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Trust is essential in performance-based product-maintenance service arrangements. Internal auditors can help ensure that internal controls are in place to maximize the success of these arrangements.
Asset availability is critical in industries where the equipment operator's performance depends on equipment uptime. "Maintenance delays"-although preferable to in-flight catastrophic failures-do not endear offending airlines to stranded passengers."Deadlined" equipment hampers the military's combat readiness. Failure of a critical piece of equipment can severely disrupt ongoing business operations.
Driven by waning profit margins on product sales and a growing demand from equipment users for guaranteed asset performance, the relationship between users and original equipment manufacturers (OEMs) of "mission critical" capital goods is changing, becoming more focused on product performance and delivered value. Unlike traditional transactions based on sales of products or services, the performance-based product-maintenance services (PPS) contracts now emerging compensate an OEM based on how well a customer's goals for performance and operational availability are met. When effectively implemented, PPS arrangements allow OEMs and their networks of service partners to share risks, enhance profitability, improve product quality and customer satisfaction, and lower services delivery costs. Thus, after-sale product services are no longer merely a cost of doing business or an afterthought.
The Department of Defense is at the forefront in embracing PPS under its Performance Based Logistics initiative, which is resulting in significantly improved equipment availability. The aircraft engine industry also has embraced PPS as payper-flight-hour-of-use offerings. A majority of commercial and business jet engines being delivered today are now covered by such service programs, often generically described as "power-by-the-hour." In the high-tech sector, where many products operate 24 hours a day, PPS solutions have become popular with enterprises that must run around the clock globally with reliability performance described in such terms as "six 9s," meaning a targeted uptime of 99.999999 percent. As evidence of the growing appeal of performance- and usage-based service agreements, Aberdeen Group recently found that 43 percent of companies it polled currently have these types of agreements in place and an additional 30 percent plan to offer them in the next 12 to 24 months.1
Companies that embrace PPS contracts see a win-win for both parties to the contract. The equipment user outsources maintenance to an OEM that can leverage efficiencies...