Can You Hard-Wire Performance?
Hard-Wiring Performance is Great in Concept...But....
The responses to the concept of promising and delivering results rather than selling products or services are in, and you've agreed that hard-wiring performance is a winning concept that provides benefits for customers, great marketing positioning in a customer's mind, and a way to keep an organization on its collective toes.
But the concept is, in the opinion of readers, one that in application raises more questions than it answers. Among these are: (1) Are you good enough to use it?; (2) Are you organized to implement it?; (3) Can you design processes to reflect the promises implicit in hard-wiring?; (4) Do you have the people, incentives, and technology to deliver on the promise?; (5) Are you big enough?; (6) Do you have the financial capability to protect against downside contingencies?; (7) Do you have the legal capability to draft documentation that protects against all contingencies?; and (8) Can there be a gap between the promise and the capability (a way to improve an organization's performance), or is this too risky? In short, there was a preoccupation with the potential downside of such a strategy. The idea was that maybe it was alright for GE, but could a smaller, less well financed organization employ it? And how safe should an organization play it when employing such a strategy?
Several of you offered other examples of performance hard-wiring. David Hawkins cited it as a motivation for consulting divisions of Big 5 professional service firms to separate themselves from their auditing colleagues in order to enable consultants to take equity positions in their clients' firms. Ilyas Naibov-Aylisli suggested it would be a good way to sell computing "power" rather than just equipment or software.
Jim Heskett Others of you cited examples of your use of hard-wiring. Jay Cross offers it as an alternative to traditional pricing. Although clients don't bite, he claims that it gets him credibility points, more business, and clients that are more satisfied with his regular fees.
Darrell Berglund, from whom I might have expected as much as one of my former students, asked whether I was asking the right question. He proposed what was for him the real question: "Does it make sense to shift (to a supplier) the risk a purchaser normally bears to itself at no (or little) incremental payment ... over and above the "normal" selling price?" Berglund answers his own question in suggesting that it depends on the extent to which the new (GE aircraft) engine (used in the hard-wiring example) differs from past models. And of course that's the point. Hard-wiring can deliver better products and services that command different prices, costs, and margins.
The questions comprise a pretty good starter checklist for those contemplating the hard-wiring of performance. In total, they suggest the benefits of sharpening an organization's capability to the point where it is a viable alternative.
Several months ago, the General Electric Company announced that it had closed a deal with Boeing that specified that only GE aircraft engines would be installed on the newest version of 777 aircraft built and sold by Boeing. This surprised industry observers for two reasons. First, aircraft engines generally are purchased separately from aircraft by the airlines footing the bill. Second, GE engines are not the first choice of all aircraft purchasers. But GE made Boeing an offer it couldn't refuse both by co-investing in the development of the engine with Boeing and by selling time rather than engines—up-time, that is. The deal guaranteed that GE would keep the engines running for a quoted cost per hour, providing whatever parts, service, and related support might be needed over the life of the engine. In short, GE Aircraft Engines hard-wired its success to the success of its engines in delivering valuable up-time to ultimate customers. But it did much more than that.
By guaranteeing up-time at a given cost, GE's management created a built-in incentive to improve the product and lower the cost. In fact, GE's management is betting that the incentive—given other management initiatives already in place—will, if it works, insure that GE's organization in the future will deliver the greatest value (best results at lowest cost), thereby enhancing customers' performance and GE's profits.
Xerox had the formula and discarded it. Until the early 1970s, nearly all Xerox copiers were leased, with revenues dependent on per-copy royalties. If the machines malfunctioned, it was in Xerox's best interests to get there as fast as possible and keep the machines running as much as possible. Xerox's service, delivered by a veritable army of service technicians, was legendary. Xerox hard-wired its success to results achieved for customers.
Then the lure of improved cash flow combined with competitors' practices led to the decision to encourage machine purchases by users. Within a short period of time, sales far outpaced leases. No longer was Xerox's success hard-wired to results achieved by the machines. The trade-off between service levels, revenues, and profitability became less obvious, particularly given the intense price competition from foreign manufacturers experienced by the company. Perceived declines in service levels were inevitable. Even today, Xerox old-timers debate the decision.
But hard-wiring incentives can have a downside. Just ask the management at eBay, which supplies an internet vehicle by which its subscribers can trade practically anything with one another. Ebay's system failures last year evoked immediate, painful outcries from its subscribers, who could calculate their hourly cost of being unable to do business through Internet trading site.
Does it make sense for a company to hard-wire its success to that of its products, services, and customers? Under what conditions? Does it require a redefinition of the business from one providing products and services to one delivering results? What impact does this have on organization, performance measures, and incentives?