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Paper info: Turning Product Business into Service Business: Performance Contracting as a Challenge of SME Customer/Supplier Networks


Turning Product Business into Service Business: Performance Contracting as a Challenge of SME Customer/Supplier Networks


Christian Buse,
Jörg Freiling
University of Bremen
Jörg Freiling and Sven Weißenfels

Place of Publication

The paper was published at the 17th IMP-conference in Oslo, Norway in 2001. It was presented in track Innovations.


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Especially in industrial markets the business is traditionally focused upon a tangible core, such as a machine or a plant, whereas services are more or less treated as add-on features in hardware dominated offers. As tangible offerings are becoming more and more exchangeable in competition, the suppliers put more emphasis on the services in their marketing management. Nevertheless, the activities often lack a sense of strategic direction. Among other shortcomings the necessity to understand the business no longer as a product business but in the way of a service business, integrating the customer into the process of providing an individual solution with lots of customized features in the whole product bundle is neglected too far.The concept of performance contracting strictly refers to this point. Such a contracting as a transaction design implies that customers and suppliers establish a contract-based relationship as a frame for several transactions following up. The customer does not buy a complex equipment. Instead, the supplier respectively the supplying network provide the infrastructure for the customer for a long time and the customer only has to pay for performance. Turning fixed into variable costs, the availability of a certain capacity, the opportunity permanent revamping according to the technological state of the art, and the closeness to the customer are substantial reasons why customers prefer contracting solutions in mechanical and plant engineering. Based on a case studies dealing with a customer/supplier network, consisting predominantly of small & medium-sized entreprises, the pro's and con's of performance contracting as a means of turning product into service business will be introduced in this paper.The emergence of contracting solutions are analyzed in terms of economic theory. Corresponding to the very nature of these arrangements, in particular the transaction cost approach, the resource dependence approach, the resource-based view, and the theories of the functions of the executive are compared in order to explain why contracting takes place and what the problems of these transaction design could be looking like. The results of the theoretical analysis are confronted with the first results of contracting arrangements in business practice.