The common business model of many companies is to produce goods or services and sell them to their customers. In doing so, they concentrate on quality characteristics of these goods or services from their own perspective: they assume that their quality requirements will match those of the customers. This way of inside-out thinking is often not applicable anymore, however, in the current economy where fast evolution, high levels of diversity and fierce, global competition are the norm. Consequently, companies should start thinking outside-in: the emphasis should be on their contribution to the success of their customers in their ecosystems. This success can have various forms, such as increasing sales figures, increasing the customer base, improving the brand recognition, or reducing the CO2 footprint.
Professor Paul Grefen, Eindhoven University of Technology and Atos Digital Transformation Consulting
Paul will be speaking at the Virtual Business Change & Transformation Conference Europe 17-19 May 2021 on the subject, ‘Keynote: Designing Outcome Thinking into Your Business‘.
This way of business thinking is often coined as outcome thinking: the value of a producer is not measured in terms of the quality of its products or services, but in terms of the impact that the products or services have on the performance of the customers of that producer, i.e., the outcome for the customers. The economic system based on outcome thinking is referred to as the outcome economy. These concepts are not new: they have been around for more than five years now. For example, they were already discussed in Accenture’s technology vision of 2015 and in the June 2016 issue of the Harvard Business Review.
The uptake of these concepts in business practice is rather slow, however. The slow adoption can be attributed to two factors. Firstly, the concepts imply a new relation between producers and their customers. This new relation means that you don’t agree primarily on the amount and nature of goods or services supplied, but that the business agreements are on the effects of the use of these goods or services. This introduces an indirection that may be scary to many producers: the value of things produced becomes only clear after these things have been used. Secondly, the concepts imply a new way of engineering the supply chain. This new way of engineering should put the focus on measuring outcomes in the customer domain and feeding these outcomes back into the operation of the supplier. This requires among other things a new way of data processing in the supply chain: the supply chain should become data-driven, based on outcome values.
Outcome-based supply chain engineering
In outcome-based supply chain engineering, the design landscape changes drastically. In the traditional situation, you design your own company including the input interface to your suppliers and the output interface to your customers. Usually, you do not include the operations of your suppliers and customers into your design. In outcome thinking, however, it becomes essential to include your customer operation into your design – and to be prepared to be included in the supply chain design of your suppliers. You can only include your customers if you understand the main design parameters of the outcome-based supply chain. These design parameters can be organized into four groups.
First of all, you need to pinpoint who the most important customer is in your supply chain. It is not always as trivial as simply pointing to the company to which you directly sell your products or services. An example can be found in the commercial airliner industry. Many aircraft are sold to leasing companies, so they are a direct customer. The most important customer in outcome thinking, however, may be the airline that leases an aircraft or even the passengers that fly with the airline.
Secondly, you need to identify the outcome for the customer that will determine your relation with this customer – and possibly even determine the amount in the bill that you will send. In the airliner example, the outcome for a leasing company may be the long-term return on investment. The outcome for an airline may be the uptime of an aircraft or the satisfaction of passengers flying in that aircraft. These outcomes are very, very different.
Thirdly, once an outcome has been identified, you have to find out how to measure the values of this outcome. As these values determine your business relationship, the measurement should take place in a well-designed fashion. It should be precise, it should be timely, and it should be performed such that both involved parties agree on the measurements. The latter is obviously of prime importance if billing is based on outcomes. The proper use of advanced information technology can play an important role in addressing this third issue. Examples of technology are Internet of Things devices to perform measurements and blockchain technologies to record measurements in a trustworthy way.
Last but not least, there is the issue of how to use outcome measurements to improve your service level to your customers. In a traditional supply chain, you measure the quality of your products or services and based on these measurements you improve the product or services. In the outcome setting, you should use the measurements in your customers business domain to improve your own operation. Obviously, this is harder because your customers’ business context is different from yours. Data may need complex processing, which may need to be performed in real-time or near-real-time. Advanced data analytics technology may play an important role here.
Starting to adopt all of this
Adopting all of this into your business is not an easy task. It requires high-level rethinking of your business. It requires discussing new business relationships with your customers, including the basics of the way you are compensated for your efforts. It may require a completely new view on data-driven business operation at the supply chain level. It may even require you to think about the use of information technology that is not yet within your comfort zone. Deciding not to accept this hard task may seem like an easy way out, but there is a formidable snake in the grass: if your competitors do accept this hard task, you may find yourself left behind sooner than you might expect.
Paul Grefen is a full professor and director of research in the School of Industrial Engineering at Eindhoven University of Technology. He received his Ph.D. from the University of Twente and was a visiting researcher at Stanford University. He was involved in various European and national research projects. He is an editor of two journals and has authored and edited several books on workflow management, electronic business and service-dominant business engineering. He is a member of the Executive Board of the European Supply Chain Forum. His research covers inter-organizational business process management, service-oriented business design and support, and architectural design of business information systems.
Copyright Professor Paul Grefen, Eindhoven University of Technology and Atos Digital Transformation Consulting
Digital Business Era: Stretch Your Boundaries. Accenture Technology Vision 2015.
M. Connerty, E. Navales, C. Kenney, and T. Bhatia. “Manufacturing Companies Need to Sell Outcomes, Not Products,” Harvard Business Review, June 2016.