The  optional  assumptions -­‐ Communications  and  contract  governance -­‐ The  contract  is  an  organic  document  that  evolves What  did  we  find  out?
  • 11. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Buyer-­‐Supplier  risks,  responsibilities  and  obligations This  model  will  be  used  to  visualize  where  the  risks  lie   SupplierBuyer Issue The  Buyer  has   responsibility  and   assumes  the  risks There  is  some  risk   transfer  to  the  supplier The  Supplier  takes  full   responsibility  and  risk
  • 12. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Scope,  Covered  Units  and  Terminal  Points The  greater  the  scope  provided  and  the  greater  the  integration  the  higher  the  supplier  risk Issue Parts SupplierBuyer Servcies Little  ”m” Condition   monitoring Upgrades Operational   support Big”M” Little  ”m”  plus   upgrades O&M
  • 13. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Owner’s  Support  Obligations The  obligations  are  part  required  and  in  part  to  facilitate  getting  the  work  done Issue Free  issue   parts SupplierBuyer All  parts   supplier   issued Supplier   inventory   management Supplier:  to   provide  all   local  support Buyer:  provide   site  support  to   facilitate   working Buyer:  to   provide  all   local  support
  • 14. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Operating  Assumptions Important  as  the  cost  model  is  based  on  specific  operational  assumptions Issue No  change  in   assumptions   allowed Clear  operational   assumptions  and  process   to  allow  them  to  be   updated No  operational   assumptions  given   and  fixed  price SupplierBuyer
  • 15. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Monitoring  of  Performance  and  System  Conditions   How  can  you  use  monitoring  and  diagnostics  systems  (iPhone  6  and  lockout…)   Issue System  used  only   for  checking  on   assumption   breaches Data  is  shared   openly,  no   advice Advice  provided  on   O&M  based  on   monitoring  system   SupplierBuyer Joint  root  cause   analysis System  used   for  billings
  • 16. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Price,  Payment  and  Performance  Commitment There  are  many,  many  ways  to  get  paid… Issue Cost  plus Fixed  price/   fixed  scope Tariff  based   (pay  per  x) SupplierBuyer Consignment Price  list Target  price Liquidated   damages/   bonuses   Liquidated   damages Fixed   escalation Pay  per   outcome Governance  of   performanceSupplier currency Buyer currency
  • 17. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Term,  Termination  and  Suspension What  is  important  for  your  customer  and  for  you?  You  cannot  force  a  relationship Issue Transactional Long-­‐term   (>12  years) Undefined SupplierBuyer Multi-­‐year   (<12  years) Termination  at   buyer’s  will Termination   for  material   default Termination   with  fee Termination  at   supplier's  will Suspension  of   3-­‐6  months
  • 18. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Liabilities  and  Warranties The  project  should  never  risk  the  sustainability  of  your  business Issue 12  months   from  delivery SupplierBuyer Fix  first   breaking  part In/out  costs Evergreen Consequential   material  damage Consequential   business  damage 12  months   from  use Post  service   performance   PO  value Contract   value Annual  contract   value Parent  Company   guarantee
  • 19. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Choice  of  Governing  Law  and  Dispute  Resolution Will  English  Common  Law  work  in  the  country  you  are  working  in? Issue Supplier  Law English  Law Buyer  Law SupplierBuyer Independent   arbitration Court Code  Law German   (Code)  Law
  • 20. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Delivery,  Title  Transfer,  Repair  Services  Logistics  and  Inventory  Utilization How  would  you  define  delivery  of  an  inspection  or  a  repair  service? Issue EXW SupplierBuyer DDP DDU EXW  +  logistics   support May  use  buyer’s   inventory Must  use  buyer’s   inventory Right  to  reject   buyer’s  inventory Logistics  support Title  of  scrap  is   with  supplier
  • 21. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Site  Conditions,  Hazardous  Materials,  Health  and  Safety The  supplier  must  be  able  to  walk  off  site  when  site  conditions  are  dangerous Issue Must  work  in  site   conditions  given   by  buyer SupplierBuyer Supplier  has  right  to   declare  site   conditions/materials   as  dangerous Country  risk
  • 22. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Taxes  and  Duties Even  with  EXW-­‐basis  there  are  taxes/duties  that  the  supplier  cannot  ignore Issue EXW-­‐basis Permanent  site   establishment DDP-­‐basis SupplierBuyer Import/export  of   temporary  tools Withholding   taxes
  • 23. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Insurance  Coverage The  Supplier  should  not  act  as  an  insurance  for  the  Buyer Issue Names  on  the   Buyer’s  insurance   policy Damage  to  Buyer’s   property  via  Gross   Negligence 3rd Party   Liability SupplierBuyer No  waiver  of   Subrogation Accidental  damage   to  Buyer’s  property Supplier  accepts   care  and  custody Deductible  with   cap  for  accidental   damage  of  Buyer’s   property
  • 24. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Indemnification   Indemnification  is  very  technical  and  important  for  business  sustainability Issue The  Buyer  has   responsibility  and   assumes  the  risks   – Supplier  is   indemnified Note:  It  is  not  possible  to  indemnification  for  ”Willful  Misconduct  or  Gross  Negligence” but  it  is   possible  to  carve  out  what  is  ”Gross  Negligence”.  Cap  on  indemnity,  period  limit  for  claims. The  Supplier  takes  full   responsibility  and  risk  – Buyer  is  indemnified SupplierBuyer The  Buyer  indemnifies  the  Suppler   for  damage  away  from  the   equipment  being  worked  on The  Buyer  indemnifies  the   Supplier  for  accidental  damage   on  the  equipment  being   worked  on  (or  provides  a  cap)
  • 25. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Force  Majeure,  Excluded  Events,  Unforeseeable  Events  and  Compensation Core  Article  in  a  multi-­‐year  contract  must  be  included  in  some  form Issue Both  clearly  defined Not  included SupplierBuyer Not  included
  • 26. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Laws,  Codes  and  Standards It  is  impossible  to  understand  what  will  happen  in  the  future  with  governments! Issue Costs  associated   with  changes  in   Laws,  Codes  or   Standards  to   Buyer’s  account SupplierBuyer Costs  associated   with  changes  in   Laws,  Codes  or   Standards  to   Supplier’s  account Costs  associated   with  changes  in   Laws,  Codes  or   Standards  in   suppliers   operational   countries  to   Supplier’s  account Costs  associated   with  changes  in   Laws,  Codes  or   Standards  in   suppliers   operational   countries  to   Buyer's  account
  • 27. Service  Innovation  |  Dr  Shaun  West Critical  aspects  of  service  contracts   Critical  aspects  of  Service  Contracts  vs  EPC  Contract  “musts” -­‐ Buyer-­‐Supplier  risks,   responsibilities  and  obligations -­‐ Scope,  Covered  Units  and   Terminal  Points -­‐ Owner’s  Support  Obligations -­‐ Operating  Assumptions -­‐ Monitoring  of  Performance  and   System  Conditions   -­‐ Price,  Payment  and   Performance  Commitment -­‐ Term,  Termination  and   Suspension -­‐ Liabilities  and  Warranties -­‐ Choice  of  Governing  Law  and   Dispute  Resolution -­‐ Delivery,  Title  Transfer,  Repair   Services  Logistics  and  Inventory   Utilization -­‐ Site  Conditions,  Hazardous   Materials,  Health  and  Safety -­‐ Taxes  and  Duties -­‐ Insurance  Coverage -­‐ Indemnification   -­‐ Force  Majeure  and  Excluded   Events -­‐ Laws,  Codes  and  Standards -­‐ Coming  into  force  – no  work   before -­‐ Warranties  &  Performance   Guarantees  – definition,  period,   exclusive  remedy   -­‐ Indemnification  – exposure  to   negligence,   capped,  limit  claim   period -­‐ Limitation  of  Liability  -­‐ on  all   types  of  damages,  NO   Consequential  Damages -­‐ Force  Majeure  – unforeseeable   events,  grant  time  and  costs -­‐ Change  Order  provisions  – must   be  compensated  (time  &  cost) -­‐ Exclude  responsibility  for  Client   responsibilities -­‐ Intellectual  Property  protection -­‐ Arbitration  Clause -­‐ Deemed  Acceptance   of  work  /   documents  after  specific  review   period -­‐ Rejection  – remedy  defined Services EPC “Law  is  not  common  sense  – No  oral  commitments;  No  unlimited  commitments  (time  or  scope)”
  • 28. Service  Innovation  |  Dr  Shaun  West HOW  DO  YOU  KNOW  THE  OUTCOME  FROM  A   SERVICE  CONTRACT?
  • 29. Service  Innovation  |  Dr  Shaun  West How  do  you  measure  the  outcome  from  a  service  contract? Group  work Please  work  in  groups  for  20  minutes  on  the  following -­‐ Left  side  of  the  class  work  on  the  MAN  Trucks   advanced  services -­‐ Right  side  work  on  the  Hitachi  trains  advanced   services Be  ready  to  share  your  thoughts  with  the  rest  of  the   class. -­‐ Describe  how  you  would  measure  the  effectiveness   (client’s  view) of  an  advanced  service  contract -­‐ Describe  how  you  would  measure  the  efficiency   (supplier  view)  of  an  advanced  service  contract What  did  we  find  out?
  • 30. Service  Innovation  |  Dr  Shaun  West How  do  you  measure  the  outcome  from  a  service  contract? Measuring  outcomes Effectiveness  (in  the  view  of  the  Buyer)   and  Efficiency  (in  the  view  of  the   Supplier)  must  be  measured   -­‐ Did  it  deliver  the  outcome  the  buyer   was  expecting -­‐ NPS  (or  other) -­‐ Sales,  costs,  margins,  on  time  etc -­‐ What  could  be  improved? Closing)projects)with)impact)) 40! ! ! Figure!54!The!project!closeout!canvas!! ! Measure  service  contract  outcomes  regularly  and  share  lessons
  • 31. Service  Innovation  |  Dr  Shaun  West REVENUE  AND  COST  MODELS  FOR  ADVANCED   SERVICES
  • 32. Service  Innovation  |  Dr  Shaun  West Revenue  and  cost  models  for  advanced  services Let’s  look  at  the  business  model  canvas Important  facts -­‐ Costs  should  be  less  than  revenues  in  the  long  run -­‐ Both  must  be  modelled -­‐ Accounting  rules  have  important  impact   -­‐ sales  recognition and  POC -­‐ Often  risks  can  be  embedded -­‐ exchange  rates,  escalation  and  are  not  well   understood What are the most important costs inherent in our business model? Which Key Resources are most expensive? Which Key Activities are most expensive? Through which Channels do our Customer Segments want to be reached? How are we reaching them now? How are our Channels integrated? Which ones work best? Which ones are most cost-efficient? How are we integrating them with customer routines? For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Revenue Stream contribute to overall revenues? For whom are we creating value? Who are our most important customers? What type of relationship does each of our Customer Segments expect us to establish and maintain with them? Which ones have we established? How are they integrated with the rest of our business model? How costly are they? What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? What bundles of products and services are we offering to each Customer Segment? Which customer needs are we satisfying? What Key Activities do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue streams? Who are our Key Partners? Who are our key suppliers? Which Key Resources are we acquiring from partners? Which Key Activities do partners perform? What Key Resources do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams? Day Month Year No. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-sa/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.
  • 33. Service  Innovation  |  Dr  Shaun  West Revenue  and  cost  models  for  advanced  services Group  work In  your  groups  and  using  the  business  model  canvas  list   the  cost  structures/revenue  streams  you  need  to   understand.   -­‐ How  could  you  model  the  costs  and  the  revenues?   -­‐ What  is  the  difference  between  the  costs  and   revenues? -­‐ What  happens  when  costs  are  driven  differently  to  the   revenues? What  did  we  find  out? What are the most important costs inherent in our business model? Which Key Resources are most expensive? Which Key Activities are most expensive? Through which Channels do our Customer Segments want to be reached? How are we reaching them now? How are our Channels integrated? Which ones work best? Which ones are most cost-efficient? How are we integrating them with customer routines? For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Revenue Stream contribute to overall revenues? For whom are we creating value? Who are our most important customers? What type of relationship does each of our Customer Segments expect us to establish and maintain with them? Which ones have we established? How are they integrated with the rest of our business model? How costly are they? What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? What bundles of products and services are we offering to each Customer Segment? Which customer needs are we satisfying? What Key Activities do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue streams? Who are our Key Partners? Who are our key suppliers? Which Key Resources are we acquiring from partners? Which Key Activities do partners perform? What Key Resources do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams? No. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-sa/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.
  • 34. Service  Innovation  |  Dr  Shaun  West Revenue  and  cost  models  for  advanced  services Revenue  streams The  revenues  streams  are  fees  in  the  contact,  some  fixed,  some  variable  some  performance  based How are we reaching them now? How are our Channels integrated? Which ones work best? Which ones are most cost-efficient? How are we integrating them with customer routines? For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Revenue Stream contribute to overall revenues? This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-sa/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. Fixed • Mobilisation • Annual  fees • Lump-­‐sum  fees • Upgrades • Monitoring Variable • Per  x  usage Performance • Bonuses • Liquidated   damages Out  of  scope • List  prices • Lump  sum • Time  and   materials • Waiting  time
  • 35. Service  Innovation  |  Dr  Shaun  West Revenue  and  cost  models  for  advanced  services Cost  drivers Costs  are  fixed,  variable,  not  all  costs  are  controllable What are the most important costs inherent in our business model? Which Key Resources are most expensive? Which Key Activities are most expensive? For what For what How are How wou How muc Fixed • Condition   monitoring • Project   management • Site   management • Mobilisation Variable • Parts • Planned   inspections • Warranty Performance • Productivity   improvements • Escalation • Bonuses • Liquidated   damages • Management   effort Out  of  scope • List  prices • Lump  sum • Time  and   materials
  • 36. Service  Innovation  |  Dr  Shaun  West Revenue  and  cost  models  for  advanced  services What  is  between  the  revenues  and  costs -­‐ Accounting  rules,  sales  recognition  vs  cash -­‐ Deferred  cash  flows -­‐ Value  at  risk  calculations  for  performance  issues -­‐ Cost  escalations  (inflation  adjustments) -­‐ Project  Gross  Margin  vs  NPV Accounting  rules  are  important  for  the  back  office,  for  the  front  office  good  project  management What are the most important costs inherent in our business model? Which Key Resources are most expensive? Which Key Activities are most expensive? Through which Channels do our Customer Segments want to be reached? How are we reaching them now? How are our Channels integrated? Which ones work best? Which ones are most cost-efficient? How are we integrating them with customer routines? For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Revenue Stream contribute to overall revenues? For whom are we creating value? Who are our most important customers? What type of relationship does each of our Customer Segments expect us to establish and maintain with them? Which ones have we established? How are they integrated with the rest of our business model? How costly are they? What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? What bundles of products and services are we offering to each Customer Segment? Which customer needs are we satisfying? What Key Activities do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue streams? Who are our Key Partners? Who are our key suppliers? Which Key Resources are we acquiring from partners? Which Key Activities do partners perform? What Key Resources do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams? No. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-sa/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. Fixed • Mobilisation • Annual0fees • Lump5sum0fees • Upgrades • Monitoring Variable • Per0x0usage Performance • Bonuses • Liquidated0 damages Out0of0scope • List0prices • Lump0sum • Time0and0 materials • Waiting0time Fixed • Condition* monitoring • Project* management • Site* management • Mobilisation Variable • Parts • Planned* inspections • Warranty Performance • Productivity* improvements • Escalation • Bonuses • Liquidated* damages • Management* effort Out*of*scope • List*prices • Lump*sum • Time*and* materials Risk…
  • 37. Service  Innovation  |  Dr  Shaun  West CLOSING
  • 38. Service  Innovation  |  Dr  Shaun  West Closing It  is  important  to  always  model  the  service  contract You  have  an  understanding  of  what  is  in  a  service  contract You  understand  the  critical  aspects  of  service  contracts You  have  ways  to  assess  the  outcome  of  the  service  contract You  now  understand  the   importance  of  good   contracts  for  advanced   services  and  why  you  should   model  them You  understand  the  modelling  of  advanced  service  contacts
  • 39. Service  Innovation  |  Dr  Shaun  West Thanks  for  your  time!