Process Framework for Value Creation and Value Capture
Alignment
The process
framework for business model innovation in outcome-based service relationships
involves three iterative phases:
1. Value Proposition Definition (Phase
1):
o Goal: Align objectives by jointly
identifying value creation opportunities and agreeing on value potential.
o Activities: Exploring value-enhancement
opportunities and creating a value proposition concept (value creation), while
simultaneously prioritizing win-win opportunities and evaluating profit
potential (value capture).
o Outcome: A corroborated concept for the
outcome-based service that can create significant value and be profitably
captured by both parties.
2. Value Provision Design (Phase 2):
o Goal: Achieve an aligned agreement by
designing the value offering and deciding on the profit formula.
o Activities: Customizing the value architecture
and designing the delivery process (value creation), alongside assessing
delivery risks and designing performance indicators (value capture).
o Outcome: A signed outcome-based service
contract that commercializes the business model.
3. Value-in-Use Delivery (Phase 3):
o Goal: Ensure an aligned outcome
partnership by refining value creation processes and regulating incentive
structures.
o Activities: Developing operational capabilities
and exploring improvement opportunities (value creation), while continuously
realigning incentives and ensuring fair value distribution (value capture).
o Outcome: The successful continuation and
potential renewal of the outcome-based service relationship, with continuous
adjustment and innovation.
Key Activities in the Value Proposition
Definition Phase
In the Value Proposition Definition phase,
providers and customers work together to define the value proposition for
outcome-based services. This phase involves two main sets of activities:
Identifying
Value Creation Opportunities
- Exploring Value-Enhancement Opportunities: This
involves jointly investigating how the shift to outcome provision can
create new value by having the provider take on more responsibility for
the customer's operations. It includes mapping the customer's operational
processes and the provider's technological solutions to find areas for
improvement, such as identifying bottlenecks.
- Creating Value Proposition Concept: This
activity focuses on clarifying how the new outcome-based service will
generate additional value. It involves dissecting overarching problems
into subproblems in collaboration with various stakeholders from both the provider
and customer sides. The goal is to define the underlying technologies,
products, and service activities that will form the outcome-based service
and clarify the value it will deliver, while keeping discussions open
enough to allow for innovative solutions.
Agreeing
on Value Distribution
- Prioritizing Win-Win Opportunities: This step
involves analyzing how different outcome-based service ideas would benefit
and cost both parties. Ideas are prioritized based on feasibility and
potential profitability, aiming for solutions that leverage the strengths
of both partners and offer mutual gains.
- Evaluating Profit Potential: This
activity assesses the gains (e.g., reduced life-cycle costs, increased
operational throughput) from the selected outcome-based service concept to
determine the profits that can be shared. It often involves interactive
discussions to understand the underlying reasoning and emphasized gains of
both parties, and to formulate requirements, sometimes using simulation
software to estimate life-cycle costs under different service
configurations.
Key Activities in the Value Provision Design
Phase
In the Value Provision Design phase, the
focus is on translating the initial outcome business model concept into a
signed outcome contract that benefits both parties. This phase involves two
main sets of activities:
Designing
the Value Offering
- Customizing Value Architecture: This
involves a detailed discussion on how value will be created, including
specific functions, duration, and performance measurement. It requires
jointly selecting the optimal configuration of product, service, and
digital components to customize the offering to the customer's unique
demands.
- Designing Delivery Processes: This
activity focuses on articulating and specifying the value creation
activities within the outcome agreement. It includes defining overall
logic and goals, translating them into the full scope of activities,
allocating responsibilities to operators, and specifying new delivery
routines. This often extends to softer aspects like trust and norms within
the relationship.
Deciding
on the Profit Formula
- Assessing Delivery Risks: This
involves evaluating potential risks that could cause the outcome-based
service to fail and mitigating them. As risks are often transferred to the
provider and new risks emerge for both parties, tools like scenario
planning are used to identify and manage these critical issues.
- Designing Performance Indicators: This is
crucial for aligning the financial incentives of the contract to ensure
both parties profit. It requires specifying the contract and indicators in
a way that promotes a win-win outcome, often involving complex and
iterative interactions to understand partner operations and clarify
appropriate performance indicators. The goal is to find simple,
operational indicators that capture what the customer truly values.
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Key Activities in the Value-in-Use Delivery
Phase
In the Value-in-Use Delivery phase, the focus
is on ensuring the long-term sustainability of the outcome-based service
relationship by continuously refining value creation processes and regulating
incentive structures. This phase involves two main sets of activities:
Refining
Value Creation Processes
- Developing Operational Capabilities: This involves
both the provider and customer developing the necessary skills and
routines to ensure optimal operation and service delivery. For providers,
this might mean hiring or training new staff and developing routines for
servicing the solution, often including digital technologies. For
customers, it means ensuring end-users interact with the solution as
prescribed and unlearn old routines.
- Exploring Improvement Opportunities: Over the
duration of the contract, which can span years or decades, parties engage
in continuous fine-tuning, upgrading, and optimizing delivery routines.
This includes systematic efforts, such as joint meetings and
problem-solving sessions, to detect problem areas and identify
opportunities to improve solutions and adapt to changing market conditions
or technological advancements.
Regulating
Incentive Structures
- Realigning Incentives: This
activity focuses on continuously identifying and addressing potential
misalignments in goals and interests that could lead to value
co-destruction. It involves revising contractual details to ensure
incentives remain aligned, often facilitated by existing trust between the
parties.
- Ensuring Fair Value Distribution: This requires
ongoing monitoring of the contract's performance to ensure both parties
continue to profit fairly. Discussions are often held regularly between
various levels of management and staff to evaluate the contract and make
adjustments for technology or market shifts, sometimes through mechanisms
like gain/pain sharing agreements, to maintain a balanced and profitable
relationship.
Reasons for Failure in Each Phase of the Business
Model Innovation Framework
The paper
identifies common reasons for failure in each phase of the business model
innovation process for outcome-based services:
- Phase 1: Value Proposition
Definition
- Inability to define the
concept concretely enough: This prevents the customer from signing off on
the new contract and can lead to internal concerns about the ability to
deliver the promised value.
- Failure to ensure value
capture and top management support: If the profit potential is not adequately
evaluated, or if key stakeholders (like top management) do not perceive
the contract as beneficial or too risky, progress to the next phase can
be halted.
- Neglecting to consider value distribution from the start: Focusing solely on value creation without simultaneously agreeing on how value gains will be shared can lead to blockages in discussions.,
- Phase 2: Value Provision Design
- Inability to translate value
creation opportunities into a jointly agreed outcome agreement: This includes failing to
agree on performance indicators, roles, and responsibilities for solution
delivery.
- Failure to ensure that the
outcome-based service captures benefits for both parties: If the revenue potential does
not clearly exceed costs and risks for both provider and customer, the
agreement may not be commercialized.
- Lack of agreement on cost structure and revenue streams: This can stall discussions and prevent the transition to a signed contract.
- Phase 3: Value-in-Use Delivery
- Inability to achieve the
expected value creation potential: If the outcome-based service does not deliver
the value-in-use as intended or expected during the design phase, the
contract may not be renewed.
- Failure to adjust value
capture mechanisms to changing circumstances: When one party is exposed to
an unfair proportion of risk or cost due to evolving market, internal, or
technological conditions, the relationship can become unprofitable and
lead to contract dissolution.
- Unbalanced agreements: If only one party profits,
the relationship is unlikely to survive long-term, leading to contract
cancellation.
Customer Involvement in the Business Model
Innovation Framework
The framework significantly emphasizes
customer involvement by adopting a dyadic perspective rather
than a provider-centric one, highlighting that the alignment of value creation and
value capture is a joint endeavor between the provider and the
customer. This is evident throughout all three phases of the business model
innovation process:
Phase
1: Value Proposition Definition
- Joint Exploration: Both parties
work together to identify value-enhancement opportunities and pinpoint
problem areas that the outcome-based service can address. This involves a
holistic mapping of the customer's operational processes and the
provider's technological solutions.
- Collaborative Concept Creation: The
overarching problem is dissected into subproblems in collaboration with
the provider's key account manager, development team, end users, and other
customer stakeholders.
- Mutual Agreement on Value Distribution: Successful
cases show that discussions about how value will be shared (win-win
opportunities) are present from this early phase, ensuring both parties
are positioned to profit.
Phase
2: Value Provision Design
- Customization and Negotiation: The initial
concept is translated into a customized value architecture that directly
meets the customer's unique outcome requirements, often requiring creative
problem-solving from both sides.
- Joint Delivery Process Design:
Responsibilities for the delivery phase are mapped out collaboratively,
extending beyond contractual clauses to include softer aspects like trust
and norms, fostering a relational approach.
- Shared Risk Assessment: Both
provider and customer engage in assessing delivery risks, acknowledging
that new risks emerge for both parties in outcome-based services.
Phase
3: Value-in-Use Delivery
- Continuous Improvement: The
relationship is viewed as a continuous partnership, with both parties
committed to ongoing fine-tuning, upgrading, and optimizing the solution's
performance. This includes joint meetings to evaluate KPIs and explore
improvement opportunities.
- Operational Capabilities Development: Both
provider and customer are responsible for developing operational
capabilities, including training end users to ensure optimal use of
equipment and adherence to new routines.
- Realigning Incentives and Fair Distribution: Continuous
monitoring and adjustment of incentives and profit distribution are
crucial, often involving regular discussions between senior management and
operational staff from both sides to adapt to changing conditions and
ensure fairness.
The study explicitly states that customer
involvement is more interactive and open in outcome-based services than in
traditional product-centric settings, requiring an "open business
model" and a "relational view" built on agile co-creation and
mutual trust.
Definitions of Value Creation, Value
Capture and
The paper defines value creation and value
capture as follows:
Value
Creation
Value creation is defined as the
processes aimed at increasing value generation. In the context of
outcome provision, this means both the provider and customer are involved in customer-specific
value-creation activities. The provider's expertise and the customer's
operational knowledge are instrumental in delivering higher use value (e.g.,
optimized operations) to the customer over time. This perspective emphasizes
"value-in-use" (value created through customer use) as a critical
distinction from the traditional "value-in-exchange" (value at the
point of sale).
Value
Capture
Value capture is defined as the
process of securing profits from value creation and the distribution of those
profits among participating actors such as providers, customers, and
partners. Successful value capture requires designing appropriate governance
mechanisms to ensure that the value created exceeds the cost of realizing it,
and that the surplus value is distributed fairly among partners. This extends
beyond contractual and legal agreements, emphasizing the importance of trust,
especially when partners focus on value-in-use as the basis for value capture.
Essentially, value capture processes involve activities that help providers and
customers determine how the additional value created should be shared between
them.
Definition of Servitization
The paper defines servitization as a significant
research stream within business model innovation that focuses on the shift
from selling products to selling outcome-based services. It recognizes the
challenges involved as a business's service portfolio evolves from simple to
more advanced forms.
Specifically, the servitization literature
has begun to acknowledge the complexities of this business model innovation,
particularly as it moves towards more advanced service offerings. The paper
notes that while this area is progressing, few servitization studies have
deeply investigated the business model innovation process specifically for
outcome-based services, which are considered the most advanced form of service
provision. It also highlights a call for more research on how providers
collaborate with customers throughout this innovation process, especially given
the increased complexity of interactions in outcome-based services.
Outcome-Based Services: Definition and Advanced Nature
Outcome-based
services involve a provider assuming responsibility for the performance
outcomes of products and services (e.g., engine functioning) and accepting
penalties for any shortcomings (e.g., engine breakdown). This model is
considered the most advanced form of service provision because it represents a
high-gain as well as a high-risk business model innovation strategy, requiring
a fundamental change in the entire business model towards the customer.
This shift
is not merely selling a product or service; it's about selling an outcome,
which means:
- Different Offer Composition: The offering is fundamentally
different, requiring a change in the whole business model towards the
customer.
- Radically Higher Performance
Guarantee: Value
is created by guaranteeing significantly higher performance.
- Changed Delivery Process: The provider becomes
responsible for the outcome, necessitating changes in the delivery
process.
- Increased Risk and Uncertainty: Profit becomes more risky,
uncertain, and closely aligned with the customer's success.
- Collaborative Effort: This shift cannot be achieved
by a single entity; it requires collaboration.
The paper
highlights that the servitization literature, while advancing, has only
recently begun to investigate the business model innovation process for
outcome-based services, underscoring their advanced nature and the complexity
of the interactions between provider and customer in this context.
Challenges in Shifting to Outcome-Based Services
The shift to
outcome-based services presents several significant challenges for both
providers and customers:
- Fundamental Business Model
Change:
Selling an outcome is not the same as selling a product or service; it
requires a complete change in the business model towards the customer.
This includes redefining how value is created, delivered, and captured.
- Increased Responsibility and
Risk for Providers: Providers assume responsibility for the
performance outcomes and accept penalties for shortcomings. This makes
profit more risky, uncertain, and aligned with the customer's success. For
instance, a provider who previously profited from product sales,
maintenance, and spare parts must now consider these as costs, with
revenue entirely dependent on delivered outcomes.
- Higher Customer Dependence: Customers must accept a much
higher degree of dependence on the provider.
- Redefining Value Creation and
Capture: The
process of redefining how value is created (e.g., lower life-cycle costs)
and captured (e.g., value distribution) is daunting and often conflicts
with traditional business-to-business relationship models.
- Evolving Challenges and
Requirements: This
redefinition rarely happens in one step; challenges, needs, and
requirements evolve throughout the business model innovation process.
- Internal Resistance and Lack of
Competence:
Internally, there can be concerns about the ability to deliver on promised
value, and a lack of competence or support to change existing product and
service contracts into outcome-based arrangements.
- Difficulty in Defining Concrete
Concepts and Agreements: It can be challenging to define the
outcome-based service concept concretely enough for customer sign-off and
to agree on how value gains will be shared, especially in early phases.
- Aligning Divergent Goals: Providers may focus on value
improvements while customers seek cost cuts, and these objectives are not
always aligned.
- Assessing and Mitigating Risks: New types of risks, such as
opportunistic customer behavior, need to be considered and mitigated.
Customers also face risks due to their dependence on the provider's
performance.
- Designing Performance
Indicators:
Formulating clear and fair Key Performance Indicators (KPIs) for
service-level agreements is complex, as customers may be unaware of how to
formulate them, requiring joint work and a relational approach.
- Operational Capabilities and
Routines: Both
providers and customers need to develop new operational capabilities and
routines, including training staff and adapting to new ways of working, to
ensure the solution is used effectively.
- Continuous Re-alignment of
Incentives: Goals
and interests can diverge over time, leading to potential value
co-destruction. Continuous re-alignment of incentives is crucial to
prevent unprofitable relationships.
- Ensuring Fair Value
Distribution:
Monitoring contract performance to ensure both parties profit and making
adjustments for technological or market shifts over extended contractual
periods is essential for long-term sustainability.
Relationship Between Servitization and
Business Model Innovation
The paper identifies servitization as a significant
research stream within business model innovation, particularly focusing on the
shift from selling products to selling outcome-based services. This shift is
considered one of the most important forms of business model innovation today.
Servitization, in this context, involves a
provider assuming responsibility for the performance outcomes of products and
services and accepting penalties for any shortcomings. This represents a
high-gain and high-risk business model innovation strategy. The paper notes
that while the servitization literature has begun to recognize the challenges
of evolving from simple to advanced service portfolios, few studies have
investigated the business model innovation process specifically for
outcome-based services, which are considered the most advanced form of service
provision.
The study aims to bridge a knowledge gap by
exploring how providers and customers align value creation and value capture
processes in business model innovation for outcome-based services, thereby contributing
to both the servitization and business model innovation literature.
Managerial Implications of the Process
Framework
The process framework offers several
important insights for managers involved in business model innovation for
outcome-based services within a B2B industrial setting:
·
Simultaneous
Consideration of Value Creation and Value Capture: Managers should consider both value creation and
value capture simultaneously throughout the entire business model innovation
process. While it's common to focus on value generation first, the paper
highlights that considering value distribution (win-win scenarios) from the
outset is crucial for successful outcome-based service innovation. The scope
and detail may change, but both elements should be addressed in parallel.
·
Active
Alignment of Value Creation and Value Capture: It is not sufficient to merely consider these
elements; managers must actively ensure they are aligned at each phase of
business model innovation. Misalignment, as seen in unsuccessful cases, can
lead to contracts that fail to deliver value-in-use and are quickly
discontinued. Alignment is presented as a vital foundation for building
profitable customer-provider relationships, not just a checklist item.
·
Continuous
Re-alignment and Innovation of the Business Model: Managers need to continuously re-align and innovate
the business model to adapt to ongoing changes in the environment. Profitable
relationships can quickly become unprofitable due to shifts in circumstances.
Outcome-based services require a strong customer and provider relationship,
trust, and a genuine sharing of risk and reward. Managers should regularly
evaluate the business model to ensure maximum value creation and capture over the
relationship's lifespan, focusing on improving relationships, creating greater
value, and ensuring fair profit distribution through regular meetings between
senior management and operational staff.
Differences from Previous Business Model Innovation
Models
The paper's framework for business model
innovation in outcome-based service relationships differs from previous models
in several key ways:
·
Dyadic Perspective
Unlike previous
models that often offered a provider-centric view of business model innovation,
this framework adopts a dyadic perspective, encompassing both
the provider and the customer. This emphasizes the interactive nature of the
relationship in shaping the innovation process.
·
Simultaneous Consideration of Value
Creation and Value Capture
Historically,
literature has tended to view value creation and value capture in a sequential
manner, as separate processes or one-time activities. This study argues that
successful business model innovation is based on the continuous
alignment of value creation and value capture across all phases,
rather than treating them as sequential steps.
·
Process Framework for Outcome-Based
Services
While prior
literature often viewed business model innovation as an outcome or investigated
its performance implications, this study develops a process framework
specifically for business model innovation in outcome-based services. It
details how the phases (value proposition definition, value provision design,
and value-in-use delivery) play a critical role in determining appropriate
value creation and value capture activities throughout the process.
·
Emphasis on Alignment and Misalignment
The framework
highlights the importance of alignment between value creation
and value capture throughout the entire innovation process, from initial
conceptualization to ongoing commercialization. It also identifies misalignment
as a key cause of failure in different phases of business model
innovation, providing concrete insights into how alignment is achieved and
maintained, which was lacking in previous studies.
·
Continuous Re-alignment Over Time
The study
emphasizes the need for continuous business model re-alignment
and innovation during the actual operation of the business model, particularly
in the context of long-term outcome-based service contracts. This goes beyond
the design and development phases, recognizing that alignment is a continuous
practice, not a one-time activity.
·
Open Business Model Innovation Perspective
It advocates for
an open business model innovation perspective, where the
alignment of value creation and value capture is a joint endeavor, not solely a
provider-centric requirement. This highlights continuous customer involvement
as a baseline for business model decisions and a point of reference to ensure
alignment, recognizing the customer's active role in co-production.
Future Research Directions
The authors
suggest several avenues for future research based on their study:
- Alignment of Value Creation and
Value Capture:
Further research is needed to explore the roles, mechanisms, and practices
through which alignment of value creation and value capture is achieved,
especially as relationships mature.
- Success and Failure in
Innovation: The
study encourages future research to investigate both successful and
unsuccessful cases in innovation management and business model innovation
domains.
- Underlying Conditions for
Outcome-Based Services: Exploring other underlying conditions such as
capabilities, prior relationships, and transaction costs could provide
relevant insights.
- Different Business Model Types: Further examination of different
types of business models and the conditions under which each is most
appropriate is warranted. This includes investigating how various solution
configurations manifest in aligning value creation and capture, and the
benefits and trade-offs involved.
- Multi-level Effects: Examining the effects of these
arrangements on organizational, relational, and individual levels would be
a fruitful line of inquiry.
- Network Perspectives: Given that business model
innovation extends beyond dyadic relationships to involve multiple
ecosystem actors, exploring network perspectives and the emergence of
business models through co-creation among different network actors
(providers, service delivery partners, customers) could provide
interesting multi-actor insights, especially in the context of digital
transformation.
Based on the article - Value Creation and Value Capture Alignment in Business Model Innovation: A Process View on Outcome-Based Business Models by David Sjödin, Vinit Parida, Marin Jovanovic, Ivanka Visnjic https://doi.org/10.1111/jpim.12516