What is an Outcome Based Model and Why do we need them?

By Venkata Rao and Mohan Shekar

Theodore Levitt, the German-born American economist and a professor at Harvard Business School is credited with coining the term ‘Globalization’ and coming up with the oft cited quote: “People don’t want a quarter-inch drill. They want a quarter-inch hole.”?Customers want end results and solutions to problems. They do not want a project or a software. They want an outcome.?Service provider’s focus on projects for a customer is a classic example of someone not seeing the wood for the trees.

In today’s networked economy, companies across a wide array of industries are developing blueprints to deliver end results and outcomes to customers.?Companies deliver outcomes mainly by transforming themselves and combining servitization with digitalization.

With increased digitization of the businesses and processes, digital capabilities are increasingly at the heart of almost every transformation. This makes every transformation exercise a ‘Digital Transformation’. However digital transformation projects are typically managed in terms of outputs, not outcomes. Unlike manufacturing, the relationship between outputs and intended results for a transformation led by digital capabilities is fractured and less clear because of uncertainty encountered in real world application/use.

The problem of uncertainty, combined with the nature of software and technology, means that managing transformation projects in terms of outputs is simply not an effective strategy in today’s digital world.

Output based approach settles for ‘done’ instead of striving for ‘success / economic value’. For e.g., do we know if a product we have created, a service we have delivered or a project we have finished is going to deliver economic value? In other words, how and when do we know when an output will deliver the desired outcomes.

In today’s digitized world, an organization’s focus on success and value creation needs the conversation to shift from outputs to outcomes. A focus on outcomes delivers economic value.

Barriers to Adoption of Outcome Based Model

If Outcome-Based Approach is the holy grail, then it begs the question - Why hasn’t the world seen an increased adoption of the outcome-based model in planning, executing, and evaluating transformation projects thus far? The reason for the slow uptake of ‘Outcome Based Models’ by service providers (internal or external) and their customers could be attributed to a lack of alignment on the foundational principles and definitions.

For starters, service providers and their consumers don't always agree on what the contract's end should be. They also have a hard time determining actionable and measurable performance criteria. Because decision-makers operate in many sectors of the business — CEOs, CFOs, CMOs, CIOs, LOB heads, product managers, and so on – they all have distinct definitions of success.

As might be expected, the stakeholders and the parties to the transformation need to jump over a few hurdles before adopting an Outcome-Based Model e.g.

• How to guarantee project completion and achievement of outcomes?
• How to ensure partners and service providers deliver?
• How to safeguard and protect organizations/teams?

How to Move into an Outcome-Based Model?

It is unquestionable that focusing on products, projects and outputs in a business world that is increasingly interested in the outcomes, is hardly a risk-proof strategy for the future. Today, more than ever, customers and service providers need to quickly move to an outcome-based model to survive and thrive.

Best Practice approach for transitioning to an Outcome-Based Service Model for managing transformations involves addressing the following key strands

• Clarify Intent – Specify the outcomes sought to ensure all parties and stakeholders of the transformation have an aligned understanding of the outcomes.
• Pursue with discretion – Transformation teams and project members should be allowed to pursue outcomes with (not unlimited) discretion
• Milestones – Regular checkpoints should be planned and agreed to track key milestones and evaluate performance against targets
• Expect Course Correction - Expect for plans to be adjusted as they are pursued. A focus on outcomes requires that features and outputs are altered to achieve the end result

A successful Outcome Based transformation also embeds these critical elements into the plan

• Messaging

Shift the conversation away from features to desired outcomes

• Success Metrics and Contracts –

Define desired outcomes in addition to feature list and agree upfront that outcomes are more important i.e., Outcome rules in case of conflict

Set a strategy and allow teams to pursue outcomes with freedom (within defined constraints) so they can address situations on the ground with first-hand information

• Pragmatic planning

Carefully balance central planning with decentralized authority to achieve scale

At SAP, we know that each customer is on its own unique transformational journey, moving at its own pace, driven by its own needs. We help to simplify digital transformation to achieve exceptional outcomes quickly and efficiently by working together to continually drive the successful business outcomes and value that matter most to you.

Whether you’re deploying something new, accelerating to the cloud, optimizing your systems, or transforming how your business works, SAP helps create the right results so you can sustain success. We can help ensure your business vision and tech strategy are working as one to create the right results from the start – and every day after.