Handouts from the class at Aston Business School looking at service contracts and cost/revenue models, what they mean, how they work and what it means for the contract terms and conditions.
An experimental study in using natural admixture as an alternative for chemic...
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
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
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…
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