Outcome-based Contracts Research Articles

Outcome‐based service contracts in the defence industry – mitigating the challenges

Purpose – This case study aims to explore the risks and challenges associated with the implementation of outcome‐based contracts (OBCs) in maintenance, repair and overhaul services in the defence industry. It also aims to identify ways to address and reduce them.

Outcome-based contracts as a driver for systems thinking and service-dominant logic in service science: Evidence from the defence industry

Two outcome-based defence contracts are studied in the attempt to better understand the provision of services in maintenance, repair and overhaul (MRO) environment that is contracted on the outcome of the equipment, rather than the provision of equipment. The nature of the contract changes the dynamics of the delivery, bringing complex issues such as customer behaviours and involvement to the forefront, with both customer and firm focused on value co-creation and co-production, rather than each party’s contractual obligation. We uncover four areas that are crucial in the understanding of value co-production in service delivery and analysed them through a systems approach combined with the application of the service-dominant logic, both considered as the theoretical underpinnings of service science.

The Limits of Cost-Effectiveness Analysis

The competitive worldwide economic environment and ever-increasing costs of health care have created a setting in which understanding costs and making sure that we achieve good value in health care are paramount. One approach to seeking value is through the use of cost-effectiveness analysis. Although this science is now several decades old, it has been refined over the last several years, with increasingly sophisticated statistical and standardized methods.1,2 Is cost-effectiveness analysis useful? Does it help in medical decision making and in allocation of scarce resources? In the accompanying article, “Cost, Effectiveness, and Cost-Effectiveness” Diamond and Kaul3 argue that cost-effectiveness analysis is not a useful approach. Although we agree with many of the points that Diamond and Kaul raise, we do not agree with their conclusion. Cost-effectiveness analysis involves an assessment of both cost and effectiveness. The distribution of each needs to be understood. A cost-effectiveness analysis is only as valid as its underlying measures of effectiveness and cost, a discussion that is beyond the scope of this article. However, the methods to make these assessments vary considerably. There are standards for cost-effectiveness, but at times, perfectly adhering to these standards is not realistic, and compromises are often made that may be entirely scientifically legitimate.4 Cost-effectiveness is, by nature, incremental. Thus, it is necessary to look at the added costs compared with a control group. Selection of the appropriate control group is a challenge itself. At times, the appropriate control is placebo, and at other times, it is active therapy; the appropriate control is dependent on the clinical question being asked. However, when cost-effectiveness analysis is conducted using data from a clinical trial, the selection of the control group will not be a decision that the analyst can affect (at least after the trial has been completed). When …

Motivating proactive subsidiary innovation: Agent-based theory and socialization models in global R&D

Abstract An integration of agency theory and socialization models is developed and used to explain the types of governance and organizational structures associated with self-initiated subsidiary innovation. This theorizing suggests that: 1) The hub structure is the greatest user of behavior-based contracting and engenders the fewest self-initiated innovations; 2) The federation structure is the greatest user of outcome-based contracting and engenders the most self-initiated innovations, but these are primarily oriented to business level strategy rather than corporate; and, 3) The network structure is the greatest user of goal internalization and is the strongest generator of self-initiated innovations which are oriented to corporate-level strategy. The empirical evidence from extant studies of other researchers in the field is consistent with these propositions. Implications for management practice, research and theory are discussed in the paper.

Asymmetric Information and Outcome-Based Compensation in Health Care - Theoretical Implications

The discussion about health care systems focuses on the dynamics of expenditures and on the weak growth of revenues. In this discussion, it is widely overseen that medical expenditures and the supply of medical services depend crucially on the compensation of physician services. The paper analyzes the implementation of an outcome-based payment system in the presence of asymmetric information. Two cases are studied in detail. First, the common situation of physician's moral hazard is analyzed. Second, a double moral hazard model is developed. Here, the patient's actions influence health outcome and cannot be monitored by the physician. It is shown that the choice of insurance and payment contracts depends on the characteristics of asymmetric information. In addition, lack of knowledge about health status and productivity of health inputs prevent a solution using outcome-based contracts.

Incentives and Self-Interest: Balancing Revenue and Rewards in China's Tourism Industry

The travel service industry is a fast-growing part of the Chinese economy. With the recent announcement of Beijing as the host city for the 2008 Olympics, this trend is poised to continue. The quality of a travel service company's (TSC) reputation generates revenue from repeat and referral business and is critical to the ongoing success of firms in this industry. A key factor in maintaining reputation is the level of quality services provided by tour guides employed by these firms. Using an agency theory framework, this paper suggests that the optimal compensation contract of tour guides is a mixture of outcome-based and behaviour-based contracts. The authors propose specific contract components that balance TSC revenue requirements and their need to maintain a strong reputation while providing incentives for tour guides to act in the best interest of the company.

Innovative contractual structures for inter-organisational systems

This paper tests the principal-agent theory in the context of contracting practices for the development of large-scale engineering projects. Five hypotheses are derived from the principal-agent theory regarding the propensity to use behaviour-based contracts versus outcome-based contracts function of the project owner's risk aversion and monitoring competencies, of the goal congruence between principal and agent, of the agent's risk aversion, and of the technological innovation required by the project. A sixth hypothesis states that more successful projects are more in line with the predictions of the first five hypotheses. All hypotheses are translated into testable propositions specific to large-scale engineering projects. For instance, outcome-based contracts are assimilated to fixed-price contracts such as turnkey and EPC. Results based on a sample of 60 power plant projects confirm that participants tend to select contracts as the principal agent theory predicts. Moreover, contracts used in successful projects follow more accurately the theoretical predictions.

Transforming community health contracts

Activity targets have dominated community health contracts for too long, claim Sue Machell and Andy Beckingham. Community nurses should now push for outcome-based contracts that enable them to measure w clinical effectiveness and impact on health

Outcome-based contracts initiative.

District nurses in east London have helped draw up a contract with a health authority based on how many patients they think they will cure.