Outcome-based Contracts Research Articles

Pricing methods in outcome-based contracting: δ6: adherence-based pricing

Aims Six Delta is a six-dimensional independent platform for outcome-based pricing/contracting. The sixth dimension (δ6) estimates prices on the basis of adherence to the prescribed regimen, whereby manufacturers provide payers with adherence-enhancing programs and whereby payers implement these programs and provide adherence data to the manufacturer. We describe this dimension’s methodology and present a proof-of-concept application to the treatment of non-small cell lung cancer (NSCLC) with EGFR mutation with osimertinib. Materials and methods We propose two paybacks based on adherence: in-advance (based on clinical trial data) and in-arrear (based on real-world data). The risk of efficacy failure pricing dimension utilizes a 7-step method: 1) defining efficacy endpoints; 2) extracting data; 3) predicting models; 4) estimating in-advance and in-arrear paybacks; 5) suggesting ranges for in-advance and in-arrear paybacks; 6) adjusting for medical inflation; and 7) performing Monte Carlo Simulation (MCS) to estimate the DSPAdherence. A proof-of-concept exercise with osimertinib in NSCLC was performed for two hypothetical outcome-based contracts: 1-year (2019–2020) and 2-year (2019–2021). The 2018 wholesale acquisition cost (WAC) for a 30-day prescription was used and inflated as needed. Herein, the DSPAdherence is estimated exclusively in terms of in-advance payback because real-world data about osimertinib are not yet available and thus the in-arrear payback cannot yet be estimated. Results For the 1-year contract, the average price for osimertinib was $13,798 (SD=$1,265) and the DSPAdherence was $13,785 (or −5.69% of the 2018 WAC) for a 30-day prescription. For the 2-year contract, the average price was $12,555 (SD=$2,847) and the DSPAdherence was $12,582 (or −13.92% of the 2018 WAC). Conclusions We demonstrated that adherence-based pricing methods can be integrated into our proposed Six Delta platform for outcome-based pricing/contracting. The proof-of-concept exercise needs to be expanded with the in-arrear pricing method based on real world data to be secured.

Pricing methods in outcome-based contracting: δ1: cost effectiveness analysis and cost-utility analysis-based pricing

Aims Six Delta is a six-dimensional independent platform for outcome-based pricing/contracting. The first dimension (δ1) estimates prices on the basis of cost-effectiveness (CEA) and cost-utility analysis (CUA). We describe this dimension’s methodology and present a proof-of-concept application to the treatment of non-small cell lung cancer (NSCLC) with EGFR mutation with osimertinib. Materials and methods CEA and CUA were performed using established methods. Probabilistic sensitivity analyses (PSA) were performed to generate cost-effectiveness acceptability curves (CEAC), specifically the PSA incremental cost-effectiveness (PSA ICER) and incremental cost-utility ratio generated CEACs (PSA ICUR). Price of treatment was estimated at three certainty levels (0%, turning point%, 100%). The marketed drug price at turning point was used to estimate prices at 0% and 100% certainty levels, as per PSA ICER and PSA ICUR-generated CEACs. The resulting prices were pooled, inflated, and simulated by Monte Carlo Simulation (MCS) methods to estimate the dimension-specific price based on CEA and CUA (DSPCEA/CUA). A proof-of-concept exercise with osimertinib in NSCLC was performed for two hypothetical outcome-based contracts: 1-year (2019–2020) and 2-years (2019–2021). Results Turning points were estimated at the 50% certainty level in both PSA ICER and ICUR-generated CEACS. At these points, the wholesale acquisition cost for osimertinib was $14,616 (30-day prescription); inflated by 0.44% for 1-year and by 0.72% for 2-year contracts. Additional prices at 0% and 100% certainty levels were quantified based on the PSA ICER and ICUR-generated CEACs. The MCS yielded a DSPCEA/CUA of $16,391 for the 1-year contract and a DSPCEA/CUA at $16,677 for the 2-year contract for a 30-day prescription. Conclusions We demonstrated that conventional CEA and CUA methods generate price estimates at varying levels of certainty that can be integrated into our proposed Six Delta platform for outcome-based pricing/contracting.

Pricing methods in outcome-based contracting: δ5: risk of efficacy failure-based pricing

Aims Six Delta is a six-dimensional independent platform for outcome-based pricing/contracting. The fifth dimension (δ5) estimates prices on the basis of the risk of efficacy failure of a drug. We describe this dimension’s methodology and present a proof-of-concept application to the treatment of non-small cell lung cancer (NSCLC) with EGFR mutation with osimertinib. Materials and methods The risk of efficacy failure pricing dimension utilizes a seven-step method: (1) defining risk; (2) extracting data; (3) predicting models; (4) performing Monte Carlo Simulation (MCS) to estimate risk of efficacy failure; 5) estimating ranges for a payback; (6) adjusting for medical inflation; and (7) performing Monte Carlo Simulation (MCS) to estimate the DSPRisk of efficacy failure. A proof-of-concept exercise with osimertinib in NSCLC was performed for two hypothetical outcome-based contracts: 1-year (2019–2020) and 2-year (2019–2021). We estimated the risk of efficacy failure for osimertinib in terms of overall and progression-free survival versus standard of care. We used the estimated risk to estimate the price reduction on the wholesale acquisition cost (WAC) for the two hypothetical contracts: a 1-year (2019–2020) and 2-year contract (2019–2021). From this we estimated the DSPRisk of efficacy failure. Results Based on the risk of OS and PFS efficacy failure for osimertinib in OS and PFS, in the 1-year contract, the DSPRisk of efficacy failure was estimated at $12,652 (or −13.44% the 2018 WAC) for a 30-day prescription. For the 2-year contract (2019–2021), the DSPRisk of efficacy failure was estimated at $13,019 (or −10.93% the 2018 WAC). Conclusions We demonstrated that pricing methods based on risk of efficacy failure methods can be integrated into our proposed Six Delta platform for outcome-based pricing/contracting.

Pricing methods in outcome-based contracting: δ4: safety-based pricing

Aims Six Delta is a six-dimensional independent platform for outcome-based pricing/contracting. The fourth dimension (δ4) estimates prices on the basis of assessments of the safety of the drug using an ex ante analysis based on clinical trial data. We describe this dimension’s methodology and present a proof-of-concept application to the treatment of non-small cell lung cancer (NSCLC) with EGFR mutation with osimertinib. Materials and methods The safety-based pricing dimension utilizes a four-step method: 1) pooling adverse events (AE), standardizing, estimating 95%Cis, and adjusting for time; 2) estimating correction factors and corrected probabilities of AEs; 3) estimating the probability of at least one adverse event (AE) occurring and leading to treatment discontinuation; and 4) estimating ranges for payback percentages and performing Monte Carlo Simulation to estimate a DSPSafety. A proof-of-concept exercise with osimertinib in NSCLC was performed for two hypothetical outcome-based contracts: 1-year (2019–2020) and 2-year (2019–2021). We estimated the DSPSafety based on the grade 3/4 AEs observed for osimertinib and standard of care. The 2018 wholesale acquisition cost (WAC) of osimertinib at $14,616 for a 30-day prescription was used. Results AEs3/4 were retrieved from the FLAURA trial. In the 1-year contract, the DSPSafety of osimertinib was estimated at $14,627 (or +0.08% the 2018 WAC) for a 30-day prescription. In the 2-year contract, the DSPSafety of osimertinib was estimated at $14,516 (or −0.68% the 2018 WAC) for a 30-day prescription. Conclusions We demonstrated that ex ante pricing methods-based paybacks for safety issues leading to treatment discontinuation can be integrated into our proposed Six Delta platform for outcome-based pricing/contracting.

Pricing methods in outcome-based contracting: δ3: reference-based pricing

Aims Six Delta is a six-dimensional independent platform for outcome-based pricing/contracting. The third dimension (δ3) estimates prices on the basis of international drug price referencing methods. We describe this dimension’s methodology and present a proof-of-concept application to the treatment of non-small cell lung cancer (NSCLC) with EGFR mutation with osimertinib. Materials and methods The reference-based pricing dimension utilizes a six-step method: (1) selecting foreign countries based on a set of four criteria (drug is available in the foreign country, price information is available in the foreign country, foreign countries are members within the organization for Economic Co-operation and Development, pricing methods in the foreign countries involve value assessment); (2) adjusting for exchange rates; (3) generating reference price (RP) scenarios; (4) adjusting with the medical inflation rate; (5) pooling all generated RP scenarios and calculating average and standard deviation (SD); (6) and Monte Carlo Simulation (MCS) to estimate the dimension-specific DSPReference. A proof-of-concept exercise with osimertinib in NSCLC was performed for two hypothetical outcome-based contracts: 1-year (2019–2020) and 2-year (2019–2021). Results The United Kingdom and Canada met the four criteria. For the osimertinib 1-year contract price, the average of eight RP scenarios, adjusted for inflation by 0.44%, was $8,892 (SD = $2,606) for a 30-day prescription. MCS yielded a DSPReference estimate of $9,395 or −35.72% of the wholesale acquisition cost (WAC) of $14,616. For the 2-year contract, the average, adjusted for inflation by 0.72%, was $8,928 (SD = $2,610). MCS yielded a DSPReference estimate of $9,442 or −35.40% of the WAC of $14,616. Conclusions We demonstrated that international price referencing methods can be integrated into our proposed Six Delta platform for outcome-based pricing/contracting.

Pricing methods in outcome-based contracting: integration analysis of the six dimensions (6 δs)

Aims Six Delta is a six-dimensional independent platform for outcome-based pricing/contracting. The six dimensions have been described separately: (δ1) cost-effectiveness analysis and cost-utility analysis-based pricing; (δ2) willingness-to-pay-based pricing; (δ3) reference-based pricing; (δ4) safety-based pricing; (δ5) risk of efficacy failure-based pricing; and (δ6) adherence-based pricing. The final step is to integrate the various dimension-specific pricing estimates into a composite estimate termed the All-Dimensional Price (ADP). We describe the methodology for this integration and present a proof-of-concept application to the treatment of non-small cell lung cancer (NSCLC) with EGFR mutation with osimertinib. Materials and methods For better accuracy in estimating the ADP, we used the prices generated from the six dimensions at scenario levels, not at the dimension-specific price (DSP) level. We pooled the price estimates and performed Monte Carlo Simulations (MCS) for the price scenarios generated by the six dimensions. We used the results of the proof-of-concept exercise involving osimertinib in NSCLC with EGFR mutation to estimate the ADP in two hypothetical contracts: 1-year (2019–2020) and 2-year contract (2019–2021). Results The average of the 30-day prescription estimates from the six dimensions averaged $10,819 (SD=$8,486) for the 1-year contract and $10,730 (SD=$8,500) for the 2-year contract. MCS yielded for the 1-year contract an ADP of $10,959 (or −25.02% the 2018 WAC price) and an ADP for the 2-year contract was $10,788 (or −26.19% the 2018 WAC price). Conclusions We demonstrated that the integration of the prices from the six dimensions of the Six Delta platform and market conditions is feasible and yields multidimensional prices estimates to support outcome-based pricing/contracting.

Pricing methods in outcome-based contracting: δ2: willingness-to-pay-based pricing

Aims Six Delta is a six-dimensional independent platform for outcome-based pricing/contracting. The second dimension (δ2) estimates prices on the basis of four willingness-to-pay (WTP) thresholds. We describe this dimension’s methodology and present a proof-of-concept application to the treatment of non-small cell lung cancer (NSCLC) with EGFR mutation with osimertinib. Materials and methods Eight WTP scenarios based on four levels of real gross domestic product per capita (<1GDP/capita, 1 × GDP/capita, 3 × GDP/capita, and >3 × GDP/capita) and two market conditions (monopolistic versus competitive) were assumed. The incremental cost-utility ratio (ICUR) was applied to differently to both markets. In the monopolistic market, assuming no competitors, the cost/QALY ratio for a drug was used; whereas in the competitive market, assuming competitors, the incremental cost-utility ratio (ICUR) was applied. One-way sensitivity analyses were performed and predictive equations were specified to estimate the prices of treatment for the resulting eight WTP scenarios; for which subsequently the average and standard deviation were calculated. A gamma distribution was specified and Monte Carlo Simulation (MCS) was applied to estimate the dimension-specific price based on WTP (DSPWTP). A proof-of-concept exercise with osimertinib in NSCLC was performed for two hypothetical outcome-based contracts: 1-year (2019–2020) and 2-year (2019–2021). The 2018 wholesale acquisition cost (WAC) of $14,616 (30-day prescription) was used to estimate the DSPWTP for each contract. Results The 1-year estimates averaged $4,654 (SD=$6,462) and the MCS yielded a DSPWTP of $4,547 or −68.89% of the 2018 WAC for a 30-day prescription. The 2-year estimates averaged $4,7667 (SD=$6,480) with the MCS generating a DSPWTP of $4,704 or −67.82% of the WAC. Conclusions We demonstrated that WTP-based methods that include various WTP thresholds and market conditions generate price estimates across these thresholds and market conditions that can be integrated into our proposed Six Delta platform for outcome-based pricing/contracting.

Outcome-based contracting from the customers' perspective: A means-end chain analytical exploration

Within the context of servitization, manufacturing firms increasingly offer outcome-based contracts (OBCs) which sell the outcome of a manufacturing process instead of the resources required for outcome creation. While extant studies have focused on the provider's viewpoint, this research explores industrial customers' requirements and goals when sourcing OBCs. We report the results of laddering interviews with purchasing and engineering managers from 32 actual and potential OBC customers. Based on a means-end chain analysis we find that, in addition to organizational goals, such as reducing costs or ensuring reliable supply, individual goals of the decision-makers also play a key role when purchasing OBCs. Specifically, the risk of being held accountable for problems that may occur in an OBC's implementation and operation emerges as an important concern of decision-makers. In contrast to extant research, that highlights how OBCs transfer operational risk from the customer to the supplier firm, our study indicates that customers also perceive elevated levels of individual and organizational risk when making OBC purchase decisions. Against this backdrop, OBC salespeople should address both individual and organizational goals of key decision-makers in the customer firm and focus on building trust in the supplier's ability to realize and operate an OBC.

Sustainable Financial Partnerships for the SDGs: The Case of Social Impact Bonds

The 2030 Agenda for Sustainable Development brought the critical challenge of how private capital can support its new goals—the Sustainable Development Goals (SDGs)—to the attention of finance, business and policy actors. Impact finance instruments, which aim to obtain both financial and positive social/environmental returns simultaneously, can serve as effective institutional mechanisms to support the financing of SDGs. Social impact bonds (SIBs) are part of this emerging field. SIBs represent multi-stakeholder partnerships, built on outcome-based contracts, designed to harness private impact-oriented investors, service providers and public entities to address social or environmental problems. SDG 17 considers partnerships priority instruments for the achievement of SDs targets. This paper provides an exploratory analysis into the field of Social Impact Bonds and aims to (i) understand how such instruments are suitable for involving sustainable economy actors in SDG-based partnerships; (ii) determine the interplay between SIBs and SDGs. In order to address these questions, the article presents a multiple case study that includes a cross case analysis of four SIBs experienced in different social policy areas and different countries. As secondary step, the study matches phases and activities of SDG-based financial partnerships derived from a literature review with those experienced by each SIB case study. The results show that SIBs are fully compliant with SDG-based financial partnership structures derived from the literature, and their architecture reveals a high degree of SDG investment readiness. The originality of the research consists of including SIBs in the analysis of the new financial tools for the achievement of the SDGs, and extending them into the field of partnerships for the Goals, at the center of SDG 17. The paper fills the significant gap in the current research related to the issues of financing sustainable development and financial sector instruments on sustainability.

Population Health Management Approach: Integration of Community-Based Pharmacists into Integrated Care Systems: Reflections from the U.S., Achievements in Scotland and Discussions in Germany.

The annual amount spent on healthcare per capita is higher and expected to grow in the U.S. compared to healthier level 4 countries (e.g., United Kingdom, Canada, Germany, Australia, Japan, Sweden, Netherlands), while health outcomes continue to be suboptimal [123]. Therefore, healthcare is slowly shifting from a fee-for-service to value-based care, which addresses social determinants of health, promotes outcome-based contracting and employs more Population Health Management (PHM) activities. The root cause for this shift has been the increase in patients’ out-of-pocket costs and the pervasiveness of poorer outcomes. PHM has been defined by many as a mindset and activities that support the Triple Aim Initiative (i.e., improving population health, experience of care, reducing costs) [4].This article outlines the value of pharmacists on health outcomes in the U.S., Germany, and Scotland and innovative PHM approaches through pharmacist collaborative networks, polypharmacy management and pharmacists’ integration in care models [15].

Rewarding for Causal Impact: Integrating Policy Evaluation and Incentive Alignment in the Design of Cross-Sector Contracts

Despite the emergence of contracts between governments and private actors involved in public services, a critical issue is how to enforce payments based on outcomes such as student learning or prisoner recidivism. Imperfect measurement may fail to reflect changes in outcomes that were caused by superior managerial effort. A possible way to address this problem is to adopt policy evaluation techniques that use control groups to examine what would have happened without the intervention, as is done in randomized controlled trials (RCTs) and other methods of counterfactual assessment. However, our database of outcome-based contracts launched or in development worldwide shows that the majority of contracts (70%) simply assess changes in outcomes measured in the treated population. In this paper we bridge the literatures of contractual incentives and policy evaluation to explain this puzzle. We develop a theoretical model to compare payment rules based on the assessment of the treated to payment rules based on a comparison between treated and control groups. Building on the idea of statistical power, we show that the later contracts may under certain conditions undermine effort. This occurs, for instance, when the number of treated subjects is small and there is limited investment per treated subject, which is associated with potential effect size. Preliminary evidence from our database of outcome-based contracts is consistent with our predictions. Our results suggest that under certain conditions RCTs and other evaluation techniques may not be optimal to reward for social outcomes, even though they are considered best practice to assess policy interventions.

Collaboration under outcome-based contracts for information technology services

The accelerated expansion of markets and intense competition have motivated firms to collaborate closely with vendor firms by outsourcing critical aspects of the business, including Information Technology services. We analyze the interaction between a service provider and a client in which they collaborate to deliver services. We assume that revenue generated from the service depends on their efforts. The client determines retail price and marketing efforts while the service provider decides on quality improvement efforts in the services. We analyze the impact of revenue share proportion on the effort exerted by both firms and the impact of the capability of the service provider on the retail pricing of the service. We develop an analytical framework to characterize the actions of the service provider and the client.

English

The paper aims to enrich the academic debate on social impact investing, through a formalization of Development Impact Bonds (DIBs)’ structure. With this purpose, the research adopts an inductive approach and presents a case study analysis of the world’s first successful DIB in education, Educate Girls Development Impact Bond. The analysis fosters the role of DIBs as tools to provide funds to non-profit organizations operating in developing countries, by reducing agency problems between investors and social services providers, and by mitigating goal displacement effects. Key words: Development impact bonds, social impact investing, outcome-based contracts, payment-by-results, social finance, pay-for-success, agency problems, non-profit organization.

Blockchain: An enabler for healthcare and life sciences transformation

Major trends in healthcare and life sciences (HCLS) include huge amounts of and longitudinal patient data, policies on a patient's rights to access and control their data, a move from fee-for-service to outcome-based contracts, and regulatory and privacy requirements. Blockchain, as a distributed transactional system of record, can provide underpinnings to enable these trends and enable transformative opportunities in HCLS by providing immutable data on a shared ledger, secure and authenticated transactions, and smart contracts that can represent rules that are executed with secure transactions. We describe HCLS use cases leveraging these facets of blockchain, including patient consent and health data exchange, outcome-based contracts, next-generation clinical trials, supply chain, and payments and claims. We then describe a blockchain-based architecture and platform for enabling these use cases. Finally, we outline a realization of this architecture in a case study and outline further research topics in this domain.

Ecosystem of outcome-based contracts: A complex of economic outcomes, availability and performance

The number of studies concerning outcome-based contracts (OBCs) has gradually increased over the past decade, with a focus on servitizing companies. The mutually beneficial baseline logic behind such contracting provides a fascinating area for research because, for instance, it facilitates overcoming the service paradox through network-driven value co-creation. In addition to contractual techniques, the digitization of services in product-service systems (PSS) has gained attention as the enabler of the given business models. We set out to research OBCs that are based on economic value (eOBCs) in the energy technology sector. We mapped the ecosystem surrounding IPP-provider contract relationships and found that the outcomes sold ultimately consist of value propositions made to serve economic outcomes that subsume availability guarantees, which subsequently subsume performance. The depiction of the value system serves as a basis on which to develop future findings concerning practices comprising the outcomes.

Do outcome-based contracts exist? The investigation of power-by-the-hour and similar result-oriented cases

Outcome-based contracts (OBCs) are claimed to be the new business model for manufacturers. They have attracted a lot of research that identifies two types of OBCs: outcomes based on availability (aOBCs) and outcomes based on economic results (eOBCs). The first involve the sale of the availability of a product whereas in the second the customer purchases the functional result of the product. This characterisation is identical to the distinction between the use-oriented and result-oriented Product-Service System type. However, there are studies that seem to challenge the prevalence and even the existence of eOBCs in practice. We have set out to investigate whether eOBCs exist. This was done by addressing the following research question: what are the differences between aOBCs and eOBCs? The study employed research design that consists of three steps: identification, selection, and analysis of OBC cases as reported in journal articles. In relation to the case studies identified, our preliminary analysis suggested that all the case studies in the literature are of the aOBC type. The only case identified as the possible case of eOBC, and subsequently selected for further analysis, is that of Power-by-the-hour (PBTH) by Rolls-Royce. The analysis of PBTH was conducted from the Remote Monitoring Technology perspective. Our key contributions are: (1) a new theoretical perspective on OBCs, (2) the articulation of differences between OBC types and of what constitutes an outcome, and (3) doubt in the existence of eOBCs in practice.

PHP346 - THE EVOLUTION FROM INTEREST TO EXECUTION: AN ANALYSIS OF RECENT TRENDS IN OUTCOMES BASED CONTRACTING ACROSS THE US AND EU

Outcome Based Contracting (OBC) is growing in frequency and complexity. Simple deals, based on binary objective outcomes, are evolving to span multiple stakeholders and outcomes measures. The recent uptick in OBCs across the US and EU tells a story of how OBCs have evolved over time, and historical drivers/barriers in contract structure indicate where OBCs will go moving forward. We conducted an extensive review of EY’s proprietary OBC Repository along with publicly available information. Analysis of the data was limited to US & EU pharmaceutical schemes with either, Payment by Result, Money Back Guarantee or Conditional Treatment Continuation. Data was segmented across several categories, including: insurance/payer partner, mode of delivery, therapeutic area, contract type, outcomes and cost. Finally, we applied a novel algorithm to Ph2/3 programs with launch dates in 2019-2020, to predict near-term product launches likely targeting an OBC. Our analysis of over 97 unique contracting schemes from 1997-2018, shows the evolution in OBC design and complexity. From 2015-2017, OBCs doubled in the US and increased 5X in Europe. We also noted an acceleration in the time from approval to OBC announcement, with the bulk of contracts executed within the first two years of product launch. The majority of these deals in the US are in CV while in Europe, oncology leads. Additionally, in the US, a greater number of individual insurers are negotiating OBCs. The deals executed in 2018 reflect an evolution in contracting structure, designed to increase transparency, reduce administrative burden, and shift the evidence strategy employed to track outcomes. This research suggests that OBCs will continue to increase both in volume and complexity. There are significant external drivers impacting this evolution, including greater data sharing capability, increasing volume of innovative launches, and openness to payer, manufacturer, and provider collaborations.

Managing challenges in social care service triads – Exploring public procurement practices of Dutch municipalities

Buying services in a triad constellation is associated with challenges related to quality control, performance monitoring, and a deteriorating information position for the buyer. There is growing attention for service triads in Supply Chain Management (SCM) literature. However, these studies are mainly theoretical. The studies suggest to manage the identified challenges by monitoring supplier performance, maintaining a strong position in the service triad, developing collaborative trusting relationships, using outcome-based contracts, and aligning incentives between buyer and suppliers. Empirical studies on service triads and management mechanisms are rare, especially in a public procurement context. We study the application of management mechanisms in a public procurement context where 393 Dutch municipalities each had to contract social care service providers at the same time. This context allows us to study which of the management mechanisms proposed in literature are actually employed in a public procurement context, and whether other mechanisms are applied that are not addressed in the literature. We find municipalities deviate from traditional bureaucratic procurement procedures and apply a relational approach to the procurement procedure, including establishing social contracts, to cope with buyer challenges in service triads. Furthermore we identify municipalities apply ex post competition to drive up service quality through tendering framework agreements and allowing clients to choose their care provider of choice. This mechanism of ex post competition through the use of framework agreements has not been suggested in service triad literature before, and may be an effective mechanism in other service triads to address service quality and customer needs fulfilment issues.

The path to outcome delivery: Interplay of service market strategy and open business models

Firms in a variety of manufacturing sectors as well as the software industry have increasingly embraced services alongside their product portfolios in order to improve financial performance. Yet, the key question “How do service market strategy change and the accompanying business model change interact, and how does their interplay affect value creation?” remains open. Relying on twelve case studies of firms that have shifted towards providing highly advanced services (e.g. outcome-based contracts), theoretical propositions concerning the interplay of market strategy and business model on value creation are derived. The firms studied report two interdependent changes: first, they evolve the market strategy from provision of pure products to provision of services and then outcomes, in order to achieve a better fit with customer needs and to grow their service businesses. Second, they rely increasingly on partners and suppliers to provide new activities that are outside their competence base. This 'open business model' allows them to grow their new service businesses effectively and efficiently. At the same time, however, the shift to a service market strategy requires enhanced accountability to customers and increases the threat of penalties in the case of failure, while reliance on partners and suppliers leads to loss of control over the activity system and increases the threat of failure due to third party dependency. Thus, this paper finds that the success of firms that shift to services and outcomes hinges on their ability to balance the trade-off between increased value (i.e. growth, efficiency and effectiveness) and increased uncertainty associated with service market strategy/open business model interplay.

Hiring Education Agents for International Student Recruitment: Perspectives from Agency Theory

This paper applies agency theory to explore the contractual relationship between higher education institutions (HEI) and HEI-contracted for-profit education agents in international student recruitment, bridging a gap in the existing literature by investigating the underlying issues surrounding these relationships. Building on insights and findings from previous studies related to this topic, our analysis shows that HEI–education agent relationships are often undermined by goal conflicts and information asymmetries that significantly constrain the possibilities for optimal contractual options to monitor and incentivise agents. The present analysis shows that hybrid governance models that include elements from both behaviour- and outcome-based contracts are often most efficient in managing HEI–education agent relationships. The paper critically evaluates how insights from agency theory can help to mitigate these problems and identifies specific inherent frictions that may make government interventions desirable in overseeing the use of education agents.