---

---

Released: October 30, 2012

Guaranteed savings contracts

Source: Steve Pearlstein, Washington Post (Free Registration)

I’m a sucker for innovative new business models, new ways of organizing the way products and services are produced, marketed and priced. The Milwaukee-based Harnischfeger company would own the earth moving and extraction equipment and, over the life of the contract, be responsible for maintaining it or replacing it whenever there was a breakdown. For the mine owners, the advantage was that Harnischfeger was effectively providing financing for the equipment and assuming some of the risk from any slowdown in coal production. By turning a potentially risky capital investment into a predictable operating cost, Harnischfeger — now part of Joy Global — made it easier for mining companies to provide their customers the longer-term, fixed-price supply contracts they demanded. Similar arrangements developed in other industries, from computers, office copiers and medical equipment to pharmaceuticals and shipping. Some of them have stood the test of time, others not, but all were part of a broad outsourcing trend that sought to take advantage of economies of scale, turn fixed costs into variable costs, and turn manufacturing firms into service companies while shifting pricing risks from downstream customers to upstream suppliers.

Read Full Article: Guaranteed savings contracts