Is there Higher Value in Outcome-Based Pay?


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Recently my work has centered on jobs that allow me to expand my thinking in the area of Outcome-Based Thinking. I have been fortunate to move into this field, and I find it exhilarating to say the least. Part of this thinking is embedded in Service Dominant Logic and the concepts of Value Co-creation and Co-production. We can talk all day, and many have been talking years about the subject and most of us still think in the lens of a Goods (Product) Dominant Logic process. The simplest explanation I can give between the two is that GD-Logic focuses on the thought of value derived at the point of transaction and SD-Logic focuses on the thought of value derived at the point of use. Money Wall

Though many forces are pulling us into the SD-Logic world, most of our thoughts and behaviors remain cemented in GD-Logic. One of the culprits that stop us from moving into this behavior is the flow of revenue or how do we get paid. In the transactional mind set, you pay for a product at the point of sale, and there is a certain guarantee that is extended. You can extend that guarantee with a service contract but at some point time it becomes yours with a little help in supporting it.

Subscription services align themselves much closer to SD-Logic revenue thinking, as you pay for the use of the product or service. Another example may be a lease where the maintenance or at least part of it, is done by the supplier. But in my mind, a true SD-Logic revenue would be outcome-based pay. The fallacy in this is how would we negotiate fair compensation for all participating parties?

The most obvious model to fall back on is sales commissions since this is all performance based pay. However, as the role of an individual sales person controlling the outcome of sales has diminished, so has commission-based selling. The problem with this model in today’s world is the fuzziness of the sales process. It is just not as simple as closing a sale anymore. For many of the reasons sales commissions seem out of place today, are the same reasons we have problems with outcome-based pay. The fuzziness of who owns the success or failure of the outcome.

Outcome-based pay for the customer can lower cost and motivate providers to provide higher quality outcomes. For the supplier, it seems to shift the entire responsibility towards their performance. A good example of the failure of this scheme is when you trouble shoot problems and ultimately they are the failure of the customer equipment compatibility, or something they just added. When you find the problem sometimes it just is not real clear especially from a customer’s standpoint who owned the problem.

Can Outcome-Base pay work? Can we move from a GD-Logic revenue structure? My take on most of this is that we have trouble leaving go of that GD-Logic or transactional thinking. Sooner, rather than later GD-Logic sales structures will disappear except for commodity based products.

Service Dominant Logic implies that value is co-created and that a higher value will be achieved through the combined efforts of both parties. This is what holds the secret to the success of outcome-based pay. It is the expected higher value, or that performance gap between normal expectation and co-create expectation. I would propose a fair price for the service that would not cause undue burden on either party could be arranged. By doing this, it would leave the gain to be shared and much easier to define. Compensation of the gap could also be determined by the level of responsibility that is assumed in achieving the outcome.

A formula like this provides the supplier a base to feel comfortable going the extra mile. It also provides the customer with commission styled incentives for better performance from the contractor. The purpose for both parties should be creating an innovative and sustainable future together. However, the language of business is money, and the money has to talk.

P.S. It seems the organizations that are most comfortable with themselves are the most comfortable with outcome-based pay.

Republished with author's permission from original post.

Joseph Dager
Business901 is a firm specializing in bringing the continuous improvement process to the sales and marketing arena. He has authored the books the Lean Marketing House, Marketing with A3 and Marketing with PDCA. The Business901 Blog and Podcast includes many leading edge thinkers and has been featured numerous times for its contributions to the Bloomberg's Business Week Exchange.


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