What is Pay for Outcome?

Normally, in the manufacturing industry, a company buys its machinery from another business. It owns the machine and pays to maintain and operate it.

While there is nothing wrong with this business model, a more efficient and cost-effective option is the pay-for-outcome method, which allows one company to have a partnership with the company that makes assets.

What is pay for outcome?
Pay for outcome is a business model that allows provider companies to supply a service instead of a good. To illustrate, imagine a business needs 1,000 printers. Instead of buying the printers outright from a company that manufactures them, in a pay-for-outcome model the manufacturer sets up the printers at the company then charges based on how many sheets are printed. In other words, the manufacturer owns and maintains the printers and a company commits to paying them based on how they use the printers. This pay-for-outcome business model is becoming more relevant for manufacturers of machinery.

With a business model that seems prone to corruption, how do you avoid that?
The risk must be analyzed, and a fair price modeled between the provider and the user. The ability to track usage on both sides is also necessary so that once deployed, the manufacturer knows how much to bill and the company buying the outcome understands their consumption of the asset. With that, risks are mitigated.

What about maintenance of the machinery?
The company offering the equipment as an outcome needs to control the maintenance costs while maintaining uptime. Continual monitoring of the assets through a combination of sensors and analytics can determine an optimal maintenance schedule.

How SAP Leonardo for Discrete Manufacturing, Pay for Outcome Option, Can Help

SAP Leonardo for Discrete Manufacturing, pay for outcome option, can help. The industry innovation kit can anticipate the costs for the provider. It can provide a more sustainable income — recurring revenue — for the equipment provider. And it can optimize maintenance management, removing barrier to entry and reducing cost for provider’s equipment upkeep service.

For machinery maintenance, a company that used to spend significant money on monthly routine checks for all assets would no longer need to worry about that with the kit. Not only does the kit help the relationship with providers but it also our maintenance costs by removing a barrier of miscommunication. It allows companies to be in full contact with providers through continuous monitoring of the asset health, so the provider can send help if or when it is needed. This is a win for both the company and providers. Because not only does it help reduce maintenance costs, but the provider’s cost of equipment upkeep is reduced as well.

Proof of Concept

Ulf Guttmann, solution manager for discrete industries at SAP, explains how this business model is being used: “Kaeser Compressors has opened this new business model. They give their air compressors to their customers and tell them that they just pay for the compressed air that they produce. And as the compressor company, they will care for the availability and performance of the compressor.”

Companies like Kaeser Compressors are selling compressed air as a service instead of a good.

With the pay for outcome option, a manufacturing company can manage their assets costs efficiently. They simplify their operations by paying for outcomes rather than incurring capital expenditures and maintenance costs. They can also have improved relationship with providers and manufacturers and operators stay aligned on the importance of keeping the assets running.

Learn more about SAP Leonardo for Discrete Manufacturing, pay for outcome option, here.