In designing a Performance Management Framework (PMF) for a new Performance Based Contract (PBC) the team asked about using a “Power by the Hour”™ approach and asked my opinion. Given the general similarity between Power by the Hour and PBC I thought it a good area to discuss.
So what is Power by the Hour?
Firstly, Power by the Hour is a trademarked term used by Rolls-Royce, the global power systems company. The term was invented in 1962 to support the Viper engine on the de Havilland/Hawker Siddeley 125 business jet. Unlike previous approach of airlines buying the engine as part of the aircraft and then having a separate maintenance contract to support it, Power by the Hour offered airlines a new option. That is, a complete engine and accessory replacement service on a fixed-cost-per-flying-hour basis.
While Rolls-Royce’s Power by the Hour approach has become more sophisticated since it’s introduction in 1960’s, from a behavioural perspective a Power by the Hour approach remains simple. If the engine is working, there is a high chance that the aircraft is flying and generating revenue for the airline. In this case, a working engine would also be generating revenue for Roll-Royce. However, if the engine is not working with the aircraft sitting on the ground, there is no revenue for either the airline or Rolls-Royce. This approach aligns the needs of both buyer and seller; that is, when the engine in working and the aircraft is flying, this makes money for both the airline and Rolls-Royce.
But why are we talking about Power by the Hour approach in a PBC Blog?
In a previous article (see Designing Successful Performance Based Contracts) I suggested that highly successful PBCs had the following characteristics:
- drives the right behaviour in the seller by addressing the Seller’s Needs;
- provides adequate commercial protections for the buyer by addressing the Buyer’s Needs; and
- balances the needs within a usable Commercial Construct (i.e. the contract).
This is achieved by aligning the Seller’s Needs against delivery of the Buyer’s Needs as reflected in the Commercial Construct.
A Power by the Hour approach delivers these three characteristics by aligning Rolls-Royce’s payment (i.e. the Seller’s Needs) with working engines (i.e. the Buyer’s Needs) all within the commercial construct (i.e. the contract). In doing so, a Power by the Hour approach is an elegant approach to delivering a highly successful PBC.
Given this, can a Power by the Hour approach work in other situations and if so, what are the Critical Success Factors and constraints that must be considered?
In the next article I will look at a Power by the Hour approach in a more generic manner including how this relates to modern “as a Service” approaches to contracting.