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Thursday, 5 January 2012

Outcome-based Contracts are NOT the same as solutioning

I've been told many times that outcome based contracts, such as flying hours, power by the hour, availability etc. are actually solutions-based contracts. (more on outcome based contracts at my previous blogpost here)

It's not.... so I thought l'll blog about the difference. Much of these insights come from my research in OBC so if you want the papers, check out my academic site

1. Diferent capability. Ability to achieve outcomes on Outcome based contracts means a capability to co-create, partner, collaborate and work together with your customer (see blogpost on value co-creation). That means you recognise that you need to keep your customers engaged and working with you and you develop your capability to do that. Solutions imply a passive customer. When you deliver 'a solution' it implies you do everything, and everything is under your control and the customer stays as a passive 'consumer'. Companies that don't really know how to collaborate, co-create and partner often prefer solutioning. Why? Because they want everything under their control. Co-creating and partnering is hard because they lose control. The ability to achieve outcomes on OBC is therefore a different capability from solutions. It's a capability of managing customer autonomy and complexity.

2. Different system. The system of solutioning is complicated. The system of achieving outcomes is complex. Complicated systems often means there is a central 'command and control' to achieve a solution. Complex means parties are autonomous and collaborating to achieve an outcome (see blog post on complicated vs complex). Complicated systems are based on reductionistic engineering science. Complex systems are based on holistic and systems science. Two completely different ways of understanding, viewing and analysing the system. Complicated systems are usually closed systems where anything outside comes into the system through designed and pre-specified conduits for inputs and outputs and predetermined 'touchpoints'. Complex systems are usually open systems where, because of autonomy, allows for a freer flow of people and information. I must stress that there are often closed complicated-type systems within complex systems so the distinction is a logical one, rather than a physical difference. We have inherited a world where often managers use reductionistic science to carve out the 'problem space' and solve it in isolation which can create more complexity from unintended consequences elsewhere in the system so its hard to tell the line between complicated and complex (there usually isn't one).

3. Paradox of solutioning is that the more you provide 'solutions' and relegate your customer to a passive role, the harder it is for you to please your customer. The logic is that an engaged customer is a happy customer because you respect their autonomy and yet able to manage the cooperation. Wanting your customer to be passive is like wanting your child to be passive and you provide everything for a child. it usually doesn't make for happy children.

4. Sometimes more expensive. Solutioning is sometimes more expensive than OBC. Why? Because to provide the 'solution' a provider need to price resources where ideally, some of these resources should not be provided by the provider but by the customer, because the customer, at the use end, has more updated information. For example, say you provide a security service for a house. If your customer wants 'incident-free' as an outcome, it goes beyond just patrolling the grounds or cctvs. It is also knowing when there may be a particular event in the house (e.g. a celebrity visit) where the event could attract security incidents. Your customer knows it but you may not. Not knowing it may make it costly for you as you need to overprovide or be overly cautious. If the customer is also responsible for the risk, the total cost of the outcome may come down. Of course, OBC could also be more expensive sometimes because of cost of cooperation/engagement. Hey, its a capability right? It's not meant to be easy.

5. Complex outcomes vs functional complicated outcomes. Some outcomes are impossible to be 'solutioned'. For example, if you may be able to provide the 'solution' of constructing a 'village' (build houses, townhall, parks, roads etc.), but you can never provide a 'community'. that can only be co-created. Similarly, many emergent properties of systems e.g. family, experience are co-created and not 'solutioned'. So if you are outsourcing a service of your firm be very careful what outcome you are outsourcing.  I see firms specifying functions to be outsourced and then becoming very unhappy because they got the outcomes wrong. Its easily to think the world is about functions. Often the outcomes we want are complex outcomes and not complicated functional outcomes. Specifying only the complicated functional outcomes for outsourcing is the most common problem I encounter because it underestimates the full outcome of the 'outsourced' element and reduces it to only a function when that element was achieving more complex outcomes before it was outsourced (and when it was part of an internal division).

6. Variety. Solutions and reductionistic engineering science in systems are really useful when there isn't much variety in the system i.e. in the context of customer 'use' of your service, there aren't many anomalies e.g. the experience of a flight. In such cases, a fully systematic system could be put in place where almost every contingency have been covered. When you have a customer in an enclosed cabin, there isn't really much else s/he needs except sleep, eat, drink, entertain (which is why I always think they dont want to give us internet access). In systems where customer 'use' of a service could have high variety e.g. a resort hotel, trying to 'command and control' the experience could end up with the customer disengaged. Be careful how you try to limit variety because not only do you end up not co-creating value, you engineer a disengaged customer. 'Variety' is double edged. It means more work for you but also an opportunity to create a better experience.

So in short, outcome-based systems are not 'solutioning' systems!

-- Posted from my iPhone

Wednesday, 4 January 2012

New Year gripes on Top Tenners

Alright, alright since everyone is in that kind of a mood where new year predictions, and top tenners abound, I thought I'll blog mine. Here are my top six gripes about the top ten things that most top ten lists are talking about in 2012

1. Big data will just be fad of visualisations. Until analytics sort out HOW macro level visualisations can actually make individuals do things differently (micro level interactions), it will fizz out. The key is EMPOWERMENT and big data gives us visibility, but not empowerment i.e. it does not tell us how the individual entities can CHANGE the phenomenon, or how the phenomenon could be co-created, rather than merely described. Don't for a minute assume that the system is the aggregate of the one; when you decompose a system, you get the fallacy of decomposition i.e. what is good for the one, may not be good for all, and what might be overall 'good' for a system could be a false optimal because it may create perverse incentives and adverse selection at a micro-level. This micro-macro aggregation and decomposition issue has been around for as long as economics and systems theory and it is the reason why there is no real link between macro economics and micro economics (did you really think that macro economics derived from micro economics? stylized facts do not a theory make...ok ok I'm being harsh). I just worry that big data  empowers the wrong sets of people - people who use it to manipulate, command, control and direct without any wish to empower, co-create and engage. Be careful the firm that talks co-creation but uses big data.....

2.  Social networks grow older, more serious, less fun. Maybe you haven't noticed it but I have. Young people are starting to move out of facebook, twitter, google+. its become an 'old persons' thing now. My girls say 'Facebook is what your parents use'. Corporates, advertisements, privacy issues have taken all the joy out of social networking for the young. To the young crowd, gaffs, faulty privacy settings, faux pas - they are all part of the entertainment of social networks. Now its all 'check your privacy', 'make no mistakes', 'don't click on this', 'predators out there', 'whom to add' 'whom not to add' 'watch for spam' 'mark zuckerberg cannot be trusted with your data' - adults (and I mean adults in the logical sense and not the age sense) have a wonderful way of killing everything that is enjoyable (and risky of course) to the young (and young at heart like me ;p). I'm not saying we should let our children be stalked by pedophiles or give our data to zuckerberg. I'm just saying that our cautious attitudes are killing social enjoyment on line and many are leaving in droves. 'Corporatisation' is also making social networks an adult platform now, so this is all becoming all too serious. implications? well, we know the young are the derring-dos, the ones that try new and different things. They throw cows, act audaciously, say too much, show too much but resulting in more interesting interactions - adults are just. so. boring. and. careful. My pet theory is that for young people, the more they have on their network, the more they interact; for the adults, the more people on their network, the more scared they are about revealing too much about themselves so interactions reduce, which of course does not do well for the health and life of the network and I think its starting to happen already.  so I predict a slowdown of ideas and innovation on such platforms. bring back the brave, the young and the risk-takers - we need you for the excitement! if not - every social network will become a linkedin. imagine how boring that is. I feel like throwing a cow at someone right now but that would be too old. the young have moved to 9gag and beyond. sigh.

3. More firms will fail. Not really a prediction, because with the 'lack of growth' and 'economic stagnation' (see gripe no. 5), one would expect it but its why they fail that I think is interesting. My prediction is that more firms fail because of more firms coming into the market and squeezing the old firms out of new opportunities. The firms that fail are those that think that the world is still the same, and they underestimate how quickly they need to be more agile and entrepreneurial, or how fast they have to seize opportunities. Have you noticed how many people talk about 'change' and 'innovation'? That suggests a systemic problem. 'have you also noticed how many firms start initiatives and committees on change and innovation? that suggests what they think is the solution. Folks, change and innovation is not the same as productivity and efficiency. the usual way of 'managing' it is usually the first step towards killing it. of course i am not suggesting we dont 'manage' it. i am only suggesting that we take too many of our old tools and hope that all the problems are still nails and screws. But the market is a marvellous thing. New firms, new entrepreneurs will carve the way and they may even collaborate with more forward looking old companies. I like to ask companies 'so how are you not changing today?' or perhaps 'how are you impeding innovation today'. 2012 will (I hope!) see the battle against traditional 'management' and more 'intervention', 'self organisation' and intrapreneurship.

4. More intrapreneurs, less managers. I read this morning an article on a top business school crowing about where their ranking is on the worldwide MBA school list and I'm thinking, do I really want to shout about that? When so many firms, with managers educated by the world's business schools are not really performing well? Are they even in touch with what's happening around the world? I know the reply to this. Schools will say they teach specialist subjects such as strategy, marketing, OB, finance and its up to the managers to practice what has been taught, rightly or wrongly but I can't help feel, as a systems person, that there is something wrong when we teach business in piecemeal terms without giving an understanding of how its is holistically practiced. I mean, the medical profession also teaches in piecemeal terms (neurology, etc.) but they extol a healthy clinical education, a holistic education as part of the specialist knowledge and not separate from it. I think there is something wrong with business school education but that's an old refrain from me so I'll stop. I think 2012 will herald more intrapreneurs - I mean, why is it that CEOs get the big press? I would like to see 'Tom Jones - a normal working Joe - wins intrapreneur of the year working for 'tradfirm' - Tom Jones is credited for asking for a budget to buy out his whole team to spend 6 months as a 'subsidiary-within-a-firm' offshoot to improve the way the company's products are being delivered and used by their customers, improvements to service and bottom line more than paid for the budget...bla bla.... one can only hope. sigh.

5.  Lower 'growth' in economies, but why does it not matter so much? I get irritated when bean counters  equate 'consumer spending' with the 'health of the economy'. At a micro level, I used to spend £15 to do one thing now i can spend £15 on broadband and do 20 things so...... how are we calculating productivity again? oh, wait is it still a input-output firm production measure? of course it is - oh well, if we don't measure consumer 'productivity', I guess we'll never know. We are now getting much more for our money because value is increasingly distributed in systems, shared intelligence, information and knowledge is gaining currency on its own and we can actually buy less and spend less.... someone please work out a better metric. I really dont want to be told that revival of economies will depend on how much I spend. I would like to see more jobs out there but this whole produce-spend-produce leading to jobs is just becoming nonsense in a distributed, interconnected and co-created world of multiple 'currencies'. Here's an example. Lets say I work and earn £1000 a month. For my quality of life, I spend £800 a month with £200 savings. I now find, with this new wonderfully connected world, I can get the same quality of life with £600 a month with £400 savings but actually, I dont really want to work so many hours so I now work less, earn £900 a month, still have £300 savings and an even better quality of life. Measure that. That link between GDP (total of how much an economy produces and sells) and Consumer spending (how much we spend)? its called MY LIFE, or as Christensen likes to call it, my jobs to be done! and i could do it more efficiently and with less money!

6. Work and play gets even more blurred on social media. Google+ is so going to take advantage of this. It cant compete with facebook. or linkedin. or twitter so its going to start hugging corporates i'm sure. big firms are needing social media so much to improve connections and relationships within the firm and to incentivise innovation, change and intrapreneurship so i think we'll start seeing SAP circle, IBM circle and then it would mesh with personal circles. Then i want to work 2 days a week so i have a few other circles, and we talk about wine, work, children, and song. this is going to be fun. and boring. but still fun. and sooooo uncomfortable for many traditionalists. roll on.

sorry for the long post. its the new year and i ate too much so there is some spare energy to burn.