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Operations strategy for the

effective delivery of integrated
industrial product-service
offerings

Industrial
product-service
offerings

Two exploratory defence industry case studies

Received October 2009

Revised March 2010
June 2010
October 2010
Accepted November 2010

Partha Priya Datta

Operations Management Group,
Indian Institute of Management, Calcutta, India, and

579

Rajkumar Roy
Department of Manufacturing, Cranfield University, Cranfield, UK
Abstract
Purpose As enterprises focus on offering integrated product/service bundles, performance-based
contracts become ever so important in ensuring effective delivery. Performance-based contracts fall
under the result-oriented category of industrial product service systems (PSSs). The paper aims to
present a conceptual framework for operations strategy in performance-based industrial PSSs that will
help manufacturing companies configure their operations to support effective delivery of integrated
product/service offering.
Design/methodology/approach This paper first develops a conceptual framework for operations
strategy in performance-based contracts by identifying the key elements after a detailed systematic
review of literature. A major shift in support and maintenance logistics for complex engineering
systems over the past few years has been observed in the defence and aerospace industries.
Availability contracting, a special type of performance-based contracts, is replacing traditional service
procurement practices. Two exploratory case studies involving defence availability contracts are
conducted for making inferences regarding the operations strategy.
Findings The important findings of this research are a set of elements of operations strategy
guiding the development of a conceptual framework, a set of operating principles and processes
supporting effective delivery of performance-based service contracts.
Originality/value The true value of this research is to open up the novel area of result-oriented
industrial PSSs operations strategy by capturing the key characteristics of operations using both
literature and empirical evidence.
Keywords Operations management, Contracts, Defence sector
Paper type Case study

1. Introduction
Upon entering into twenty-first century, the business environment for the manufacturing
industry has changed significantly. Well-designed products are no longer found to
be criteria for distinct competitive advantage in manufacturing industries.
This research reported here is jointly funded by British Aerospace Systems PLC and Engineering
and Physical Science Research Council (EPSRC) and conducted as part of the Support Service
Solutions: Strategy and Transition (S4T) project consortium led by the University of Cambridge.

International Journal of Operations &

Production Management
Vol. 31 No. 5, 2011
pp. 579-603
q Emerald Group Publishing Limited
0144-3577
DOI 10.1108/01443571111126337

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Manufacturers now tend to include more services in their total offering to facilitate the
sale of their goods (Brax, 2005). Unlike the normal product offering with defined
functionality the product-service mixed offering includes a greater variety of functions
and therefore a higher value (Johansson et al., 2003).
Baines et al. (2007) have identified several key challenges of integrated product/service
offerings. The transformation towards including a higher degree of services in the product
solution has in some cases produced some managerial difficulties for the companies (Oliva
and Kallenberg, 2003). Companies need to be able to configure their operations strategy to
support their offering and there is little guidance in existing literature on how to achieve
this. This paper aims at understanding the operations strategy for successfully delivering
integrated product/service offerings. This paper particularly focuses on industrial product
service offerings, which is defined as supply of services in the form of tangibles such as
spares, manpower and consumables related to maintenance of industrial goods and
intangibles as training, knowledge, technical support and customer support for effective
operations (Johansson and Olhager, 2004). The contracts between the customer and
provider are of prime importance in industrial product service systems (PSSs). Especially,
for high-cost, high-technology and long-life products/equipment, the service contracts are
extremely crucial. Performance-based contracting is replacing traditional spare purchase
type contracts. Customers are now focusing on what is required in terms of equipment
operations rather than how a facility (a spare/repair action) is to be delivered according to
set technical specifications (Gruneberg et al., 2007). A major shift in support and
maintenance operations for complex defence equipment (aircrafts, ships and missiles) has
been observed in defence and aerospace industry over the past few years.
Availability-based contracting, a variant of performance-based contracting,
is increasingly being used in UK defence equipment service procurement. An
availability-based contract is a type of contract in which the end customer contracts out
through-life support of equipment based on availability levels, as opposed to the traditional
model where assets and services are purchased on demand (www.defenseindustrydaily.
com/). Such contracts are beneficial for both customers and providers. The customer
eliminates maintenance infrastructure and inventory costs. On the other hand, the provider
assures a long-term revenue stream through long-term contracts. However, such contracts
can only deliver benefits if the operations strategies are properly and effectively
implemented. The academic literature provides very little guidance with respect to how the
operations strategies for such contracts should be implemented. This paper aims at filling
this gap by reporting the key elements of operations strategy for performance-based
industrial service contracts in the context of UK defence industry.
This paper first reviews the relevant literature in the field of operations strategy in the
context of industrial service offerings. Next, the paper discusses the concept of
performance-based service contracts and the delivery strategies. The paper provides a
conceptual framework for operational strategy for performance-based service contracts.
Next, the paper describes the case study based research methodology adopted and shows
how the different elements of operations strategy identified in the framework contribute to
effective delivery of services in two defence service contracts.
2. Literature review
The changes in the type of offering (a combination of product and services) and the
associated performance outcomes warrant a reformulation of a firms operations strategy.

This paper focuses on performance-oriented industrial services operations strategy.

The next two sub-sections review literature in industrial services operations strategy
and performance-based industrial service contracts.
2.1 Industrial service
In industrial services, firms move from manufacturing physical goods to delivering
services by adding services as a key component of their business strategy.
One of the first to discuss the change in operations under industrial service settings was
Levitt (1972) who described how manufacturing firms should integrate services into their
offerings and focus on nurturing their customer relationships, recommending a
production-line approach to services. Sundbo (1994) presents the idea of modularised
service as a category between pure manufacturing and pure services (Table I). This enables
service operations to utilise the efficiency characteristics of manufacturing processes. This
change has later been designated as servitisation (Vandermerwe and Rada, 1988).
Manufacturing

Modulised service

The product it generally concrete The service is semi-material (it is

(it is technology)
not technology, but is embedded
in a technological form)
Ownership is transferred when a Ownership is partly transferred
purchase is made
(the right of using the service
facility in an appointed period
and form)
The product can be resold
The product can be passed on
and sometimes resold
The product can be
The product can be
demonstrated
demonstrated by reference to
previous examples
The product can be stored by
The product can sometimes be
sellers and buyers
stored (e.g. self-service, discs)
Consumption is preceded by
Production and consumption are
production
separated in many cases (but not
in all)
Production, selling and
Production, selling and
consumption are locally
consumption are locally
separated in many cases
differentiated
(but not in all)
The product can be transported The product can often be
transported (if it is an
information service)
The seller produces
The buyer takes part in the
composition of the finished
product, but not in the
production
Indirect contact is possible
Direct contact is not necessary
between company and client
fur the production, but
sometimes for delivery
Can be exported
The service can sometimes be
exported (particularly if it is an
information service)

Industrial
product-service
offerings
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Classic service
The service is intangible
(it is not technology)
Ownership is not generally
transferred
The product cannot be resold
The product cannot usually be
effectively demonstrated (it does
not exist before purchase)
The product cannot be stored
Production and consumption
generally coincide
Production, consumption and
often even selling are spatially
united
The product cannot be
transported
The buyer/client takes part
directly in the production
In most cases, direct contact is
necessary
The service cannot normally be
exported, but the service
delivery system can

Table I.

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A PSS is considered to be a special case of servitisation, which provides value by

integrating products and services (Baines et al., 2007). Case study research (Roy, 2000) has
revealed a spectrum of PSS types. First is the product-oriented service (where the prime
focus of the offering is the product and service is offered as an addition), second is the
use-oriented system (where the provider sells the use providing all additional actions to
support life cycle of maintenance and upgrade) and final category is result-oriented system
(where the seller is paid for the units of service delivered to the customer). Baines et al.
(2009) studied a manufacturer providing a portfolio of product/service offerings and
outlined a framework for operations strategies in the context of product-based servitised
organisations. The researchers identified 12 different types of operational characteristics
under two key operations strategy elements structural and infra-structural
characteristics. Although this study throws some light into the operations strategy in a
real-world industrial services offering yet the study focuses more into standardised
product assembly type services with strong product-oriented service focus.
Oliva and Kallenberg (2003) demonstrated a manufacturing to services continuum for
machine manufacturing industry. They showed how products become part of the
offering in industrial services in contrast to being the focal point of value proposition.
Jackson and Cooper (1988) found that industrial services need to be customised to meet
an organisations needs and that they are also more complex. Jackson et al. (1995) divide
business services into two categories: maintenance, repair and operation services and
production service while Boyt and Harvey (1997) classify industrial services into
elementary, intermediate and intricate services. Hence, industrial services are viewed as
a series of activities connected to customers value creating processes in a
business-to-business context.
Thus, industrial service offerings are increasingly of a more customer oriented,
comprehensive and tailored nature. According to Wise and Baumgarter (1999),
integrated solutions entail products and services being combined into seamless
offerings. A customer solution is an integrated offering characterised by customisation
(i.e. based on the unique requirements of each customer) and typically, but not necessarily,
co-creation (i.e. co-developed with the customer) (Vandermerwe, 1996). According to
Frambach et al. (1997), industrial customers increasingly want turnkey solutions instead
of products that partially solve their needs. This means suppliers having to offer tangible
products augmented with product services. Finally, full/advanced service is defined as
comprehensive bundles of products and/or services that fully satisfy the needs and wants
of a customer related to a specific event or problem (Oliva and Kallenberg, 2003). In order
to adopt service orientation in industrial firms, perspective transitions have been pointed
out by several researchers. A transition is needed when firms change from a service
supporting the customers product to a service supporting his actions (Mathieu, 2001).
Adopting a full service or solutions strategy in industrial services is typically interrelated
with a number of strategic changes on the supply side of firms (Gadde and Snehota, 2000).
Spring and Araujo (2009) examined the implications of offering different
combinations of products and services on the operations strategy. A general
discussion of product/service offerings is carried out in different examples ranging from
business-to-business to business-to-customer personalised offerings. The study is
limited to intra-firm capabilities in conceptual discussion of operations strategy thus
lacking a holistic perspective. The study lacked practical significance in absence of
detailed empirical study of real-world cases. One study by Roy and Cheruvu (2009)

looked at the different drivers for competitive industrial product service offerings
development. They looked at the infrastructural factors as well for delivering
sustainable customer value. However, the framework is the conceptual nature with no
validation from real world. Frohlich and Westbrook (2001) investigate the differing
supply-chain integration strategies implemented by a firm with upstream suppliers in
accordance with its integration strategies with downstream customers. These authors
conclude that tighter integration (i.e. longer arcs) resulted in better performance. In the
service operations literature, a distinction has been made between back office
(supplier-facing) and front office (customer-facing) activities (Chase and Tansik, 1983).
Most of the literature in industrial services focuses mainly on conceptual framework
derivation (Boyt and Harvey, 1997; Johansson and Olhager, 2004). Very few studies have
looked into the operations strategy of industrial organisations adopting a service focus.
Also, empirical evidence on implementation and challenges of implementing the
operations strategies to effect successful delivery of full services is sparse in literature.
2.2 Performance-based industrial service contracts why and how
Principal-agent model provides a good theoretical basis for understanding the
buyer-supplier relationships, information and need for performance monitoring
(Robinson and Scott, 2009) in industrial service contracts. The principal (customer)
cannot observe and evaluate the time and effort put in by the supplier in a particular
task. Under such situations, the agent (supplier) can attempt to maximise his utility by
inappropriately representing his efforts (Kunz and Pfaff, 2002). It is, therefore, important
to have an output or performance-based contract designed. The performance-based
contracting tends to focus on achieving a required outcome rather than a contract for the
supply of a set of prescribed specifications (Gruneberg et al., 2007). Thus, the buyer
purchases the result of product use not ownership of the product. Under
performance-based contracts suppliers have full responsibilities for performance
(Glas and Essig, 2008). There are equitably aligned risks and incentives between
suppliers and customers in performance-based contracting (Kim et al., 2007). Since such
type of contracts involve the entire performance periods of the assets, relationship
between actors play a key role in the operations strategy formulation.
Performance-based contracts are an example of result-oriented industrial PSS.
This has affected the way in which the supply network interacts as responsibilities get
redistributed based on a target outcome (Alonso-Resgado and Thompson, 2006).
This means that all associated parties need to understand the process, competencies and
assets required to deliver the customers required performance level. Through incentives
or penalties, involved parties need to improve performance over contract period.
In performance-based contracts, customers may have significant tasks to perform
(Ferrer et al., 2010). Parasuraman et al. (1985) state that evaluating the quality of a service
is a difficult matter, because customers involvement makes it difficult to standardise the
output. They also state, in many cases, there are no clear performance measures for
evaluating service quality as it is based on the outcome as well as the process of service
delivery. This paper highlights performance assessment as one of the key elements of
operations strategy in performance-based service contracts.
A successful service delivery as per the pre-set performance requirements (quality,
speed, flexibility or cost leadership) requires understanding the operations capabilities
of the provider firm. Most world-class operations strive to deliver high performance in all

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four of these performance requirements, but in any performance-based service contract,

this is very hard to quantify and maintain as there are many uncertainties involved.
A match between demand and resources enables desired service quality standards to be
achieved while also maintaining resource productivity rates (Armistead and Clark,
1992). In order to achieve this match, it is necessary to identify and study processes
involved in service delivery (Aurich et al., 2006). As the service offering constitutes a
range of different activities, there is value in breaking down the different elements
configuring the industrial service operations strategy and analysing the interactions and
distinctions between them. Operations strategy needs to account for service delivery
uncertainty driven by the quality of information and type of contract (Armistead and
Clark, 1992). These need to be studied in detail to guide operations strategy development
in performance-based industrial and performance-based service contracts.
3. Research design
3.1 Research question and programme
The literature review shows that few research work have been directed to understand the
operations strategy in a result-oriented industrial services offering. A number of
typologies, models have been developed to provide some guidance on how to configure
an operations strategy. However, empirical validation is required to provide a complete
and detailed picture of the challenges and effective operations in performance-based
industrial PSSs. Performance focus is lacking in most of the studies in industrial service
operations strategy literature. Thus, the research question arises for this study as to how
to provide an effective and efficient service delivery system that is capable of meeting
target outcomes desired by the customer and the service provider? As previous work in
this area is largely conceptual and the area of performance-based service contracts is
relatively new, we first build a theoretical framework that synthesises the different
operations strategy elements mentioned in extant literature. Next, we carry out in-depth
case study of two such performance-based service contracts. The results of this study are
used to identify operations strategy elements for effective delivery of performance-based
contracts. The case study method is summarised in following sections.
3.2 Case study based research approach
Case study based research is appropriate in this context since we are addressing a how
type of research question (Baines et al., 2009). This methodology is suitable for a
relatively new, exploratory investigation where the variables are still unknown and the
phenomenon being studied (operations strategy in performance-based industrial PSS) is
not well understood (Ferrer et al., 2010). The unit of analysis for this research programme
is an organisation, which enters into performance-based service contracts with
customers in order to deliver services as per pre-agreed performance measures.
We reviewed two cases in depth. The analysis and review of the cases were based on
semi-structured interviews with personnel within the customer organisation and the
firm. All the interviewees are managers involved in the operation and design of the
contracts. In all, 15 semi-structured interviews were conducted with stakeholders from
the firm and customer organisation. Many of the interviews were conducted by a large
multi-disciplinary research team (involving researchers from manufacturing, marketing
and operations management disciplines). This allowed an all-rounded coverage of the
research topic and facilitated exploration from different perspectives for effective data

collection (Meredith, 1998). The resultant interview questions were decided by the
research team in an integrated manner after carrying out several initial familiarisation
workshops with the organisations. The interview questions primarily focus on
determining how and why the case companies had begun to deliver advanced/full service
offerings and the issues, this was posing for their earlier product-oriented operations.
A series of guiding interview questions were identified. These were organised around the
framework that is presented in Section 5. A selection of key questions included:
.
How is the service designed? How is service performance measured?
.
How is the service delivered? What constitutes the offering? What are the key
resources?
.
What is the outcome of the service delivered? What is the benefit to the customer?
.
How do you perceive the service level delivered? What is the benefit to you?
(customer questions)
.
How do you manage operations to deliver target performance?
.
What are the implications of shifting away from a manufacturing-oriented
operating model in these contracts?
3.3 Case selection
Choice of case companies is critical to this research as we needed to explore a company
with experience of executing performance-based service contracts. Since the area is
relatively new and services are diverse, it was very difficult to find contracts offering
similar types of product/service combinations. We were of the opinion that the case
company should have prior experience of configuring operations strategy in
product-based offerings. This would help bring out the challenges and new elements
of operations strategy in an advanced services offering under performance-based
contracts. The UK defence industry was the ideal choice for our research.
Availability-based contracting is increasingly being used in UK defence equipment
service. The premise behind availability contracting is summarised in the official UK
Ministry of Defence (MoD) Guidelines (2007, www.berr.gov.uk/files/file33168.pdf):
Contracting for Availability (CfA) is a commercial process which seeks to sustain a system or
capability at an agreed level of readiness, over a period of time, by building a partnering
arrangement between the MoD and Industry.

Under CfA, the supply of spares takes second place to the overall goal of providing the
availability and upgrades to mechanical and electrical equipment. Consequently,
industry is incentivised to deliver reliable and capable equipment (e.g. an aircraft
should be capable of flying day or night with the weaponry to defend and attack),
reduce maintenance downtimes and minimise the number of required spares as part of
a total package of maintenance, repair, overhaul, logistics support as well as equipment
availability. In such cases, both the delivery and the availability performance become
part of the service offering. While organisations may be aware of the former and could
price/contract accordingly, it is often a challenge to contract/price on the latter as
availability is of value to the customer even if the actual service does not get consumed.
Two defence contracts are used as two case studies to be able to understand new
processes and behaviours and overcome single case study limitations. Both the
contractors are predominantly manufacturing-oriented organisations and availability

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type service contracts are totally new business to them. For confidentiality reasons, the
two contracts are termed X and Y and the companies are termed 1 and 2, respectively.
Contract X is for weapons systems service in the army and Y is for fighter aircraft service
within the air force.
3.4 Results and data analysis
Data were collected between June and November in 2008. Interviews were conducted with
key personnel from the two organisations and the MoD. Each of the 15 interviews lasted
between 1.5 and two hours and was recorded and subsequently transcribed. We coded the
interview data on a number of dimensions underpinning the conceptual framework to gain
insights into the key variables that govern the service delivery performance. In the next
few sections, we describe our framework along with the interplay of different key
variables and illustrate them with exploratory investigation of case material.
4. An operations strategy framework for performance-based industrial
PSS
This section summarises the principal constructs underlying the theoretical framework
shown in Figure 1. Table II summarises the key elements of operations strategy (extracted
from literature). These are categorised under prime dimensions of the framework. Four
key dimensions of operations strategy in performance-based contracts are identified. The
first is contract definition that covers price, payment plan, technical and functional aspects
of the industrial assets, key performance indicators (KPIs), operations constraints,
contract duration, contingencies and liabilities of both parties (Gupta et al., 2008). The
second dimension operations strategy of the service provider includes end-to-end service

Contract
definition
a) Incentives
b) Performance measures

Service provider
operations strategy
Organisational readiness

Customer
operations strategy
Co-production

Figure 1.
Performance-based
contract operations
strategy conceptual
framework

External environmental factors

Service delivery
Performance measures

Service
delivery

Contract
definition

A well-drafted output
specification ensures
successful delivery
(Gupta et al., 2008)

Key performance
Indicators can be defined
through contracts
(Ng et al., 2009)

Performance measures
guide operations, help
monitoring past, present
and future customer
expectations (Robinson
and Scott, 2009)

Effective information
flow is essential for
effective service supply
chain management
(Lee, 2002), provide
continuous Improvement
opportunities by
providing integration
between front and back
offices (Price et al., 1995)

New arrangements for

sharing gains, costs and
risks induce more
responsible operations
(Johnsen et al., 2009)
such as efficient supply
chain information
architecture, aligned
suppliers, workforce,
innovation (Fuhr, 2007)
Different payment
Through effective
models (Kim et al., 2007; Information sharing
Ng et al., 2009)
multiple customer
expectations and
requirements can be
Included In designing
KPIs (Collier, 1994)
Deliver value-for-money Performance critical
solution that will benefit information is essential
both parties (Kim et al., for effective delivery
2007; Robinson and
(Sampson and Forehle,
Scott, 2009)
2006)

The customer assesses

effectiveness (quality,
satisfaction and utility)
to his own inputs
(Parasuraman, 2002) and
devises operations
strategy

Information about
customer operations,
installed equipment;
service performed
(Sampson and Forehle,
2006);

Performance

Incentive design for

responsible usage of
equipment by customer
to improve performance
(Ng et al., 2009)

Key operations strategy constructs

Organisational readiness Incentives
Information

Understanding customer
organisational culture
and values (Kumar and
Kumar, 2004); building
customer relationships,
efficient management of
customer resources
(Lee, 2002)
Developing a service
culture (Neely, 2008);
improving product
reliability and
maintainability through
training, collaborative
design with suppliers
(Kumar and Kumar,
2004); agile service
network (Roy et al.,
2009); efficient resource
management (Lee, 2002)
Ease in capturing
Ability to react to
variability in inputs,
changes in customer
(Lovelock and young,
demands (Roy et al.,
1979); ease in capturing 2009); efficient resource
and enhancing perceived management (Lee, 2002)
value of service offerings
(Bitner et al., 1997)
Active customer
Flexibility in service
participation, usage
delivery and
(Ng et al., 2009)
maintaining availability
level (Kumar and
Kumar, 2004);

Operations Customer Operating conditions

strategy
operations (Kumar and Kumar,
dimensions
2004); Customer inputs,
knowledge, skills,
motivation, operational
processes knowledge
capture (Kellogg and
Chase, 1995)
Service
Customer participation
provider
accommodated, planned
operations and designed into the
process (Lovelock and
young, 1979)

Co-production

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Table II.
Performance-based
industrial service
contract operations
strategy map

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operations carried out by the provider (Kumar and Kumar, 2004). The service delivery
strategy involves the process of providing the service for sustaining customer specified
performance (Gupta et al., 2008). Such type of contracts depends heavily on customers
operations strategy. Table II shows the interrelationships between the different
dimensions through identifying the key elements described below.

588

4.1 Co-production
The performance-based contracts imply active customer participation. Ng et al. (2009)
state that, usage of the equipment by the customer under such long-term contracts for the
whole operational life of the equipment will have impact on the way the contractor delivers
service. Kumar and Kumar (2004) support this by stating that climatic and operating
conditions have considerable influence on service delivery. Customers motivation,
knowledge, expectations and skills can be diverse and difficult to capture causing
inefficiencies in the output process (Kellogg and Chase, 1995). Therefore, the service
delivery system has to be flexible enough to cope with the variability in (customer) inputs.
However, some researchers are of the opinion that, service output improves through
customer participation by enhancing two-way communication (Lovelock and Young,
1979) and enhancing the perceived value of service offerings (Bitner et al., 1997). Hence,
customers operational processes form a very important part in forming operational
strategies for performance-based service contracts.
4.2 Information
Services are information rich and require information processing capability from the
service personnel and service technology. Customer is a key supplier of performance
critical information in delivery of performance critical information (Sampson and
Forehle, 2006). Customers exchange information with service delivery performers to
assure that customer expectations fit his/her perceptions at least for those activities
(Collier, 1994). Information on the installed equipment or service performed is required
as an input for delivery of industrial services, performance measurement and
continuous improvement (Oliva and Kallenberg, 2003). Information sharing integrates
front and back office activities (Price et al., 1995) and reduces customer effort to acquire
information about back-office activities.
4.3 Incentives
Powerful incentives are used in such contracts to transfer risks and ensure compliance with
performance measures (Robinson and Scott, 2009). Consequently, as suppliers take on more
responsibility, they seek new arrangements for sharing of profits, costs and risks
(Johnsen et al., 2009). In defence contracting, incentives to produce good performance and
incentives to induce innovation were subjects of discussions (Fuhr, 2007) to ensure that the
goals of the parties concerned are aligned. Robinson and Scott (2009) showed an incentive
system that measures level of service against a percentage scale with a minimum standard
and a scale for applying penalties if performance falls below threshold. Kim et al. (2007)
used analytical models to examine the optimal incentive mechanism for delivering the
best product availability requirements in aerospace and defence organisations. According
to Ng et al. (2009), unless severe conditions arise service providers inability to meet targets
may result in payments being withheld or reduced. If service performance is tied with
customers operations, uncertainty due to varying level of equipment usage will be reduced.

4.4 Organisational readiness

Developing a service culture inside a traditional manufacturing business is needed for
complex engineering service design and delivery (Neely, 2008). In industrial services,
solution provider will get competitive advantage by understanding customer
organisational cultures and values (Kumar and Kumar, 2004). In industrial service
delivery, it is necessary to involve the entire supply chain. In industrial service supply
chains, the efficient management of demand, capacity and resource, customer and supplier
relationship is important (Lee, 2002). An agile service network has to be developed that can
be changed dynamically with varying customer demands (Roy et al., 2009).
4.5 Performance assessment
The selection of the KPIs is a key step to define the processes in service delivery.
A well-drafted output specification is fundamental to the successful delivery of long-term
performance-based service contracts (Robinson and Scott, 2009). Co-production is
however, a source of two measurement problems. First, input calculus should embrace all
the productive resources provided by supplier and customer in the transformation
process. Typically, the contributions of the client are not accounted or compensated but
they affect as sacrifice for the client (Ravald and Gronroos, 1996). Second, the total service
output consists of the benefits gained by both parties. To bring the reasoning a step
further, service processes may link several contributors and beneficiaries, which are not
compensated for their inputs or charged for the gained benefits and spillages (business
cycles or competitors or numerous works done as a gesture of goodwill). There exist a
number of factors that affect the service outcome beyond the official book keeping of the
participating companies. As illustrated by Parasuraman (2002), service operational
productivity is sum of seller and buyer productivity. The buyer assesses his productivity
by relating the effectiveness (quality, satisfaction and utility) to his own inputs, while
suppliers productivity links revenues to the inputs in use.
4.6 The framework
All these elements, dimensions of operations strategy and their linkages are shown in
the form of a framework in Figure 1. The arrows show the information element of
operations strategy that contributes to the service delivery. The contract definition
shapes the suppliers operations strategy which in turn affects the service delivery.
Performance critical information from customers operations strategy is essential for
successful service delivery. Similarly, the service performance information from service
delivery will help customer develop operations strategy in terms of resource and facility
planning. Customers operations strategy shapes the performance measures drafted in
contract definition, whilst incentives reshape customers operations strategy in terms of
responsible equipment usage. The entire framework is shaped by environmental drivers
like world and state economy, business scenario and technology development. The
external political and economic environment can impact the customers ability to
procure a system as the need arises. Accordingly, this will shape the contract definition
and operations strategy of customers. Rapid technological development can increase the
capabilities of the companies and this might positively influence the suppliers
operations strategy. The members in the performance-based contracts need to agree on
payments, rewards and performance measures after assessing the gap between required
and delivered services. The service delivery process is often at an unbalanced state,

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where the service providers capacity and the demand rate are not equal. This influences
the sustainability of a contract as the perceived customer value or satisfaction gets
affected. The suggested conceptual framework serves as the foundation for illustrating
operations strategy of performance-based service contracts in the case studies discussed
in the next section.

590

5. Findings from the case studies

In the following sub-sections, we first discuss the key findings from the two case studies
and categorise them under the key operations strategy dimensions. Next, we will carry
out a comparative analysis of the two cases to show how the interrelationships between
the different operations strategy constructs and dimensions affect the service delivery
performance.
5.1 Customer operations strategy
5.1.1 Multiple customers. Projects X and Y are launched to provide support to defence
equipment on an availability basis. The companies have to satisfy two different
customers, one is the defence logistics organisation (DLO) or the commercial customer
who drafts the contract jointly with the companies and the other is the operational
customer or the MoD personnel in regiment, navy or air force who actually use the
equipment (Figure 2). The operational customers provide necessary resources called
government furnished assets (GFA) for service delivery. The service level agreements
between DLO and operational customer are about setting the key performance measures
for availability. The DLO expects the contractor to offer means to save operating costs.
The selected case studies involve similar equipment in operation for a long time and the
MoD has detailed service and cost information for X and Y.
Both the DLO and the operational customers demand reduction of operational faults
in battlefield. To add to the complexity, all military equipment spares inventory is
owned by the MoD and contractors are tasked to either use existing inventory of spares
to ensure availability or purchase new ones at their own costs. This creates a choice of
delivering availability through existing spares (lower costs to the contractor but may
Commercial
customer

SL

ct
ra
nt
Co

Savings

1st line
arisings
reduced

Figure 2.
The different
requirements of customers
in availability contracts

Manpower savings
aircraft availability
Operational
customer

Increased profit
GFA

Contractor

need more frequent repairs) or new parts (cost more to the contractor but would require
less frequent repairs). Under a CfA type of contract the contractor will endeavour to
manage the trade offs in the most efficient way possible. One representative from
company 1 mentioned about the dilemma as:

Industrial
product-service
offerings

If you rely on the kit being to a certain standard or reliability, there will be a problem.
Since the kit may not have been looked after properly in the past, has not been maintained
properly [. . .] we might suddenly find ourselves spending a lot more money than first
anticipated.

591

5.1.2 External environment. The problem of having multiple customers is pointed out
by one MoD respondent as the separation of point of service delivery and usage. This
actually impacts the contract definition:
Theres quite a big gap between the commercial staff who negotiated the contract [. . .] and
those who employ the output of the contract.

An important element of the operations strategy is the external environment. As the

need to mount military operations from different geographical regions develop,
current CfA does not take that into account sufficiently as for where the real availability
needs to be delivered.
5.1.3 Co-production. One of the respondents from the customer side commented:
The service is delivered through a network which is not owned by the contractor renders it
unstable [. . .] because the military customer acts as a supplier to the industrial contractor in
terms of returning the unserviceable components in a timely fashion.

This is true for both the cases and actually harms the service delivery by adversely
influencing the performance. The typical challenges of co-production in the two cases
are discussed in Table III.
First problem is the timely availability of customer supplied resources in such
contracts. In view of the companies, customer does not necessarily regard or see impact
of their roles in delivering the service. Customer always believes their first role is to be
a fighting force. Though customer commits fixed annual man-hours to the contract,
but only a fraction is available, rest is spent in guard duty, sports day. This
non-availability adversely impacts the performance of the contracts.
Second problem is culture compatibility. One MoD respondent believes the earlier
animosity on air-force side to apparent invasion of company 2 has died down slowly.
However, such operation in partnership is effective only with contractors little bit that
is close to the air-force bases where a small team of company 2 is co-located. The
company 2 and MoD organisations which are far away from the service delivery site
still inherit the age-old adversarial buyer supplier relationships. Some examples
are depicted in Table III.
5.2 Contract definition
5.2.1 Incentives. In contract Y, company 2 and MoD are incentivised through a
gain-share pain-share mechanism. The incentive scheme is based on a banded firm price
(i.e. price varies with different flying usage band) and a built-in mechanism for sharing
savings throughout the contract. Price is reviewed every five years. The monthly
payment is linked to contractors availability performance. Also, there is an annual
reconciliation against where company 2 said they are going to be in terms of spending.

Table III.
Operations strategy
dimensions for contracts
X and Y

Contract X

Contract Y

592

A. Customer operations strategy

Al. Co-production 1. Implementatioon of co-production. Company 1 employs personnel who join 1. Implementation of co-production. Company 2 has to use people and
assets that belong to the MoD in delivering the service and also be
the territorial army to ensure front-line availability and they work side-byco-located physically at the customers site. For example, both
side the Royal Electrical and Mechanical Engineers (REME). They are called
company 2 and MoD personnel work in the bays side-by-side on
sponsored reserves
maintenance and repair activities
2. Culture clash. Initial adversarial relationship between REME and company 1 2. Culture clash. Joint behaviour/culture emerging after initial period of
personnel is still existing. The MoD people are sceptical about fellow civilian
animosity. Culture of blame is existent. Suppliers blame GFA in case
workmen. Culture of trust is still not there. Years of negligence to
of any performance failure. Air force blames suppliers if there is any
obsolescence risk management or process improvement resulted in large
problem even if not related to them. Culture of if in doubt send back
spares storage
to repair results in huge costs of repair or testing of no faults are
found
B. Contract design
Bl. KPIs
Only one single composite success factor is used to assess contract performance Multiple performance indicators are used to assess contract
performance
B2. Incentives
1. Service provider incentives. Full risk is on company 1 as there is no pain-share 1. Service provider incentives. Very difficult to comprehend and complex
to operate. For example, the contract Y incentive scheme has a fixed
arrangement and any escalation in costs due to inefficient management has to
cost element (a certain number of employees who will be on the
be company 1s responsibility. The gain-share arrangement is also variable
platform for the life of the platform, IT/IS development and training).
This means that costs have to be recorded and allocated according to
whether fixed and part of the incentive, or fixed but not part of the
incentive scheme, and variable costs. Even then there is additional
complexity; the fixed number of employees is not actually fixed and
will flex downwards somewhat over time. Variable costs are linked
directly to repair rates
2. Customer incentives. To protect the service provider from unexpected costs 2. Customer incentives. The contracts are designed to cover GFAdue to misuse related damages, contracts are designed to cover these clauses
related issues. If there is a loss of availability due to GFA nonavailability, the service provider can reconcile the short-fall
(continued)

Operations
strategy
dimensions

IJOPM
31,5

Contract X

Contract Y

1. Maintenance. Forward and depth maintenance policy traditional four lines 1. Maintenance. Company 2 has responsibility for supply chain, fleet
management, optimising capability required in aircraft, managing
of maintenance support condensed into a simplified, two-level construct:
obsolescence, improving maintenance throughput, reducing levels of
forward and depth. Forward support contains only better trained front line
risings/faults, reducing no-faults-found, improved testing facilities of
people and has a greater need for resilience as equipment in frontline has very
aircrafts, reducing spares in supply chain repair loop. Company 2
little downtime. Depth support collapses the second line of maintenance by
also investing largely in diagnostics, testing to avoid sending
reducing the number of maintenance locations. Company 1 is accountable to
not-faulty parts to repair loop
operate the base maintenance saving manpower and reducing repair time.
Introducing fleet management and controlled humidity storage to avoid
deterioration of spares and sustain equipment readiness/availability.
Providing spares warehouse at regiment which is replenished as and when
required
2. Flexibility. Company 1 also introduces flexibility by going extra, finding every 2. Flexibility. Contractor for their own benefit has modernised the air
force workshops, created quality management systems and reduced
way to reduce costs and improve service, neglect minor user-related damages,
costs by doing things differently. Design teams look at how things
use of all the operational knowledge of the system to make the operations
are done at base, how they service and how to reduce servicing
flexible to changes in customer requirements
cycles, can they bring modifications to service as they know other
users of same aircraft doing things differently than the way the UK
does. Any changes or modification is endorsed through contract
change protocol by jointly developing with customer
D. Service provider operations strategy
Dl. Organisational 1. Culture change. Traditionally, company 1 will have contract for tech support, 1. Culture. Previously, it was only customer asking for spares and
company 2 has to supply it. Air force got what they asked for.
readiness
supply support separately. In basic manner, customer kit breaks down and
No dialogue was there, why they needed that particular spare.
they come to company 1 to make it more reliable. In no way there is incentive
Thus, traditional contracts in resulted in lots of assets on the shelf.
to reduce costs from company side except goodwill. Also, there was no
However, in contract Y, company 2 is more interested in solutions,
compulsion from both sides to deliver by a certain date. But now company 1
data, stakeholder management and risk and uncertainty analysis to
has to bear the cost to look at safety, obsolescence, reliability, etc. through out
reduce the costs of service
the duration of contracts though they might not directly affect the availability
2. Supply chain. There is a limited gain share agreement with one supplier, but 2. Supply chain. Suppliers account for around 7,096 of supply chain cost
but company 2 does not appear to adopt a joint structural/proactive
such negotiations were extremely difficult, there was little enthusiasm in the
approach in working with major subcontractors. The suppliers feel
supply chain for availability contracting. Also as reported above, wider
left out of the availability concept and thus are not locked into the
supply chain involvement was limited by the spares and cannibalisation
risk sharing arrangements. Difficulties in extending the dialogue in
possible in this contract
supply chains as there is very poor level of support data available

C. Service delivery

Operations
strategy
dimensions

Industrial
product-service
offerings
593

Table III.

IJOPM
31,5

594

With respect to pain/gain sharing arrangements, there is pain or gain sharing set at
50/50 if company 2 over-spends or under-spends, respectively. So, there are strong
financial motivations for both parties to work together and continually reduce aircraft
operation costs. In contract X, company 1 effectively signs up for all of the risk in terms
of agreeing to a firm price. There is no pain share in the contract. In the first few years,
MoD gets a much higher percentage of the savings, after that majority of gain share goes
to company 1.
The target price performance incentive (TPPI) type of arrangement between MoD
and company 2 is shown in Figure 3. The key features of this incentive mechanism are:
.
it gives a price sufficiently stable at contract signature to allow internal;
.
the price easily changes with varying flying levels;
.
fixed unit prices with supply chain providers; and
.
provides a financial motivation (and simple share-out mechanism) for both sides
to work together to reduce overall programme costs.
The variable costs are subject to 50:50 gain and pain share keeping aside a certain
percentage for profit. The fixed costs savings are retained by the service provider while
additional costs are funded by the provider.
The incentive arrangement is self-funded by savings under contract X. The share of
savings is skewed based on involvement in the project. In early years, since MoD is
more involved (Figure 4), it enjoys larger share of savings. While towards the end of
the contract, the share of company 1 (industry in Figure 4) grows. Again the shares of
Variable costs
Spares-inclusive repairs
Manpower sensitive to flying levels

Fixed costs

Fixed management team

L&IS and CIS
Training

Cost
increase
Profit @ 3%

Painshare at 50:50
Baseline cost
and profit

Cost
increase

100% funded
by customer (inc 3%)
Cost increase funded by company 2

Risk allowance in price

Company 2 retain 100% savings

Company 2 retain 100% savings

Profit @ 10%
Gainshare at 50:50

Gainshare at 50:50

Cost
decrease

Figure 3.
Target price performance
incentive mechanism

Contract price initially based on mutually

agreed flying hours
Price and payment for variable costs is
adjusted annually from baseline if projected
flying hours differ to contract assmuptions
Annual adjustment also compares baseline
costs/risks against actual cost/risk spend to
calculate either painshare or gainshare

Source: Contract Y, Company 2

Annual adjustment compares baseline

costs/risks against actual costs/risk spend to
calculate gainshare

Industrial
product-service
offerings

Industry
shareline (%)
MoD
shareline (%)
Contract
end

Contract
start
Contract
performance + SFyy

595

Industry
shareline
(%)

Contract
performance + SFxx
Contract
performance

MoD
shareline
(%)

Figure 4.
Incentive mechanism

Source: Contract X, Company 1

industry go down if the availability performance is below the set success factor (SF).
On the other hand, if performance . SF, no additional price is paid to the industry by
MoD but that additional savings is retained by the industry.
5.2.2 Performance assessment. The performance indicators in contract Y are set after
much careful considerations. The KPIs were designed to measure number of aircrafts
available (flying hours to make them usable for training or battlefront) and spares
available (number of non-functional days). There is a non-contractual KPI that measures
the the MoDs performance in delivering GFA. In contract X, a single SF is based on a set of
weighted contract performance indicators (CPIs) (Figure 5). Performance indicators (PI)
are measured to indicate the cause or mitigation of future problems. All CPIs are calculated
based on analysis of quantifiable PIs. For example, in-barracks-availability (target
100 per cent) is measurable based on threshold of two hours. If company 1 cannot get the
equipment functioning in two hours, it starts losing money. The flexibility in design of
PIs and KPIs and how to achieve that are down to companies 1 and 2, respectively.

P
P
Source: Contract X, Company 1

In Barracks
availability
Availability
on
excercise/Ops

gh
tin
g

Equipement
readiness

W
ei

A
na

P
P
P
P
P

ly
sis

5.3 Organisational readiness

External business environment and temporal demographics need to be considered in
service provider operations strategy. For example, in winter due to chartered airlines
maintenance work sufficient number of maintainers may not be available.

SF

Figure 5.
Performance indicators

IJOPM
31,5

596

There are serious cultural challenges of a partnered solution. The military and
commercial teams have different ways of thinking about maintenance. For example, in
order to plan operations it is essential to record the timing of each activity in
maintenance but MoD personnel does not have the swipe in culture. So, it costs
companies extra manpower to find out MoD labour hours.
Both companies are design authorities in the equipment. Managing MoD run
workshops, managing military workforce are all new to them. The biggest challenge
for company 2 is to gauge the fleet capability, maintenance schedules and stages of
operational service upgrade. Attempts to simultaneously optimise the capability and
upgrade are totally unexplored areas for it.
Another cultural barrier for both the companies was shedding off the pride of being
a design authority. One respondent clearly mentioned this challenge as:
[. . .] its engineering, its design, its manufacture, its drawings its configuration control its
obsolescence whereas contracting is what else can I do for you sir and a courtesy and scope
creep again [. . .]

In view of one company 1 respondent:

[. . .] in traditional spare repair type contracts, contractors could have turned round and said
We cant deliver but now, if they do they are the ones who are going to suffer.

So, now both companies calculate over the period of contract the number of spares
based on consumption profile data and price accordingly.
Suppliers account for the majority of supply chain cost and play key roles in
subsystems, technical upgrades, repairs and obsolescence management. Since
availability contracting incentivises lower number of faults, it is very difficult to
incentivise the suppliers in such long-term contracts. In the cases, the service providers
set up traditional contracts with their suppliers, where the suppliers have no visibility of
the customer demand.
5.4 Service delivery
5.4.1 Information. Both companies and the MoD respondents mentioned visibility of
frontline usage is an issue in successful operation of such contracts. One MoD
respondent quoted:
[. . .] if the weapon system for which you are providing availability leaves your hands and you
are not informed of any changes that would be germane to that engineering climate you start
to see a risk developing that by the time it comes back into your hands you will have lost the
opportunity to plan.

The data quality for spares, maintenance logs were very poor for both the contracts.
Company 2 respondent commented that:
We manage the flow of assets from the suppliers but we also manage the demand of assets
from the suppliers. The subtlety here is that the transportation system is what we call the
GFA [. . .] there is very little point in us by better demand forecasting having an asset
available at a supplier if the customers system takes four weeks to get that asset from the
supplier to the aircraft.

Issues regarding information integration within company 2 are evident in one

response:

[. . .] the teams that accompany our main interface with the supply chain are from our own
organisation team which is in the North West. I dont believe that they are being engaged as
much as we at base probably should do.

5.4.2 Service delivery effectiveness. Company 1 created an integrated service delivery

framework (Figure 6). In As-was solution, company 1 used to deliver stand-alone services
to the customer as and when requested. In contract X, the whole programme is delivered by
a joint team formed across customer and service provider organisation. This team has full
information of all levels of maintenance activities. Company 1 now has full ownership of all
repairs and spares workshop, recruits military man power (sponsored reserve or SR in
Figure 6) for carrying out service at battlefront and the regimental base. Royal Electrical
and Mechanical Engineers (REME) reduction saves customer manpower. Apart from
above changes in service delivery configuration, company 1 introduced innovative
measures as use of parts from drawn down equipment to help reduce procurement costs.
Another key aspect of contract X is a two-tier integrated project team where the
company 1 team is integrated with MoD at operational and strategic levels. The senior
customer executive roles are more useful in expediting solutions.
Company 1 spends a lot of time in building relationships and trust with customer.
Company 1 tries to be as flexible as possible in ignoring minor customer errors, but
after certain level, they bind them to CPIs. So, for equipment which is damaged due to
customer misuse and losses are huge (up to 5 million) MoD will be charged.
Contract Y is a combination of several contracts which were already running with
the customer for several years. However, there were major issues in terms of
misalignment of previous supply chain contractual terms with what company 2 signed
up in contract Y (performance based). One of the key challenges thus was to integrate
HQ land

Customer programme executive

Industrial
product-service
offerings
597

IPTL

Project manager

Joint delivery team

4th line/industry

Regiment base
Regiment

Engineering support
Configuration/upgrades
Obsolescence
Missile management and
surveillance
Safety
Reliability assessment
Help desk
Technical queries
Technical support

Training and training

equipment support

OJT training

In battlefronts

Fleet management
storage

Unit holdings
TA holdings

Centralised repair
workshop

1st line
support

1stLine levels 1 and 2

battery fitter section
REME and company1
operators (SR)

SR

Company 1 operated
Level 3 repair capability

Primary Eqpt. Spares

Missiles
Spares and distribution
Factory SRU/LRU
Repairs
Reprovisioning
Reprovisioning

MoD logistics

Operations

Supply management
traders

Company 1 accountability in
as wassolution

Company 1 accountability
in contract X

Information:
Equipment:

Figure 6.
Service delivery
framework for company 1

IJOPM
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598

the different individual traditional contracts under the aegis of contract Y. One of the
key difference in operations of contract Y and previous contracts is summed up as:
One of the things that we found in contract Y is the customer has bought a whole load of
capability upgrade kits through earlier supply contracts with us. These are still sitting in the
boxes that we supplied them in because they havent had the capacity, the time, the will
and/or whatever to actually embody those onto the aircraft. Our challenge going forward is to
batch the upgrades in an effective manner and integrate them and not only integrate them
onto the platform but integrate them from a commercial and project delivery perspective into
contract Y because at the minute this has been done by a separate project team based in a
separate location.

Company 2 relies on air force engineers to help them deliver the service. The
downsizing of air force maintenance manpower has made it difficult to provide
sufficient number of working hours. In addition, non-availability of other GFA results
in additional costs in the form of subcontracts.
In spite of so many challenges, contract Y is still delivering service to the required
performance levels because of actual physical proximity of the teams and aligning as
well as to customers environment and expectations. Company 2 has implemented
integrated information systems to time the activities for better planning, implemented
continuous improvement measures, such as better housekeeping and safety standards,
total quality control initiatives at service bases.
The most important element of operations strategy for service delivery is the
customers operations strategy. The drafting of the contract, setting the KPIs and relating
them to meaningful payment mechanisms constitute important part of operations
strategy. While considering the contractors operations strategy, organisational readiness
factors need to be considered. All these shape the service delivery, which includes
maintenance policies, facility layout, obsolescence management and process improvement.
Since the level of operational risk and complexity is so much in these types of contracts,
the contract never attains stability. Uncertainty in supply is influenced by availability of
right resources. Uncertainty in demand included information on usage. Other sources of
uncertainty in service delivery derive from the supplier-customer interaction and the
adoption of service culture.
6. Discussion
Through comparing the findings from two case studies, we identify the key factors
contributing to the successful delivery of performance-based industrial service
contracts. In this paper, we have researched engineering service contracts where the
key objective was to maximise the availability of the equipment under long-term
service contract. Both organisations 1 and 2 are new to industrial service provision and
are undergoing a massive culture change. Table IV shows the different important
elements of operations strategy and how they can benefit the customer and the
supplier. We use different factors to tabulate the benefits, for example to the customer
the prime benefits are availability improvement and cost reduction. While for the
service provider, there can be many benefits, for example, increasing the resource pool
for future business sustainability, responsiveness to customer demand, information
flow and improved customer and supplier relationships.
Information is of prime importance for success of performance-based service contract
as it helps in defining the contract terms, setting pre-bid costs for the contracts for the

Contract X and Y delivery success contribution

Detailed service information, process data, cost data,

equipment usage pattern and network wide
information
Service provider
(a) Maintenance: Spend-to-Save type culture: invest
operations
in newer equipment, safety and obsolescence
strategy
management to reduce dependence on faulty parts
(b) Flexibility: accommodating and flexible to
varying customer demand, over-looking minor
damages by the customer and building joint
delivery team
(c) External business environment or temporal
demographics consideration use multi-skilling
and maintain good strength of trained workforce
to hedge
(d) Developing service oriented culture managing
logistics, scheduling capability upgrades,
manpower resource management, customer and
supplier relation management, change of internal
mindset, removing behavioural silos, fostering
partnership
Customer
Partnership: need to partner with whole service
operations
provider organisation rather than only a little-bit at
strategy
the base, building joint delivery team
Contract definition Incentives: need to be designed to result into win-win
situation for both parties, cost and risks should be
shared equitably (as shown in TPPI type
arrangement)
KPIs: should be designed after considering factors as
capability, customer affordability, environments,
severe conditions of usage and uncertainty; the
flexibility in deciding the range is also important

Information

Key framework
elements

Good customer relationship and trust, good

information flow
Improved responsiveness

Improved responsiveness, improved delivery

performance and increased future business

Improved communication, responsiveness,

delivery performance and reduced costs, risks

Reduced cost

Better availability
performance
Better availability
performance

Better availability
performance at reduced cost
and risks
Better availability
performance
Better availability
performance

Reduced cost

Better availability
performance

Better performance

Reduced risk and better performance

Reduced cost

Service provider

Better availability
performance

Benefit
Customer

Industrial
product-service
offerings
599

Table IV.
Attributes for effective
service delivery across
the two contracts

IJOPM
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600

service provider and most importantly it helps in delivering the target performance level
and hence the payments received. All respondents feel the need to build a congenial
customer-service provider-supplier relationship is essential for successful operations of
such contracts. Use of integrated customer-service provider team, understanding
customers processes and inventory ordering patterns are essential factors for successful
delivery of contract. Effective contract design including linking customers
responsibility to the contract KPIs is an important element of operations strategy.
The service delivery process for such contracts is not studied in contemporary
literature. This paper presents empirical evidence from case study findings on the
operations strategy for successful service delivery. The study on customer operations
strategy, contract definition, performance assessment and organisational readiness
helps in understanding the operations strategy elements for effective delivery of
performance-based contracts. This is one of the most important contributions of this
paper. The findings for both the contracts show the challenges of such contracts as
multiple customers, external environment risks, co-production risks, incentive risks,
KPI measurability problems and information integration.
7. Conclusion
This research develops an operations strategy conceptual framework after conducting
a detailed literature review. The research uses defence industry example to show the
added complexity of the service offerings, the constraints of operations as using GFA
and intricate contractual settings governing the delivery performance. Since the point
of use is separated in time and space from the point of delivery, neither the commercial
customer nor the supplier has any knowledge of the actual operating environment of
the equipment. As there is no way to judge and incentivise the contractors, some
innovative way of measuring their performance is developed as cost saving and
sharing. This entails a whole new set of operations strategy dimensions. This paper
reports these sets of strategic dimensions and elements.
This paper has set out a series of indicative characteristics for servitised
manufacture. First, in CfA, the service provider needs to be proactive and flexible. The
service provider has to be ever-ready to make extra investment in additional resources
and process improvement to ensure better performance. The capacity planning has to
be flexible as the contractor has no visibility of frontline usage. Second, the contractor
has to adopt joint operations strategy with supplier and customer. There should be
end-to-end full visibility of the entire contract. Third, both parties in the contract have
to make some sacrifices, which cannot be accounted in financial terms. For example,
the contractor carries out much work beyond contract scope to facilitate smooth
delivery of availability. The final element of success is the configuration of the contract
incentives and performance indicators.
The contribution of this paper is twofold. First, it proposes a set of theoretical
operations strategy constructs for effective and efficient delivery of performance-based
industrial service contracts. The framework is a contribution to PSS literature where
operations strategy area is quite under-researched. Second, this paper provides a basis
to construct a set of guidelines for devising operations strategy for effective delivery of
performance-based service contracts.
Although this study is based on two case studies in defence sector, we believe our
results can be of use to a wider set of organisations offering outcome-based service

offering. One limitation of the study is the lack of consideration of the service network,
which actually forms a bigger part of the service delivery process. Future work may look
into the impact of service network on the customer and contractor operations strategy.
Quantitative techniques such as analytical modelling or simulation can be used to
actually find the impacts of changes in various elements on the service performance.
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Corresponding author:
Partha Priya Datta can be contacted at: ppdatta@iimcal.ac.in

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