Linköping Studies in Science and Technology
Licentiate Thesis No. 1515
Integrated Product Service Offerings for Rail Infrastructure
– Potential Benefits and Challenges
Sofia Lingegård
Environmental Technology and Management
Department of Management and Engineering
Linköping University, SE-581 81 Linköping, Sweden
www.liu.se
© Sofia Lingegård, 2012
Linköping Studies in Science and Technology,
Licentiate Thesis No. 1515
LIU-TEK-LIC-2011:54
ISBN: 978-91-7519-997-9
ISSN 0280-7971
Printed by LiU-Tryck, Linköping 2012
Original cover pictures: Peter Modin
Distributed by:
Linköping University
Department of Management and Engineering
SE-581 81 Linköping, Sweden
Abstract
Large amounts of different materials are used when building and maintaining railway
infrastructure, and the environmental impacts from the upstream production stages are
significant. Industry’s motivation to innovate is low, new products or methods are rarely
used, and the lowest price is the main driver for selecting a tender.
Integrated Product Service Offerings, or IPSO, has been put forward in the research literature
as a potential concept to, from a life-cycle perspective, reduce the environmental impact of
products and services, increase cost efficiency and quality, and act as a driver for change.
Therefore, this thesis attempts to answer to the aim: “Can the concept of Integrated Product
Service Offerings improve the management of rail infrastructure and if so, what would such an
implementation induce in terms of risk factors?” The Swedish rail infrastructure is used as a case
to discuss the considerations and feasibility of such an implementation. Theories such as
product development, information asymmetry and innovation are used to complement the
literature focusing on IPSO. The empirical part of the thesis has been collected using
individual interviews, group interviews and a survey approach.
The contracts currently used in the railway industry have several advantages, such as being
a familiar business model that is straightforward to calculate for the contractors. However,
they are not optimal for innovation due to e.g. detailed specifications, standards and
technological and market lock-in effects. Technological and market lock-in, in combination
with a lack of information transfer between different contracts and actors, are major
disadvantages with the current practice. Furthermore, the buyer’s conservative business
culture makes it difficult to implement new types of contracts since it is difficult to break old
habits. Even though the providers are part of the same mature market, the organizational
changes needed for them to fulfill IPSO contracts are not seen as a barrier.
A benefit with IPSO is the holistic life-cycle perspective that provides incentives for
dematerialization, resulting in a more resource-efficient and durable infrastructure. IPSO
requires improved information transfer, something which stimulates innovation as well as
processes for evaluation of the contracts. Further benefits are potential incentives to get
contractors involved in the design phase, where the major decisions about the life-cycle are
made, in order to reduce the infrastructure's environmental impact and total life-cycle cost.
The contractors hope that IPSO contracts will make the buyer focus less on e.g. the initial
purchasing price and more on the total life-cycle cost in relation to quality in order to get the
best solution.
The actors see themselves as parties with opposing interests. At the same time, IPSO will
most likely imply more long-term cooperation, something that calls for common interests,
shared risks and flexibility. The innovation possibilities with IPSO could benefit from
loosening up the material handling monopoly that the buyer currently holds. Since the buyer
I
is a dominant actor within the industry, this organization has major possibilities to introduce
changes that the other actors would have to conform to.
Several challenges with IPSO are discussed, and most of them are derived from the risk and
uncertainty aspects that come with long-term contracts and inexperience with a new
business model. On one hand, the contractors request more flexibility; on the other hand,
they are reluctant to take on more responsibility that could lead to increased risk. However,
risk does not have to be seen as something completely negative, as it depends on how the
contractors choose to deal with it. They can either develop the necessary skills and
competence needed to identify and handle the risk in a strategic manner, foster a competitive
advantage, or take the problems as they come in a more ad hoc way. A way to reduce risk
and uncertainty seems to be to focus on transparency and information sharing between the
actors and the contracts. This would also open up IPSO contracts for reinvestments, where
the current lack of information concerning the condition of the facilities results in reluctance
for IPSO contracts.
This research has focused on IPSO for rail infrastructure management, using the Swedish rail
infrastructure as a case to discuss the considerations and feasibility of such an
implementation. The conclusions, therefore, are valid for rail infrastructure in other
geographical locations as well.
II
Acknowledgements
The past two and a half years of research are now summarized, analyzed and concluded in
this Licentiate thesis. It has been a challenging yet interesting process including many
inspiring encounters with people from around the world.
First, I would like to thank my supervisor Mattias Lindahl for his commitment to the project
and his flexible approach to providing guidance and feedback, regardless of it being a
working day or a weekend. I would also like to thank my co-supervisor Niclas Svensson for
sharing his knowledge about the rail infrastructure industry, wise from wisdom gained
during his own work as a PhD candidate. Additionally I owe gratitude to Tomohiko Sakao
for introducing me to the field of Integrated Product Service System and providing me with
survival tips for conferences in Japan.
A collective thanks goes out to the Division of Environmental Technology and Management
at Linköping University for their support during this fall. Additionally I would like to thank
the Thursday cakes program, previously known as Monday cakes, which always contribute
to the atmosphere. Another group thanks to my friends and fellow PhD student colleagues
for welcome interruptions in the working process.
I would also like to thank the Swedish Transport Administration (Trafikverket) for financing
this research as well as all the respondents for participating making the research possible.
Another thank you goes to Mica Comstock for contributing to the quality of the thesis by
proof reading every sentence and making sure they are comprehensible.
I would like to thank my parents for providing long-distance support when I felt a bit down
and to my sister to whom (I hope?) I am always welcome for a “fika.” Thank you Michael
Martin for enduring me during this process and for supporting me all the way. Finally, thank
you to Nivos our Vizsla for eating my floor boards, steeling my sandwich spreads but still
managing to lighten up my day with his constant happiness to see me.
III
IV
List of Appended Papers
[P1]
Lingegård S., Lindahl, M., & Svensson, N. (2011) PSS for Rail and Road
Infrastructure. Paper presented at the Functional Thinking for Value Creation,
Proceedings of the 3rd CIRP International Conference on IPS², Braunschweig.
[P2]
Lingegård, S. (2011) PSS Contracts for Rail Infrastructure. The R&D Management
Conference June 28th-30th, Norrköping.
[P3]
Lingegård, S., Sakao, T. & Lindahl, M., (2011). Theoretical Environmental
Comparison of Integrated Product Service Offerings vs. Traditional Sales. In: Cogan
B, editor. Systems Engineering.
[P4]
Lingegård S., (2011) Identification of Risks related to Integrated Product Service
Offerings of Rail Infrastructure. Draft to be submitted during 2012.
My contribution to articles
For [P1], [P2] and [P4] I have realized the data collection and the writing of the papers with
guidance and support from Mattias Lindahl and Niclas Svensson. [P3] was written by
Mattias Lindahl, Tomohiko Sakao and me as a joint effort where I contributed with one
section.
Related Publications
Lingegård, S. (2009) PSS for rail and road infrastructure - a literature study. Linköping
University – IEI Report Number LIU-IEI-R-- 10/0112—SE.
Lingegård, S., Lindahl, M. & Sundin, E., (2010) Organizational changes in connection with
IPSO. In: Tomohiko Sakao TL, Mattias Lindahl, editor. CIRP's 2nd IPS² Conference,
Linköping, 14-15 April. p. 461-6.
V
VI
TABLE OF CONTENTS
1
INTRODUCTION ....................................................................................................................... 1
1.1 AIM AND RESEARCH QUESTIONS .......................................................................................... 3
1.2 LIMITATIONS .......................................................................................................................... 4
1.3 DEFINITIONS AND CONCEPTS................................................................................................ 5
1.4 STRUCTURE OF THESIS ........................................................................................................... 5
2
FRAME OF REFERENCE ........................................................................................................... 7
2.1 A LIFE-CYCLE PERSPECTIVE FOR PRODUCT DEVELOPMENT ................................................. 7
2.2 INNOVATION .......................................................................................................................... 8
2.3 TECHNOLOGY AND MARKET LOCK-IN .................................................................................. 9
2.4 INTRODUCTION TO INTEGRATED PRODUCT SERVICE OFFERINGS .................................... 10
2.5 DEVELOPING AN INTEGRATED PRODUCT SERVICE OFFERING ......................................... 13
2.5.1
The importance of the supply chain .................................................................................. 14
2.5.2
Life-cycle thinking and information asymmetry .............................................................. 14
2.6 ORGANIZATION AND CORPORATE CULTURE ..................................................................... 15
2.7 FINANCIAL RISKS AND UNCERTAINTIES FOR LONG-TERM CONTRACTS ........................... 15
2.8 INDUSTRY EXAMPLES OF IPSO IMPLEMENTATION ............................................................ 16
3
2.8.1
BT Industries .................................................................................................................... 17
2.8.2
ITT Flygt .......................................................................................................................... 17
2.8.3
Danfoss ............................................................................................................................. 17
2.8.4
Rolls-Royce ....................................................................................................................... 18
METHODOLOGY..................................................................................................................... 19
3.1 RESEARCH STRATEGY .......................................................................................................... 19
3.2 RESEARCH PROCESS ............................................................................................................. 22
4
3.2.1
Literature reviews ............................................................................................................. 22
3.2.2
Interview study ................................................................................................................. 23
3.2.3
Survey ............................................................................................................................... 26
3.2.4
Group interview................................................................................................................ 27
SUMMARY OF CONTRIBUTIONS TO THE THESIS ..................................................... 29
4.1 APPENDED PAPERS .............................................................................................................. 29
4.2 [P1]: PSS FOR RAIL AND ROAD INFRASTRUCTURE ............................................................. 29
4.3 [P2]: PSS CONTRACTS FOR RAIL INFRASTRUCTURE .......................................................... 30
4.4 [P3]: THEORETICAL ENVIRONMENTAL COMPARISON OF INTEGRATED
PRODUCT SERVICE OFFERINGS VS. TRADITIONAL SALES.......................................... 31
4.5 [P4]: IDENTIFICATION OF RISKS RELATED TO INTEGRATED PRODUCT
SERVICE OFFERINGS OF RAIL INFRASTRUCTURE. ...................................................... 31
VII
5
SWEDISH RAILWAY INFRASTRUCTURE IN RETROSPECT – A BRIEF
SUMMARY ................................................................................................................................ 33
6
CONTRACTING FORMS CURRENTLY IN USE .............................................................. 35
6.1 CONSTRUCTION CONTRACTS .............................................................................................. 36
6.2 MAINTENANCE CONTRACTS ............................................................................................... 36
6.3 DESIGN-BUILD CONTRACTS ................................................................................................ 38
6.4 THE ACTOR'S PERSPECTIVE OF CURRENT PRACTICE ........................................................... 38
7
IPSO CONTRACTS FOR RAIL INFRASTRUCTURE....................................................... 41
7.1 MODELING AN IPSO CONTRACT ........................................................................................ 41
7.1.1
The Arlanda airport shuttle – an IPSO contract? ............................................................ 42
7.2 BENEFITS AND ADVANTAGES OF IPSO CONTRACTS .......................................................... 42
7.2.1
The view of the contractors ............................................................................................... 42
7.2.2
The view of the STA.......................................................................................................... 43
7.3 CHALLENGES FOR IPSO CONTRACTS ................................................................................. 44
8
7.3.1
The view of the contractors ............................................................................................... 44
7.3.2
The view of the STA.......................................................................................................... 47
RISK FACTORS IDENTIFIED FOR USING PSS FOR RAIL
INFRASTRUCTURE................................................................................................................. 51
9
DISCUSSION ............................................................................................................................ 53
9.1 THE CURRENT SITUATION RAIL INFRASTRUCTURE PROCUREMENT .................................. 53
9.1.1
Technological lock-in and lack of information transfer..................................................... 53
9.1.2
Conservative culture ......................................................................................................... 54
9.2 POTENTIAL BENEFITS AND CHALLENGES REGARDING IPSO FOR RAIL
INFRASTRUCTURE ........................................................................................................ 55
10
9.2.1
Increased value and cost reduction ................................................................................... 55
9.2.2
Developing a more durable railway .................................................................................. 55
9.2.3
Competition and supply chain .......................................................................................... 57
9.2.4
Organization and culture ................................................................................................. 57
9.2.5
Contracting ....................................................................................................................... 58
CONCLUSIONS AND FUTURE RESEARCH .................................................................... 61
10.1 RQ1 – HOW IS RAIL INFRASTRUCTURE MANAGEMENT CURRENTLY
PROCURED? .................................................................................................................. 61
10.2 RQ2 – WHAT ARE THE POTENTIAL BENEFITS AND CHALLENGES FROM THE
PROVIDER AND BUYER PERSPECTIVES REGARDING IPSO FOR RAIL
INFRASTRUCTURE? ....................................................................................................... 61
10.3 RQ3 – WHAT POTENTIAL RISK FACTORS CAN BE IDENTIFIED WHEN USING
IPSO FOR RAIL INFRASTRUCTURE? ............................................................................. 62
VIII
10.4 CONCLUDING REMARKS ..................................................................................................... 63
10.5 FUTURE RESEARCH............................................................................................................... 63
11
REFERENCES ............................................................................................................................ 65
APPENDIX 1:
Interview Guides
APPENDIX 2:
[P1] PSS for Rail and Road Infrastructure.
APPENDIX 3:
[P2] PSS Contracts for Rail Infrastructure.
APPENDIX 4:
[P3] Theoretical Environmental Comparison of Integrated Product
Service Offerings vs. Traditional Sales.
APPENDIX 5:
[P4] Identification of Risks related to Integrated Product Service
Offerings of Rail Infrastructure.
IX
X
1 Introduction
Railway traffic in Sweden uses mainly electricity from hydro and nuclear power, resulting in
a relatively small use of fossil fuels according to previous research (Svensson, 2006). The
same dissertation states that when the railway is addressed in environmental terms, it rarely
includes the pressures from the infrastructure that account for a substantial part of the
greenhouse gas emissions from the railway transport. Large amounts of different materials
are used when building and maintaining the infrastructure, and the environmental impacts
from the upstream production stages are significant (Svensson & Eklund, 2007). Thus far, the
Swedish Transport Administration, or STA, has not had a life-cycle approach to its work.
There is a need for the STA to start working with the environmental management of
products when designing new products, i.e. before introducing them in the material supply
chain, to reduce their environmental impacts (Svensson, 2006).
Certain contracting forms, such as performance contracting, can increase the drivers for
change within the industry and thereby increase cost efficiency and quality from a life-cycle
perspective (The Swedish Agency for Public Management, 2009). The fact that the provider
has control over the whole life-cycle of the product provides incentives to realize more
environmentally and economically sound development when considering the whole lifecycle (Lindahl, 2006). This type of contracting is also known as an Integrated Product Service
Offering (IPSO), and implies that one actor has the responsibility to deliver a result and
therefore has incentives to optimize the use of energy and material (Goedkoop et al., 1999;
Tukker & Tischner, 2006b). IPSO is defined as “…from a lifecycle perspective, to offer and
optimise a solution with a combination of products and services that satisfies an identified
customer need, and at the same time increases the suppliers’ competitiveness“ (Lindahl,
2006). Products and services that operate well together are developed in parallel into an
integrated offering. This, however, implies that the provider needs to be in charge of the
design phase for this to work. This is important, since it is in the design phase where
materials are selected and most of the environmental impacts are locked into the product
(Lewis & Gertsakis, 2001). In fact, the design phase in a product life-cycle corresponds to
around 80% of the influence for the total environmental impact of the life-cycle of the
offering (Sakao, 2009). There are a number of conditions that are well-suited to the IPSO
business model:(Tukker & Tischner, 2006a):
•
products with high operations and/or maintenance costs;
•
complex products that require special competencies to design, operate, manage
and/or maintain;
•
products with considerable consequences or costs if not used correctly or
appropriately;
•
products where operational failure or downtime is not tolerated;
•
products with long life; or
•
products with only a few major customers on the market.
1
All these conditions apply to the rail infrastructure industry, where a complex infrastructure
system with high maintenance costs represents the product, and where this system causes
major impact on the train traffic if it breaks down. The life-cycle of a railway lasts decades,
and on the Swedish market there is only one customer, the STA.
The need for change and development is known within the industry; in 2003, the STA 1
initialized the Renewal in the Civil Engineering Industry forum, with the purpose of creating
a forum for renewal (FIA, 2011). Greater efficiency, improved interaction, better incentives
for research investments and more effective mediation of knowledge are the established
goals for this initiative, and terms like "life-cycle thinking" and "improve resource efficiency"
are mentioned as ways to reach these goals (FIA, 2011). It is now the STA's strategy to get as
much railway as possible for the money spent. This includes increased productivity, level of
innovation and competition and a will to think more from a life-cycle perspective and work
more cost-efficiently. Changes in the business model is one of the strategies mentioned to
reach these goals (Trafikverket, 2011).
Furthermore, productivity development in the construction industry in Sweden, such as
road and rail infrastructure, has been weak for a long period of time, possibly due to the
traditional form of contracting used (Nilsson, 2009a). The motivation to innovate is low in
the industry, new products or methods are rarely used, and the lowest price is the main
driver for selecting a tender (Olander et al., 2010). Construction contracts are currently used
to a large extent in Sweden, but this type of contract has shortcomings concerning weak
incentives for development of the procedures (Nilsson et al., 2006a). To create incentives for
economic and environmental innovation, there is a need for strong public support (Cerin,
2006). The public part in the rail infrastructure industry in Sweden is the STA, and this
organization is responsible for 80% of the total rail system in the country (Banverket, 2008).
Before 2001, the STA procured all contracts within its own organization, but since 2001 the
contracts have been procured in competition, which has resulted in a cost reduction;
nevertheless, costs are still increasing (Banverket Produktion, 2009). The mismanagement of
the rail infrastructure over the past decades has caused poorly maintained infrastructure and
an inefficient organization (Alexandersson & Hultén, 2008; Thompson et al., 1998; Tullberg,
2000).
Implementing a new business model, however, is not without its challenges; when the
business model changes, so do the risks (Nystén-Haarala et al., 2010). For an outcome-based
contract such as an IPSO, the risk distribution changes and the supplier is responsible for risk
concerning e.g. investments and maintenance (Nystén-Haarala et al., 2010). Risks are caused
by uncertainties that, for a long-term performance-based contract, arise at the bidding stage
In 2010, the Swedish Rail Administration, the Swedish Road Administration and the Swedish
Maritime Administration, as well as the Swedish Institute for Transport and Communications
Analysis, all became a part of a new larger organization called the Swedish Transport Administration
(The Swedish Transport Administration, 2010b)
1
2
(Erkoyuncu et al., 2011). Key uncertainties for a IPSO contract are performance, operation,
training, engineering, affordability and commercial uncertainties (Erkoyuncu et al., 2011).
The research presented in this thesis is funded and supported by the STA showing that there
is a will to improve the industry and increase productivity, the rate of innovation and
competition. IPSO contracts could be one way to achieve this, by introducing the industry to
life-cycle thinking and performance contracts. Previous research states that to create
incentives for significant economic and environmental win-win innovation, strong public
support is needed (Cerin, 2006). The author further suggests that this could be achieved by
extended producer responsibilities and environmental public procurement, both of which
IPSO contracts have the potential to include, either directly or indirectly.
This research has been realized at the Division of Environmental Technology and
Management, Linköping University, a research group with the outspoken aim to work for
proactive measures to solve environmental issues. As mentioned above, the rail
infrastructure accounts for a large environmental impact; it is therefore of interest to
investigate a business model like IPSO that could be used to provide a proactive approach to
reduce this impact. This Licentiate thesis presents a starting point in the investigation of a
complex issue, and will be followed by other research projects that more profoundly relate to
this topic.
1.1 Aim and research questions
The concept of IPSO provides elements that could potentially improve some of the issues in
the rail infrastructure industry. At the same time, this could generate risks: both now within
other industries where the IPSE concept has been implemented, as well as later in during the
course of long-term contracts. This reasoning provides the following aim for the thesis:
“Can the concept of Integrated Product Service Offerings improve the management of rail
infrastructure and if so, what would such an implementation induce in terms of risk
factors?”
It is important to emphasize that the research has been performed from the perspective of the
buyer and the providers, which means that it is their perspective of this matter that is
presented and analyzed. To answer the research aim, an initial research question was
formulated to generate a foundation of knowledge. Furthermore, the aim itself has been
broken down into two separate research questions. These questions are presented below.
RQ1: How is rail infrastructure management currently procured?
a) What types of contracts are used today for procurement?
b) How are the different actors involved in these contracts?
c) What are the actors’ views on the current practice of procurement?
3
The research question will provide a description and analysis of the current situation for rail
infrastructure management, investigating both advantages and disadvantages. This
information is needed to understand the context for further investigation in RQ2 and RQ3.
The actors in this context are, in most cases, the buyer and the providers.
RQ2: What are the potential benefits and challenges from the provider and buyer
perspectives regarding IPSO for rail infrastructure?
This research question has a deliberately broad scope due to its explorative nature, and
provides a mapping of benefits and challenges from the view of the buyer and the providers.
This research question will provide a description and analysis of the scenario of using IPSO
for rail infrastructure management in Sweden. Since IPSO has potential to make the
infrastructure more resource-efficient, the main focus of these benefits and challenges will be
environmental and economic. Additionally, to be able to answer RQ3 the knowledge of the
benefits and challenges that would be created using IPSO is necessary. RQ2 provides an
overview needed to generate a deeper understanding in RQ3.
RQ3: What potential risk factors can be identified when using IPSO for rail
infrastructure?
After investigating the current situation in the industry and the potential benefits and
challenges for IPSO for rail infrastructure, it is possible to take the investigation one step
further. The focus for RQ3 is on an risk, which is essential for both long-term contracting and
for implementation of IPSO. The concept of IPSO, where dematerialization and a life-cycle
perspective in the design phase are essential, could potentially reduce environmental as well
as economic risk. RQ3 will identify risk factors from the buyer and provider perspectives, as
well as propose how the risks can be managed.
1.2 Limitations
This section presents the limitations placed on this thesis. The areas and topics below are not
irrelevant to the aim and research questions, but are also not in the core of the research or
considered for inclusion in further research.
•
The first research question is, as described above, deliberately formulated to be open
with an explorative approach. The area is later narrowed down to some focal areas,
namely organizational changes, market and competition and risk.
•
Excluded from the discussion concerning long-term contracts are contracting law and
public procurement-related issues. It is assumed that the research is realized within
the laws and regulations of public procurement.
•
Performance measures that are normally used for IPSO contracts will not be
discussed in more than a brief, qualitative way, since this focus will be included in
future research.
4
•
Pricing strategies for contracts will not be discussed as a focus area in this thesis.
Pricing and cost are very much related to the risk management of the contracts, and
will therefore be somewhat covered and explained when necessary for the reasoning
as a whole. Cost will be one of the focus areas for future research.
•
This thesis will not discuss different financing forms, such as Public Private
Partnership, since the focus is on the content of the contracts and the organization
around them.
1.3 Definitions and concepts
This section presents a shorter description of the definitions and concepts that are essential
for this thesis. It is important to describe what they mean in the context of this research to
avoid misinterpretations while reading.
Contractors: The companies that perform construction and maintenance work in the
construction industry.
Innovation: Innovation is defined as “the introduction of something new, or an act or
process for new ideas, methods, or devices”(Pakkala, 2002).
Integrated Product Service Offering, IPSO: IPSO be defined as “…from a lifecycle
perspective, to offer and optimise a solution with a combination of products and services
that satisfies an identified customer need, and at the same time increases the suppliers’
competitiveness” (Lindahl, 2006).
Life-cycle: A life cycle can be described as the concept of product life, and includes the life
phases as well as the loops between them. The phases include design/development, resource
extraction, production of materials, manufacturing, use and end-of-life activities. (Rebitzer et
al., 2004). The life-cycle concept is an approach to products, processes and services where all
life-cycle stages have environmental and economical impacts (Fava & Weston, 1997).
Product: A physical product/good is a tangible items that is available on the market and has
a market value (Kotler, 2011).
Risk: The term risk in this thesis is defined as the threat of loss from an unwanted event, and
the loss can concern financial, performance or timescale loss (Erkoyuncu et al., 2009).
Service: A service is a performance or a process that is intangible, perishable, and
heterogeneous. Furthermore, the consumption and the production of a service are
inseparable (Ng, 2008).
1.4 Structure of thesis
Chapter 1 includes the introduction where background, motivation, aim and research
questions as well as limitations are presented.
5
In Chapter 2, the frame of reference for this thesis is described to provide a theoretical
structure and scope.
The methodology of the research presented in this thesis is described in Chapter 3. This
chapter includes both the research strategy, explaining which methodological choices were
made during the course of the thesis project, as well as how they were realized and what
measures that were taken to ensure the quality of the work.
In Chapter 4, a summary of the appended papers and a description of their contribution to
the thesis are presented.
Chapter 5, which presents a brief summary of the management of the Swedish railway
infrastructure, is needed to understand the background of the organization and the current
condition of the rail infrastructure.
Chapters 6-8 present the results from the appended papers as well as new material needed
to be included to answer to the aim of the thesis. Chapter 6 describes the contracting forms
currently used in Sweden and the actors’ view of them, while Chapter 7 focuses on the
potential use of IPSO contracts. In Chapter 8, potential risk factors related to the use of IPSO
contracts are presented.
In Chapter 9, the results are discussed and the areas of the research questions are covered.
The conclusions of the thesis are presented in Chapter 10. This last chapter also includes
planned and suggested future research.
6
2 Frame of reference
The theory used in this thesis spans several different areas of theory. The first section
presents the concepts of the life-cycle perspective and resource efficiency for product
development. This is essential to this thesis, since the management of rail infrastructure
includes a large amount of material and is currently lacking a holistic perspective. Rail
infrastructure represents a mature industry with long life-cycles and the concepts of
innovation as well as technology and market lock-in area are of interest. These areas are
presented in Section 2.2 and 2.3. Subsequently, the concept of IPSO is presented including
key aspects, examples from the industry, benefits and challenges as well as an additional
focus on uncertainties and risk for IPSO. Examples of IPSO offerings from four different
companies are presented in the end of this chapter, in Section 2.8, to illustrate the business
model.
2.1 A life-cycle perspective for product development
Given that railway infrastructure is responsible for large environmental impacts in Sweden,
it would be interesting to look into proactive ways to improve future construction and
maintenance work. It has been determined that a large degree of the environmental pressure
of society can be attributed to flows of material and energy (Ayers, 1994). Previous research
in the rail infrastructure area states that large amounts of different materials are used when
building and maintaining the infrastructure, and that the environmental impacts from the
upstream production stages are significant (Svensson & Eklund, 2007). For certain products,
such as infrastructure, it is the initial stages of the life-cycle, i.e. the resource extraction as
well as the processing and refining of raw material, that have the largest environmental
impact (Clift & Wright, 2000). This is because the infrastructure requires large amounts of
energy in the construction phase, but during the use phase the products are generally more
passive in terms of energy use. Additionally, these products are typically non-complex since
they do not include large amounts of different types of material, making the end-of-life
treatment less complicated and thus less energy consuming (cf. (Svensson, 2006)). For the rail
infrastructure, three products have been pointed out as the main contributors to material use
and material-related energy: steel rail, concrete ties and ballast material such as crushed
rocks (Svensson, 2006).
A strategy to reduce material and energy is dematerialization, where the focus is on lowering
the inputs (Dobers & Wolff, 1999), and focusing on dematerialization can reduce the
environmental impact (Mont, 2000; Öhlund, 2003). Dematerialization contributes to lowering
environmental impacts as well as to reducing costs, and key factors are e.g. cooperation and
a focus on functions, and not on products (Dobers & Wolff, 1999).
Previous research within the infrastructure industry states that the earlier in the planning
process the provider is involved, the better the opportunities are to adapt the content and the
realization of the project to its specific conditions and the requirements (Nilsson, 2009a). As
7
mentioned in the introduction, the design phase of an IPSO has the largest part in the
influence on the environmental performance of an offer (cf. (Lewis & Gertsakis, 2001)). The
importance of making decisions early in the product development process, when there is still
freedom to make changes, is supported by the illustration in Figure 1. The further along in
the process the more modifications cost, due to the difficulty in making the changes. This is
more thoroughly described in Appendix 4.
Figure 1: The relation between “Freedom of action”, “Product knowledge” and “Modification cost”
is shown (Lindahl, 2005).
The life-cycle of a product (goods and services) can be described as the concept of product
life, including the life phases as well as the loops between them. The phases include
design/development, resource extraction, production of materials, manufacturing, usage and
end-of-life activities (Rebitzer et al., 2004). The life-cycle concept is an approach to products,
processes and services and acknowledges that all life-cycle stages have environmental and
economic impacts (Fava & Weston, 1997). This implies a holistic view of products, which
emphasizes that the effects of a decision at one point in the life-cycle can cause
environmental impacts at other stages. Previous research within the area of life-cycle
thinking points at the integration of environmental considerations into design, manufacture,
packaging and processes to achieve economic and environmental benefits as the ultimate
goal (Fava & Weston, 1997).
2.2 Innovation
The management of the activities involved in the process of idea generation, technology
development, manufacturing and marketing of a new or improved process or product can be
8
described as innovation (Trott, 2012). Innovation could be improvements of a product or
something new to the world or the firm (Ahmed & Shepard, 2010). This means that
innovation can be both radical or incremental, and can be described as a life-cycle beginning
with a radical change in technology (Trott, 2012). The performance of a technology is often
displayed in a S-curve where the performance is plotted against time or engineering effort
(Christensen, 1992), as illustrated in Figure 2.
A new and radical technology marks the beginning of the S-curve, whereas incremental
innovations occur when moving along a given S-curve (Christensen, 2000). In the early
stages of the curve the technology is poorly understood, but improvements in the technology
begin to accelerate until a limit is reached (Schilling & Esmundo, 2009). Not all technologies
reach their limit, but could instead be replaced by another technology somewhere along the
PRODUCT PERFORMANCE
S-curve (Christensen, 2000).
Third technology
Second technology
First technology
TIME OR ENGINEERING EFFORT
Figure 2: The Technology S-curve (Christensen, 1992).
In the beginning of the curve differentiation of design is in focus for the market, followed by
a standardization phase where a dominant design is set (Trott, 2012). This is when the focus
shifts to efficiency and lowering production costs (Schilling & Esmundo, 2009). It is here
where the bargaining power for both supplier and customer will increase and the actors will
secure positions on the market, providing entry barriers for new actors (Trott, 2012).
2.3 Technology and market lock-in
The dominant design is not always the best or optimal technology, but could instead be the
design that has a faster learning curve; the result is that the more learning that occurs, the
9
less likely the actors will be to investigate other technologies, even if they are better (Ahmed
& Shepard, 2010).
Technological lock-in is a result of mainly two elements; technological paradigms, i.e.
technology S-Cures, and increasing returns to adoption, meaning incentive structures and
reinforcement paths for a technology (cf. (Perkins, 2003)). Technologies are parts of broader
networks with supporting infrastructures with physical evidence along with technical,
economic and organizational structures enabling existing technologies (Perkins, 2003).
Learning, culture and habit can lead to inefficiency due to employees’ unwillingness to
explore new ways of doing things, since this could cause them to lose their positions of
control and power (Ahmed & Shepard, 2010). The costs for switching a technology becomes
significant, since not only physical elements need to be changed but also existing skills,
behavior patterns and work practices (Perkins, 2003). This is also in line with the design
paradox, seen in Figure 1, where the modification costs increase over time. It is also true for
customers that become attached to products even though there are better or cheaper options
(Ahmed & Shepard, 2010). These network factors raise the barriers for new technologies that
are not part of the dominant technological design to enter the market (Perkins, 2003). The
result is a type of market lock-in. For the rail infrastructure market and technology, lock-ins
are e.g. the width of the tracks and the signal system that need to be compatible with the
trains. Another market lock-in is the situation where there is only one dominant buyer on the
market, as is the case for rail infrastructure in Sweden.
2.4 Introduction to Integrated Product Service Offerings
Many different definitions and names exist for contracts or business models based on
performance or function (Ng & Yip, 2009a; Ng et al., 2009; Nilsson et al., 2006a; Zietlow,
2004). A further development of these models are the ones including a systems approach,
where the life-cycle of the product and service are included (Alonso- Rasgado et al., 2004;
Brady et al., 2005a; Goedkoop et al., 1999). Additionally, some business models take the lifecycle approach one step further and emphasize the integrated development of the product
and the service for the offering (Lindahl, 2006; Meier et al., 2010; Meier et al., 2005) Names
and definitions of these concepts are presented in Table 1.
Table 1: Different names for performance-based contracts.
Name
Outcome-based
contracting
Performancecontracting
10
Definition/description
“…a contracting mechanism that allows the
customer to pay only when the firm has
delivered outcomes, rather than merely activities
and tasks.”
“The contract terms are based on that future
users are given access to some specific services,
not on the contractor fulfilling technical
specifications: it is the performance of the asset
over the contracting period that matters.”
Reference
Ng et al., 2009, p. 1
(Ng et al., 2009)
Nilsson et al., 2006, p.
7 (Nilsson et al.,
2006a)
Performance
based contracts
“…are about contracting on performance, rather
than tasks or outputs by the service provider.”
Performance
contracts
“Performance Contracts are defining a product
and it is up to the contractor how to achieve this.
Therefore, work selection, design and delivery
are all his responsibility.”
“…solutions projects usually include the
responsibility for the provider to manage,
resource, support and improve the delivery of
the solution through the life of the product or
system in use.”
“The customer purchases a function and the
hardware plus service includes the totality of
activities that enable the customer to benefit from
a total functional provision.”
Solutions
projects
Functional sales
Product service
system, PSS
“a marketable set of products and services
capable of jointly fulfilling a user’s need”
Integrated
Product Service
Systems, IPS²
“…is characterized by the integrated and
mutually determined planning, development,
provision and use of product and service shares
including its immanent software components in
Business-to-Business applications and represents
a knowledge-intensive socio-technical system.”
“…from a lifecycle perspective, to offer and
optimise a solution with a combination of
products and services that satisfies an identified
customer need, and at the same time increases
the suppliers’ competitiveness. “
Integrated
Product Service
Offerings, IPSO
Ng and Yip, 2009, p.
207 (Ng & Yip,
2009b)
Zietlow, 2005, p. 3
(Zietlow, 2004)
Brady et al., 2005, p.
364 (Brady et al.,
2005a)
Alonso-Rasgado et
al., 2004, p. 515
(Alonso- Rasgado et
al., 2004)
Goedkoop et al.,
1999, p. 18
(Goedkoop et al.,
1999)
Meier et al., 2010, p.
608 (Meier et al.,
2010), originally in
(Meier et al., 2005)
Lindahl et al., 2006,
p. 1-2 (Lindahl, 2006)
The two models using the integrated approach, Integrated Product Service Systems, IPS² and
IPSO are largely interchangeable, but in this thesis the IPSO will be the concept used.
IPSO has a life-cycle perspective and includes large parts of the value chain in an integrated
offering that instead of selling physical products provides functions, service and
performance (Sundin, 2006). With integrated development, it is no longer possible to
separate the product and the service in the different phases of the life-cycle (Meier et al.,
2010). Figure 3 illustrates how an IPSO includes the activities of the product life-cycle for a
product with a high environmental impact from the use phase, which is true for many cases
(Sakao, 2009). The bars show a rough estimation of the environmental impact of the activities
(left vertical axes), while the dotted line shows the accumulated environmental impact (right
vertical axis).
11
Env.
impact
IPSE (Integrated Product Service
Engineering) of offering
LC env.
impact
Influence on
LC env. impact
(accumulated)
100%
approx.
80%
Design Production Logistics Usage
EOL
treatment
Time
Figure 3: Comparison of IPSO and other activities (Sakao, 2009).
In this thesis, an IPSO is a result-oriented service, meaning that the buyer and provider agree
upon a functional result but the provider is free to decide how to achieve this result (Tukker,
2004). Figure 4 presents a framework, based on a review of the research area, that illustrates
the concept of IPSO in the figure referred to as IPS², and the elements involved in the lifecycle to provide success for the offering (Roy & Cheruvu, 2009). The left side of Figure 4
presents drivers for IPSO, such as customer affordability, technology development and
environmental sustainability. Three main aspects of the commercial environment of the IPSO
are presented: risk and uncertainties, contractual platform and cost and revenues. Design,
delivery and adaptation are presented as the three main stages of the IPSO life-cycle, and
listed beneath them are the required capabilities for the different actors involved in the
offering. These include among other things service network, organization structure and cocreation of value. The main outcome from an IPSO is sustainable customer value, where
customer value is defined as the difference between what the customer receives and what the
customer has paid, as well as the time and energy spent to buy the product and learn how to
use it.
12
Figure 4: A framework for IPSO, referred to as IPS² in this figure (Roy & Cheruvu, 2009).
2.5 Developing an Integrated Product Service Offering
IPSO provides the supplier with a possibility to increase the value of the solution for the
customer, as seen in Figure 4, by integrating components in new ways (Brady et al., 2005a),
and is thereby a driver for the development of technical solutions (Lindahl, 2006). There are
incentives for the supplier to realize improved economic and environmental development
when considering the whole life-cycle (Lindahl, 2006), as illustrated in Figure 3.
Infrastructure projects procured using integrated contracting including design, construction
and maintenance have better life-cycle costs (Pakkala, 2002). Additionally, using a productservice mix with more durable materials and other designs may prolong the lifetime of the
product and potentially optimize maintenance and operations (White et al., 1999). Previous
research has also shown that projects with an integrated process, such as IPSO projects for
infrastructure, are completed faster (Pakkala, 2002).
IPSO could be initiated by the provider to generate growth or a continuous revenue stream
throughout the whole life cycle of the product (Brady et al., 2005a; Mont, 2002). In a mature
industry, IPSO could be part of a growth strategy (Mont, 2002). Other internal drivers for the
provider are resource management and environmental improvements (Mont, 2004). The
external drivers vary depending on the industry sector. In a mature market like the rail
infrastructure industry it can be difficult for providers to differentiate due to standardized
technology, which makes the competition focused on price and subsequently low profit
margins (Mont, 2004). There are innovation possibilities since the offerings follow the
customer’s needs, but this requires a focus on the whole system with suppliers and buyers
13
(Lindahl, 2006; Tukker, 2004). The knowledge that actors gain through experience provides
leverage in the process of incremental innovation (Trott, 2012). A benefit mentioned in the
literature for IPSO is the possibility to gain knowledge during the use of the offering to
reconfigure or redesign it (Meier et al., 2010). The knowledge base of a company is larger
than the sum of the individual knowledge of the employees (Trott, 2012). This knowledge is
not easily accessible for other actors, since it is distinctive to the firm and includes the
individual way in which the technology is applied (Trott, 2012).
It can be difficult, however, to convert abstract demands into concrete quality performance
indicators, resulting in difficulties for buyers to know if they got what they asked for, and for
providers to determine what to supply (Tukker, 2004). To reduce the gap between required
and delivered results for performance-based contracts such as IPSO the actors need to agree
on performance measures (Datta & Roy, 2011).
2.5.1 The importance of the supply chain
One of the great challenges with IPSO is to manage the supply chain, which plays an
important role for the business model (Meier et al., 2010; Mont, 2004). Uncertainties related
to the supply chain include capacity, resource availability and capability in the supply chain
network (Erkoyuncu et al., 2011). Conflicts of interest between the different actors in the
supply chain can also be a challenge for IPSO (Mont, 2002). Other uncertainties affecting the
performance are those from the supply chain: scale of chain, skill requirements, degree of
customization and changes in the requirements (Meier et al., 2010). Another external barrier
for IPSO could be the lack of demand from public procurement, which otherwise could serve
as a driver (Mont, 2002)
2.5.2 Life-cycle thinking and information asymmetry
The environmental impact of a product is caused by the different stages of the life-cycle, such
as the raw materials or the use phase (Lewis & Gertsakis, 2001). Hence, by changing e.g. the
characteristics or the process of usage or end-of-life, the environmental impact could
potentially change as well. The provider needs to be competitive, something which requires
a minimum use of resources for a maximum utilization of the element in the offering (Meier
et al., 2010).
However, information is needed to do so, and it might not always be easily accessible.
Between the provider and the user, information asymmetry is found in many cases; this is
thoroughly described in [P3], (Lingegård et al., 2011). Briefly explained, the provider often
holds more information about the product than the user. This could be information
concerning toxicity of a product, or perhaps how to achieve the best energy performance.
The reasons for this asymmetry could be diverse, such as a lack of user education or a
deliberate strategy from the provider’s side. Nevertheless, the information asymmetry could
be a key factor in making IPSO a meaningful business model and the provider has the
possibility to provide more efficient maintenance or upgrades during the use phase.
14
2.6 Organization and corporate culture
To become a service provider, considerable changes have to be made within the
organization, capabilities and management of the firm (Oliva & Kallenberg, 2003). For a
company to shift to IPSO instead of selling products and services separately requires an
organizational change. In fact, this change is considered one of the major barriers for the
business model, as it leads to changes both within the organization as well as changes in the
relationship with other actors in the product-service chain (Mont, 2002). Profitability during
an IPSO contract depends on how skilled the organization is in assessing failure risks for the
equipment (Oliva & Kallenberg, 2003).
Earlier research has pointed out the difficulties associated with a traditional mindset among
customers (Alonso- Rasgado et al., 2004). Instead of focusing on the product price, the
customers need to focus on the price for the whole life-cycle, and these two cannot be
directly compared. The customer needs to learn about the cost structure of the offerings;
otherwise, this lack of knowledge could serve as a barrier (Mont, 2002). There is, therefore, a
need for models and tools that can illustrate in a simple way the financial benefits of the
offerings (Berggren & Björkman, 2002). Additionally, customer acceptance of the offering as
well as trust between the actors is of importance (Mont, 2002).
The transition to an IPSO business model imposes organizational challenges for both
provider and buyer. Buyers might lack life-cycle cost knowledge needed to evaluate the
offering and understand the concept due to a traditional business mindset (Mont, 2004). The
new conditions require that operational and organizational structures for the provider need
to be adapted (Meier et al., 2010). For instance, a cross-functional way of working to design
an IPSO is a necessity, meaning that representatives from different areas and departments in
the provider organization need to be involved (Brady et al., 2005a). Since more information is
needed, more trust is required between the buyer and supplier to achieve this transparency
(Lingegård et al., 2010). IPSO also implies a longer business relationship that needs to be
strong for long-term performance (Meier et al., 2010).
2.7 Financial risks and uncertainties for long-term contracts
Implementing IPSO as a business model is not without challenges; as for any change in the
business model, the risks change as well (Nystén-Haarala et al., 2010). IPSO implies taking
over some of the customer’s processes, which is a major risk for the provider (Meier et al.,
2010). On the other hand, IPSO also reduces unpredictability and variability of demand
during the contract time, which makes risk reduction a driver for the business model (Mont,
2004; Oliva & Kallenberg, 2003).
Long-term contracts increase risks and uncertainty, and the risks are caused by uncertainties
that for a long-term performance-based contract arise at the bidding stage (Erkoyuncu et al.,
2011; Meier et al., 2010). The term "risk" in this thesis is defined as "the threat of loss from an
unwanted event," and the loss can concern financial, performance or timescale loss
15
(Erkoyuncu et al., 2009). Managing the uncertainties for the whole life cycle at the bidding
stage is challenging, and the major inputs to calculate the cost are e.g. historical data,
supplier inputs and user requirements (Meier et al., 2010). Assumptions concerning
equipment failure have to be made as well as a prediction of maintenance activities (Datta &
Roy, 2010). Another problem with long-term contracts is the risk of obsolescence with a
technology or component no longer in use and unable to be purchased (Romero Rojo & Roy,
2009).
Figure 5 illustrates the uncertainties that arise during the life-cycle of long-term
performance-based contracts, such as long-term IPSO contracts. The reliability of the
information from the customer is important for cost estimations (Datta & Roy, 2010).
Figure 5: Illustrating uncertainty from the bidding stage through disposal for a long-term
performance-based contract. (Erkoyuncu et al., 2011)
Risk assessments including forecasting and economic development are very important for
these long-term contracts and also to consider both sides of the risk, namely the supplier and
the buyer sides (Alonso-Rasgado & Thompson, 2006). For outcome-based contracts such as
IPSO contracts the risk distribution changes, and the supplier is responsible for risk related
to e.g. investments and maintenance (Nystén-Haarala et al., 2010). The uncertainties and
risks need to be identified, planned, assessed, handle and monitored, and the provider and
customer should cooperate in doing so (Meier et al., 2010).
2.8 Industry examples of IPSO implementation
In this section, examples of implemented IPSOs are presented. The examples, representing
different industry sectors, were collected from different research groups in Europe.
16
2.8.1 BT Industries
BT Industries is a global forklift manufacturer owned by the Toyota Material Handling
Group. The company provides forklifts on a long-term rental basis with the aim to provide
customers with a forklift function at the lowest price (Sundin E. & Bras B., 2005). The rental
solution includes forklifts, maintenance, spare parts and driver training and can be
complemented with back-up trucks during peak seasons (Kowalkowski, 2008). Information
is gathered, by maintenance personnel or software solutions, from products in use at the
customer site to better control the fleet of rental forklifts (Östlin et al., 2008). After use, the
product returns to the seller and a remanufacturing operation is realized (Östlin et al., 2008).
The idea behind the solutions is that the customers should focus on their core business and
let BT Industries take responsibility for the material handling (Sundin E. & Bras B., 2005). By
doing so, customers know the cost of their material handling in advance and avoid having
capital tied up in forklifts (Kowalkowski, 2008). For the customer, this implies less risk as
well as more flexibility (Sundin E. & Bras B., 2005).
2.8.2 ITT Flygt
Submersible pumps are the most common products provided by ITT Flygt, a leading
supplier in this area. The description in this section has been collected from earlier research
in the industrial service area (Kowalkowski, 2008). The company has an ambition to offer the
customers trouble-free operations and the lowest possible maintenance and energy cost by
using advanced monitoring and control systems. The company has related an after-market
ladder for the development of service offerings. The ladder starts with part distribution and
traditional maintenance and repair, and ends with long-term service contracts such as
condition monitoring and operation agreements where the customer pays a fixed price per
volume of liquid. In 2008, all the different types of offerings were in place except the last
mentioned above. The aim of the service contracts is to create value for the customers in the
form of reliability, extended product life, cost control etc. A fixed predictable income and a
better position in the replacement business are benefits for the provider, ITT Flygt.
2.8.3 Danfoss
The description of the IPSO provided by Danfoss has been collected from a case description
in a PhD thesis (Matzen, 2009). The company is a Danish manufacturer of refrigeration,
heating, and motion control products for a global market, and has traditionally sold controls
and refrigeration components to refrigeration equipment manufacturers and contractors. A
new service offering called RETAIL-CARE was developed targeting food retail companies
with hundreds of stores. The remote monitoring and control functionality of electronic
refrigeration control systems for their offerings range from remote monitoring to project
management contracts. Customer training and technical support are examples of services
that existed before the IPSO contracts, but they are now a revenue-generating activity instead
of a sales support function.
17
2.8.4 Rolls-Royce
Rolls-Royce, a global manufacturer of gas turbines, provides integrated power systems and
services for several different markets for use on land, at sea and in the air (Rolls-Royce, 2011).
Instead of selling the engine to the customer, Rolls-Royce leases out “power-by-the-hour” in
a Total-Care Package (Baines et al., 2007). The company gets paid based on availability,
meaning the number of hours the engine is in use (Erkoyuncu et al., 2011). The company has
direct access to the products and can collect data to enable improvements such as increased
efficiency and maintenance schedules. This reduces cost and environmental impact (Baines
et al., 2007). To achieve this, Rolls-Royce works with a supply chain with 20 worldwide
storage locations to be able to optimize support and avoid disruption within its customers'
operations (Rolls-Royce, 2011).
18
3 Methodology
This chapter presents the overall research design, followed by the research process, where an
overview of the methods used is presented. The chapter continues with a more detailed
description of the use of the methods, followed by a short summary of the appended papers
and their contribution to the thesis.
3.1 Research strategy
The overall aim of this thesis “Can the concept of Integrated Product Service Offerings improve
management of rail infrastructure and if so, what would such an implementation induce in terms of
risk factors?” is of an exploratory nature. An exploratory orientation is used to give
fundamental knowledge and understanding about an area of interest, and to provide input
to better narrow down the research for further investigation (Lekvall & Wahlbin, 2001; Yin,
2009). The research presented in this licentiate thesis is of an exploratory nature, as not much
has been done before in the area of IPSO for rail infrastructure. Furthermore, the result and
conclusions from this licentiate thesis will be used as a stepping stone for further research.
However, the research also has descriptive and explanatory features which depend on the
characteristics of the research questions that were derived from the overall aim.
The aim was too complex to investigate without specifying more detailed research questions,
which follow a linear structure where the output from one research question provides the
input for the subsequent question. This was true except for the first research question, where
an initial clarification interview provided the input needed. The interview was exploratory
and unstructured, which is useful when there is a need to find out the important topics to
investigate, as well as what to exclude from the study (cf. (Merriam, 1994)). Research can be
realized using both primary data collection, where the researcher collects data from the
original source, and secondary data collection, where for example existing statistics and
reports are included (Lekvall & Wahlbin, 2001). The research in this thesis is based on both
primary data including interviews, a focus group and a survey, and secondary data
including literature reviews.
RQ1: How is rail infrastructure management currently procured?
RQ1 provides a description and an explanation of the current situation in the rail
infrastructure industry, as well as investigates what research has been realized within the
topic of interest. This research question has clearly-formulated, specific questions with a
focus on how industry currently works, which makes the nature of the research question
descriptive (cf. (Lekvall & Wahlbin, 2001)). This information is fundamental to the realization
of the following research questions. Furthermore, this question asks “how” the infrastructure
is procured, with “how” being an explanatory question used for explaining operational links
(cf. (Yin, 2009)). However, this research question also includes elements of an explorative
investigation, since it is used to frame the following research questions and provide input for
19
them (cf. (Lekvall & Wahlbin, 2001; Yin, 2009)). Two of the sub questions of RQ1 are of an
exploratory nature, asking “what types of contracts?” and “what are the actors’ views?”
Typically questions using “what?” as an interrogative are exploratory (Yin, 2009).
For RQ1, a literature study was conducted to aid in an initial framing of the problem and
provide direction for the research question. This is a common procedure for qualitative
research (Creswell, 2009). Furthermore, more limited literature reviews have been used
throughout the research process to investigate certain topics for the appended papers, for
example. Additionally, an interview with a respondent from top management at
Arlandabanan Infrastructure AB was conducted to learn more about the Arlandabanan
project, since it is the project in Sweden that is the closest to becoming an IPSO contract for
rail infrastructure. The interview followed the same procedures as for the main interview
study described below but using a less structured approach. Furthermore, the interview
study described for RQ2 focused primarily on IPSO contracts, but it also included questions
concerning the current situation. Information from the interview study was used to provide
answers to RQ1 as well. This was the explanatory part of RQ1, where the information from
the literature was not enough to answer the question.
RQ2: What are the potential benefits and challenges from the provider and buyer
perspectives regarding IPSO for rail infrastructure?
RQ2 has a more consistent exploratory nature, since IPSO contracts are not commonly used
in Sweden for rail infrastructure and little has been published in this area. The question asks
for “what the potential benefits and challenges are?” and as described above “what”
questions are generally explorative (cf. (Yin, 2009)). For this phase, a qualitative interview
study was used to collect the information needed. This type of interview is used to obtain a
description of a phenomenon from the perspective of the respondent (Kvale, 1997). To
choose an interview study as the main data collection method is appropriate when it is
believed to provide more and better information at a lower cost than other methods
(Merriam, 1994). In this case, no other method could provide the type of information needed
since it is based on the experience and opinions of the respondents, and therefore could not
be found for example in archives. Additionally, other methods basing data collection on
primary sources such as surveys would not be adequate, since a survey only provides
quantitative or numeric descriptions (Creswell, 2009). The interviews give descriptions of the
context within the respondents’ work environment and their interpretation of it. This is an
example of descriptions that can only be provided by asking the respondents, and then
interviews are the only way (cf. (Merriam, 1994)).
The structure for interviews can vary from open, where only the themes are chosen in
advance, to very structured, where the interview consists of standard questions (Kvale,
1997). The more structured an interview is, the easier it is to analyze; on the other hand, the
spontaneous and unexpected answers that come with a less-structured interview might be
lost as a result (Kvale, 1997). Open interviews are used when little is known about the
20
research topic and the researcher does not have enough knowledge to ask specific and
relevant questions (Merriam, 1994). In this case, there was sufficient background knowledge
available to conduct semi-structured interviews. Semi-structured interviews are used to
retrieve certain information from all respondents, and are guided by some preset main
questions, but the order or exact formulation are not decided before the interview (Merriam,
1994). This made the interviews focused, but there was still room for additional questions or
shorter discussions about related areas (cf. (Kvale, 1997)). For this thesis, the main theme for
the interviews was IPSO contracts for rail infrastructure. To frame an interview and state the
topics and the main questions to be included, the use of an interview guide is helpful (Kvale,
1997). Semi-structured interview guides, one for the buyer and one for the providers, were
constructed using the input from the literature study and the initial clarification interview.
The interview guides can be found in Appendix 1.
The results from the interviews were validated using a survey that was sent out to all the
respondents. A survey is normally used to detect patterns and to enable comparisons; in this
case, it was a cross-section, where data is collected at one point in time (cf. (Creswell, 2009;
Merriam, 1994)). Here, the results were used mainly to confirm that the key elements derived
from the interviews were in fact key elements, but also to let the respondents rank the
importance of each element. The respondents from the STA and the contractors received
slightly different surveys, depending on the results from the interviews. While the questions
were the same, the factors they were asked to rank differed. There were two reasons for not
sending the survey to others as well. First, it required some explanation in the beginning of
the interviews to make sure than the respondents understood what types of offerings were to
be discussed. Sending the survey to those that were uninformed could decrease the validity
of the study. Second, the underlying causes for why they would answer in a certain way
cannot be detected in a survey.
RQ3: What potential risk factors can be identified when using IPSO for rail
infrastructure?
From both the initial literature review and the performed interviews it was evident that risk
was a key parameter for the discussions. Risk is therefore the focus of RQ3; even though the
topic is narrowed down to risk factors, the nature of RQ3 is still explorative since the factors
are unknown. The interview study provided information for this research question, but to
gain more knowledge on the topic a group interview was initiated. A group interview is a
type of interview that is appropriate for exploratory investigations, where deeper
understanding for the respondent’s perspective in a defined area is desired (Lekvall &
Wahlbin, 2001). In group interviews the interviewer has less control over the situation, and
the interaction between the respondents can easily result in spontaneous statements (Kvale,
1997). The purpose of the realized focus group was to trigger a discussion between the
respondents, since they represented different perspectives of the studied topic.
21
The empirical parts of research questions two and three have been collected simultaneously
and thus overlap, but their analysis can be described as a linear process where the results
and analysis from one part were used as input in the subsequent part. The research has
primarily a qualitative approach, but some elements of quantitative methods were
introduced as well to further establish the quality of the results. The concept of triangulation
has been used throughout the research, using several different sources of information for
each research question (cf. (Merriam, 1994)).
3.2 Research process
The research process consisted of several steps and different data collection methods. The
following sections describe in more detail how the research methods were used. Table 2
shows what methods were used to answer each research question, or RQ. Additional
information about the methods used can be found in the appended papers.
Table 2: Research methods used to answer each research question. X denotes that data from this
method was used extensively to answer the RQ. (X) indicates that only a small part of the data was
used for a particular RQ.
RQ1
RQ2
RQ2
Initial literature
review
X
(X)
Semi-structured
interview study
X
X
X
Focus group
X
X
Survey
(X)
X
3.2.1 Literature reviews
Different literature reviews were performed during the course of this thesis project. The
main and initial literature review was performed in the first phase of the project to gain
knowledge about PSS contracts or similar ones already realized, as well as to collect
information about research performed in this area. This literature review has a broader scope
than the scope of this licentiate thesis, since the focus included not only rail infrastructure
but also road infrastructure, as well as other industry areas where long-term contracts are
used such as the aircraft industry. Since very little has been done in the area of IPSO for rail
infrastructure, it is of great interest to investigate what other areas have learned in terms of
benefits and challenges when implementing IPSO. To keep the focus, the most relevant
material for this particular research was prioritized while the rest was merely skimmed
through (cf. (Yin, 2009)). The search was done in databases and gradually, as relevant
literature was found, the corresponding reference lists were investigated as well. Literature
reviewed included several different kinds of sources: scientific articles, reports, homepages,
masters theses as well as doctoral and licentiate theses. Throughout the process, the
information has been read in a critical way to understand what audience it was written for
and with what purpose in mind (cf. (Yin, 2009)).
22
Initially, keywords were used to narrow down the search to relevant literature. Examples of
keywords used are infrastructure, long-term contracts, IPSO contracts, performance
contracts, Design-Build contracts etc. The aim was to find research focusing on the long-term
aspect, performance aspects and also on larger and complex contracts. No geographical
limits were used when searching for literature; instead, the search included literature from
several continents. To be able to properly use information, it is important to identify its
source and date of the information (Holme & Solvang, 1996). The difficulty in judging the
quality is why some information is not included in this thesis or in the appended articles.
Furthermore, the conditions for some of the contracts were far from the ones found in
Sweden, and therefore not relevant in this study.
The information has, when it was possible, been triangulated using different sources.
However, the information concerning the use of IPSO contracts for rail and road
infrastructure was limited to just a few sources. This could imply that the information was
biased, but most of the information was retrieved from the Swedish National Road and
Transport Research Institute. When the same references started to show up in the search the
literature review was stopped (cf. (Merriam, 1994)). Furthermore, less extensive literature
reviews were performed within the process of writing the appended papers, and thus
focused on the specific scope of the paper.
3.2.1.1 Analyzing the literature
The information was structured by dividing it into examples of IPSO or similar contracting
already realized for rail and road infrastructure, and to benefits and challenges identified for
IPSO in other industry areas. The focus for both the examples and for experiences from other
industry areas was on long-term complex contracts such as for roads, the railway and the
defense industry. Different concepts of contracts have been compared, as well as similarities
and differences between the examples of contracting, using IPSO or parts of the concept. The
differences in the level of detail between the presented examples of projects resulted in them
not being entirely comparable. On the other hand, the comparison is still feasible for most of
the issues and provided an overview of issues for further research. The result and analysis of
the literature provided an outline and a starting point for the interview guide.
3.2.2 Interview study
The interview study was performed from the spring to the fall of 2010 to provide different
perspectives and ideas concerning the research problem.
In this case, the interview guide was based on the results from the literature study and the
initial clarification study. The guide was also validated by the same respondent as in the
clarification study before it was used on other respondents. The interview guide was
developed into two different interview guides, one for the STA and one for the contractors.
The overall questions were the same, but they were angled to better fit the situation of the
respondents. The guides included around 40 overall questions as well as keywords and
23
additional questions to ask if the respondent did not cover all the areas of interest. The
interview guide was not constructed to be followed in a strict manner, but rather as a guide
to keep the interview on the right track and make sure nothing was forgotten The semistructured interview guides, both translated to English, can be found in Appendix 1.
3.2.2.1 Selection of respondents
The choice of respondents was made to get the overall picture of the industry and to gain
knowledge of both the buyer and the providers' perspectives and their interaction. In total,
the results from 14 interviews are included in this thesis. The criteria for the respondent
selection at the STA were to include both representatives from the Investment Division and
the Traffic Division of the organization, as well as to focus on people holding positions at a
managerial level. This was a conscious choice, since an overview of the organization and an
understanding of the strategy and market was preferred to contribute to the research. The
respondents at the STA are presented in Figure 6. Apart from providing information
concerning the research topic, the initial clarification interview also provided potential
respondents within the STA that could be of interest for the interview study. Subsequently,
the respondents themselves suggested others as potential respondents during the course of
the interview study.
Figure 6: a) The respondents from the STA participating in the interview study. b) Illustrates the
organization of the STA with the divisions of the respondents circled. Modified picture,
(Trafikverket/The Swedish Transport Administration, 2010).
A similar approach was used for the respondents at the contracting companies. The
respondents at the STA provided contact information to their contacts within the contractors’
organization. Almost all of the respondents from the contractors’ organizations worked in
the marketing or business divisions of the companies. These respondents provided
knowledge concerning the operations and strategies within their own companies, as well as
information regarding the relationship and interaction with the buyer, the STA. A few
respondents worked in the maintenance area, while others had an overall responsibility,
24
which contributed to the total picture of the contractors’ perspective. The respondents within
the organization of the contractors are presented in Table 3.
Table 3: Respondents from the providing side.
Contractors
Contractor A
Contractor B
Contractor C
Contractor D
Contractor E
Contractor F
Contractor G
Position of the respondent
Regional Business Manager
Marketing Manager
Marketing Division, Tender and Calculations Coordinator
Business Area Manager, Maintenance
Business Area Manager, Maintenance
Design Consultant, Project Manager
Marketing Manager
Within the STA, seven different respondents were interviewed, providing different
perspectives since they work in different divisions as well as hold different positions within
the divisions. Interviews were also performed for the contractors, where most of the contacts
were provided by respondents at the STA. Others were contacted spontaneously to complete
the perspective. All in all, seven contractors were included in the study, two of these socalled construction companies and the rest specific railway contractors. Most of the
respondents worked in managerial positions within the organizations. More detailed
information concerning the respondents is presented in the results. Both phone interviews
and face-to-face interviews were performed, and all were recorded. This is helpful to be able
to focus on the respondent and the dynamic of the interview (Kvale, 1997). The principle of
convergence was used to determined when enough interviews had been performed, namely
when the results indicated that further interviews would not contribute with new
information (cf. (Lekvall & Wahlbin, 2001)). Each interview lasted approximately one hour
and was recorded. To improve the reliability, most of the respondents have been sent the
data from the interview to be able to validate the content and thereby improve the quality of
the data. The interview study was geographically limited to Sweden.
Interviews with additional respondents from different divisions of the STA could have
provided more information, but not necessarily new information. Interviewing those in more
operative positions would have provided more detailed information about operations and
implementation, but at this stage this was not the type of information preferred. After seven
interviews the results were converging, with the respondents highlighting the same areas of
interest, which is why the interviews study was ended. What was really needed was more
in-depth information; this is why the decision to gather a focus group was made.
3.2.2.2 Analysis of the interviews
The interviews were recorded, which made it possible to transcribe them afterwards. This
was not done literally; rather, the content of the interviews was condensed into summaries
focusing on the essence of the information. Some quotes, however, were written down word
25
by word to be used later in the results. A transcription of an interview is a sort of
interpretation done by the person transcribing, and the quality of the information can be
improved by having clear purpose and process for the transcription, as well as by checking
its reliability (Kvale, 1997). The interview guide was used to frame the transcription process
and to ensure the answers for the main questions were retrieved. Furthermore, the
transcription was sent to the respondents to validate the information.
The transcribed information was compiled for each interview and structured in the different
topics of interest. This was done using the concentration approach, were the information is
formulated into shorter, more concise sentences (Kvale, 1997). Advantages and challenges
for the current contracts, and well as for IPSO contracts, were derived and compared. The
comparison was made both within the group of contractors and within the respondents from
the STA, as well between the contractors and the STA. Both the actual factors as well as the
motivation behind them have been studied. The factors were listed, and depending on how
many of the respondents mentioned a specific factor, the factors were seen as more or less
essential. The factors that were indicated by at least two of the respondents were then used
in a survey study to further validate the results.
3.2.3 Survey
The aim of the survey was not so much to retrieve new information, but more to validate the
results from the interview study and to try and make the respondents narrow down the most
important factors in the questionnaire that was sent out to them. This type of sample
selection for a survey can be seen as a "judgment" or "assessment" selection. Such a selection
is common in exploratory studies, and is based on respondents being chosen using certain
criteria (cf. (Lekvall & Wahlbin, 2001)). In this case, the criteria were that the respondents had
participated in the interviews and were well-informed in the area.
The survey was constructed using the Survey Monkey web tool and sent out to the
respondents in May 2011. Using a web tool provides several advantages; the survey can be
easily sent out to the respondents, and the respondents cannot be influenced by upcoming
questions since they are not accessible (Lekvall & Wahlbin, 2001). On the other hand, this
also implies that the respondents do not get an overview of the survey (cf. (Lekvall &
Wahlbin, 2001)). This, however, was solved by stating the number of questions and the
estimated time for completion, which in this case was seven questions and approximately
five minutes, both in the email and in the beginning of the survey. The survey was sent to the
respondents’ email, making it a fast method of distribution. On the other hand, the survey
easily disappeared in the numerous email received by the respondents each day, which is
why a reminder was sent out a week after the first email.
There are several different types of questions to use in a survey; in this case, closed
questions, open-ended questions and scale questions were used (cf. (Bell, 1993)). The survey
began with closed questions, where the respondents were asked to state their name,
organization and position. This means that the respondents were not anonymous and that it
26
was possible to connect the survey results with the interview results. The majority of the
questions, however, were scale questions, where the respondents were asked to grade the
answer on a scale from 1-5, where 1 = strongly disagree and 5 = strongly agree. The
respondents were asked to rank statements derived from the interviews on this scale. The
statements represented challenges for the current practice, benefits and challenges for PSS
contracts. Benefits for the current practice were asked using an open question, since not
enough information concerning this had been retrieved from the interview results.
3.2.3.1 Analysis of the survey
Most of the respondents completed the survey, and the results could therefore be analyzed
and used to validate the information from the interviews. This was realized by determining
that the information was correctly understood and that the actors identified were in fact
important factors. Furthermore, the ranking of the factors is used as an indication of their ingroup relationship. The results are displayed in graphs in this thesis to provide a clear
picture of the ranking.
3.2.4 Group interview
The group interview was conducted in May 2011 at a conference hotel in Stockholm to which
the respondents were invited. The recorded discussion lasted five hours, but the topic was
continuously discussed during coffee breaks and the lunch break. Three of the respondents
from the interview study were invited to participate. Those chosen represented important
areas within the STA: the Business developer for maintenance contracts and the Procurement
Manager for maintenance contracts from the Traffic Division, and a manager from the
Investment Division. The fact that these three respondents participated was a conscious
decision; apart from having knowledge on the topic, they also showed interest in the topic
during the interviews, as well as being outspoken and generous with their ideas and beliefs.
For a group interview, it is important to think through the group constellation as well as to
not include too many respondents (Lekvall & Wahlbin, 2001). Besides the respondents, three
from the research team also participated, mainly as moderators. As stated in the Research
Strategy, the purpose was to trigger a discussion between experts in the area. The value of
this method is that, as a result of the group dynamic, discussions and aspects are generated
that would not appear during individual interviews (Lekvall & Wahlbin, 2001). Even though
this interview was unstructured in nature, there were still set focus areas to frame it.
3.2.4.1 Analysis of the group interview
During the interview, notes were taken at times where important information was discussed.
This facilitated the transcription process and narrowed it down to only those particular parts
of the interview. Having the three respondents present at the same time made this interview
different from the other interviews, since the respondents' intergroup discussion brought the
topic to a deeper level where arguments that had not previously been raised were presented.
The respondents' intergroup dynamic contributed to enriching the information already
27
collected, adding another dimension to the discussion. Additionally, the group interview
was a great way to validate the information and address remaining questions from previous
interviews.
28
4 Summary of contributions to the thesis
The data for this thesis was collected using a literature review, an interview study, a focus
group and a survey, as described in Chapter 3. Some of the data has been presented and
analyzed in the appended papers that are presented in Section 4.1. Other parts of the
information from the data collection have not previously been presented in the papers but
are needed to complement the presentation of the results in Chapter 5-8. Table 2 in Section
3.2 illustrates what data collection methods that have been used to provide results for each of
the research questions.
4.1 Appended papers
This section briefly summarizes the contribution from each of the appended papers as well
as the method employed. Table 4 shows which papers that contributed which one of the
three research questions.
Table 4: Contribution of the appended papers to the research questions. [P1], [P2] and [P4] directly
contribute to answer the research questions, while [P3] indirectly contributes by providing to the
theoretical framework, illustrated with (X).
[P1]
X
RQ1
RQ2
RQ3
[P2]
X
X
[P3]
(X)
(X)
(X)
[P4]
X
X
X
4.2 [P1]: PSS for Rail and Road Infrastructure
Aim
To aim of this paper was to investigate what has been published in the area of Product
Service Systems 2, PSS, and contracts for rail and road infrastructure, as well as to look into
the current state of rail infrastructure procurement. More specifically, the paper answered
the following three research questions:
•
RQ1: What types of contracts are currently used when procuring rail and road
infrastructure?
•
RQ2: To what extent are PSS contracts used for rail and road infrastructure?
•
RQ3: In what way are PSS contracts for rail and road infrastructure documented?
Method
This paper was entirely based on the initial literature study, where several different types of
printed sources were used.
2
Product Service Systems in this paper is equivalent to Integrated Product Service Offerings.
29
Contribution
This paper provided several examples of realized projects for rail and road infrastructure
where contracts with similarities to PSS contracts had been used. Additionally, it was
concluded that the lack of publications, in combination with interest from the industry in the
field, implies that there is a gap in the area where research is needed - both to facilitate the
use of the contracts and to move the research forward.
4.3 [P2]: PSS Contracts for Rail Infrastructure
Aim
To aim of this paper was to investigate what has been realized thus far for rail infrastructure
in the Product Service Systems 3 area and to highlight potential benefits and challenges when
using PSS contracts for rail infrastructure. Furthermore, the aim was to present a model
illustrating traditional contracts and PSS contracts. This resulted in the following research
questions:
•
RQ1: To what extent are PSS contracts used for rail infrastructure?
•
RQ2: What phases are included in a model for traditional contracts and PSS contracts,
when procuring rail infrastructure?
•
RQ3: What possibilities and challenges do actors identify for PSS contracts for rail
infrastructure?
Method
This paper was partly based on the initial literature review, and partly on the interview
study. The literature review served as a framework for the development of the interview
guide.
Contribution
Both benefits and challenges when using PSS contracts for rail infrastructure are discussed.
The potential for optimizing the process and lowering the total cost are highlighted benefits,
while a major concern is the increased risk-taking by the contractors, potentially increasing
the prices and thereby neutralizing the potential cost reduction from the optimization. Other
issues are the type of project suitable for PSS contracts, the length of the contracts and the
conservative culture within the STA.
Furthermore, the paper presents models constructed to illustrate the contracts used today for
procuring rail infrastructure. Models illustrating the composition of PSS contracts for rail
infrastructure are also included. The models clearly show the different phases of the
contracts, and state which actors are responsible for each phase. The models have been
modified partly after input from the focus group where they were presented and discussed.
The updated versions of the models are presented in [P4].
3
Product Service Systems in this paper is equivalent to Integrated Product Service Offerings.
30
It was concluded that further investigation of the reasoning of the respondents was needed,
including the use of a focus group.
4.4 [P3]: Theoretical Environmental Comparison of Integrated Product
Service Offerings vs. Traditional Sales
Aim
The aim of this book chapter was to lead a theoretical discussion regarding which IPSE
factors are expected to increase environmental performance of the product and service lifecycle compared to a traditional product sales business.
Method
The method used was a literature review covering the main relevant factors.
Contribution
This paper compares IPSO and traditional sales from an environmental point of view. The
theoretical discussion points out four aspects that are of importance for the environmental
impact: product development, asymmetry of information, economies of scale and risk. The
four aspects are interlinked with each other, and this connection needs to be further
investigated. Risk was identified as a crucial parameter to consider, and economies of scale
were shown to be an enabler to more effectively control of risk. The paper contributes to the
theoretical framework of the thesis as well as serves as a framework for what needs to be
further investigated in the case of using PSS contracts in the rail infrastructure. This chapter
will be further developed into a journal paper.
4.5 [P4]: Identification of Risks related to Integrated Product Service
Offerings of Rail Infrastructure.
Aim
The aim of this paper is to identify potential risk components when using IPSO for rail
infrastructure, from both the perspective of the provider and buyer. Furthermore, the aim is
to investigate how these risks can be potentially reduced or avoided.
Method
Risk was identified as a key parameter for IPSO and was highlighted as a challenge in [P2],
making risk the first factor to be more deeply investigated. The interview study as well as the
group interview served as empirical input for this paper.
Contribution
This paper identifies potential risk components when using IPSO for rail infrastructure, from
both the perspective of the provider and buyer. The risk factors can be categorized into three
different groups: market risks, contractual risks and organizational risks.
31
32
5 Swedish railway infrastructure in retrospect – a brief summary
A brief summary of the management of the Swedish railway infrastructure is needed to
understand the background of the organization and the current condition of the rail
infrastructure. In this section, the history of railroad technology, from its start in the middle
of the 19th century until the present time, is described.
The history of the Swedish State Railways (Statens Järnvägar), SJ, starts in the middle of the
19th century, when the railroad came to Sweden and was from the start a topic for discussion
concerning financing (Tullberg, 2000). In 1939, the Swedish Government decided that the
entire rail infrastructure should be state-owned and the tracks should be privatized. The
history continues into the 1950s, when the market for the railroad totally changed with the
use of private cars, and when SJ began to prioritize important tracks while cancelling others
(Tullberg, 2000). When a line started to show losses, the investments in the infrastructure
were normally halted (Alexandersson & Hultén, 2008).
During the 1980s, rail traffic increased again due to environmental thinking related to the oil
crisis. However, SJ could not handle this increase, and the result was higher costs for the
organization. This led to a questions about the organization's finances and efficiency, and it
was considered unwieldy, reluctant and incapable of change (Tullberg, 2000). In 1988, SJ was
divided into two parts: the Swedish Rail Administration, responsible for infrastructure, and
a reorganized SJ, in charge of train traffic (Riksrevisonen, 2005). The driving force behind this
was SJ’s recurring problems (Alexandersson & Hultén, 2008). The organization now had
stand-alone business units within the Divisions that had their own profit centers, and
internal service markets were created (Kopicki & Thompson, 1995).
Since 1995, train traffic in Sweden has been open to competition (Tullberg, 2000). Prior to
2001, the construction and maintenance of the infrastructure were only realized by a single
internal organization, Banverket Produktion at the Swedish Rail Administration, but since
then are now procured in competition. Infranord (formerly Banverket Produktion) is still the
dominate actor in the market (Banverket, 2008). In 2008, the Swedish Rail Administration
was responsible for 80% of the total rail system in Sweden (Banverket, 2008). Since 2010, the
organization has been part of a larger administration called the Swedish Transport
Administration, which includes the Swedish Road Administration, the Swedish Maritime
Administration as well as the Swedish Institute for Transport and Communications Analysis
(The Swedish Transport Administration, 2010b).
The split between the rail infrastructure and train traffic functions as well as increased
competition, may have resulted in sub-optimization of the system and loss of economies of
scale (Alexandersson & Hultén, 2008). On the other hand, the reorganization was needed for
several reasons, e.g. to change the managerial focus from production to customer service
(Kopicki & Thompson, 1995). The reorganization of the railways and of the tender system
also put focus on operational cost efficiency (Alexandersson & Hultén, 2008).
33
34
6 Contracting forms currently in use
This section describes the different types of contracts used in Sweden today for construction
and maintenance of rail infrastructure. In addition, the views of the STA and the contractors
are presented. The results presented in this section are from the interview study, the focus
group and the survey unless another reference is stated.
Between 2006 and 2010, the cost for operation and maintenance has increase due to the
deteriorating condition of the infrastructure and simultaneous increase in total traffic
volume. Furthermore, the total maintenance and reinvestment costs corresponded to around
38% of the total investment cost during 2010 (The Swedish Transport Administration, 2010a).
The STA has three types of contracting currently in practice: construction contracts, designbuild contracts and performance contracts, where the last two are recent developments in the
contracting forms to improve the situation. The current procurement process is illustrated in
Figure 7.
Figure 7: The current procurement process. (The Swedish Transport Administration, 2010b)
The STA is divided into two divisions, where the Investment Division participates in the
Design and Construction phase, while the Traffic Division is involved in the Operations and
Maintenance contracts. The contractors formulate tenders based on detailed specifications
provided by the STA, and the procurement of the construction and the subsequent
operations and maintenance are done independently. When a maintenance contract ends, a
new procurement process is initiated for a new maintenance contract until a reinvestment is
needed to improve the standard of the facility.
In traditional contracting, the life-cycle of the rail infrastructure is divided into several
different contracts, with different actors involved in each phase. There is no continuation
between building and maintaining, since these are separate contracts and there could also be
separate contractors who win the contracts. However, the contractor that is in charge of
maintaining a section is likely to keep maintaining it, since this organization already is
established in the area and therefore can offer a lower price than its competitors.
35
6.1 Construction contracts
Construction contracts, or Design-Bid-Build contracts, where the procurer specifies what,
how and how much, are the most common contracts within the infrastructure construction
industry in Sweden (Nilsson & Pyddoke, 2007; Nilsson et al., 2006b). In fact, 87% of all
projects with new rail infrastructure were realized as construction contracts during 2010
(Olander et al., 2010). Typically, the scope of the projects and the detailed design
specifications are realized by consultants on behalf of the STA, and the contractor is obliged
to realize the project within the set time, price and standard level (Pakkala, 2002). The choice
of tender is mainly based on the lowest price (Hedström et al., 2005). Construction contracts
imply that the procurer carries all the risk, and a maximum roof for the price is set which
does not create any incentives for the contractors to make the processes more efficient;
instead, they benefit from reaching the maximum sum (Nilsson et al., 2005). Figure 8
presents a schematic diagram of the construction contract. The shaded part of the figure
shows the maintenance contracts and is described in Section 6.2. The Design phase is
estimated to take around three months and the Construction phase between half a year and
three years, depending on the project.
RESPONSIBLE
STA/
Contractor
STA
Planning
Design
Procurement
Construction
Procurement
STA
Consultant
STA
Contractor
STA
Operations &
Maintenance
Contractor
EXECUTOR
Figure 8: A schematic diagram illustrating the construction contracts. The shaded part of the figure
shows the maintenance contracts that are described in Section 6.2. Modified figure from [P2],
(Lingegård, 2011).
6.2 Maintenance contracts
Since 2005, performance contracts have been used for maintenance in Sweden, meaning that
the STA procures a set functionality of the track and the contractor decides appropriate
measures to take while still considering maintenance regulations (Banverket Produktion,
2009; Riksrevisonen, 2010). Performance contracts are similar to Design-Build contracts in
that the contractor is responsible for parts of the detailed design. The function, however, is
set on a detailed level, and is far from an overall function. Examples of functional
requirements (Banverket, 2009):
36
“The snow depth at the railway yards (…) is not to exceed 200 mm over the top edge of the
sleepers.”
“Clearing of snow around gears (…) on the railway yards is to be executed regardless of
snow depth so that full function can be achieved.”
Table 5 presents the content of a performance contract in greater detail.
Table 5: The content of the performance contract. (Banverket, 2009).
Performance contracts
Maintenance
Operations
Winter-related services
Slipperiness caused by
leaves
Property maintenance
Corrective
Execution of inspection
comments
Error recovery
Preventive
Inspections
Work with signal system,
railways yards, tracks etc.
Damages, accidents and crimes
The length of a performance contracts is five years, with an additional two-year option that
usually falls out, and with bonuses and penalties used as a control mechanism. Several
maintenance contracts are procured after each other during the life-cycle of the facility.
Figure 9 illustrates a schematic model of maintenance contracts where the repetition of
contracts is shown. Additionally, during the lifetime of the infrastructure reinvestments are
needed, but they are not shown in this figure. The difference between maintenance and
reinvestment is different cost levels.
Figure 9: A schematic diagram illustrating the maintenance contracts. The shaded part to the left in
the figure illustrates the construction contract for the facility that was described in Section 6.1.
Another type of building contract, described in Section 6.3 below, is also a possibility. Modified
figure from [P2], (Lingegård, 2011).
37
6.3 Design-Build contracts
A newer type of contracting for building rail infrastructure is the Design-Build contract,
where the contractor is responsible for both the more detailed design phase as well as the
construction phase (Nilsson, 2009b). This provides an opportunity for the contractor to
influence the construction. In Sweden, Design-Build contracts have not been used for more
than a few years, and during 2010 only 13% of the building contracts for railway were
Design-Build contracts (Olander et al., 2010). Figure 10 presents a model of the Design-Build
contract. The STA has the overall responsibility until the construction phase, where it is
shared with the contractor that is in charge of the detailed design. The overall design has
already been determined by the STA with the help of design consultants, and performance
requirements are set for the technical standards, but the way in which these requirements are
met is the contractor's choice.
RESPONSIBLE
STA/
Contractor
STA
Planning
Design
Procurement
Construction
STA
Consultant
STA
Contractor
EXECUTOR
Figure 10: Schematic diagram illustrating the Design-Build contract. Figure based on data from the
interviews.
6.4 The actor's perspective of current practice
Traditional contracting, and specifically construction contracting, has several advantages
such as being a familiar business model which all actors can relate to and calculate. The STA
also emphasizes the fact that they know what they get, since the contract has been specified
all the way to its end. Furthermore, the contractors are also restricted to buy all the material
from the STA. A quote from one of the respondents at the STA explains the current situation:
”Not only do we write the recipes; we give them the ingredients too!”
Top manager, STA
When the contractors and the STA were asked to state benefits with the current contracting
forms, the majority were positive to the newer type of contracts, Design-Build and
performance, where the responsibility of the contractor is greater. On the other hand, the
disadvantages and challenges with the traditional form of contracting, especially
38
construction contracts, are several, with the most essential presented in Figure 11. The STA
and the contractors were asked to rank how well the statements, derived from the
interviews, reflect their view of the industry. For the STA, 7/7 respondents answered this
question, while the number for the contractors was 6/7. This survey serves as a validation for
the interviews as well as an indication of the importance of each factor. The values represent
the average of the respondents’ rankings.
Resource-demanding work processes
Unequal market distribution
Micro-managed work process
Little/No room for development
High penalties and low bonuses
2,0
2,5
3,0
3,5
4,0
4,5
High penalties and low bonuses
Micro-managed work process
Little/No room for development
Resource-demanding work processes
Unequal market distribution
2,0
2,5
3,0
3,5
4,0
4,5
5,0
Figure 11: The upper graph illustrates the contractors’ view of the challenges and problems with
the current contracting situation and the lower graph illustrates the STA’s view. On the scale
1=strongly disagree, 5 =strongly agree.
The current procurement practice is seen as resource-demanding from both sides. As one of
the contractors expressed it, “every step has to be controlled by the STA which is resourcedemanding, especially for an industry that has a shortage of resources in labor”. The STA agrees that
the system as it works today is inefficient. An example is the design results that are delivered
by consultants that are not optimal for actual building; the phrase “paper solution” was
mentioned during the interview. These quality issues are noticed by the contractor during
the building phase, and result in lost time and money when the design has to be taken back
to the drawing table.
Most of the critique is aimed at the construction contracts, where the actors feel that the
contractors are not involved early enough in the process to make a difference. On the other
39
hand, the contractors are participating in the newer Design-Build contracts as early as in the
design phase. However, during the interviews it was revealed that sometimes these contracts
end up looking a lot like construction contracts due to the STA, which interferes in the
contractor's work. It is similar for the maintenance contracts based on performance where the
function is in construction technicalities, since the stretch, design and appearance are already
set. It is said that old habits are hard to break, and that the STA is a very technically-oriented
organization and always has controlled the technical details. The respondents of the STA are
well aware of the fact that there is little room for creativity for the contractors; in fact, one of
them expressed it as follows:
”What creative dishes come out of only following recipes in detail?”
Top Manger, STA
Furthermore, the incentive structure was discussed and the contractors feel that the bonuses
are just for show, while the penalties are disproportionately larger. Another disproportionate
area is the market distribution, with one larger actor dominating. This actor is Infranord, the
former in-house contractor at the STA before the deregulation in 1999.
40
7 IPSO contracts for rail infrastructure
This section will focus on IPSO contracts for rail infrastructure, starting with the presentation
of a schematic model for the contracts. Then, the perspectives of the STA and the contractors
concerning IPSO are described and categorized according to benefits and challenges. The
results presented in this section are from the interview study, the focus group and the survey
unless another reference is stated.
7.1 Modeling an IPSO contract
An IPSO contract can be described as a Design-Build contract with a long-term maintenance
commitment, where both the design concerning the construction and the maintenance are
taken into account and integrated in the initial design phase. In this case, the functional
requirements are on a higher level than for the Design-Build and performance contracts
currently used for maintenance. An IPSO contract includes design and construction as well
as operations and maintenance, as illustrated in Figure 12. The STA procures a function and
does not specify in detail how the contractor should realize it, e.g. “build a railway from A to
B with C capacity and maintain it for X years. After the contract period the railway should
have Y required capacity.” According to the respondents, the initial planning of the stretch
and the environmental evaluations would still be performed by the STA. This is because the
phase includes e.g. redemption of house and environmental impact assessments that can
make or break the approval and realization of the project, which is not a risk the contractors
are willing to take. The design of the construction and the maintenance, however, is the
responsibility of the contractor. The design and construction phases in the IPSO contract
depend on the scale of the project, while the operations and maintenance phase is estimated
by the actors to run between 10-45 years.
RESPONSIBLE
STA
STA/
Contractor
Procurement
Planning
STA
STA/
Contractor
Contractor
Design
Construction
Consultant/Contractor
Operations & Maintenance
Contractor
EXECUTOR
Figure 12: Schematic figure illustrating an IPSO contract for rail infrastructure. Modified figure
from [P2], (Lingegård, 2011)
41
7.1.1 The Arlanda airport shuttle – an IPSO contract?
The information concerning the Arlanda airport shuttle contract has been retrieved from the
interview with Arlandabanan Infrastructure AB. There is currently only one contract in
Sweden using the concept of a long-term performance contract, and that is the one for the
airport shuttle between Stockholm and Arlanda airport. The contract was formulated as a
functional contract where the buyer asked for a specific result, namely “an airport shuttle to
Arlanda with connection to the north”. The design was not specified, but the travel time was
set at 20 minutes and the speed at 200 km/h. In this case, the train traffic was part of the
contract. The project was also partly financed by a private party. The consortium that won
the bidding consisted of several larger construction companies, including a train producer.
The result to this constellation was that the construction companies sold their shares in the
project when the building phase was completed. This means that they only had a 5-year
perspective, and that the new owners are now more focused on the maintenance. There were
no companies with a maintenance focus in the consortium, and no actor with the overall
responsibility. The construction and the maintenance of the infrastructure are two separate
contracts lacking continuity and incentives to lower the cost and increase the efficiency of
material use over the life-cycle of the infrastructure. Therefore, while this is not an example
of an IPSO contract, it can be seen as a step in that direction.
7.2 Benefits and advantages of IPSO contracts
The factors that were emphasized the most during the interviews, and that were mentioned
by more than one respondent among the contractors and the STA respondents, were
transferred to a survey study. Figures 13 and 14 present the results. Among the contractors,
4/7 answered this question, while 5/7 of the respondents at the STA answered it. The values
represent the average of the respondents’ estimates and serve as an indication for the
importance of the statements. This section presents an overview of the general perspectives
of the STA and the contractors, and does not go into detail concerning the opinions of the
specific contractors and employees of the STA.
7.2.1 The view of the contractors
According to the contractors, extended responsibility compared to today is required for
development, but the positive outcomes of the IPSO contract would not come overnight but
can be viewed as a long-term drive for development. The increased responsibility would
start a thinking process, one that does not exist if you only follow a specification, and making
use of the knowledge within the organization. It was pointed out that the contractor would
have to start thinking about where in the life-cycle you could make money and how. One
suggestion was that the contractors could buy the material themselves, and this could then
be used as a factor for competition. One of the contractors claimed that everything lasts for
five years, but with longer contracts they would be more thorough. It would be more
interesting for a contractor to use solutions that lower the operations and maintenance costs.
42
This could be done with solutions that are more durable and do not require many measures.
It was stated that this would probably increase the lifetime of products. This was the opinion
of most of the contractors, but one of the respondents did not see the incentives of building
better if the maintenance also was included in the contract, and stated that IPSO contract
would not make a difference in quality.
From an organizational perspective, the benefits would be a smoother transition between the
construction and the maintenance phase of the projects, as the knowledge is already within
the organization of the contractor. Furthermore, this knowledge could be used to discuss
solutions in the organization, and ensure that no one takes shortcuts, since the contractor is
responsible for the entire project. Additionally, a long-term contract would provide longterm planning, making it easier to make investments due to the longer payback time. Finally,
it was said that this could lead to it no longer being the lowest price that wins the bidding,
but the proposal with the best solution.
Coordination synergies in the bidding process.
Possibility to compete in purchasing and material
supply management.
Provide better/more durable technical solutions.
Result in a lower total cost.
Provide a holistic perspective over the life cycle.
More creative way to work.
2,0
2,5
3,0
3,5
4,0
4,5
5,0
Figure 13: The contractors’ perspective concerning benefits and advantages for PSS contracts for
rail infrastructure. On the scale 1=strongly disagree, 5 =strongly agree.
7.2.2 The view of the STA
The STA respondents think that the IPSO contract would provide more thought through
construction in terms of maintenance. The holistic view would make the contractors adopt a
life-cycle perspective and consider the life-cycle costs of the infrastructure. The contracts
would spur innovation development in the industry, since sufficiently skilled contractors
would realize solutions providing a lower cost, which would result in a competitive
advantage. This would be a driver for the whole industry to be innovative, but the
development would start with small steps.
In general, the STA believes that the contractor would build more durably if they knew they
were to maintain the infrastructure for a longer period as well. Some of the respondents also
believe that the contractors would probably control the design consultants in a better way
43
than the STA, which would save both time and energy compared with the current situation.
Even though the opinion was that these types of contracts would narrow down the possible
number of national contractors due to the size of the projects, the international contractor
would probably be interested in these types of projects due to their size.
The contractors have the potential of control the design
consultants better than the STA.
Attracts international contractors.
Result in a lower total cost.
Provide a holistic perspective over the life cycle.
Provide innovation to the industry.
Different philosophy among the contractors leading to
more durable solutions.
2
2,5
3
3,5
4
4,5
5
Figure 14: The STA’s perspective concerning benefits and advantages of PSS contracts for rail
infrastructure. On the scale 1=strongly disagree, 5 =strongly agree.
7.3 Challenges for IPSO contracts
Similar to the previous section concerning benefits and advantages, the factors that were
mentioned by more than one of the respondents, among the contractors and the STA, were
transferred to the survey study. The results from this study are presented in Figures 15 and
16. Among the contractors, 6/7 answered this question while 5/7 of the respondents at the
STA answered. The values represent the average of the respondents’ estimates and serve as
an indication of the importance of the statements. The more detailed explanation of the
challenges in this section presents an overview of the general perspectives of the STA and
the contractors, and does not go into detail concerning the opinions of the specific
contractors and employees of the STA.
7.3.1 The view of the contractors
The contractors identified several challenges that can be narrowed down into challenges
related to the contract, the market and the organization. The different challenges are
presented in Figure 15.
44
Risk for higher total cost due to larger risk-taking for the contractors
Problematic for reinvestments
Which company will be the PSS provider, general och technical …
A supporting corporate group is required for the contractor
Risk for locking the market long-term
Design competence within the contractors' organizations
Longer and more expensive procurement process
Difficult to measure quality
The contractors will take greater risks
Continuity of the contracts is required
Transparency between the contractors and the STA
Requires large enough projects for financial turnover
Risk-sharing between the STA and the contractors
Requires a new way of thinking for the STA
STA's competence to evaluate the tenders
2,0
2,5
3,0
3,5
4,0
4,5
5,0
Figure 15: The contractors’ perspective of challenges using IPSO contracts for rail infrastructure.
On the scale 1=strongly disagree and 5=strongly agree.
7.3.1.1 Contractual challenges
The way in which the risk would be shared with the IPSO contracts was one of the main
concerns the contractors had, even though there were different opinions concerning how big
of a challenge the increased risk taking was. They all agreed that the risks have to be
calculable, and that not all the risk could be transferred to the contractors. The IPSO contract
would give the contractors more risk, but some of them also identified more opportunity,
and as long as these two factors were in balance it would not be a problem. One contractor
said that there are regulations that handle risk, but the more risk the contractor takes, the
more it will cost for the buyer, and several contractors did not think the STA realized this.
On the other hand, it was believed by others that the total cost would be lower, since the
price would be kept down by the competition. Furthermore, risk was pointed out as
something that is difficult to price since it had not been done before. The pricing would be
done depending on the method that was chosen, but it was also indicated by one of the
contractors that a very risky method would not be chosen for a long-term contract. Renegotiations during the course of the contract period were mentioned as a way to reduce the
uncertainties.
The length of the contracts was another major issue. The longer the contracts are, the more
durable the construction must be. If the contracts are too long, however, it will be difficult to
calculate and there will be a charge for the risk, making it more expensive for the
community, and that is not the point with this type of contract. Another challenge is the
45
content of the contract in terms of limits. Since the rail infrastructure is a system, it would be
difficult to measure the function or capacity of a single contract, since it depends on the
conditions of the contracts surrounding it. Another question raised was the starting point of
the contractor’s involvement. The contractors believed that more transparency would be
necessary as well as common goals for this type of contract to work. Another limit is the
volume of the projects, which need to be large enough to be profitable for the contractor that
needs to make investments to maintain the railway. If the project is not large enough, there is
a risk that the contractor will outsource the maintenance to a contractor that is in charge of
the surrounding maintenance contracts.
The functional requirements result in difficulties in measuring and evaluating the contract.
The contractors emphasized the need for factors that are measurable and factors that the
contractor can influence. This also included a set residual value that is measureable.
Additionally, how would the benefits for society be measured? The functional requirements
for an IPSO would make it difficult to set a price on the contract. The clearer and more
straightforward a contract is, the more bids will be received. The reason that the performance
contracts for maintenance receive few bids today is because the contractors will not start
calculating an offer unless they are, according to one contractor, 80-90% sure of winning the
contract. The fact that it will require more time and effort for calculating the IPSO offerings
will make them more expensive.
7.3.1.2 Market-related challenges
The contracts have to be large enough as described above, but on the other hand the
contractors also are concerned that too many larger contracts would result in a locking of the
market, leaving some contractors outside for years. This would then decrease the
competition. Some contractors point out that the market is not working today anyway, due
to a monopoly situation for enjoyed by one contractor.
The contractors believe that IPSO contracts would only work for new investments, since
there is a need for information concerning reinvestments that does not exist today.
Documentation of rail facilities in Sweden is described as inadequate by some contractors.
This could potentially be solved by having some parts of the facility, such as changes of
switches, outside the contracts due to their hight cost.
7.3.1.3 Organizational challenges
The IPSO contract is complex, and none of the contractors think they can handle all the parts
within their own organization. They believe that companies will join forces, but the interface
between them was identified as a difficulty. One contractor has to take the overall
responsibility for the IPSO contract. Most of the contractors agreed that the technical
contractors specified on railway projects could affect the capacity of the infrastructure the
most, and it would be the most natural for those types of companies to have the main
responsibility. On the other hand, it was said that they lack the required financial strength
46
and project management experience. Therefore, it would be more logical if the general
contractors had the IPSO responsibility. The long-term survival of the contractors was also
mentioned, and the technical contractor did not believe that long-term resources would be a
problem if they had the responsibility, but it would be a different story for the general
contractors that would be dependent on the technical resources from outside their
organizations. Another issue related to the long-term perspective was that the interest within
the contractors’ organization might disappear during the course of the contract, since the
same people are not working in the organization during the entire period. This also relates to
the continuity of IPSO projects that is needed on the market to maintain the competence
within the organizations. One of the contractors mentioned that the offering would probably
not be immediately cheaper, since it takes time to learn.
Currently, the contractors do not have design competence within their organizations. One
problem that was mentioned was that the same consultants would be used by the contractors
as the STA uses today, and therefore it would not generate a new way of thinking. The
contractor would, on the other hand, control the consultants more than the STA. Some
contractors stated that they would have a competence base in-house; another contractor took
it further and said they needed their own development division to achieve real innovative
solutions. Others argued that all the competence does not have to be in-house, but that
enough is needed to master the technology and understand the process and production. It is
important to know what is bought from subcontractors. A few contractors stated that they
have been prepared for this type of contract through their international corporate group.
There are different opinions among the contractors concerning the competence and readiness
of the STA. The IPSO contract is another business model and requires a new way of thinking;
this part was seen as the most difficult for the STA. Most of the contractors do not believe
that the STA is prepared for the life-cycle price of the contracts, and doubt the organization
can evaluate the bids. Some contractors were milder in their judgment, saying that the STA
has the competence but the different divisions need to communicate and interact more,
which would be a huge adjustment. The STA is described as conservative, which could result
in the STA trying to control the contracts, in turn causing problems with responsibility and
risk-taking.
7.3.2 The view of the STA
Similar to the contractors, the respondents at the STA also indicated a number of challenges
that can be categorized into challenges related to the contract, the market and the
organization. The challenges for IPSO contracts are illustrated in Figure 16.
47
Would only work for larger projects
Problems measuring the residual value
Longer and more expensive procurement process
Could result in weaker competition
Both general and technical contractor are required
Contract length
Issues regarding the interface between different contracts
Problematic for reinvestments
STA's competence to evaluate the tenders
Risk for higher total cost due to larger risk-taking for the
contractors
Difficulty setting functional requirements
Problematic material and spare part handling if standard material
is not used
Requires increased cooperation between the divisions at the STA
2
2,5
3
3,5
4
4,5
5
Figure 16: The STA’s perspective on challenges in using IPSO contracts for rail infrastructure. On
the scale 1=strongly disagree and 5=strongly agree.
7.3.2.1 Contractual challenges
The respondents agree that the partner with the best ability to affect the risk should be the
one with the responsibility for it. For the IPSO contracts, the contractors would take all the
responsibility and thereby more risk, which they might compensate for with a higher price.
According to the STA, this increased risk-taking will have to be compensated for by
intelligent solutions. On the other hand, most of the respondents believe that there is a risk
for a higher total cost when the contractors take the overall responsibility. In general,
incentives are seen as better to use than penalties to achieve quality, but some believe that
penalties give the contractor a reason to maintain a high standard of work. A payment plan
where the contractor receives a sum for maintenance, but where a reduction is made every
time maintenance work is performed, was mentioned as a way to regulate the payment to
the contractors.
The length of an IPSO contract was an issue that all the respondents indicated as important,
but at the same time difficult to decide. It has to be long enough so that the contractor is
forced to take the consequences in the maintenance phase for choices made during the
design and construction phases. In addition, it has to be long enough for the contractor to be
able to make investments and build an organization around the project. Some respondents
think that the contracts should last the entire economic lifetime of the infrastructure, but also
add that this might not be possible since it would be too long. Concerns of excessively long
contracts were mentioned, since the respondents feel that there is a risk that the parties will
become tired of each other or that the contractor will stall in the work procedures.
48
The procurement process was thought to be longer, since it would take more time for the
contractors to calculate, and because the time for the STA to evaluate the tenders would
increase. Furthermore, they believed that the procurement process would be more expensive,
but that this would be somewhat compensated for by less frequent procurements. The
evaluation of both tenders and the actual projects themselves were seen as a major problem.
Also mentioned was the difficulty in evaluating a long-term contract, because it takes many
years to get the overall picture. In addition, the complexity of defining functional
requirements for the contracts, setting appropriate measures as well as measuring the
residual value of the infrastructure will be challenging.
A related topic was the interface between two IPSO contracts, since some parts such as the
contact line cables have a considerably longer stretch than the tracks. If the power needs to
be closed down at one part that belongs to Contract A, this could affect the performance of
Contract B. This issue would have to be considered for reinvestment contracts where the
infrastructure already exists.
Currently, the STA is responsible for all the material handling and purchasing, and concerns
were raised concerning the fact that the contractors could choose to use non-standard
material in their investments. This would then cause problems with the spare part handling
if the STA was still to be responsible for this part. Some of the STA respondents foresaw
problems if the contractors themselves would be in charge of the material handling. Nonstandard material would be expensive to store, and when the long-term contract ends the
responsibility for the maintenance and the spare parts once again would be the responsibility
of the STA. If the contracts were as long as the lifetime of the material this would not be a
problem, but different materials have different lifetimes, and it would be difficult to find the
point in time where it would be most efficient to end the contract.
7.3.2.2 Market-related challenges
According to the respondents, IPSO contracts are mostly feasible for larger, new
investments. They state two reasons for this. First, the contracts have to be large enough to be
economically beneficial to build an organization around it and to make investments. Second,
documentation is lacking for the older infrastructure, resulting in too many uncertainties
concerning the condition of the material and components.
Another market-related aspect is the competition in the Swedish rail infrastructure industry,
which is already low. An IPSO project is a large project and thus requires a large contractor,
which according to the STA would exclude the smaller organizations. Furthermore, one
contractor could not realize this type of contract by itself; there is a need for both a general
contractor making the foundation and a technical contractor building the actual rail
infrastructure and performing the maintenance. The question is which one should be the
IPSO contractor. The respondents feel that it would be logical if the technical contractor had
the overall responsibility, since that is where the technical competence is located. On the
other hand, these companies are in general too small, and a larger general contractor is better
49
suited to lead such a project. Even though the number of national contractors that would
leave tenders for an IPSO contract would be reduced, the respondents think that the number
of international contractors would increase, since an IPSO contract is large enough for them
to invest in Sweden.
7.3.2.3 Organizational challenges
The Investment Division and the Traffic Division at the STA are two organizations that have
little integration and very different ways of thinking. While the Investment Division has a
project-oriented work form that follows an investment project, the work of the Traffic
Division follows yearly cycles, i.e. fall-winter-spring-summer. Connecting these two
divisions will not be done without friction, according to some respondents within the STA.
Furthermore, the respondents describe the STA as a technically-oriented organization with a
business culture where the employees, in general, are very interested in all the technical
details of the contracts. This fits perfectly with the construction contracts but another
approach, where the contractors take the responsibility, needs to be adopted to work with
IPSO contracts. The respondents describe this change as a hurdle the STA must pass.
Competence is another area that was mentioned, and some stated that having people bound
to long-term contracts would result in a lack of competence in an industry that already has a
shortage of competence in some areas. According to the respondents, more competence in
calculation and risk management is needed within the contractors’ organization. Concerning
the competence within the STA, the respondents seem to agree that most of it already exists
and that the major challenge is to coordinate it, e.g. the cooperation between the Investment
and Traffic Divisions. The importance of improving documentation, however, is
emphasized. This is needed since the people procuring an IPSO will not be there during the
entire course of the contract.
An additional organizational concern is the relationship with the contractors. Another type
of relationship is needed that is built on more trust than found in the current relationship.
This is needed since the contractors will take over much of the responsibility that the STA
has today, and the STA will have to take a step back. According to several of the
respondents, however, this will be difficult due to the business culture at the STA. Despite
less control from the STA, the respondents still feel that some type of follow-up is needed,
since everything cannot be assigned to the legal framework and the regulations.
50
8 Risk factors identified for using PSS for rail infrastructure
Table 6 presents the risks and uncertainties structured in three categories: market risks,
contractual risks and organizational risks. A more detailed presentation of this table and the
risks can be found in [P4] in Appendix 5. The factors in the table have all been presented in
Chapter 7, with the exception of pricing. When discussing pricing of these contracts, the
respondents seem to prefer one fixed and one adjustable part. It is the contractors in
particular that prefer an adjustable part as a way to decrease risk-taking, e.g. if and when
traffic volumes change. The STA, on the other hand, is of the opinion that if a contractor has
the overall responsibility for the project, the price should be as fixed as possible.
Table 6: Summary of the factors causing uncertainty and risk for the potential use of IPSO
contracts. [P4].
Market risks
Contractual risks
Organizational risks
Decreased competition
• Decrease in nr of contractors
• Market readiness for IPSO
contracts
Contracts content
• Suitable projects
• Material and spare part
handling
Supply chain disruption
• Long-term survival of
contractors and
subcontractors
Contract length
• Payback time vs. risk taking
• Uncertainties
The STA corporate culture
• Conservative
• Divided into two separate
divisions
• Lacking long-term
perspective for procurement
• Shortcomings in
documentation
Risk-sharing
• No references for calculations
• Inexperience
Trust
• Risk-sharing
• Transparency
Pricing
• Fixed vs. adjustable price
• Risk for higher prices
Competence
• STA’s capability to judge the
tenders
• Contractors’ design and
project management
competence
Market lock-up
• Geographical region locked
for a longer period of time
Evaluation
• Long-term
• Concretize functionality
51
52
9 Discussion
In this section, the results are discussed and analyzed. First, the current way for procuring
rail infrastructure is discussed, followed by the discussion concerning IPSO for rail
infrastructure. This part starts by discussing the benefits with this type of contract from the
perspective of both the buyer and providers. Thereafter, the challenges, including risks and
uncertainties, are discussed from the same perspectives.
9.1 The current situation rail infrastructure procurement
The traditional construction contracts have advantages such as being a familiar business
model that is straightforward to calculate for the contractors. This is in line with previous
research that states that an advantage with construction contracts is that the distinct roles of
the buyer and the contractors are clear (Pakkala, 2002). The STA argues that one of the
advantages with the construction contracts is that they know exactly what will be built. On
the other hand the STA does not get more than asked for since the contractor only are paid to
follow the specifications. Detailed specifications do not optimize the innovation since
innovation typically comes through the contractor or supplier network (Pakkala, 2002).
9.1.1 Technological lock-in and lack of information transfer
In the rail infrastructure industry a dominant design for contracts has reached
standardization. The focus is on costs and the winning bids are often the ones with the
lowest price. The focus in the standardization phase of a technology cycle should also be on
efficiency (Schilling & Esmundo, 2009). However, in this case the actors claim the contracting
form and the way the work is realized is inefficient and time consuming. This implies that
the dominant standard set in the industry might not be the optimal for the work that needs
to be executed, however the actors have invested a lot in this work practice (cf. (Ahmed &
Shepard, 2010)). The STA states that the solutions suggested by the design consultants are
not always feasible for to build. This is not realized until the contractors, that have more
operative knowledge about the technology than the consultants do, discover the
shortcomings. The construction process then has to be stopped while the design is re-worked
wasting time and money while the project is delayed. The contractors have from previous
projects gained knowledge of construction but this knowledge is not transferred to the
design consultants, this is a type of information asymmetry (cf. (Lingegård et al., 2011)) that
will be further discussed below. This can be compared to the design paradox, Figure 1,
where product knowledge increases with time in the product life-cycle and modification
costs increases. This is an example of the cost overruns that are usual for this type of
contracting (cf. (Pakkala, 2002)). The customer, the STA, sets the market regulations and the
organization has a conservative culture where the willingness to change sometimes is low,
which in itself can lead to inefficiency (cf. (Ahmed & Shepard, 2010)).
53
Currently the only actor that has the overall view and responsibility of a railway facility is
the STA, see Figure 8-10. This means that the STA is the actor that should hold information
concerning the condition of the rail infrastructure. However, the information that exists
today lacks details and is not complete since there are no incentives for the contractors to
deliver this information. This results in that knowledge gained by one contractor during one
contract, is not collected and used as input for the next contract. This can be illustrated by
Figure 1 where the product knowledge increases during the life-cycle of the product but in
this case this information is not transferred back meaning that the next product life-cycle
start with the same information level as the previous one. There is no information transfer
between e.g. the maintenance contracts since there are no incentives to do so due to the
short-term contract lacking in continuity along the lifetime of the facility. This is caused by
the breakdown of the life-cycle into several different contract, Figure 9. This causes an
information asymmetry between the contractors and the buyer, cf. [P3]. There is however a
possibility that the same contractor wins the subsequent contract since this organization has
learnt and therefore can provide a more efficient, and cheaper, bid than its competitors. For
the building contracts, Figure 8 and 10, it is the same story. The gained knowledge is not
transferred back to the STA and the design consultants when they design new projects.
Information gained during the life-cycle of the facility is not used by the STA and the design
consultants in the next design phase and therefore not increases the product knowledge,
Figure 1. This information could potentially result in efficiency gains and technical
development, since it is in the design phase the major decisions are taken e.g. about the
resource efficiency (cf. (Lewis & Gertsakis, 2001)). The technology and design is locked for
the whole life-cycle of the facility, when it has been realized but there is on the other hand
room for incremental innovation (cf. (Christensen, 2000). This will however only be possible
if the information concerning failures and possible improvements is transferred back to the
STA to be incorporated into the design. The same standards are chosen repeatedly since
there are no feedback loops bringing back information that challenges the current technology
and standards. This is an example of how the existing structures such as behavior patterns
and work practice are enabling and reinforcing the existing technology, (cf. (Perkins, 2003)).
9.1.2 Conservative culture
Little or no interest are shown by the STA for other methods than those specified (Stenbeck,
2004). Even though the construction contracts are most frequently used there are changes in
the industry. There is a development taking place towards more life-cycle thinking and
functional requirements (Arnek et al., 2007). The Design-Build contracts are a step in this
direction. For these contracts the distinct roles for the actors have been an issue and the STA
has interfered more than what was initially decided. This has sometimes made the DesignBuild contracts similar to the construction contract. Despite this the contractors are positive
even though they find Design-Build contracts more difficult to calculate. A significant
cultural change is needed to change from an in-house organization to a client-based
organization and it is not an easy process (cf. (Pakkala, 2002))
54
9.2 Potential benefits and challenges regarding IPSO for rail infrastructure
IPSO contracts are not an updated version of the old in-house monopoly that the STA
previously had on the Swedish rail infrastructure market. The principal of IPSO is that one
provider has the overall responsibility of the design, construction and maintenance (Lindahl,
2006). Even though SJ had the overall responsibility before the market was exposed to
competition this was not a form of IPSO since the divisions were structured as their own
profit centers and an internal market was created (Kopicki & Thompson, 1995). The different
parts of the organization cared more about their internal finances than the overall project,
which created sub-optimization. Additionally, even though an internal market was created,
there was only one part that constructed the infrastructure and one that maintained it. Thus,
there was no competition that could provide incentives for quality improvement or
innovation.
9.2.1 Increased value and cost reduction
The rail infrastructure market operates within the laws and regulations of public
procurement, which adds certain conditions and a different context to the buyer-provider
perspective of IPSO. Hence, the provider in this case cannot change the business model and
initiate an IPSO in a way of generating growth and continuous revenue streams (Brady et al.,
2005a; Mont, 2002). A more durable railway for a lower life-cycle price would be an
increased value for the STA and thereby the society in the form of reduced costs for the
railway infrastructure. The costs for the railway are increasing and the STA has an
outspoken strategy to improve cost efficiency (Banverket Produktion, 2009; Trafikverket,
2011). From the examples of IPSO contracts illustrated in Section 2.8 state that the lowest cost
possible and cost control for the customer are key aspects for the business model (Baines et
al., 2007; Kowalkowski, 2008; Sundin & Bras, 2005). The contractors hope that IPSO contracts
would make the STA focus less on the initial purchasing price, as they do today, and more
on the quality and the best solution for the facility by adopting a life-cycle perspective when
evaluating the price. Increased customer value is one of the main benefits for the IPSO
business model (Brady et al., 2005a).
9.2.2 Developing a more durable railway
The material use from rail infrastructure has a large environmental impact (Svensson, 2006).
An IPSO with a fixed price could provide incentives for minimum input and maximum
utilization of the elements in the offering (Meier et al., 2010). This is in line with theories of
how dematerialization can reduce environmental impact (Mont, 2000; Öhlund, 2003). The
life-cycle perspective was mentioned as an improvement from the current situation. The
contractors stated that knowing that they were going to maintain the facility themselves
would result in more durable infrastructure since they have the possibility to balance the
construction cost to the maintenance cost, which is in line with previous research on
infrastructure project (Pakkala, 2002; White et al., 1999). The contractors believe that they can
55
be more creative and thereby affect the rest of the life-cycle if they are involved in the design
phase, as illustrated in Figure 1 where freedom of action is decreasing with time.
Additionally, to decrease the environmental impacts from the facilities environmental
considerations need to be incorporated in the design phase to be efficient (Sakao, 2007).
Taking environmental issues into account in a proactive way will be less costly than doing it
later since the modification costs increases over time, Figure 1. Their focus is on cost
reduction and process efficiency but this indirectly results in a focus on reduction of
environmental impact as well. The contractors will, using the IPSO business model, make
sure that the facility is as durable as possible to reduce maintenance and changing of spare
parts, which implies less use of resources such as material and energy. This type of incentive
are in place at ITT Flygt where the aim of the offerings are e.g. to create reliability and
extended product life (Kowalkowski, 2008). Another example is BT Industries that
remanufacture their forklifts which provides incentives for a extended life-cycle of the
products (cf. (Östlin et al., 2008)). The holistic IPSO view provides incentives for the
contractors to optimize the use of resources and realize more economical and environmental
development (cf. (Lindahl, 2006; Tukker & Tischner, 2006b)). Increased efficiency and
thereby reduced cost and environmental impact is achieved by Rolls-Royce using IPSO
contracts for engines (Baines et al., 2007).
The contractors are however concerned about the material handling monopoly. This is a type
of technological and market lock-in from the STA where the material and products are set in
advance (cf (Perkins, 2003)). The contractors believe that an open market for material
handling would improve their competitiveness against the other contractors. A possibility
for the contractors to more freely choose the material to use would further expand the
benefits for the IPSO since the innovation potential could increase when the offering would
not be locked to a certain selection of material and components. The drawback, according to
the STA, is that different types of construction and mixed systems would be used making it
hard to manage the material supply. If the STA would procure a traditional maintenance
contract after the IPSO contract, this would include the STA being in charge of the material
supply, which could be expensive if it involved non-standard material. There is however no
evident reason for why the contractor would choose to use non-standard material with odd
spare-parts since this would increase the maintenance costs. The STA’s concern about the
material could on the other hand also be a matter of attitude and competence. The question is
why the STA is in charge of the material supply in the first place? This is a remain from
when all activities were performed in-house, including the material supply.
IPSO contracts would also provide incentives for documentation since the contractor has to
demonstrate the value of the facility in the end of the contract as well as to have measures for
evaluation during the contracts. For all the examples presented in Section 2.8, BT-Industries,
ITT FLygt, Danfoss and Rolls-Royce, information is a key factor to the implementation and
realization of their offerings (Baines et al., 2007; Kowalkowski, 2008; Matzen, 2009; Östlin et
al., 2008). For a provider of rail infrastructure upgrading or redesigning is not easy due to the
56
technological lock-in. On the other hand, the processes for maintenance can be developed
during the contract using the knowledge and experience gained during the use phase of the
IPSO contracts (cf. (Meier et al., 2010)). For long-term IPSO contract within the UK defense
industry the information flow is stated to be a major benefit providing data such as
equipment usage pattern, cost data and network wide information (Datta & Roy, 2011).
9.2.3 Competition and supply chain
Another important issue for the STA is the potential increase in the competition from
international contractors. In a mature industry IPSO could be part of a growth strategy
(Mont, 2002) but since the respondents believe that larger international companies would be
interested in the IPSO contracts there might not be room for the national companies to grow.
The respondents also stress that smaller contractors would not be able to bid on large
contracts like this and that long-term contracts could potentially freeze the market. Therefore
the packaging of the contracts seems to be of utmost importance since it potentially affects
the competition and thereby the number of offerings participating in each bidding process.
Another market-related issue is the possibility of supply chain disruption, and this fact has
to be accepted and accounted for from the supplier’s side (Erkoyuncu et al., 2009). To be able
to realize the efficiency needed for the IPSO contracts a key factor for Rolls-Royce is to
develop the supply chain (Rolls-Royce, 2011). It has also been stated that a formal
relationship is not enough for an IPSO contract, and for the partnership to be successful there
is a need to align the profit incentives between them (Lockett et al., 2011). This implies the
importance of transparency.
9.2.4 Organization and culture
Only changing the business model and contracts would be insufficient, since the relational
issues are required and determined by the business needs (Thompson et al., 1998). A major
hurdle in this case seems to be the organization and culture at the STA, which lacks a longterm overall perspective in combination with an internal reluctance to change and develop
the process of contracting. This type of internal resistance has in previous research been
described as preventing the change needed to develop new product-service mixes (Cooper &
Evans, 2000). The challenge is related to the change of mindset within the organization and
the need for internal marketing (Sundin et al., 2009). This type of cultural challenge has been
observed within the defense industry in the UK, where customer and the provider had
different ways of thinking about maintenance routines resulting in extra costs to make up for
this difference (Datta & Roy, 2011). This implies the importance of working together and
understanding the other parties’ perspective. For the rail infrastructure industry, as for the
defense industry in the UK, a massive cultural change is needed (cf. (Datta & Roy, 2011)).
Providers need to develop new skills for understanding long-term risk as well as being able
to identify, evaluate and manage risk (Brady et al., 2005b). In this case, this goes for both
provider and customer due to the complex relations between the actors and the structure. A
57
multi-skilled and cross-functional team is needed to produce the offering (Brady et al.,
2005b). The contractors can already identify potential synergies within their own
organizations as a result the holistic work practice and the cross-functional approach. The
construction and maintenance phases would benefit from the fact that the all knowledge
would be in the same organization and solutions could be discussed from a life-cycle
perspective. Previous research has shown that project with an integrated process such as
IPSO projects for infrastructure results in that projects are completed faster (Pakkala, 2002).
Other changes needed are more cooperation between the Investment and Traffic Divisions at
the STA and the need for both a general contractor and a technical contractor to fulfill the
cross-functional skills.
The actors see themselves as parties with opposing interests. Long-term cooperation,
however, calls for common interests, shared risks and flexibility rather than making one side
take all the risk (Nystén-Haarala et al., 2010). Within the defense industry in the UK, where
similar contracts are used, risk-sharing and transparency are explicitly encourage by the
buyer (Johnsen et al., 2009). The same research concludes on the other hand that this is not
easily implemented in practice due to the lack of trust between the actors. The actors in the
UK defense industry suggested open books relations as a solution to gain trust but this type
of relationship requires high levels of trust to be implemented (Johnsen et al., 2009).
9.2.5 Contracting
The packaging of the project is very important, both in terms of contract length and volume.
The length is connected to the risk assessment possibilities for both the supplier and buyer
perspective (cf.(Alonso-Rasgado & Thompson, 2006)). For long contracts the contractors are
concerned about the possibility to estimate the costs, which is something that has to be done
in the bidding stage (cf. (Erkoyuncu et al., 2011)). The length of the life-cycle for a rail
infrastructure is very much dependent on the elements used for the construction and which
elements that are decided to be the ones steering the length of the contract.
Related to the length and volume of the contracts is the contractors’ concern about their
increased responsibility, including a large part of the life-cycle for the infrastructure, and
increased responsibility equals increased risk according to the contractors. A key
characteristic of IPSO is the reduction of unpredictability and variability of demand during
the contract time, making risk reduction a driver for the business model (Mont, 2004; Oliva &
Kallenberg, 2003). The contractors want more flexibility on one hand, but are on the other
hand reluctant to take more responsibility that could lead to an increased risk. However, risk
does not have to be seen as something completely negative, it all depends on how the
contractors choose to deal with it. They can either develop the necessary skills and
competence needed to identify and handle the risk in a strategic manner, or take the
problems as they come in more of an ad hoc way.
Other industries has managed the uncertainties with long-term contracting by adding
flexibility to the contract using soft elements such as renegotiation (Nystén-Haarala et al.,
58
2010). There are factors that the contractor cannot predict such as changes in traffic volume
that would have a great effect on the wear and degradation of the tracks. Innovations and
constant improvements can sometimes be dampened by long-term contracts, since the
provider is protected from competition for a longer period of time (Panesar & Markeset,
2008). Renegotiations could be seen as a fresh start within the contracts to maintain quality.
Another precautions for risk are performance indicators and the pricing structure (NysténHaarala et al., 2010). Both parties have indicated that the evaluation, both during the contract
and afterwards, will be difficult. Operationalization of the functional result of the contracts
needs extra attention; one important part of the contracts is to specify precise parameters so
that it can be determined whether or not the IPSO is satisfactory delivery (Alonso-Rasgado &
Thompson, 2006; Tukker & Tischner, 2006b). Due to the length of the contract, it will take
time before the entire project can be evaluated, and a residual value has to be determined so
that the two parties can work towards the same goal. Challenges for the providers are e.g.
assumptions concerning equipment failure, prediction of maintenance routines and
communication problems with the customer (Datta & Roy, 2010). Risk of unpredictable costs
can be reduced by access to resources, and the trust in a relationship can be helped by
sharing information (Ng & Nudurupati, 2009). This shows how important transparency and
information sharing will be for the IPSO contracts to work. The need for improved
information management has already been discussed earlier in this thesis. However, the
actors’ reluctance to use IPSO contracts for reinvestment is also related to the lack of
information. This reluctance is confirmed in the literature where it is stated that lack of
historical data causes unpredictability (Ng & Nudurupati, 2009).
59
60
10 Conclusions and future research
IPSO has the potential to provide an opportunity for the rail infrastructure industry to
decrease its economic costs and environmental impact e.g. through improved innovation,
resource efficiency and accessibility of the infrastructure. However, while the economic
benefits are the main driver for the industry itself, the potential environmental benefits are
seen as a positive side effect. The conclusions for the specific research questions are
presented below.
10.1 RQ1 – How is rail infrastructure management currently procured?
The railway infrastructure is a mature industry where standardization, cost focus and a longterm use phase are the main features. The contracts currently used have advantages such as
being a familiar business model that is straightforward to calculate for the contractors.
However, they are not optimal for innovation due to e.g. detailed specifications, standards
and technological and market lock-in effects.
Construction contracts are mainly used for building the facilities but Design-Build contracts
are slowly introduced as an attempt to involve the contractors in the design phase.
Performance contracts are used for maintenance and are formulated similar to the DesignBuild contracts. However, the intent behind these contracts are not always fulfilled since the
buyer controls the process more than needed due to a conservative attitude that is difficult to
change.
Technological and market lock-in, in combination with a lack of information transfer
between different contracts and actors, are major disadvantages with the current
procurement process. The breakdown of the life-cycle results in several short-term contracts
lacking in continuity along the lifetime of the facility, and thereby a lack of incentives for
information transfer. This implies that the same standards are chosen repeatedly, since there
are no feedback loops bringing back information that challenges the current technology. The
technology and design are locked for the whole life-cycle of the facility, and only incremental
innovation is possible. Another technology and market lock-in is the monopoly the buyer
holds on the material and products used for industry.
10.2 RQ2 – What are the potential benefits and challenges from the provider
and buyer perspectives regarding IPSO for rail infrastructure?
A benefit with IPSO is the holistic life-cycle perspective that provides incentives for
dematerialization, resulting in a more resource-efficient and durable infrastructure. IPSO
requires improved information transfer, which in turn stimulates innovation as well as
processes for evaluation of the contracts. Further benefits are potential incentives to get
contractors involved in the design phase, where major decisions about the life-cycle are
made, in order to reduce the infrastructure's environmental impact and total life-cycle cost.
61
The contractors hope that IPSO contracts will make the buyer focus e.g. less on the initial
purchasing price, as they do today, and more on the total life-cycle cost in relation to quality
in order to get the best solution.
The organization and culture at the STA has been identified as a barrier for IPSO, since it
lacks a long-term overall perspective in combination with an internal reluctance to change
and develop the process of contracting. A cross-functional approach within the organization
is needed, e.g. between investment and maintenance. Even though the contractors are part of
the same mature market, the organizational changes needed for them to fulfill IPSO contracts
are not seen as a barrier. The contractors can already identify potential synergies within their
own organizations as a result of the holistic work practice and the cross-functional approach.
The actors see themselves as parties with opposing interests. At the same time, IPSO will
most likely imply more long-term cooperation, something that calls for common interests,
shared risks and flexibility. The innovation possibilities with IPSO could benefit from
loosening up the material handling monopoly that the buyer currently holds. Furthermore,
the IPSO contracts would provide incentives for documentation for the contactors since they
need to be able to prove the quality of the facility.
Since the buyer is a dominant actor within the industry, this organization has major
possibilities to introduce changes that the other actors would have to conform to. This also
implies that the packaging of the contracts, i.e. their length and volume, has to be carefully
thought through since it could affect market conditions such as competition and potential
market lock-ins. A market-related issue the contractors have to consider is the risk of supply
chain disruption during the course of the contracts.
10.3 RQ3 – What potential risk factors can be identified when using IPSO for
rail infrastructure?
Several challenges have been discussed, and most of them derive from the risk and
uncertainty aspects that come with long-term contracts and the inexperience of a new
business model. The contractors want more flexibility on one hand, but are on the other hand
reluctant to take more responsibility that could lead to an increased risk. The increased
responsibility also equals increased risk-taking, but even so, IPSO reduces the
unpredictability and variability of demand for a long period of time for the contractors.
However, risk does not have to be seen as something completely negative; it all depends on
how the contractors choose to deal with it. They can either develop the necessary skills and
competence needed to identify and manage the risk in a strategic manner, foster a
competitive advantage, or take the problems as they come in more of an ad hoc way.
A way to reduce risk and uncertainty could be to include some type of renegotiations during
the contract time since not all factors, e.g. changes in traffic volume, can be estimated in the
design phase. The contractors are concerned about estimating costs, and it is therefore
important through operationalization of the functional result to facilitate both pricing and
62
evaluation of the delivered quality. Furthermore, focusing on transparency between the
buyer and provider as well as information sharing is a way to reduce risk. Improved
information transfer could also open up IPSO contracts for reinvestments, where the current
lack of information about the facilities causes too much unpredictability for IPSO contracts.
10.4 Concluding Remarks
This research has focused on IPSO for rail infrastructure management, using the Swedish rail
infrastructure as a case to discuss the considerations and feasibility of such an
implementation. The conclusions are therefore valid for rail infrastructure in other
geographical locations as well.
10.5 Future research
This thesis presents current practice and opinions from the actors in industry concerning
IPSO for rail infrastructure. The conclusion is that there are potentially both economic and
environmental benefits in using this model. The next step in this research will be to show this
improvement potential in a quantitative way using life-cycle assessment and life-cycle cost
analysis for environmental and economic calculations. This will be realized using scenarios
relating to both current and IPSO contracts. Furthermore, one part will focus on the overall
system on a general level, while the other part will investigate an example of changing a
material or a product to see the potential effect on cost and the environment.
Additionally, the industry is requesting further investigation and analysis of the functional
requirements needed for an IPSO contract. How can these be formulated, and on what level
is it feasible to set them? These are questions that are essential for the successful
implementation of an IPSO contract.
63
64
11 References
Ahmed, P. K., & Shepard, C. D. (2010) Innovation management: context, strategies, systems and
processes. Essex: Pearson Education Limited.
Alexandersson, G., & Hultén, S. (2008) The Swedish Railway Deregulation Path. Review of
Network Economics, 7(1).
Alonso- Rasgado, T., Thompson, G., & Bergström, B.-O. (2004) The design of functional (total
care) products. Journal of Engineering Design, 15(6): 515-540.
Alonso-Rasgado, T., & Thompson, G. (2006) A rapid design process for Total Care Product
creation. Journal of Engineering Design, 17(6): 509 - 531.
Arnek, A., Hellsvik, L., & Trollius, M. (2007) En svensk modell för offentlig-privat
samverkan vid infrastrukturinvesteringar, Vol. 588. Linköping: Swedish National
Road and Transport Research Institute.
Ayers, R. U. (1994) Industrial methobolism: theory and policy. In : Ayres RU, Simonis UE, editors.
Industrial methabolism - restructuring for sustainable development. Tokyo: United Nations
University.
Baines, T. S., Lightfoot, H. W., Evans, S., Neely, A., Greenough, R., Peppard, J., Roy, R.,
Shehab, E., & et al. (2007) State-of-the-art in product service-systems. Journal of
Engineering Manufacture, 221(10): 1543-1552.
Banverket. (2008) Banverkets årsredovisning 2008. Borlänge: The Swedish Rail
Administration.
Banverket. (2009) Entreprenadbeskrivning: Drift och underhåll av järnvägsanläggning Västra
Götaland.
Banverket Produktion. (2009) Banverket Produktion Årsrapport 2009: Banverket Produktion.
Bell, J. (1993) Introduktion till forskningsmetodik (Third ed.). Lund: Studentlitteratur.
Berggren, C., & Björkman, M. (2002) Funktionsförsäljning/funktionsupphandling för hållbar
tillväxt - Idépromemoria och kunskapsöversikt.
Brady, A., Davies, A., & Gann, D. M. (2005a) Creating value by delivering integrated
solutions. International Journal of Project Management, 23(5): 360–365.
Brady, T., Davies, A., & Gann, D. M. (2005b) Creating value by delivering integrated
solutions. International JOurnal of Project Management, 23: 360-365.
Cerin, P. (2006) Bringing economic opportunity into line with environmental influence: A
discussion on the Coase theorem and the Porter and van der Linde hypothesis.
Ecological Economics, 52: 209-225.
Christensen, C. M. (1992) Exploring the Limits of the Technology S-Curve. Part 1:
Component Technologies. Production and Operations Management, 1(4): 340.
Christensen, C. M. (2000) The innovator's dilemma. New York: Harper Business: An imprint of
HarperCollins Publishers.
Clift, R., & Wright, L. (2000) Relationships Between Environmental Impacts and Added
Value Along the Supply Chain. Technological Forecasting and Social Change, 65(3): 281295.
Cooper, T., & Evans, S. (2000) Product to Services. Sheffield: The Centre for Sustainable
Consumption, Sheffield Hallam University.
Creswell, J. W. (2009) Research Design: Qualitative, Quantitative, and Mixed Methods Approaches
(Third Edition ed.). USA: SAGE Publications.
65
Datta, P. P., & Roy, R. (2010) Cost modelling techniques for availability type service support
contracts: A literature review and empirical study. CIRP Journal of Manufacturing
Science and Technology, 3(2): 142-157.
Datta, P. P., & Roy, R. (2011) Operations strategy for the effective delivery of integrated
industrial product-service offerings: Two exploratory defence industry case studies.
International Journal of Operations and Production Management, 31(5): 579-603.
Dobers, P., & Wolff, R. (1999) Eco-efficiency and dematerialization: Scenarios for new
industrial logics in recycling industries, automobile and household appliances.
Business Strategy and the Environment, 8(1): 31-45.
Erkoyuncu, J., Roy, R., Shehab, E., & Cheruvu, K. (2011) Understanding service uncertainties
in industrial product–service system cost estimation. The International Journal of
Advanced Manufacturing Technology, 52(9): 1223-1238.
Erkoyuncu, J. A., Roy, R., Shehab, E., & Wardle, P. 2009 Uncertainty challenges in service cost
estimation for product-service systems in the aerospace and defence industries. Paper
presented at the 1st CIRP Industrial Product-Service Systems (IPS2) Conference,
Cranfield University, UK.
Fava, J. A., & Weston, R. F. (1997) LCA: Concept, methodology, or strategy? Journal of
Industrial Ecology, 1(2): 8-10.
FIA. (2011) About FIA. www.fiasverige.se. 2011-10-09.
Goedkoop, M. J., Halen, C. J. G. v., Riele, H. R. M. t., & Rammens, P. J. M. (1999) Product
Service systems, ecological and economical benefits: PricewaterhouseCoopers
N.V./Pi!MC/Storrm C.S./Pre Consultants, Netherlands.
Hedström, R., Ihs, A., & Sjögren, L. (2005) Funktionsupphandling av väg- och banhållning,
Problem och möjligheter., Vol. 971. Linköping: Swedish National Road and Transport
Research Institute.
Holme, I. M., & Solvang, B. K. (1996) Forskningsmetodik: om kvalitativa och kvantitativa metoder
(Second ed.). Lund: Studentlitteratur.
Johnsen, T., Howard, M., & Miemczyk, J. (2009) UK defence change and the impact on
supply relationships. Supply Chain Management: An International Journal, 14(4): 270279.
Kopicki, R., & Thompson, L. S. (1995) Best Methods of Railway Restructuring and
Privatization. In W. Bank (Ed.), CFS Discussion Paper Series, Number 111. Washington:
Cofinancing and Financial Advisory Services. World Bank.
Kotler, P. (2011) Reinventing Marketing to Manage the Environmental Imperative. Journal of
Marketing, 75(4): 132-135.
Kowalkowski, C. (2008) Managing the industrial service function. Linköping University,
Linköping.
Kvale, S. (1997) Den kvalitativa forskningsintervjun. Lund, Sweden: Studentlitteratur.
Lekvall, P., & Wahlbin, C. (2001) Information för marknadsföringsbeslut (4 ed.). Göteborg,
Sweden: IHM Publishing.
Lewis, H., & Gertsakis, J. (2001) Design+environment: a guide to designing greener goods.
Sheffield: Greenleaf publishing.
Lindahl, M. (2005) Engineering Designers’ Requirements on Design for Environment Methods and
Tools. Royal Institute of Technology, Tockholm.
Lindahl, M., E. Sundin, A. Öhrwall Rönnbäck, G. Ölundh, J. Östlin,. 2006 Integrated Product
and Service Engineering – the IPSE project. Paper presented at the Changes to
Sustainable Consumption, Workshop of the Sustainable Consumption Research
66
Exchange (SCORE!) Network (www.score-network.org), supported by the EU’s 6th
Framework Programme, Copenhagen, Denmark.
Lingegård, S. 2011 PSS Contracts for Rail Infrastructure. Paper presented at the The R&D
Management Conference 28-30 June Norrköping Sweden.
Lingegård, S., Lindahl, M., & Sundin, E. (2010) Organizational changes in connection with
IPSO. In T. L. Tomohiko Sakao, Mattias Lindahl (Ed.), CIRP's 2nd IPS² Conference,
Linköping, 14-15 April: 461-466. Linköping.
Lingegård, S., Sakao, T., & Lindahl, M. (2011) Theoretical Environmental Comparison of
Integrated Product Service Offerings vs. Traditional Sales. In B. Cogan (Ed.), Systems
Engineering.
Lockett, H., Johnson, M., Evans, S., & Bastl, M. (2011) Product Service SYstems and supply
network relationships: an exploratory case study. Journal of Manufacturing Technology
Management, 22(3): 293-313.
Matzen, D. (2009) A systematic approach to service oriented product development. PhD thesis,
Technical University of Denmark, Kongens Lyngby.
Meier, H., Roy, R., & Seliger, G. (2010) Industrial Product-Service Systems—IPS². CIRP
Annuals - Manufacturing Technology, 59(2): 607-627.
Meier, H., Uhlmann, E., & Kortmann, D. (2005) Hybride Leistungsbündel Nutzenorientiertes Produktverständnis durch interferierende Sach- und
Dienstleistungen. wt Werkstattstechnik online, 7(8): 528-532.
Merriam, S. B. (1994) Fallstudien som forskningsmetod (Case Study Research in Education). Lund:
Studentlitteratur.
Mont, O. (2000) Product Service Systems Stockholm: Naturvårdsverket - The Swedish
Environmental Protection Agency.
Mont, O. (2004) Product-Service Systems: Panacea or Myth? , Lund University, Lund.
Mont, O. K. (2002) Clarifying the concept of product-service system. Journal of Cleaner
Production, 10(3): 237-245.
Ng, I., & Yip, N. 2009a Identifying Risk and its Impact on Constracting Through a Benefit BasedModel Framework in Business to Busniess constracting: Case of the denfence industry. Paper
presented at the 1st CIRP Industrial Product-Service Systems (IPS²) Conference,
Cranfield University.
Ng, I., & Yip, N. 2009b Identifying Risk and its Impact on Constracting Through a Benefit BasedModel Framework in Business to Busniess constracting: Case of the denfence industry. Paper
presented at the 1st CIRP Industrial Product-Service Systems (IPS2) Conference,
Cranfield University.
Ng, I. C. L. (2008) The pricing and revenue management of services; A Strategic approach. Oxford:
Routledge, an imprint of the Taylor and Francis group.
Ng, I. C. L., Maull, R., & Yip, N. (2009) Outcome-based contracts as a driver for systems
thinking and service-dominant logic in service science: Evidence from the defence
industry. European Management Journal, 27(6): 377-387.
Ng, I. C. L., & Nudurupati, S. S. (2009) Outcome-based service contracts in the defence
industry-mitigating the challenges. Journal of Service Management, 21(5): 656-674.
Nilsson, J.-E. (2009a) Nya vägar för infrastruktur. Stockholm: SNS Förlag.
Nilsson, J.-E., Bergman, M., & Pyddoke, R. (2005) Den svåra beställlarrollen. Stockholm: SNS
Förlag.
Nilsson, J.-E., Ihs, A., Leif, S., Wiman, L. G., & Wågberg, L.-G. (2006a)
Funktionsupphandling. Sammanfattning av kunskapsläget och rekommendationer
67
för fortsatt forskning, Vol. 506. Linköping: Swedish National Road and Transport
Research Institute.
Nilsson, J.-E., & Pyddoke, R. (2007) Offentlig och privat samverkan kring infrastruktur- en
forskningsöversikt, Vol. 601. Linköping: Swedish National Road and Transport
Research Institute.
Nilsson, J. (2009b) Nya vägar för infrastruktur. [New ways for infrastructure]. Stockholm,
Sweden: SNS Förlag.
Nilsson, J., Ihs, A., Sjögren, L., Wiman, L. G., & Wågberg, L. (2006b) Funktionsupphandling:
Sammanfattning av kunskapsläget och rekommendationer för fortsatt forskning.
Linköping, Sweden: VTI.
Nystén-Haarala, S., Lee, N., & Letho, J. (2010) Flexibility in contract terms and contracting
processes. International Journal of Managing Projects in Business, 3(3): 462-478.
Olander, S., Widén, K., & Ågren, R. (2010) FIA:s förändringsmätning av anläggningssektorn i
Sverige: Resultat för 2010.
Oliva, R., & Kallenberg, R. (2003) Managing the transition from products to services.
International Journal of Service Industry Management, 14(2): 160-172.
Pakkala, P. (2002) Innovative Project Delivery Methods for Infrastrucutre. Helsinki: Finnish
Road Enterprise.
Panesar, S. S., & Markeset, T. (2008) Industrial service innovation through improved
contractual realtionship: A case study in maintenance. Journal of Quality in
Maintenance Engineering, 14(3): 290-305.
Perkins, R. (2003) Technological lock-in, Internet Encyclopedia of Ecological Economics:
International Society of Ecological Economics.
Rebitzer, G., Ekvall, T., Frischknecht, R., Hunkeler, D., Norris, G., Rydberg, T., Schmidt, W.
P., Suh, S., Weidema, B. P., & Pennington, D. W. (2004) Life cycle assessment: Part 1:
Framework, goal and scope definition, inventory analysis, and applications.
Environment International, 30(5): 701-720.
Riksrevisonen. (2005) Bolagisering av Statens järnvägar: RiR 2005:11. Stockholm:
Riksrevisionen.
Riksrevisonen. (2010) Undehåll av järnväg.
Rolls-Royce. (2011) Rolls-Royce homepage. 2011-11-21. http://www.rolls-royce.com.
Romero Rojo, F. J., & Roy, R. (2009) Obsolescence management for long-life contracts: state of
the art and future trends. International Journal of Manufacturing Technology, 49(9-12):
1235-1250.
Roy, R., & Cheruvu, K. S. (2009) A competitive framework for industrial product-service
systems. International Journal of Internet Manufacturing and Services, 2(1): 4-29.
Sakao, T. (2007) A QFD-centred design methodology for environmentally conscious product
design International Journal of Production Research, 45(18-19): 4143-4162.
Sakao, T. (2009) A View of Service, Quality, and Value for Sustainability, 12th International
QMOD Conference. Verona.
Schilling, M. A., & Esmundo, M. (2009) Technology S-curves in renewable energy
alternatives: Analysis and implications for industry and government. Energy Policy,
37(5): 1767-1781.
Stenbeck, T. (2004) Incentives to Innovations in Roads and Rail Maintenance and Operations.
Royal Institute of Technology, Stockholm.
68
Sundin, E., & Bras, B. (2005) Making Functional Sales Environmentally and Economically
Beneficial through Product Remanufacturing. Journal of Cleaner Production,, 13(9): 913925.
Sundin, E., M. Lindahl, A. Öhrwall Rönnbäck, G. Ölundh Sandström,J. Östlin, . 2006
Integrated Product and Service Engineering Methodology. Paper presented at the 11th
International Conference of Sustainable Innovation, Chicago, USA.
Sundin, E., Ölundh Sandström, G., Lindahl, M., & Öhrwall Rönnbäck, A. 2009 Industrial
Challenges for Product/Service SYstems: Experiences from a large company netowork in
Sweden. Paper presented at the CIRP Industrial Product-Service Systems (IPS²)
Conference, Cranfield UK.
Sundin E., & Bras B. (2005) Making Functional Sales Environmentally and Economically
Beneficial through Product Remanufacturing. Journal of Cleaner Production,, 13(9): 913925.
Svensson, N. (2006) Life-Cycle Considerations for Environmental Management of the Swedish
Railway Infrastructure. Doctorial, Linköping University, Linköping.
Svensson, N., & Eklund, M. (2007) Screening of environmental pressure from products in the
Swedish railway infrastructure: Implications for strategic environmental
management. Resources, Conservation and Recycling, 52(2): 248-265.
The Swedish Agency for Public Management. (2009) Sega gubbar? En uppföljning av
Byggkommisionens betänkande " Skärpning gubbar!": The Swedish Agency for
Public Management.
The Swedish Transport Administration. (2010a) The Swedish Transport Administration:
Annual Report 2010. Borlänge. Sweden.
The Swedish Transport Administration. (2010b) Trafikverket. 2010-06-22.
www.trafikverket.se.
Thompson, I., Cox, A., & Anderson, L. (1998) Contracting strategies for the project
environment. European Journal of Purchasing & Supply Management, 4(1): 31-41.
Trafikverket. (2011) Trafikverkets strategi för drift och underhåll mars 2011, Elmia Nordic Rail
Utställarseminarium 2011, Jönköping Sweden: Trafikverket.
Trafikverket/The Swedish Transport Administration. (2010) Pocket Facts 2010, The Swedish
Transport Administration, railways, roads, traffic and transports. Borlänge Sweden.
Trott, P. (2012) Innovation management and new product development (Fifth edition ed.). Essex:
Pearson Education Limited.
Tukker, A. (2004) Eight types of product-service system: eight ways to sustainability?
Experiences from suspronet. Business Strategy and the Environment, 13: 246-260.
Tukker, A., & Tischner, U. (2006a) New Business for Old Europe. Sheffield: Greenleaf
Publishing.
Tukker, A., & Tischner, U. (2006b) Product-services as a research field: past, present and
future. Reflections from a decade of research. Journal of Cleaner Production, 14(17):
1552-1556.
Tullberg, M. (2000) Växelsång: Om organisation för förändring på SJ. Handelshögskolan vid
Göteborgs universitet, Göteborg.
White, A. L., Stoughton, M., & Feng, L. (1999) Servicizing: The Quiet Transistion to Extended
Product Responsability. Boston: Tellus Institute.
Yin, R. K. (2009) Case Study Research: Design and Methods (Forth ed.). London: SAGE
Publications.
69
Zietlow, G. (2004) Implementing performance-based road management and maintenance
contracts in developing countries-an instrument of German technical cooperation:
German development cooperation.
Öhlund, G. (2003) Environmental and Development Persepctives of Functional Sales. Royal
Institiute of Technology, Stockholm.
Östlin, J., Sundin, E., & Björkman, M. (2008) Importance of closed-loop supply chain
relationships for product remanufacturing. International Journal of Production
Economics, 115(2): 336-348.
70
APPENDIX 1 Interview guides Interview guide: The Swedish Rail Administration The term functional contract (funktionsentreprenad med helhetsåtagande) was used for IPSO contracts during the interview. Introduction 1. What types of contracts are used in the current situation for ʺtrain‐relatedʺ procurement i.e. track, maintenance, etc? 2. What is your definition of a functional contract with overall commitment? 3. What obstacles and challenges are there in the current situation when it comes to procurement contracts? For each type of contract? 4. What obstacles and challenges are associated with the functional contracts? 5. What advantages would there be with the functional contract? 6. How would functional contracts affect the use of technology? 7. What problems with the current construction would a change solve? 8. Do you see the function of procurement as a future scenario? 9. What would be required for the Swedish Rail Administration to start with function contracts with overall commitment (design, construction, maintenance)? Contracts 10.
11.
12.
13.
14.
15.
How long are the contracts today? How long should the contract be for the functional contract? Are there regulations on contract length with regards to public procurement? Do you see any problems with the length of this type of contract? What? Do you think the tendering process will take a longer or shorter period of time? In some contracts in the UK, renegotiation of some parts at regular intervals (5 years) was introduced; is this something that you think might be necessary? How long should the intervals be? What would need to be renegotiated? 16. Are there risks associated with the contract length? For the contractor / client? 17. What are the advantages and disadvantages of using such long contracts? Cost, reimbursement and risks 18. How does the funding look today? 19. What should the funding look like? 20. How are reimbursement costs for offers (contracts) in use calculated (should be calculated)? What are the difficulties in this? 21. Are there regulations for compensation etc. by public procurement? (how compensation is calculated, etc.) 22. How does the contractor set a fixed price that covers the risks, but at the same time is competitive? 23. What degree of transparency would be needed to assess offers on price etc? 24. How should interest rates and profits be handled? 25. Where should the line be drawn between client and contractor? Risks, responsibilities, etc? 26. What is needed to determine risks and compensation? Organization 27. What functions or parts of the organization are involved in procurement work today? 28. What organizational changes will be required at the Swedish Rail Administration?  Which parts of the organization will need to change? How?  What is the interplay between the involved parts today? Will the interaction between the parts change?  Will new skills be required in the organization to implement functional contracts? Which ones? 29. Are there routines in place to preserve knowledge within the organization? 30. The Swedish Rail Administration’s organization will have less detail control over the functional contracts. Will this create any problems in the corporate culture? 31. Does the Swedish Rail Administration’s have the organization necessary to implement functional contracts? Contractors 32. What will be required of suppliers, contractors and subcontractors, as opposed to today? 33. Do the contractors have the organization necessary to implement the functional contracts? 34. What organizational changes will be required of the contractor? 35. What requirements must be placed on the contractorʹs organization in the tender? 36. Will the relationship between client and contractor change?  How? What are the challenges? 37. How do functional contracts potentially affect the contractor market? 38. How many contractors are there today in Sweden and abroad who could perform a functional contract?  Number of contractors who are capable of a functional contracts? Contracts 39. Do you have any contact with other employees within the Swedish Rail Administration’s that I could contact to get their perspective on the functional contracts? 40. Do you have any contacts with contractors who I could contact to get their perspective on the functional contracts? Interview guide: Contractors The term functional contract (funktionsentreprenad med helhetsåtagande) was used for IPSO contracts during the interview. Introduction 1. What types of contracts are used in the current situation for ʺtrain‐relatedʺ procurement, i.e. track, maintenance, etc?  Functional contracts? With overall commitment? 2. Has Company X performed any type of functional contract yet? 3. What is your definition of a functional contract with overall commitment? 4. What obstacles and challenges are there in the current situation when it comes to procurement contracts? For each type of procurement (contract)? 5. What obstacles and challenges are associated with functional contracts? 6. What advantages do you see with the functional contract? 7. How would the functional contract affect the use of technology? 8. Have there been problems in the past that have been solved with the help of changes in the contract form? 9. What type of contracts in the future? What problems with the current construction would a change solve? 10. Do you see the function contracts as a future scenario? 11. What would be required for the Swedish Rail Administration to start with functional contracts with overall commitment (design, construction and maintenance)? Contracts 12. How long are the contracts today? 13. What would the business model look like for a functional contract with overall commitment? 14. How long should the functional contract be? 15. Are there regulations on contract length with regards to public procurement? 16. Do you see any problems with the length of this type of contract? What? 17. Do you think the tendering process will take a longer or shorter period of time? 18. In some contracts in the UK, renegotiation of some parts at regular intervals (5 years) was introduced; is this something that you think might be necessary? How long should the intervals be? What would need to be renegotiated? 19. Are there risks associated with the contract length? For the contractor / client? Cost and compensation 20. How does the funding look today? 21. What should the funding look like? 22. How are reimbursement costs for offerings (contracts) in use calculated (should be calculated)? What are the difficulties in this? 23. Are there regulations for compensation etc. by public procurement? (how compensation is calculated, etc.) 24. How does the contractor set a fixed price that covers the risks, but at the same time is competitive? 25. What degree of transparency would be needed to assess offers on price etc? 26. How should interest rates and profits be handled? 27. Where should the line be drawn between client and contractor? Risks, responsibilities, etc? 28. What is needed to determine risks and compensation? 29. What are the advantages and disadvantages of using such long contracts? Organization 30. How does the organization work today? What functions or parts of the organization are involved in offers at the Swedish Rail Administration? 31. Would changes in the organization be required? 32. Will new skills be required in the organization to implement this type of overall commitment? Which ones? 33. Are there routines in place to preserve knowledge so that it remains within the organization? 34. Could it require cooperation with other contractors to offer overall commitment? 35. Does the Swedish Rail Administration have the organization necessary to implement functional contracts? 36. What requirements must be placed on the contractorʹs organization in tender? 37. Will the relationship between client and contractor change?  How? What are the challenges? Contractor market 38. How does the function of contractors potentially influence the contractor market? 39. How many contractors are there today in Sweden and abroad who could perform functional contracts?  Number of contractors who are capable of a functional contract? Minimum number that is acceptable for competition? 40. Problems with having multiple subcontractor companies that are dependent during the entire life‐cycle? If a vendor retires / goes bankrupt etc? APPENDIX 2 Lingegård S., Lindahl, M., & Svensson, N. (2011) PSS for Rail and Road Infrastructure. Paper presented at the Functional Thinking for Value Creation, Proceedings of the 3rd CIRP International Conference on IPS², Braunschweig. PSS Contracts for Rail and Road Infrastructure
Sofia Lingegård, Mattias Lindahl and Niclas Svensson
Department of Management and Engineering, Linköping University, Linköping
Sweden
Abstract
The productivity development for rail and road infrastructure has been weak a long time; and explanation can be found
in the traditional contracts used, with little room for incentives for innovation. This literature study investigates the use of
the few realized PSS contracts within the rail and road infrastructure. The descriptions and the scientific reports are on a
synoptic level and a majority of the reports are funded by the involved actors, showing that there is an interest for PSS
contracts in the industry and indicating significant potential for further research in the area.
Keywords:
Rail infrastructure; Road Infrastructure; Literature review
1
INTRODUCTION
Productivity development in the construction industry, such as road
and rail infrastructure, has been weak for a long period of time,
possibly due to the traditional form of contracting used. In the recent
years, these traditional forms for operation and maintenance have
caused increased costs, and thus resulted in an increased interest
for new contracting types [1-2]. Construction contracts are currently
used to a large extent in Sweden, but this type of contract has
shortcomings concerning weak incentives for the development of
procedures [3]. Interviews with managers at the Swedish Transport
Administration, formerly the Swedish Rail Administration (see more
detailed information in Section 3), are in line with this argument,
which claims that the major obstacles for technical development, as
well as the limited room for innovation, are due to over-detailed
specifications of how to do things [4]. This gives the procurer a
reason to design the contracts to produce more incentives for cost
efficiency [3]. It is also in the strategy of the Swedish Transport
Administration to improve the cost efficiency of maintenance by
improving the conditions already in the development phase, and to
perform maintenance as efficiently as possible considering the
entire life cycle of the products [5] . One way of doing this could be
with another type of contracting. Performance contracting gives
better incentives for contractors to develop the product by e.g.
finding a better balance between building and maintaining costs [6].
The contractor is responsible for delivering an agreed upon function
and can decide how this should be done, as well as for weighing
building costs against future maintenance cost which should
provide a cheaper solution for both procurer and contractor [6]. This
type of contracting, when the customer only pays when outcomes
have been delivered instead of the traditional payment for tasks and
activities, is also called Product Service Systems, or PSS [7]. A
more extensive review of this type of contracting can be found in
Section 4.
This is the starting point of the DORIS (Development of (Integrated
product service) Offerings for Rail Infrastructure Systems) project
which was launched in cooperation with the Swedish Transport
Administration to investigate the possibility for PSS contracts within
the rail infrastructure in Sweden. This paper is based on parts of the
initial literature study [8] and has the following objective.
1.1
Objective
The objective of this paper is to, through a literature study,
investigate what has been published in the area of PSS contracts
for rail and road infrastructure, as well as to look into the current
state of rail infrastructure procurement. This gives the following
research questions:

RQ1: What types of contracts are currently used when
procuring rail and road infrastructure?

RQ2: To what extent are PSS contracts used for rail and road
infrastructure?

RQ3: In what way are the PSS contracts for rail and road
infrastructure documented?
1.2
Limitations
The examples of PSS contracts presented are mostly implemented
in Scandinavia, with the exception of one example from the UK.
Furthermore, issues concerning performance requirements and
measures will not be addressed in this paper, even though these
issues represent major challenges for these contracts.
1.3
Outline of the paper
This paper starts with a description of the method used, and
subsequently presents the PSS concept. Next, examples of PSS
contracts for rail and road infrastructure are presented, followed by
the discussion, conclusion and suggestions for further research.
2
METHOD
The starting point for the literature study was an introductory
interview with an employee at the Swedish Transport
Administration, one well informed with the working process in the
organization. The goal was to gain sufficient knowledge within the
area to start searching for literature for this study.
Literature reviewed includes several different kinds of sources:
scientific articles, reports, homepages, master theses as well as
3rd CIRP International Conference on Industrial Product Service Systems, Braunschweig, 2011
doctoral and licentiate theses. The information has, when it was
possible, been triangulated using different sources. However, the
information concerning the use of PSS contracts for rail and road
infrastructure was limited to just a few sources. This could imply
that the information was biased, but most of the information was
retrieved from the Swedish National Road and Transport Research
Institute. No geographical limits were used when searching for
literature; instead, the search included literature from several
continents, even though some of it is not included in this paper. This
is partly due to the difficulty in judging the quality, and partly since
the conditions for the contracts were far from the ones in Sweden,
and therefore not relevant in this study.
3
THE CURRENT SITUATION FOR PROCUREMENTS OF RAIL
AND ROAD INFRASTRUCTURE IN SWEDEN
The Swedish Rail Administration is responsible for 80% of the total
rail system in Sweden [9]. Since 2001, the Swedish Rail
Administration has exposed its maintenance contracts to
competition, and by the end of 2009, 88% (measured in track
distance) of the maintenance had been exposed to competitive
procurement [10]. Furthermore, competitive procurement has
resulted in reduction in costs for maintenance, but despite this,
maintenance costs are increasing, and in 2008 maintenance costs
and reinvestment cost made up over 50% of the cost for new
investments.
It was concluded in a doctorial thesis [11] from 2006 concerning the
former Swedish Rail Administration that there has not been
significant pressure on the organization, internally or externally, to
use life-cycle environmental management, and the work has been
focused on environmental issues found locally, and not on life-cycle
perspectives. Furthermore, the author states that the railway needs
to adopt new perspectives to start working with environmental
management of the products, and to set environmental
requirements already when designing new products, i.e.before
introducing them in the material supply chain.
3.1
PRODUCT SERVICE SYSTEM: ONE CONCEPT, SEVERAL
NAMES
The focus for this paper is PSS contracts where the procurer
requests a function instead of a specific execution [12]. This kind of
functional buying/selling has many different names, and during this
literature study several different names for the concept of buying a
function have been revealed. The most commonly occurring are
presented in Table 1. The concepts in the tables have no intergroup
order.
Name
Definition/description
Reference
(Name,
year,
page)
“…a contracting mechanism that
allows the customer to pay only
when the firm has delivered
outcomes, rather than merely
activities and tasks.”
Ng et al.,
2009, p. 1
[14]
Performancecontracting
“The contract terms are based on
that future users are given access to
some specific services, not on the
contractor fulfilling technical
specifications: it is the performance
of the asset over the contracting
period that matters.”
Nilsson
et al., 2006,
p. 7 [3]
Performancebased
contracts
“…are about contracting on
performance, rather than tasks or
outputs by the service provider.”
Ng and
Yip, 2009,
p. 207 [15]
Functional
sales
“The customer purchases a function
and the hardware plus service
includes the totality of activities that
enable the customer to benefit from
a total functional provision.”
AlonsoRasgado
et al., 2004,
p. 515 [16]
Solutions
projects
“…solutions projects usually include
the responsibility for the provider to
manage, resource, support and
improve the delivery of the solution
through the life of the product or
system in use.”
Brady
et al., 2005,
p. 364 [17]
Performance
contracts
“Performance Contracts are defining
a product and it is up to the
contractor how to achieve this.
Therefore, work selection, design
and delivery are all his
responsibility.”
Zietlow,
2005, p. 3
[18]
Product
Service
System, PSS
“a marketable set of products and
services capable of jointly fulfilling a
user’s need”
Goedkoop
et al., 1999,
p. 18 [7]
Integrated
Product
Service
Offerings,
IPSO
“…from a lifecycle perspective, to
offer and optimise a solution with a
combination of products and
services that satisfies an identified
customer need, and at the same
time increases the suppliers’
competitiveness. “
Lindahl
et al., 2006,
p. 1-2 [19]
Outcomebased
contracting
Construction contracts
Construction contracts are the most common contracts within the
infrastructure construction industry in Sweden [12]. The concept is
based on the procurer specifying what, how and how much for the
project [6]. This includes the choice of technology, materials and
functions, and the tenders are made in unit prices with the choice of
tender mainly based on the lowest price [2]. Construction contracts
imply that the procurer carries all the risk, and a maximum roof for
the price is set which does not create any incentives for the
contractors to make the processes more efficient; instead, they
benefit from reaching the maximum sum [6]. Furthermore, the
author states that it also increases the incentives for the contractors
to make additional orders to increase their profitability, or even to
present a low tender and then make the money on the additional
orders.
3.2
4
Service contracts
The Swedish Transport Administration has since 2005 used
performance contracts for its maintenance [5], meaning that “…the
Swedish Rail Administration procures a functionality of the track
that has been set in advance. The contractor subsequently decides
what measures to take with respect to the performed reviews and
regulations for maintenance.” [13] The length of the contracts is 5
years, with an additional 2 years option with bonuses for
improvements, such as a lower number of errors, and with penalties
when the contractor has not reached the levels of e.g. delays [5].
Table 1: Different names for performance-based contracts.
From this table it can be concluded that even though the names of
the concepts differ they still include the same content, namely that
the focus is on the output, and not on how the output is achieved. In
this paper, the concept will be called Product Service System, or
PSS, since this is the most common name of the concept. The PSS
for the infrastructure includes planning, construction and
subsequently maintenance of the construction when the usage
phase has started [12].
4.1
PSS characteristics
PSS offerings have a life-cycle perspective, and the combination of
products and services can be combined into an optimized solution
for the customer, as well as to give the manufacturing company the
possibility to have control over the product throughout its whole lifecycle [17, 19]. PSS provides the supplier with a possibility to
increase the value of the solution for the customer by integrating
components in new ways [17], and is thereby a driver for the
development of a technical solution [19]. This provides incentives
for the supplier to realize a more economical and environmental
development when considering the whole life-cycle [19]. Companies
acting in a mature industry can use the PSS as a growth strategy
and compete with their core competence rather than with physical
assets [20]. The author also states that PSS requires a closer and
improved relationship with the customer, and the customer no
longer has to be the owner of the product.
5
PSS FOR RAIL AND ROAD INFRASTRUCTURE
This section provides examples of projects fulfilling all or parts of a
PSS contract for road or rail infrastructure.
5.1
PSS for rail infrastructure
The two rail projects reviewed, as seen in Table 2, are collected
from Sweden and the UK, and differ considerably in their content.
Arlandabanan, Sweden
Arlandabanan is a 20 km long railroad section with double tracks, a
7 km tunnel and several underground stations between the city of
Stockholm and Arlanda airport [21]. The winning tender for this
Public-Private Partnership, PPP,contract was a consortium
constructed by six companies from several different countries [22].
The consortium later formed the company A-train AB to finance,
build and subsequently run the train traffic. Construction began in
1995 and was finished in 1999, when the ownership of the facility
was transferred back to Arlandabanan Infrastructure AB, former Abanan AB. At the same time, A-train got the right to use the tracks
for traffic until 2040, as well as the responsibility to run and maintain
the facility during the same time period. [21] The ticket revenues
from the end customers serve as revenues for A-train in this
contract [12]. Arlandabanan Infrastructure AB has the possibility to
cancel this agreement in 2010 if A-train is not fulfilling the
requirements of the contract [21] .
Two thirds of the construction costs were funded by the consortium,
while the last third was a conditional loan from the government. All
the income risk was carried by the consortium, as well as most of
the cost risk in the project. [23] A-train had the right to a penalty
from Arlandabanan Infrastructure AB in case it would not be
possible to construct a double track within the time that was agreed,
since this would delay the traffic start, and also for other issues
such as discovery of archeological findings or incorrect technical
information [24]. A-train got the freedom to balance the cost for the
initial investment and the cost for maintenance, and subsequently
chose to use another solution for the tracks than the original idea of
the procurer [25].
The Northern Line, UK
In 2003, three long-term contracts including maintenance and
upgrading of infrastructure of the London Underground network
were signed dividing the network into three parts e.g. the part
including the Jubilee, the Northern and the PiccadillyLines. These
PPP contracts spanned over 30 years, with opportunities to review
the contracts and requirements every 7.5 years [26]. For the
Northern Line, the contract included the leasing of the trains and an
area of 50 stations, and full responsibility for the design,
manufacturing and cleaning of trains and related equipment [27]. In
addition, the contract was formulated so that 80% consisted of
capital works and 20% of service elements the first years, while the
service made up 100% of the total in the fifth year and beyond.
The contracts were output-specified, and the required performance
levels were measured with the following three factors [26]:

Availability, counting delays and disruptions lasting longer than
two minutes.

Capability of the line.

Ambience, measuring the quality of the customers’ travelling
environment.
These measurements were all set in 2003, before the contracts
started, and a level of around 5% worse than the historic data of the
London Underground was decided to be the benchmark for the first
five years, and then subsequently become more challenging with
time [26]. The report also states that bonuses and penalties are
used as additional adjustment for the performance, and liabilities for
environment and safety are included. Furthermore, the same report
claims that the availability for the JNP Lines have improved on the
whole since the start in 2003/2004. This has, on the other hand, not
been consistent for all the lines, e.g. the availability measure for the
busy Northern line was 48% worse than the benchmark in
2005/2006 [28]. Furthermore, the article states that the parties then
agreed upon a change in the contract to solve the problem, i.e. the
program for renewable the tracks was accelerated and initiated two
years earlier than stated in the initial contract.
Project
Content
Length
Payment
Arlandabanan,
20 km (SWE)
Finance,
build,
operate and
maintain.
45 years
Contractor built
the tracks and is
now leasing them.
Ticket revenues.
The Northern
Line,
50 stations
(UK)
Design,
manufacture
and service.
30 years
Leasing contract
based on a
guaranteed
number of trains
and performance
improvement.
Table 2: Reviewed contracts for rail infrastructure.
5.2
PSS for road infrastructure
Three Scandinavian road contracts are reviewed in this paper.
Table 3 illustrates their differing financial solutions.
Norrortsleden, Sweden
An ongoing contract for the Swedish Transport Administration
includes design, construction and then maintenance for 15 years.
The project comprises 7 km of highway, including a tunnel and
several road bridges. The public procurement process started in
2003, and three companies sent in their tenders. The differences in
price for the contracts concerning the design and construction were
minor, while there were significant differences in the pricing
concerning the maintenance phase. The contractor built the
construction during a period of 3.5 years (2005-2008), and is
currently responsible for maintaining it. [29]
The technical requirements were mostly formulated as functional
requirements; examples follow below, translated directly from
Swedish [29]:

“The road and the tunnel should be designed for a dimensioned
speed of 90 km/h.”

“The road body,…, should by the transfer have a remaining
lifespan (residual value) of at least 25 years.”

“The design of the bridges should follow an overall coherent
formation concept for the whole of Norrortsleden.”
During the construction phase the role of the procurer was one of
advisor, since the operation was led by the contractor [30]. The
report also refers to the fact that the two organizations were built to
mirror each other to ease the cooperation. A fixed annual payment
for the construction with a special arrangement for the tunnels,
where the contractor classifies the quality of the mountain as well
as what activities are needed, serves as guidance for the pricing,
and any sums above or below this price are shared by the two
parties [29]. Furthermore, the reports states that the compensation
to the contractor for the maintenance phase is paid as a fixed sum
every year; this sum is adjusted by an index based on nine weights
specified in the contract, e.g. amount of traffic [29]. The risk of the
project was decided to be assign to the one that was in the best
position to manage it, in this case the contractor [30].
E18, Finland
In Finland in 2005, a performance contract was signed for a 51 km
road section, including tunnels and bridges, concerning design,
construction, operation and finance[3, 31]. The section, MuurlaLohjanharju, is a cooperation between the public and private
sectors, with the Finnish Road Authority buying the entire project
from a consortium [32] .
The tenders of the contract were, apart from the price, judged on
e.g. experience of similar projects, preliminary plan for building and
maintenance, plan for reassuring quality, plan for handling technical
disturbances and the contractors’ financial situation [3]. The authors
claim these parameters influenced the pricing by plus or minus
10%. The contract lasts until 2029, equal to 21 years, and as from
the opening of the road in 2008 the Finnish Road Authority pays a
service fee depending on the availability and service level of the
road including several quality criteria [31-32]. The fee is connected
to a yearly index regulation, and the procurer carries the risk for an
increase in price for different components used [3]. The authors
further state that the maintenance costs are based on a calculated
value for the extent of the traffic, and the contractor does not carry
the risk for an increase in traffic. Furthermore, they mean that there
is a deduction in fee e.g. if the availability is not satisfactory, and the
traffic safety is measured every year to give the contractor
incentives to work for accident reduction. The report also states that
innovations that bring a decreased number of accidents are
rewarded, while an increase in the yearly accident count results in a
deduction from the yearly payment. Furthermore, the contractor is
also refunded for the initial investment when the road is ready for
traffic, providing incentives for fast opening. At the end of the
contract period, the road section will be transferred and Finnra will
attain control [31]. This will be done without any additional fees, and
the road section must be in the condition agreed upon [32].
E39, Norway
Three road projects have been procured by PPP contracts [23]. The
three projects were 27 km, 38 km and 38 km respectively, and they
have similar characteristics so the description will be limited to one
of them, namely the first section, E39 Klett- Bårdshaug [33]. Four
potential tenders were competing for the contract [23]; however, the
potential contractors had to apply for a pre-qualification
questionnaire to determine that the contractors fulfilled
requirements such as necessary technical and professional
knowledge, financial strength to complete the project, documented
experience and a list of reference projects [33]. The construction
started in 2003 and two years later the road opened, two months
before the scheduled time [23]. The authors also state that the
contractor is responsible for financing, building and maintenance
over a period of 25 years, and after that the Norwegian public roads
administration take over the maintenance.
The responsibility of the contractor is the safety and the availability
of the road and for standards such as environmental standards [33].
Furthermore, the report points out that the contract includes more
detailed requirements, such as quality and performance standards
and quality routines for which the NPRA can survey to make sure
they are being followed. The public part carries risk for events that
the project company has no or minor possibility to influence, such
as changes in legislation, while risks related to financing, planning,
construction, operation and maintenance are allocated to the
project company according to the report.
The project company receives an annual payment depending on
the availability, performance, safety and amount of traffic on the
road, but out of these, availability and performance are the major
contributions to the payment, while the rest are seen as additional
payments [33]. These traffic payments increase with increased
traffic, as well as the safety payments, which are seen as a bonus
related to the number of and the character of the accidents that
occur compared to an equivalent average road [23]. Furthermore,
the authors state that the Norwegian public roads administration
has introduced a toll system for the roads for the first 15 years, from
which the income will cover part of the costs for the project.
Project
Content
Length
Payment
Norrortsleden,
7 km (SWE)
Design,
construct
and
maintain.
15 years
Fixed yearly sum
based on index
Special payment
model for tunnels.
E18,
51 km (FIN)
Finance,
design,
construct,
and
maintain.
21 years
Initial investment
and service fee to
contractor
depending on
availability and
service level of
the road. Adjusted
for change in
traffic.
E39,
27 km (NOR)
Finance,
design,
construct,
and
maintain.
25 years
Payment
depending on
availability and
standard of the
road. Toll system
for procurer.
Table 3: Reviewed contracts for road infrastructure.
6
DISCUSSION
This concluding discussion has the ambition of answering the
research questions posed in the introduction by contrasting
reviewed contracts.
6.1
What types of contracts are currently used when
procuring rail and road infrastructure?
Currently, construction contracts are the most common way to
procure rail and road infrastructure in Sweden [12], while
maintenance contracts are mostly a type of performance contract
spanning over five years with specified functional requirements [5].
This is a short time period compared to the life-cycle of rail tracks,
which is why PSS contracts would be of interest instead.
6.2
To what extent are PSS contracts used for rail and road
infrastructure?
The two examples reviewed for rail infrastructure have both
similarities and differences. The Arlandabanan project included both
building the tracks and later maintaining them, as well as operating
the train traffic [21]. The Northern Line project, on the other hand,
focused on the actual trains and reinvestment, maintenance and
operation of them [27]. Both of the contracts involve the operating of
the traffic, but only in the case of Arlandabanan is the construction
of the tracks included. The Northern Line contract has an outputspecified performance level where availability is emphasized when
it comes to payment for the contractor [26]. For Arlandabanan, it is
a totally different case since that consortium receives its revenues
from the end customers [25] and not the procurer. While the
Northern Line contract was formulated as a PSS contract, it is not
known how specified the contract for Arlandabanan was, even
thought there seems to have been margins for flexibility for A-train
when formulating their solution [25]. Other similarities are the long
time period for the contracts, 45 years for Arlandabanan [21] and 30
years for the Northern Line [26]. This differs a lot from the time
periods currently used for maintenance contracts in Sweden.
The three road contracts reviewed differ significantly in size when
measured in kilometers as well as the payment mechanism. The
E18 and the E39 both have an output-specified payment where the
fee depends on availability and performance or service level [3233]. The E18 contract also includes the fulfillment of some quality
criteria in the payment model, and this is also the case for the E39
[32-33], but this model is far from the fixed yearly sum that the
payment for the Norrortsleden consists of, where only an
adjustment is made by an index [29]. All three contracts do however
make adjustments for changes in traffic, since this is something the
contractor cannot affect, meaning there has to be some flexibility in
the contracts making it possible for the contractor to carry the risk.
All contracts reviewed in this paper seem to have the life-cycle
perspective that is included in a PSS contract [19] as well as the
combination of products and services [19] that is required. The type
of products and services differs from different contracts, even
though they are implemented in the same industry. In four of the
five cases the procurer owns the product, the rail tracks, while in the
fifth case it is the contractor who owns the product, the trains, which
is in line with the characteristics of a PSS saying that it is not
necessarily the customer who gets the ownership of the product
[34]. However, even though most of the contracts are outputspecified there are still more detailed requirements from the buyer.
6.3
phase of the contracts can span over decades, implying a complete
evaluation will not be realized in the near future since most of the
contracts reviewed in this study have recently transitioned from the
building to the maintenance phase. Something worth mentioning is
that the reports are mainly financed by the governmental
organizations, in the case of Sweden by the Swedish Transport
Administration, showing that there is in fact an interest in these
types of contracts from the procurer side.
7
The lack of publications, in combination with interest from the
industry in this field, implies that there is a gap in the area where
research is needed both to facilitate the use of the contracts but
also to move the research forward. The next step in the DORIS
project is to conduct an interview study focusing on possibilities and
challenges concerning PSS contracts for rail and road infrastructure
in Sweden. The respondents will consist of the Swedish Transport
Administration, contractors and track design actors. This will be
followed by a quantitative study focusing on the environmental and
economical advantages and disadvantages with PSS contracts for
rail and road infrastructure.
8
ACKNOWLEDGMENTS
The authors would like to thank
Administration for financing the study.
9
the
Swedish
Transport
REFERENCES
[1]
Nilsson J.-E., (2009). Nya vägar för infrastruktur. Stockholm:
SNS Förlag.
[2]
Hedström
R.,
Ihs
A.,
Sjögren
L.,
(2005).
Funktionsupphandling av väg- och banhållning, Problem och
möjligheter. Linköping: Swedish National Road and Transport
Research Institute.
[3]
Nilsson J.-E., Ihs A., Leif S., Wiman L.G., Wågberg L.-G.,
(2006).
Funktionsupphandling.
Sammanfattning
av
kunskapsläget och rekommendationer för fortsatt forskning.
Linköping: Swedish National Road and Transport Research
Institute.
[4]
Stenbeck T., (2004). Incentives to Innovations in Roas and
Rail Maintenance and Operations. Stockholm: Royal Institute
of Technology.
[5]
Riksrevisonen, (2010). Underhåll av järnväg.
[6]
Nilsson J.-E., Bergman M., Pyddoke R., (2005). Den svåra
beställlarrollen. Stockholm: SNS Förlag.
[7]
Goedkoop M.J., Halen C.J.G.v., Riele H.R.M.t., Rammens
P.J.M., (1999). Product Service systems, ecological and
economical
benefits.
PricewaterhouseCoopers
N.V./Pi!MC/Storrm C.S./Pre Consultants, Netherlands.
In what way are the PSS contracts for rail and road
infrastructure documented?
Little has been done and consequently documented in the area of
PSS contracts for road and rail infrastructure. This is especially true
for the rail infrastructure, where few projects have been realized.
For the infrastructure that has in fact been procured with a PSS
type of contract, the information concerning the implementation
includes reports and not articles published in scientific journals.
These reports consist of information concerning the planning and
building of the infrastructure, but in general the contracts have not
been in place long enough to be evaluated. The maintenance
CONCLUSION AND FURTHER RESEARCH
Contracting for rail and road infrastructure in Sweden is done using
traditional construction contracts, and with maintenance contracts
using a small degree of performance dimension. A general
conclusion from this literature study is that the PSS contracts used
for road infrastructure are more developed than the ones for rail
infrastructure. This could be due to the complexity of the rail
structure, implying there are more issues to handle than when
building roads. It is therefore likely that the rail infrastructure can
benefit from the experience from the road infrastructure. On the
other hand, the road contracts are output-specified, but still have
elements of more detailed requirements.
[8]
Lingegård S., (2010). PSS contracts for rail and road
infrastructure - a literature study, LIU-IEI-R-- 10/0112--SE.
Linköping: Department of Management and Engineering.
[26] London Underground, (2010). Transport of London, PPP &
Performance Report 2009/2010, Report from the financial
year ending March 31 2010. London.
[9]
Banverket, (2008). Banverkets årsredovisning
Borlänge: The Swedish Rail Administration.
[27] Harding A., Watts P.,(2000). The Northern Line Train Service
Contract. Proceedings of the Institution of Mechanical
Engineers -- Part F -- Journal of Rail & Rapid
Transit.214(1):55-60.
[10] Banverket Produktion, (2009). Banverket
Årsrapport 2009. Banverket Produktion.
[11]
2008.
Produktion
Svensson N., (2006). Life-Cycle Considerations
Environmental Management of the Swedish Railway
for
Infrastructure [Doctorial]. Linköping: Linköping University.
[12] Nilsson J.-E., Pyddoke R., (2007). Offentlig och privat
samverkan kring infrastruktur- en forskningsöversikt.
Linköping: Swedish National Road and Transport Research
Institute.
[13] Banverket, (2009). Banverket årsredovisning 2009. The
Swedish Rail Administration.
[14] Ng I.C.L., Maull R., Yip N.,(2009). Outcome-based contracts
as a driver for systems thinking and service-dominant logic in
service science: Evidence from the defence industry.
European Management Journal.27(6):377-87.
[15] Ng I., Yip N., (2009). Identifying Risk and its Impact on
Constracting Through a Benefit Based-Model Framework in
Business to Busniess constracting: Case of the denfence
2
industry. 1st CIRP Industrial Product-Service Systems (IPS )
Conference. Cranfield University. p. 230.
[16] Alonso-Rasgado T., Thompson G., Elfström B.-O.,(2004). The
design of functional (total care) products. Journal of
engineering design.
[17] Brady T., Davies A., Gann D.M.,(2005). Creating value by
delivering integrated solutions. International Journal of Project
Management.23(5):360-5.
[18] Zietlow G., (2004). Implementing performance-based road
management and maintenance contracts in developing
countries-an instrument of German technical cooperation.
German development cooperation.
[19] Lindahl M., E. Sundin, A. Öhrwall Rönnbäck, G. Ölundh, J.
Östlin,, (2006). Integrated Product and Service Engineering –
the IPSE project. Changes to Sustainable Consumption,
Workshop of the Sustainable Consumption Research
Exchange (SCORE!) Network (wwwscore-networkorg),
supported by the EU’s 6th Framework Programme.
Copenhagen, Denmark.
[20] Mont O.K.,(2002). Clarifying the concept of product-service
system. Journal of Cleaner Production.10(3):237-45.
[21] Arlandabanan
Infrastructure.
Infrastructure
AB,
(2010).
Arlandabanan
[22] Arlandaexpress AB/A-train, (2010). Arlanda express- About
us.
[23] Arnek A., Hellsvik L., Trollius M., (2007). En svensk modell för
offentlig-privat samverkan vid infrstrukturinvesteringar.
Linköping: Swedish National Road and Transport Research
Institute.
[24] Enberg N., Hultkranz L., Nilsson J.-E., (2004). Arlandabanan,
en uppföljning av samhällsekonomiska aspekter på en
okonventionell projektfinansiering några år efter trafikstart.
Swedish National Road and Transport Research Institute.
[25] Nilsson J.-E., (2008). Upphandling, avtalsutformning och
innovationer. Borlänge: VTI.
[28] (2006). Three years on, and the PPP presents a MIXED
picture. Railway Gazette International.162(10):669-74.
[29]
Förnyelse i anläggningsbranschen (FIA), (2005). Slutrapport
kortversion: Funktionsentreprenad Täby Kyrkby-Rosenkälla.
Förnyelse i anläggningsbranschen.
[30] Förnyelse
i
anläggningsbranschen
(FIA),
(2008).
Funktionsentreprenad i Täby Kyrkby-Rosenkälla, byggskedet.
p. 22.
[31] Lehtinen P., Tuomisto T., Mikkola I.,(2006). Finland paves
roads for future PPPs. International Financial Law
Review.25:2:53-5.
[32] Vägförvaltningen (Finnra), (2005). Riksettan-till födel för alla,
Motorvägen
E18
Muurla-Lojo.
The
Finnish
Road
Administration.
[33] Norwegian Public Roads Administration, (2001). PPP-project
E39 Klett-Bårdshaug.
[34] Mont O.K.,(2002). Claryfying the concept of product-service
system. Journal of Cleaner Production.10:237-45.
APPENDIX 3 Lingegård, S. (2011) PSS Contracts for Rail Infrastructure. The R&D Management Conference June 28th‐30th,, Norrköping. PSS Contracts for Rail Infrastructure
Sofia Lingegård
Department of Management and Engineering, Linköping University, Linköping
Sweden
Abstract
Increased costs and few incentives for technical development within the rail infrastructure
industry have resulted in an increased interest for new contracting types such as PSS. This
paper examines the current situation, investigates benefits and challenges when using PSS
contracts, and attempts to develop a model for both traditional and PSS contracts. The results
show that advantages, such as incentives for development and potentially lower costs, are
challenged by a conservative buyer in combination with reservations. This is due to
inexperience and insecurity working with this business model, resulting in the actors
questioning the feasibility. The models developed clearly show the different phases of the
contracts and state which actor is responsible for the each phase. This is useful when
comparing different contracts, as well as when determining responsibility and issues related to
the interface between different phases and actors.
Keywords: product service systems, rail infrastructure, innovation, model.
1. Introduction
For a long period of time, productivity development has been weak in the construction
industry, such as road and rail infrastructure, possibly due to the traditional form of
contracting used. These traditional forms for operation and maintenance have caused
increased costs, and thus resulted in an increased interest for new contracting types (Hedström
et al., 2005, Nilsson, 2009). Construction contracts are currently used to a large extent in
Sweden, but this type of contract has shortcomings concerning weak incentives for the
development of procedures (Nilsson et al., 2006). Major obstacles for technical development,
as well as the limited room for innovation, are due to over-detailed specifications of how to do
things (Stenbeck, 2004). This gives the procurer a reason to design the contracts to produce
more incentives for cost efficiency (Nilsson et al., 2006). To improve the cost efficiency of
maintenance by improving the conditions as early as in the development phase, and to
perform maintenance as efficiently as possible considering the entire life cycle of the
products, is also in the strategy of the Swedish Transport Administration (Riksrevisonen,
2010). One way of doing this could be with another type of contracting. Performance
contracting gives better incentives for contractors to develop the product by e.g. finding a
better balance between building and maintaining costs, and the contractor is responsible for
delivering an agreed-upon function which should provide a cheaper solution for both procurer
and contractor (Nilsson et al., 2005). This type of contracting is also known as Product
Service Systems or PSS (Goedkoop et al., 1999). A more extensive review of this type of
contracting can be found in Section 3.
In cooperation with the Swedish Transport Administration (STA), the DORIS (Development
of integrated product service Offerings for Rail Infrastructure Systems) project was launched
to investigate the possibility for PSS contracts within the rail infrastructure in Sweden. This
paper, partly based on parts of the initial literature study (Lingegård, 2010) as well portions of
the subsequent interviews with actors in the industry, has the following objective.
1.1.
Objective
The objective of this paper is to investigate, through a literature review and an interview
study, what has been realized so far for rail infrastructure in the PSS area, and to highlight
potential benefits and challenges when using PSS contracts for rail infrastructure.
Furthermore, a model illustrating traditional contracts and PSS contracts will be developed.
This leads to the following research questions:
RQ1: To what extent are PSS contracts used for rail infrastructure?
RQ2: What phases are included in a model for traditional contracts and PSS contracts,
respectively, when procuring rail infrastructure?
RQ3: What possibilities and challenges are the actors identifying for PSS contracts for rail
infrastructure?
2. Method
An introductory interview with a well-informed employee at the Swedish Transport
Administration was the starting point for this research. The goal was to gain sufficient
knowledge within the area to start searching for literature for this study. A literature review
was selected as the first phase of the research, since it could provide information concerning
the current praxis in the industry in focus as well as to present a picture of the main areas of
interest, and thereby steer the research towards an interesting and useful path.
Literature reviewed includes several different kinds of sources: scientific articles, homepages,
reports, master theses as well as doctoral and licentiate theses. The information was limited to
just a few sources, and most of the information was retrieved from the Swedish National Road
and Transport Research Institute and the Swedish Transport Administration. When possible,
triangulation using different sources was used. No geographical limits were employed when
searching for literature; instead, the search included literature from several continents, even
though some of it is not included in this paper. This is partly due to the conditions for the
contracts, which differed significantly from the ones in Sweden, and therefore are not relevant
in this study, partly due to the difficulty in judging the quality. The next step was to conduct
interviews and thereby dig deeper into the areas of interest. The literature study provides a
foundation, but the relationship between the actors as well as the perspectives on PSS for the
different actors had to be explored using interviews. The respondents were chosen using the
snowball approach, starting with the one contact that initialized the literature search. The
interviews were performed by phone or during meetings and were always recorded.
3. Product Service System: one concept, several names
The focus for this paper is PSS contracts, where the procurer requests a function instead of a
specific execution (Nilsson & Pyddoke, 2007). This type of functional buying/selling is
known by different names, with the most commonly occurring presented in Table 1 with no
intergroup order.
Table 1: Different names for performance-based contracts.
Name
Outcome-based
contracting
Performancecontracting
Performancebased contracts
Definition/description
“…a contracting mechanism that allows the customer to
pay only when the firm has delivered outcomes, rather
than merely activities and tasks.”
“The contract terms are based on that future users are
given access to some specific services, not on the
contractor fulfilling technical specifications: it is the
performance of the asset over the contracting period
that matters.”
“…are about contracting on performance, rather than
tasks or outputs by the service provider.”
Reference
Ng et al., 2009, p.
1 (Ng et al., 2009)
Nilsson et al.,
2006, p. 7 (Nilsson
et al., 2006)
Ng and Yip, 2009,
p. 207 (Ng & Yip,
2009)
Functional sales
Solutions
projects
Performance
contracts
Product Service
System, PSS
Integrated
Product Service
Offerings, IPSO
“The customer purchases a function and the hardware
plus service includes the totality of activities that enable
the customer to benefit from a total functional
provision.”
“…solutions projects usually include the responsibility
for the provider to manage, resource, support and
improve the delivery of the solution through the life of
the product or system in use.”
“Performance Contracts are defining a product and it is
up to the contractor how to achieve this. Therefore,
work selection, design and delivery are all his
responsibility.”
“a marketable set of products and services capable of
jointly fulfilling a user’s need”
“…from a lifecycle perspective, to offer and optimise a
solution with a combination of products and services
that satisfies an identified customer need, and at the
same time increases the suppliers’ competitiveness. “
Alonso-Rasgado
et al., 2004, p. 515
(Alonso-Rasgado
et al. , 2004)
Brady et al., 2005,
p. 364 (Brady et
al. , 2005)
Zietlow, 2005, p. 3
(Zietlow, 2004)
Goedkoop et al.,
1999, p. 18
(Goedkoop et al.,
1999)
Lindahl et al.,
2006, p. 1-2
(Lindahl, 2006)
From this table it can be concluded that even though the names of the concepts differ, they
still include the same content; namely, the focus is on the output, and not on how the output is
achieved. In this paper, the concept will be called Product Service System, or PSS, since this
is the most common name for the concept.
3.1.
PSS characteristics
PSS offerings have a life-cycle perspective, and the combination of products and services can
be combined into an optimized solution for the customer, as well as give the manufacturing
company the possibility to have control over the product throughout its whole life-cycle
(Brady et al., 2005, Lindahl, 2006). PSS provides the supplier with a possibility to increase
the value of the solution for the customer by integrating components in new ways (Brady et
al., 2005), and is thereby a driver for the development of a technical solution (Lindahl, 2006).
This provides incentives for the supplier to realize a more economical and environmental
development when considering the whole life-cycle (Lindahl, 2006). Companies acting in a
mature industry can use the PSS as a growth strategy and compete with their core competence
rather than with physical assets (Mont, 2002). The author also states that PSS requires a closer
and improved relationship with the customer, and the customer no longer has to be the owner
of the product.
4. The current situation for rail infrastructure procurement
The Swedish Transport Administration, formerly the Swedish Rail Administration, is
responsible for 80% of the total rail system in Sweden (Banverket, 2008). Since 2001,
maintenance contracts for the Swedish rail system have been procured in competition
(Banverket Produktion, 2009). Although competitive procurement has resulted in reduction in
costs for maintenance, the costs are still increasing, and in 2008 maintenance and
reinvestment costs made up over 50% of the cost for new investments.
It was concluded in a doctorial thesis (Svensson, 2006) concerning the former Swedish Rail
Administration that there has not been significant pressure on the organization, internally or
externally, to use life-cycle environmental management, and the work has been focused on
environmental issues found locally, and not on life-cycle perspectives. Furthermore, the
author states that the railway industry needs to adopt new perspectives to start working with
environmental management of the products, and to set environmental requirements when
designing new products, i.e. before introducing them in the material supply chain.
Construction contracts are the most common contracts within the infrastructure construction
industry in Sweden (Nilsson & Pyddoke, 2007). The concept is based on the procurer
specifying what, how and how much for the project (Nilsson et al., 2005). The tenders are
made in unit prices, with the choice of tender mainly based on the lowest price (Hedström et
al., 2005). Construction contracts imply that the procurer carries all the risk, and a maximum
roof for the price is set which does not create any incentives for the contractors to make the
processes more efficient; instead, they benefit from reaching the maximum sum (Nilsson et
al., 2005).
Since 2005, performance contracts have been used for maintenance in Sweden
(Riksrevisonen, 2010), meaning that “…the Swedish Rail Administration procures a
functionality of the track that has been set in advance. The contractor subsequently decides
what measures to take with respect to the performed reviews and regulations for
maintenance.” (Banverket, 2009) The length of the contracts is 5 years, with an additional 2year option, and uses bonuses and penalties (Riksrevisonen, 2010).
The phases in the life-cycle of railway infrastructure are the following (Banverket, 2002,
Trafikverket, 2011):
•
Design/Planning: When a need is identified and different solutions are evaluated,
enquiry documentation is generated, including requirements for the specific
procurement as well as requirements on potential tenderers. The process from idea to
finished construction may take several years.
•
Construction: The construction of the rail infrastructure.
•
Operations: Measures taken to make sure the construction works as intended without
changing the technical or functional state of the construction. Examples of operations
measures include cleaning of the facility and removal of leaves and snow.
•
Maintenance: Measures taken during the life-cycle of the construction to maintain
and restore the standard. Preventive maintenance is perform in set intervals or based
on the state of the construction, while corrective maintenance deals with errors that
have occurred in the functionality of the construction.
Another type of maintenance is the reinvestment to restore the original state of the
construction. The construction has to be evaluated as technically expended and/or not
economically feasible to maintain. The difference between maintenance and
reinvestment is different cost levels.
4.1.
Industry examples of PSS for rail infrastructure
This section provides two different examples of PSS projects which are collected from
Sweden and the UK, as shown in Table 2.
4.1.1. Arlandabanan, Sweden
Arlandabanan is a railroad section with double tracks, including a 7 km tunnel and several
underground stations, between the city of Stockholm and Arlanda airport (Arlandabanan
Infrastructure AB, 2010). The winning tender for this Public-Private Partnership (PPP)
contract was a consortium constructed by six companies from several different countries
(Arlandaexpress AB/A-train, 2010). The consortium later formed the company, A-train, to
finance, build and subsequently run the train traffic. In 1999, after three years of construction,
the ownership of the facility was transferred back to Arlandabanan Infrastructure AB, but Atrain got the responsibility to run and maintain the facility during the same time period, as
well as the right to use the tracks for traffic until 2040 (Arlandabanan Infrastructure AB,
2010). In this contract, ticket revenues from the end customers serve as revenues for A-train
(Nilsson & Pyddoke, 2007).
A conditional loan from the government made up one-third of the construction costs, and all
the income risk was carried by the consortium, as well as most of the cost risk in the project
(Arnek et al., 2007). A-train had the right to a penalty from Arlandabanan Infrastructure AB
for major changes in the prerequisites, e.g. if it was not feasible to construct a double track
within the time that was agreed, due to e.g. discovery of archeological findings or incorrect
technical information (Enberg et al., 2004). A-train got the freedom to balance the cost for the
initial investment and the cost for maintenance, and subsequently chose to use another
solution for the tracks than the original idea of the procurer (Nilsson, 2008).
4.1.2. The Northern Line, UK
In 2003, three long-term contracts including maintenance and upgrading of infrastructure for
the London Underground network were signed. These PPP contracts spanned over 30 years,
with opportunities to review the contracts and requirements every 7.5 years (London
Underground, 2010). The contract for the Northern Line included the leasing of the trains and
an area of 50 stations, and full responsibility for the design, manufacturing and cleaning of
trains and related equipment (Harding & Watts, 2000). During the first four years, 80% of the
contracts consisted of capital works and 20% of service elements, while the service made up
100% of the total in the fifth year and beyond.
The contracts are output-specified, and the required performance levels were measured with
the following three factors (London Underground, 2010):
•
Availability, counting delays and disruptions lasting longer than two minutes.
•
Capability of the line.
•
Ambience, measuring the quality of the customers’ travelling environment.
Before the start of the contracts in 2003, the measures were set at a level of around 5% worse
than the historic data of the London Underground. This was decided to be the benchmark for
the first five years, and then subsequently become more challenging with time (London
Underground, 2010). The report also states that bonuses and penalties are used as additional
adjustment for the performance, and liabilities for environment and safety are included.
Table 2: Reviewed contracts for rail infrastructure.
Project
Arlandabanan,
20 km (SWE)
The Northern Line,
50 stations, (UK)
Content
Finance, build, operate
and maintain the tracks.
Operate the train traffic.
Design, manufacture and
service the trains. Operate
the train traffic.
Length
45 years
30 years
Payment
Contractor built the tracks and
is now leasing them. Ticket
revenues.
Leasing contract based on a
guaranteed number of trains
and performance improvement.
5. Modelling the rail infrastructure procurement
The interview study includes seven respondents from different contracting companies and
seven respondents belonging to the STA, whereof three work within the Investment Division,
three within the Operations Division and one within the Material Services. The Investment
Division procures construction contracts while the Operations Division procures operation
and maintenance contracts. The respondents believe that these two divisions currently do not
have much interaction. A model illustrating who holds the responsibility for each phase for
the traditional contracts currently used to procure rail infrastructure in Sweden is shown in
Figure 1. The Investment Division participates in the Design and Construction phase, while
the Operations division is involved in the Operations and Maintenance contracts.
Design,
3 months
Construction,
0,5-3 years
STA
Investment
Contractor X
Operations, 5+2 years
Maintenance, 5+2 years
STA
Operations
Contractor Y
Figure 1: Illustration of traditional contracts for procuring rail infrastructure in Sweden and what part
has the responsibility for each phase.
The contractors formulate tenders based on the enquiry documentation developed by the STA,
as described in Section 4. The procurement of the construction and the subsequent operations
and maintenance are done independently. When an operations and maintenance contract ends
a new procurement process is initiated. The owner of the last contract has an advantage when
bidding on the next contract, since this company is already established in the area and hence
likely can offer a tender with a lower cost.
5.1.
Procuring infrastructure with PSS contracts
A PSS contract for rail infrastructure would include design, construction as well as operations
and maintenance, as shown in Figure 2. The STA would announce an enquire document,
where only what is wanted is specified, and not how it is supposed to be realized. The
planning of the stretch and the environmental evaluations are still performed by the STA, but
the design of the construction and the maintenance are the work of the tenderer. Tenders are
sent in from contractors, with all tenders within the laws and regulations required, and the
STA does not interfere with the design. The STA does however evaluate the design in the
tenders, after the Design phase in Figure 2, and subsequently chooses the best offer. Even
though the Contractor X in Figure 2 is shown as being responsible for the whole contract, this
company would need to bring in sub-contractors to be able to manage the whole life-cycle.
Normally, a combination of more general contractors and railway-specialized contractors are
involved when rail infrastructure is constructed and maintained.
The respondents did not have a common opinion concerning the length of the contract, mostly
due to the operations and maintenance phase of the contract, which was hard for them to
estimate. These contracts span over five to seven years today, and the question remains of
how many years would be suitable for a PSS contract. Another issue raised concerning the
contracts is what types of projects are suitable for them, i.e. new constructions and/or
reinvestments.
Design,
+3 months
Construction,
0,5-3 years
Operations, 10-45 years
Maintenance, 10-45 years
Contractor X
Figure 2: Illustration of PSS contracts for rail infrastructure and the actor that is responsible.
5.2.
PSS Advantages and challenges for rail infrastructure
Among the respondents, the views of advantages and challenges concerning PSS for rail
infrastructure varied. Differences were also found within the STA and among the contractors.
On the other hand, several issues were indicated as advantages and challenges for both
groups, as seen in Table 3.
Table 3: Advantages and challenges described by the interviewed respondents in the rail infrastructure
industry.
Advantages
Challenges
Provide the full picture of the life-cycle.
Organization-related issues such as culture
and competence.
Increased risk for the provider with longterm contracts.
Impact on the market; competition and size
of companies.
Suitable length of the contract concerning
risk management and payback time.
Procuring a function boosts development
and innovation.
More durable solutions with a long-term
perspective.
Result in a lower total cost when balancing
construction costs with operations and
maintenance costs.
Suitable projects; new projects and/or
reinvestments
A life-cycle perspective boosts development
The contractors would have the responsibility for both the construction and the maintenance of
a specific area of rail infrastructure, which was mentioned as an advantage by the respondents,
since it would imply more room for creativity and innovative solutions. Furthermore, according
to most of the contractors knowing that they were going to maintain the area themselves would
make them build more durably, since they have the possibility to balance the construction cost
with the maintenance cost. They argue that more flexible and suitable solutions are likely to
bring down the total cost of the project. This is in line with the literature stating that using a
product-service mix with more durable materials and other designs may prolong the lifetime of
the product and potentially optimize maintenance and operations (White et al., 1999).
Furthermore, with a PSS contract the contractors feel there are incentives for innovation and
clever solutions. New combinations of products and services, as well as more customized
offers, could better respond to the change in conditions and needs (Mont, 2002).
Risk management
According to the respondents, a major hurdle for PSS is the fact that they claim the contractor
will have to carry more risk compared to traditional contracts. This is due to the uncertainty
factor connected to long-term contracts, where the contractor would have to base their pricing
on estimations. This mainly concerns the operations and maintenance phase, but according to
the respondents even uncertainties in the construction phase could be considerable in some
cases. This could potentially increase the price, making this a concern for both provider and
buyer. This matter has been discussed in the literature, with (Oliva & Kallenberg, 2003) saying
that the profitability of a provider depends on the ability to assess risks accurately. On the other
hand, good risk management could be seen as a competitive advantage for the contractors if
they learn how to design to avoid or at least decrease the risk. There is another dimension to the
long-term factor in the PSS literature; namely, the possibility for manufacturing companies to
continuously receive revenue when providing services as well (Brady et al., 2005). In the rail
infrastructure industry, however, contractors already provide the services, but traditionally in
independent operations and maintenance contracts where the risk is lower. This means that the
cost reduction from having the overall picture and making clever solutions will have to exceed
the potential price increase caused by the risks connected to a long-term contract. This is all
dependent on the contractor’s ability to assess risks, and it is possible there is a learning curve
involved that would diminish this issue with time and experience.
Conservative corporate culture
Both the STA and the contractors are concerned about the conservative culture within the
STA, and also the way the organization is structured, where the Investment and Operations
Divisions have separate budgets and sub-optimize their profits. This could cause problems
when evaluating the tenders after the Design phase. This could also be potentially problematic
when evaluating completed contracts, since the two divisions have different perspectives. The
lack of information on lifetime costs of ownership can prevent the customer from
understanding the product-service options (Railway Gazette International, 2006). In this case,
however, the hurdle is probably more due to a traditional way of thinking and a short-time
perspective from the buyer’s side. Furthermore, hesitation concerning the acceptance of this
type of contract within the corporate culture of the STA has been raised from both the STA
itself and from the contractors. This resistance has been described in previous research as
preventing the change needed to develop new product-service mixes (Cooper & Evans, 2000).
Market situation
The respondents are also concerned about the potential effect the PSS contracts could have on
the market. In a mature industry, PSS could be part of a growth strategy (Mont, 2002), but
since the respondents believe that larger international companies would be interested in the
PSS contracts, there might not be room for the national companies to grow. The respondents
also stress that smaller contractors would not be able to bid on large contracts like this, and
also that long-term contracts could potentially freeze the market. If there are any national
companies capable of taking on PSS responsibility, they would be the ones that already are of
decent size, since it has been emphasized that smaller companies would not stand a chance in
the current competition.
5.3.
Applying the model
The two examples reviewed for rail infrastructure, the Arlandabanan project in Figure 3 and
the Northern Line in Figure 4, have both similarities and differences. Both include design,
construction and operations and maintenance as well as operating the train traffic. On the
other hand, the Arlandabanan project involves construction of new infrastructure while the
Northern Line focuses on reinvestment of the infrastructure (Arlandabanan Infrastructure AB,
2010, Harding & Watts, 2000). The Northern Line contract has an output-specified
performance level where availability is emphasized when it comes to payment for the
contractor (London Underground, 2010). It is a totally different case for Arlandabanan, since
that consortium receives its revenues from the end customers (Nilsson, 2008) and not the
procurer. While the Northern Line contract was formulated as a PSS contract, it is not known
how specified the contract for Arlandabanan was, even though there seems to have been
margins for flexibility for the A-train when formulating their solution (Nilsson, 2008). Other
similarities are the long time period for the contracts, 45 years for Arlandabanan
(Arlandabanan Infrastructure AB, 2010) and 30 years for the Northern Line (London
Underground, 2010). This differs significantly from the time periods currently used for
maintenance contracts in Sweden, discussed in previous sections.
Both contracts reviewed in this paper seem to have the life-cycle perspective that is included in
a PSS contract (Lindahl, 2006), as well as the combination of products and services (Lindahl,
2006) that is required. The type of products and services differs for the contracts, even though
they are implemented in the same industry.
The Arlandabanan project
Design
Construction,
3 years
Maintenance, 45 years
Operations, 45 years
Operating the train traffic,
45 years
Contractor X
Figure 3: Illustration model of the Arlandabanan project.
The Northern Line
Design
Maintenance, 30 years
Construction,
+ 5 years
Operations, 30 years
Operating the train traffic,
30 years
Contractor X
Figure 4: Illustration model of the Northern Line project.
6. Concluding discussion and conclusion
Judging from the interviews, it is clear that PSS contracts are believed to improve the
incentives for development and innovation in the industry. This type of contract also has the
potential for optimizing the process and lowering the total cost. One major concern is the
increased risk taken by the contractors, potentially increasing the prices and thereby
overthrowing the potential cost reduction from the optimization. Other issues are the type of
project suitable for PSS contracts, the length of the contracts and the conservative culture
within the STA. These issues, in combination with reservations due to inexperience and
insecurity working with this business model, make the respondents question the feasibility of
PSS contracts.
The models constructed illustrate the contracts used today for procuring rail infrastructure as
well as the composition of PSS contracts. The models clearly show the different phases of the
contracts, and state which actor is responsible for the each phase. This is useful when
comparing different contracts, and also when determining responsibility and issues related to
the interface between different phases and actors. More stakeholders could potentially be added
to the model and thus influence these issues in different phases, such as in the operation of train
traffic, if this function is not included in the contract.
6.1.
Further research
The next step in the DORIS project is to further analyze the material from the interview study
and dig deeper into the reasoning of the respondents. The study will also be extended with a
workshop including top managers from the STA to investigate and clarify the role, motivation
and attitude towards PSS contracts for rail infrastructure. This will be followed by a
quantitative study focusing on the environmental and economic advantages and disadvantages
of PSS contracts for rail infrastructure.
Acknowledgments
The author would like to thank the Swedish Transport Administration for financing the
research and the respondents for contributing with their time and knowledge.
References
Alonso-Rasgado T., Thompson G. & Elfström B.-O.,(2004). The Design of Functional (Total
Care) Products. Journal of engineering design.
Arlandabanan Infrastructure AB, (2010). Arlandabanan Infrastructure.
Arlandaexpress AB/A-train, (2010). Arlanda Express- About Us.
Arnek A., Hellsvik L. & Trollius M., (2007). En Svensk Modell För Offentlig-Privat
Samverkan Vid Infrstrukturinvesteringar. Linköping: Swedish National Road and Transport
Research Institute.
Banverket, (2002). Asek Ii-Delprojekt Dirft Och Underhåll I Banverket.
Banverket, (2008). Banverkets Årsredovisning 2008. Borlänge: The Swedish Rail
Administration.
Banverket, (2009). Banverket Årsredovisning 2009. The Swedish Rail Administration.
Banverket Produktion, (2009). Banverket Produktion Årsrapport 2009. Banverket Produktion.
Brady A., Davies A. & Gann D.M.,(2005). Creating Value by Delivering Integrated
Solutions. International Journal of Project Management.23(5):360–5.
Brady T., Davies A. & Gann D.M.,(2005). Creating Value by Delivering Integrated Solutions.
International Journal of Project Management.23(5):360-5.
Cooper T.Evans S., (2000). Product to Services. Sheffield: The Centre for Sustainable
Consumption, Sheffield Hallam University.
Enberg N., Hultkranz L. & Nilsson J.-E., (2004). Arlandabanan, En Uppföljning Av
Samhällsekonomiska Aspekter På En Okonventionell Projektfinansiering Några År Efter
Trafikstart. Swedish National Road and Transport Research Institute.
Goedkoop M.J., Halen C.J.G.v., Riele H.R.M.t. & Rammens P.J.M., (1999). Product Service
Systems, Ecological and Economical Benefits. PricewaterhouseCoopers N.V./Pi!MC/Storrm
C.S./Pre Consultants, Netherlands.
Harding A.Watts P.,(2000). The Northern Line Train Service Contract. Proceedings of the
Institution of Mechanical Engineers -- Part F -- Journal of Rail & Rapid Transit.214(1):55-60.
Hedström R., Ihs A. & Sjögren L., (2005). Funktionsupphandling Av Väg- Och Banhållning,
Problem Och Möjligheter. Linköping: Swedish National Road and Transport Research
Institute.
Lindahl M., E. Sundin, A. Öhrwall Rönnbäck, G. Ölundh, J. Östlin,, (2006). Integrated
Product and Service Engineering – the Ipse Project. Changes to Sustainable Consumption,
Workshop of the Sustainable Consumption Research Exchange (SCORE!) Network
(wwwscore-networkorg), supported by the EU’s 6th Framework Programme. Copenhagen,
Denmark.
Lingegård S., (2010). Pss Contracts for Rail and Road Infrastructure - a Literature Study, LiuIei-R-- 10/0112--Se. Linköping: Department of Management and Engineering.
London Underground, (2010). Transport of London, Ppp & Performance Report 2009/2010,
Report from the Financial Year Ending March 31 2010. London.
Mont O.K.,(2002). Clarifying the Concept of Product-Service System. Journal of Cleaner
Production.10(3):237-45.
Mont O.K.,(2002). Claryfying the Concept of Product-Service System. Journal of Cleaner
Production.10:237-45.
Ng I.Yip N., (2009). Identifying Risk and Its Impact on Constracting through a Benefit
Based-Model Framework in Business to Busniess Constracting: Case of the Denfence
Industry. 1st CIRP Industrial Product-Service Systems (IPS2) Conference. Cranfield
University. p. 230.
Ng I.C.L., Maull R. & Yip N.,(2009). Outcome-Based Contracts as a Driver for Systems
Thinking and Service-Dominant Logic in Service Science: Evidence from the Defence
Industry. European Management Journal.27(6):377-87.
Nilsson J.-E., (2008). Upphandling, Avtalsutformning Och Innovationer. Borlänge: VTI.
Nilsson J.-E., (2009). Nya Vägar För Infrastruktur. Stockholm: SNS Förlag.
Nilsson J.-E., Bergman M. & Pyddoke R., (2005). Den Svåra Beställlarrollen. Stockholm:
SNS Förlag.
Nilsson J.-E., Ihs A., Leif S., Wiman L.G. & Wågberg L.-G., (2006). Funktionsupphandling.
Sammanfattning Av Kunskapsläget Och Rekommendationer För Fortsatt Forskning.
Linköping: Swedish National Road and Transport Research Institute.
Nilsson J.-E.Pyddoke R., (2007). Offentlig Och Privat Samverkan Kring Infrastruktur- En
Forskningsöversikt. Linköping: Swedish National Road and Transport Research Institute.
Oliva R.Kallenberg R.,(2003). Managing the Transition from Products to Services.
International Journal of Service Industry Management.14(2):160-72.
Railway Gazette International, (2006). Three Years on, and the Ppp Presents a Mixed Picture.
Railway Gazette International: DVV Media UK Ltd. p. 669-74.
Riksrevisonen, (2010). Undehåll Av Järnväg.
Stenbeck T., (2004). Incentives to Innovations in Roas and Rail Maintenance and Operations.
Stockholm: Royal Institute of Technology.
Svensson N., (2006). Life-Cycle Considerations for Environmental Management of the
Swedish Railway Infrastructure [Doctorial]. Linköping: Linköping University.
Trafikverket, (2011). Så Blir Väg- Och Järnväg Till.
White A.L., Stoughton M. & Feng L., (1999). Servicizing: The Quiet Transistion to Extended
Product Responsability. Boston: Tellus Institute.
Zietlow G., (2004). Implementing Performance-Based Road Management and Maintenance
Contracts in Developing Countries-an Instrument of German Technical Cooperation. German
development cooperation.
APPENDIX 4 Lingegård, S., Sakao, T. & Lindahl, M., (2011) Theoretical Environmental Comparison of Integrated Product Service Offerings vs. Traditional Sales. In: Cogan B, editor. Systems Engineering. Chapter Number
Integrated Product Service Engineering Factors influencing environmental performance
Sofia Lingegård, Tomohiko Sakao*, Mattias Lindahl
Department of Management and Engineering, Linköping University
Sweden
1. Introduction
In society today there is increased awareness about environmental problems, e.g. climate
change and pollution. This, in combination with concern about future shortages of natural
resources, has resulted in increased pressure to find innovative strategies that can tackle
these problems. Simply put, the main reasons for these problems are tied to society's use of
products, and in general caused by:
• Number of products used – the growing population poses a need for an increasing
number of products.
• Time products are used – the average time a product is used before it is scrapped has
decreased. There are several reasons for this, e.g. quickly-changing needs and poor
quality.
• How materials and energy are consumed for a product – in general, the material and
energy invested for a product is not re-used or is used in an inefficient way.
Clearly, strategies for tackling these problems need to be investigated. During the last two
decades, industry and academia have proposed and tried to implement several strategies
and solutions. From academia, these include Functional Economy (Stahel 1994) and the
Integrated Product Service Engineering (IPSE) concept, also often called Product/Service
Systems (PSS) (e.g. (Mont 2002; Tukker and Tischner 2006; Sakao and Lindahl 2009)). PSS is
defined, for instance, as “a marketable set of products and services capable of jointly
fulfilling a user’s needs” (Goedkoop, Halen et al. 1999). Service in this chapter includes
operation, maintenance, repair, upgrade, take-back, and consultation. In addition to this
definition, other authors (Tukker and Tischner 2006) regard PSS as a value proposition, one
including its network and infrastructure. Another concept, named Total Care Products
(Functional Products), has been developed as well with some connection to PSS. It
comprises “combinations of hardware and support services”. The economically efficient
functioning of this concept should be achieved by the proposition of an “intimate business
relationship” between the service provider and the customer. As a result, both the provider
and the customer obtain benefits through sharing existing business risks (Alonso-Rasgado,
Thompson et al. 2004; Alonso-Rasgado and Thompson 2006). Furthermore, the proposal of a
“life cycle-oriented design” (Aurich, Fuchs et al. 2006) highlights an important step for the
“product and technical service design processes” integration. It is also interesting that
Aurich et al. address designing products and services based on life cycle thinking.
Furthermore, some specific engineering procedures and computer tools have been
developed and validated with industrial cases (e.g. (Sakao and Shimomura 2007; Sakao,
Birkhofer et al. 2009; Sakao, Shimomura et al. 2009)).
However, the research in this area is still in its infancy and a number of questions remain
unanswered. Specifically, a general weakness in existing literature is that even though a
large number of authors have stressed PSS’ environmental and economic potential (e.g. (Roy
2000; Mont, Singhal et al. 2006)), very few studies have proved PSS’ potential for changing
environmental performance.
In the manufacturing industry, the trend of servicizing has been evident regardless of the
environmental concern or the academic debate (e.g. (Sakao, Napolitano et al. 2008)). In much
of the manufacturing industry today, numerous companies’ business offerings are a
combination of physical products and services. In fact, over 50% of the companies in the
USA and Finland provide both physical products and services (Neely 2007). Some
manufacturing firms are even strategically shifting from being a “product seller” towards
becoming a “service provider” (Oliva and Kallenberg 2003). Namely, the industry possesses
a driver for service integration, something which should be seen as an interesting
opportunity for academia (Isaksson, Larsson et al. 2009).
As explained above, PSS is a likely solution for environmental problems from the theoretical
and practical viewpoints. However, little is known scientifically about PSS’ impact on
environmental performance. It is the research community who should respond to this lack
of knowledge, and this is the overall subject of this chapter.
There are two main questions to consider. One is under which conditions PSS is a suitable
offering, since it is a prerequisite for PSS to work in business practice in order to realize its
influence on environmental performance. In general, PSS approaches seem to work well if
any of the following conditions apply (Tukker and Tischner 2006):
• products with high costs to operate and/or maintain;
• complex products that require special competencies to design, operate, manage and/or
maintain;
• products with considerable consequences or costs if not used correctly or
appropriately;
• products where operational failure or downtime is not tolerated;
• products with long life; or
• products with only a few major customers on the market.
In addition, recent research has reported on characteristics of products suitable for PSS. For
instance, (Lay, Copani et al. 2010) argue that the innovativeness of products has positive
influences on the integration of product and service. Theoretical investigation has also
begun: For instance, property rights (Furubotn and Pejovich 1972) have gained attention as a
key for PSS to be meaningful (Hockerts 2008; Dill, Birkhofer et al. 2011). Yet, all these
literature are insufficient, especially from scientific viewpoints.
The other main question is which PSS factors influence the environmental performance in
comparison with traditional product-sales type business. (Tukker 2004) is one of very few
who have attempted to analyze the relation between PSS types and their influence on
environmental impact, yet he fails to present a thorough background and reasons.
In sum, thus far there has been growing interest in PSS. Among other things, there has been
relatively more work with the analytical approach (e.g. (Mont 2002)), and less work with
PSS synthesis (e.g. (Sakao and Lindahl 2009)). Even with relatively more work available on
analysis, there is analysis to be conducted as to PSS’ factors making PSS meaningful as a
business and influential on environmental impacts. This PSS with a certain level of
complexity is believed to be a good example of areas where Systems Engineering
(Lindemann 2011) can contribute.
2. Objective and method
This chapter endeavours to lead the scientific discussion regarding which IPSE factors are
expected to, in theory, lower the environmental impact of a life cycle compared to a
traditional product sales business. To do so, the IPSE concept is introduced, first with an
emphasis on engineering processes rather than an object such as PSS. In the following
sections, four aspects from theory will be discussed: product development, information
asymmetry, economies of scale, and risk. These sections discuss how environmental impacts
are influenced from a product life cycle perspective, and highlight crucial factors
theoretically. They are followed by an overall discussion and an examination of some
promising future work. The chapter provides the research community with a first
theoretical cornerstone regarding environmental performance by IPSE. To practitioners, it
will be an eye opener for how they engineer.
3. Redefining IPSE
Our research group at Linköping University and KTH (The Royal Institute of Technology)
in Sweden has developed what is termed Integrated Product Service Engineering (IPSE)
(Lindahl, Sundin et al. 2006). IPSE has the following characteristics in relation to other
existing concepts. First, and in common with PSS, IPSE looks at combinations of products
and services. Second, IPSE is a type of engineering, which is different from PSS per se. In
addition, it attempts holistic optimization from the environmental and economic
perspectives throughout the life cycle. Third, IPSE consists not only of design as the most
influential activity, but possibly other engineering activities such as maintenance, upgrade,
remanufacturing, etc. Therefore, IPSE has to deal with the time dimension of the life cycle.
Figure 1 depicts different interesting processes for IPSE, obviously showing various
disciplines and different aspects to be addressed.
This section reveals additional characteristics of IPSE. An IPSO (Integrated Product Service
Offering) is an offering that consists of a combination of products and services that, based
on a life cycle perspective, have been integrated to fit targeted customer needs. Further,
IPSO means that products and services have been developed in parallel and are mutually
adapted to operate well together. This contrasts with the traditional product sale, where the
provider transfers control and responsibility to the customer at the point of sales. An IPSO
often creates close contact between the supplier and customer, leading e.g. to offers being
customized and improved to better suit the customer. In many cases, the service provider
retains responsibility for the physical products in the IPSO during the use phase. One
example is when a client does not own the machines installed by the supplier, but only uses
them and pays for the manufactured volumes; then, when the customer does not need them
anymore, the supplier takes back the machines. Such cases increase the provider’s interest to
ensure that the customer uses machines installed as long as possible and that any
disturbances, such as the need for repairs, are reduced. The increased responsibility by the
IPSO supplier also potentially facilitates improvements identified and implemented in
comparison to traditional sales. This could lead to a product lifetime extension.
IPSO buyer/user
Product
usage
Purchase
material, energy, information, money, person hours
IPSO provider
Marketing
& sales
IPSO dev.
R&D
Business
model
design
Logistics
Service
delivery
Service
dev.
Production
EOL
treatment
Product
dev.
Fig. 1. Processes of IPSE’s interest (Sakao, Berggren et al. 2011)
Based on (Sakao 2009), IPSE is explained in comparison to Ecodesign (environmentally
conscious design) due to some commonality with Figure 2 (a) and (b), where different types
of engineering activities are put on the identical graph. The graph depicts the environmental
impact of a certain type of product with high impact from its usage phase, which holds true
in many cases. The horizontal axis represents the time dimension on the life cycle. Bars
represent the environmental impact from each phase such as production and usage (scaled
with the left vertical axis). A dotted line represents the accumulated influence of the activity
at each phase of the life cycle’s environmental impact. It is shown that the design phase has
by far the highest ratio (some 80%), which is generally known.
As seen by the dotted line, Ecodesign is obviously crucial, since it is the design activity with
the dominant influence. However, is Ecodesign sufficient? The answer is no, since it leaves
out control after the design phase. This is why IPSE is more effective, including the possible
employment of other engineering activities such as maintenance. Naturally, company
management must be committed if they are to carry out IPSE. IPSE includes a business
issue, e.g. how to sell services.
What characteristics of IPSE are to be paid particular attention to in this chapter? The first is
its length on the time dimension. It can be as long as 20 - 30 years in the case of an
investment machine (e.g. aircraft engine) or facility (e.g. railway). Therefore, IPSE has to
address much of this dimension with the fact that the earlier a certain action is taken the
more effective its outcome is in general. It is actually realized by effective design. Thus,
design is naturally a core of IPSE.
Communication
Maintenance
Upgrade Reuse
Env.
impact
Recycle
Ecodesign
LC env.
impact
”Eco
logistics”
Influence on
LC env. impact
(accumulated)
100%
Cleaner
production
Env.
impact
IPSE (Integrated Product Service
Engineering) of offering
LC env.
impact
100%
approx.
80%
approx.
80%
Time
Design Production Logistics Usage
EOL
treatment
(a) Various Eco-activities
Influence on
LC env. impact
(accumulated)
Time
Design Production Logistics Usage
EOL
treatment
(b) IPSE
Note: The environmental impact (shown by bars) is a rough estimation of active products.
EOL and LC stand for end-of-life and life cycle, respectively.
Fig. 2. Comparison of IPSE and other activities.
Then, what is design? A seminal work by (Pahl and Beitz 1996) states “design is an
engineering activity that … provides the prerequisites for the physical realization of solution
ideas” (originally in (Martyrer 1960)). It has a lot to do with the processing of information –
information about needs and wants from stakeholders and through the product life cycle, as
well as about function and structure of the product. Effective processing of information
plays a central role in IPSE – this is the second characteristic.
Then, design of what? This is the next relevant question as discussed in (Cantamessa 2011),
which points out an artefact, i.e. an object to be designed, is today “integrated and systemic
product-services linked in a high-level user experience”. Also acknowledging co-creation of
value by a provider and a customer/user is a strong idea behind the servicizing (see e.g.
(Vargo and Lusch 2004)), a provider cannot get rid of influence from its customer/user to
create the intended value. Thus, a provider can design something contributing to its value,
but cannot design the value itself. This means that control of risks of the value creation
process is crucial. Thus, this risk is the third characteristics.
In sum, IPSE can be defined as an engineering activity controlling risks of value creation
through dealing with information originating from a wide window on the time dimension.
These three characteristics are discussed in the following sections with their relevant
theories: time dimension and design with the theory of product development, information
processing with theory about information asymmetry, and risk. In addition to these,
economies of scale are also discussed since it is vital to business activities in general.
4. Product development
According to ENDREA1 (ENDREA 2001), product development is defined as: “all activities in
a company aiming at bringing a new product to the market. It normally involves design, marketing
and manufacturing functions in the company”. A product can in this context be both physical
and non-physical. As is well known, when developing new products, designers typically
follow a general procedure (sequence of activities), a so-called product development model.
A product development model normally involves design, marketing and manufacturing
activities. The current business model for many products, to get the customer to buy the
product, implies that the focus is normally on cutting down the cost for manufacturing the
product and delivering it to the customer. This is done in order to get a price that is accepted
by the customer. It also implies that little focus is placed on later phases of the product's life
cycle, e.g. the use phase (with activities such as use of energy and consumables, service and
maintenance, and upgrading) and end-of-life. At the same time, life cycle cost studies and
life cycle assessments have shown that for many products, it is during the use-phase (in
reality often the longest phase of a product's life) and its related activities where the major
costs and environmental impact for the product occur. Figure 2 shows, in a basic way
(different products have different profiles), the environmental impact accumulation over the
product's life cycle.
When developing IPSO, the basic principal is to consider all life cycle phases in order to
optimize the offering from a life cycle perspective. The idea is to get the lowest total cost for
the offering possible, not only to get the lowest cost for product. This generates new
conditions for the product development. Since the focus is expanded to cover more life cycle
phases, e.g. the use phase, it implies that the number of potential offering solutions
increases, which is good from an optimizing perspective. At the same time, costs are often
associated with the use of materials and energy, which in turn provides a negative
environmental impact, implying that more cost-optimized products usually have less
environmental impact.
Figure 2 also illustrates the different phase’s impact on the total environmental impact and
how important the design phase is, especially the early part of it. This is at the same time
logical, since it is in the early phases of product development that the product specification
is defined, i.e. what parameters must/should be focused on. Examples of parameters are:
how it will be used; how long it will work; what type of power it will use; what type and
amount of consumables will be used during the normal use phase; what spare parts will be
needed; and what is the lifetime of the product. Today, many companies' main concern in
their product specifications is how to optimize and improve the production of their
products, and how to develop products that are not too durable. This is important, since the
predominate way of earning money is by selling products to customers.
At the same time, the initial product specification sets up boundaries for potential actions in
the later phases. This is a well-known fact for people working with product development,
1 Engineering Research and Education Agenda (ENDREA). ENDREA was a joint effort between four of
the major Swedish institutes of technology: Chalmers University of Technology in Göteborg, the Royal
Institute of Technology in Stockholm, Linköping Institute of Technology in Linköping and Luleå
University of Technology in Luleå. Funding came from the Swedish board for strategic research, SSF,
industry and the participating universities. The main idea behind ENDREA was to create a national
cooperation in creating a new type of research in the engineering design area.
often referred to as the "design paradox". When a new design project starts, very little is
known about the final product, especially if the product is a new one for the designers. As
the work on the product progresses, knowledge is increased. At the same time, the scope of
freedom of action decreases for every product decision step taken, since time and cost drive
most projects. Costs for later changes increase rapidly, since earlier work must be redone
(Ullman 2002). The paradox is that when the general design information is needed, it is not
accessible, and when it is accessible, the information is usually not needed.
Figure 3 shows the principal relation between freedom of action, product knowledge and
modification cost2. The figure is the author’s further development of three figures: the
design paradox (Ullman 2002), costs allocated early but used late in the project (Andreasen
1987) and the cost for design changes as a function of time during the planning and
production process (Bergman and Klefsjö 2003).
Fig. 3. The relation between “Freedom of action”, “Product knowledge” and “Modification
cost” is shown (Lindahl and Tingström 2000).
Figures 2 and 3 illustrate the importance of the design phase as well as getting in relevant
requirements as early as possible in the development process. It also shows the problem
with traditional product development. Often, little care is taken in product development
(and in its specification) for future services, maintenance, and end-of-life-treatment.
Traditionally, the initial focus is on developing the physical product; once that is done, a
possible service (intangible product) is developed, but this is hindered by the limitations set
up from the physical product. When developing IPSO, the development is accomplished in
an integrated and parallel approach.
The rate of market and technological changes has accelerated in the past decade. This
implies that companies must be pro-active in the sense that they must be able to rapidly
respond to fluctuations in demand (Collaine, Lutz et al. 2002). Central to competitive success
in the present highly-turbulent environment is: the company’s capability to develop new
2 This figure can also be found in the author’s licentiate thesis Lindahl, M. (2000). Environmental Effect Analysis
- an approach to design for environment Licentiate Thesis, Royal Institute of Technology.
products (Gonzalez and Palacios 2002); to improve, further develop and optimize old
products; and to do so faster than competitors (Stalk and Hout 1990). Designers must
develop and proceed faster, while at the same time covering an increased number of
different demands on the product. A way to handle these challenges is to do more of the
product development in a more parallel and concurrent way in order to e.g. shorten the
calendar time (from start to stop) and increase the collaboration over competence
disciplines. One concept in line with this is Integrated Product Development3 (IPD), whose
basic idea is to increase the efficiency in product development by more parallel activities
and a higher degree of co-operation between functions, levels and individuals in an
enterprise (Olsson 1976; Andreasen 1980). Norell (1999) characterizes the performance of
IPD as follows: parallel activities; cross-functional collaboration by multifunctional teams;
structured processes; and front-loaded development. The four characteristics above are in
line with what (Wheelwright and Clark 1992), (Cooper, Edgett et al. 1998), and (Wilson,
Kennedy et al. 1995) regard as important features for successful product development.
However, if a business model is changed from selling products to providing a function via
IPSO, this also changes the conditions for development. When selling products, there is a
need to constantly sell new ones in order to survive. In order to do so, the company must
constantly come out with new models and/or features, and do so at an increased speed to
keep competitors out. This also implies that a company should not want to offer all potential
technical improvements in new products, but rather split them up over several versions in
order to be able to sell more products over time.
However, if a company sells IPSO, this is changed since the focus is not on selling products
but rather on selling functionality to the customer. In principal, once an IPSO is sold to a
customer, the company wants him/her to use it for as long a time as it is economically
interesting. If a company has technology that can e.g. cut down the energy consumption
during use, it will implement the best technique at once instead of taking it in steps. Instead
of spending time on developing different versions of a product, with IPSO the company in
principal has more time for developing more optimized offerings - offerings that are more
cost-efficient and effective, and therefore in general give a lower negative environmental
impact. Nevertheless, it will still be relevant for shortening the calendar time (from start to
stop).
5. Information asymmetric between a provider and a user
In general, environmental impact of a product life cycle is determined by product
characteristics themselves and processes on the product. The former includes the type and
amount of materials in a product, while the latter includes how to treat the product at EOL
(end of life). Thus, the environmental impact of a product can be decreased by changing
either its characteristics or its processes. However, one has to own and apply appropriate
information to do so. There are different types of such information about a product itself or
3
Other similar common terms which correspond to this concept are Concurrent Engineering Söderved, H. (1991).
Concurrent Engineering - ett arbetssätt för effektiv produktframtagning (in Swedish only). Stockholm, Sweden,
Sveriges Mekanförbund, Prasad, B. (1997). Concurrent Engineering Fundamentals - Integrated Product
Development - Volume 2. Upper Saddle River, New Jersey, Prentice-Hall. and Lean Product Development
Mynott, C. (2001). Lean product development : the manager's guide to organising, running and controlling the
complete business process of developing products. Northampton, UK, Westfield Publ..
processes along the life cycle phases such as design, manufacturing, usage, and EOL. In
addition, the information may not be documented in such a way that it is easily
transferrable to another actor as depicted in Figure 4.
Who owns the information on how to improve the environmental aspect of the product and
processes at different stages of the life cycle? Information asymmetry exists in many cases
between the OEM, who in many cases designs a product, and the user. For instance, how the
substances contained in a product are toxic is not necessarily known to a user but is to a
designer. In addition, how to attain the best energy performance for the product in practice
may be more hidden to a user than to a designer – the user simply does not know how to
operate the given product for the best performance, or the provider has more knowledge of
the best available technologies at the moment. There can be various reasons for this, such as
a lack of user education in spite of the existence of the necessary information, or the strategy
of a user as a company not to get the competence.
Information
Product
Information
Human
Money
Human
Provider
User
Fig. 4. General illustration of information owned by provider and user
Note that information asymmetry in the “market for lemons” addressed by (Akerlof 1970) is
not the main issue of this chapter. In that case, the information possessed by a provider is
about a product at a point of sale and is unchanged after the sale of the product, as it is
based on a product-sales type business and the provider has no access to the product
afterwards. This is shown with gray lines in Figure 5: the information of a user about the
product increases along time and can surpass that of a provider. Note that variation of
speed of the increase along time is not considered in this graph. In IPSE, on the other hand, a
provider can obtain more information with access to the product during usage, and could
maintain superiority regarding product information over the user. This is drawn as Cases 1
and 2 in Figure 5, to refer to the same and a higher speed as compared to the user,
respectively. In Case 3, due to the lower speed than the user, the provider is surpassed by
the user.
Information asymmetry can be a weapon for a provider to obtain payment in IPSE and
makes IPSE meaningful as a business. For example, in the case where an OEM owns more
information about usage or EOL of a product, there is potential for the OEM to provide
IPSO so that the environmental impact is less than would be for product sales. It is also
often reasonable for an OEM to be able to provide maintenance or upgrade service of its
product. From the viewpoint of environmental performance, on the other hand, information
asymmetry is a hindrance to improvement, since it is costly to transfer information to an
actor who needs it.
Some regulations are effective so as to diminish the information asymmetry – a simple
example is a symbol of “no to be put it in a dustbin” attached to an electronic product by the
WEEE (Waste Electrical and Electronic Equipment Directive) (EU 2003). This symbol
conveys effective information from a provider to a user: this product should not be disposed
of in a regular dustbin from an environmental viewpoint. As is explained by Cerin (Cerin
2006), this type of information flow has potential to decrease the environmental impact.
However, everything is not covered by regulations. A user may be willing to pay for
information that contributes to the environmental performance of the product. This is where
business opportunities for an OEM as an IPSO provider can be found.
Information
about the product
Case 2
Case 1
Case 3
Time
Point of sale
IPSE
Provider
Product-sales type
User
Fig. 5. Transitions of amount of information about a product after sales
Summarizing the discussion above, three levels of information asymmetry are assumed to
exist in this context. If there is no (or too little) information asymmetry, there will be no gain
in environmental performance through IPSE and no IPSE activities. On the other hand, in
case there is a high level of information asymmetry, i.e. enough to make IPSE meaningful,
there would be economic activities as well as environmental gain. The rest is an
intermediate level, where there are no IPSE activities and thus loss of environmental
performance. Note that this discussion focuses on a single parameter, information
asymmetry; there can be other influential parameters if IPSE is meaningful.
6. Economies of scale
Economies of scale are the result of an increased number of units produced or distributed,
making it possible for the unit price to decrease (Chandler 2001; Cook, Bhamra et al. 2006).
An IPSE provider has the possibility to attain economies of scale through several different
aspects. To provide IPSE is, in some cases, equal to being responsible for all the life cycle
costs of the offering, which provide incentives to optimize the total cost as well as to realize
economic development, and potentially environmental development (Lindahl, Sundin et al.
2006; Tukker and Tischner 2006). The provider would be able to gain economies of scale for
both the products and the services. Leverage in production and administration could be
created by offering the same services to different customers (Morey and Pacheco 2003).
Another way of decreasing costs and achieving economies of scale could be realized when
answering customers’ demands by constantly configuring the same technology and skills in
different ways (Cook, Bhamra et al. 2006). For a certain industry the market capacity is
limited, which means that a single company may not reach its scale of economy since its
market share is relatively fixed for a certain period of time. It is not possible to realize largescale effects with only a few customers, since much information is needed before, during
and after the delivery which results in high transaction costs (Arnold 2000). If a number of
companies outsourced their processes to one organization, this would aggregate the volume
and the production efficiency would increase (Gao, Yao et al. 2009). This would also bring
down the transaction costs, since they were created when transferring goods and services
(Chandler 2001). If the transactions occur frequently they are better handled within one
single organization, since hierarchical governance facilitates administrative control and
coordinated adaptability (Toffel 2008). Furthermore, customers want to benefit from the
knowledge of the supplier, and are reluctant to do business with several suppliers if they
want an integrated and global offering (Mathieu 2001). However, the number of actors
should be enough to make sure all the components of the offer are delivered by experts
(Mont 2004).
Reduced transaction costs are not the only costs to consider. New costs for complementary
products may also appear for the provider in the beginning, but will benefit from economies
of scale after the transition (Toffel 2008). Even though IPSE offerings imply customized
solutions to achieve economies of scale, they have to be combined with well-defined
modular structures at the component level (Windahl, Andersson et al. 2004). If a company
wants to profit from economies of scale, this standardization of components is to be the first
step (Arnold 2000). This could also be useful when considering remanufacturing, since parts
that are worn out quickly or require frequent upgrading should be placed in an accessible
way (Sundin and Bras 2005). Considering the remanufacturing, this process could also
benefit from an economies of scale perspective. The IPSE approach would provide the
manufacturer with the knowledge of how many products that are entering the process, as
well as when they would do so, which would provide the IPSE provider with a
remanufacturing plan that is easier to manage (Sundin and Bras 2005).
When it comes to other steps in the life cycle of the offering, the IPSE provider can
economically afford a high level of specialization and technological features due to
economies of scale, and can thereby optimize resource consumption and waste production,
leading to better eco-efficiency for the company. The provider also often gains a competitive
advantage over the customer when it comes to experience and knowledge concerning the
product. With this information, the provider can optimize maintenance routines and thereby
minimize the cost (Toffel 2008). Furthermore, the provider can benefit from scale effects
when observing how the equipment is repaired across their whole customer base and use
this knowledge (Toffel 2008). Further increased knowledge and understanding will result in
increased availability and reduced product failures (Alonso-Rasgado, Thompson et al. 2004).
Economies of scale can also emerge when the provider is in charge of the operations at the
site of the customer, when the expertise of the provider in running the equipment can
provide reduction in lead time and scale affects (Lay, Schroeter et al. 2009).
In sum, there are economies of scale in IPSE as well. Major positive factors include carrying
out similar services so that an organization can learn from one service and apply it to
another. In the case of IPSE, in contrast to the case of selling physical products, exactly the
same offering does not exist, since a customer or user is involved in the service. This
difference means that IPSE requires more involvement of staffs of a provider learning to
gain economies of scale. Another factor is a market capacity, and it is necessary to take into
account transaction cost and complementary product cost. Needs addressed by IPSE differ
slightly from one offering to another. Therefore, modularization is a key to gain economies
of scale, but service modularization needs more research than product modularization (e.g.
(Simpson, Siddique et al. 2006)).
7. Risk
There are various types of risk, namely possible negative consequences from the
environmental viewpoint. Reasons for this include an actor’s lack of necessary information
due to another actor’s possession of the information, which was already discussed in the
section on information asymmetry. There is another reason as well – non-existence of
information.
Whether a product is better from an environmental standpoint for a given need is not
necessarily certain at the time the product is first used. Different factors for this originate
from the environment (not in the meaning of sustainability) and users. The former includes
the speed of progress of the technology used in the product (or product generations) (see
e.g. (Deng and Williams 2011)). If a new product is more energy efficient than the original
one, and it becomes available before the end of usage, it may be better environmentally to
switch to the new product. The user factor includes his/her discontinuity with the need for
the chosen product (see different classical reasons for this in (Hanson 1980)). For instance, a
change in demand causing a user to stop using a product after a short time, and owning
another product in addition, generates additional environmental impact.
How can these different types of uncertainty be better handled? A provider could do this. If
a provider promises a user in a contract that the “best” available technology is provided
within the contract period, the user can avoid the uncertainty of the technology progress.
For the user’s discontinuity of the need, a provider could give an option to a user so that the
user can return the product to the provider after a certain period of time. By doing so, a user
can shorten the time of holding that risk. The “trick” behind this is scale of economy that
enables a provider to cancel different types of risks arising from its users. Thus, variety of
the needs by a group of many customers is cancelled.
In sum, there are different types of uncertainty, due to unavailable information. In the case
of product sales, they generate risks of producing higher environmental impact than if this
uncertainty and risk is managed through IPSE. Note that this is not merely an actor’s lack of
information; rather, the information is not available in spite of a willingness to get it. This is
where business opportunities for IPSO exist, and existing research has not approached with
that viewpoint. For instance, uncertainty in PSS has been researched as an object to be
reduced for more accurate cost estimation (Erkoyuncu, Roy et al. 2011). Note that e.g.
leasing by itself does not improve EOL management of leased products (Lifset and
Lindhqvist 1999). If there is a high degree of uncertainty of technological progress or
demand discontinuity, and if the risk can be cancelled by an OEM, IPSO has potential to
decrease environmental impact.
8. Concluding discussion
Quality issues
Environmental issues
Design issues
Marketing issues
Et cetera
Use phase
Manufacturing issues
Production phase
Economic issues
End-of-life treatment phase
This chapter endeavoured to lead theoretical discussion regarding which IPSE factors are
expected to increase environmental performance of a life cycle compared to a traditional
product sales business. Four aspects from theory were discussed and their relevance was
pointed out. In the theory of product development, information about a product is pointed
out to be a crucial parameter, although the theory is to be adapted according to the nature of
the offering – IPSO as opposed to a physical, traditional product. Then, asymmetry of the
information about a product between a provider and a user was identified as a key for IPSE
to be meaningful also through comparison with the product sales type business. Economies
of scale were brought into the discussion and this remains to be an important issue for IPSE
but with different characteristics from the product sales type business. Finally, risk was
discussed and pointed out to be a crucial parameter to be controlled after sale and
economies of scale were shown to be an enabler to control the risk in a better way. As shown
in these four sections, these aspects are interlinked with each other (see Figure 6) and need
to be further investigated. Nevertheless, the chapter has provided a first theoretical
cornerstone regarding conditions for IPSE to be a meaningful business style and IPSE’s
influential factors on environmental performance.
Fig. 6. Relations between different issues at each phase of a life cycle
9. Acknowledgment
This research was partially supported by a Trafikverket (the Swedish Transport
Administration)-funded project “Integrated Product Service Offerings of the Railway
Infrastructure System”.
10. References
¶(6pt)
Akerlof, G. (1970). "The market for lemons: quality uncertainty and the market mechanism."
Quarterly Journal of Economics 84: 488-500.
Alonso-Rasgado, T. and G. Thompson (2006). "A rapid design process for Total Care
Product creation." Journal of Engineering Design 17(6): 509 - 531.
Alonso-Rasgado, T., G. Thompson, et al. (2004). "The design of functional (total care)
products." Journal of Engineering Design 15(6): 515-540.
Andreasen, M. (1987). Integrated Product Development. Berlin, Springer.
Andreasen, M. M. (1980). Machine Design Methods Based on a Systematic Approach. Lund,
University of Lund. Ph.D. Thesis.
Arnold, U. (2000). "New dimensions of outsourcing: a combination of transaction cost
economics and the core competencies concept." European Journal of Purchasing &
Supply Management 6(1): 23-29.
Aurich, J. C., C. Fuchs, et al. (2006). "Life cycle oriented design of technical Product-Service
Systems." Journal of Cleaner Production 14(17): 1480-1494.
Bergman, B. and B. Klefsjö (2003). Quality from Customer Needs to Customer Satisfaction.
Lund, Studentlitteratur AB.
Cantamessa, M. (2011). Design ... but of What. The Future of Design Methodology. H.
Birkhofer. London, Springer: 229-237.
Cerin, P. (2006). "Bringing economic opportunity into line with environmental influence: A
discussion on the Coase theorem and the Porter and van der Linde hypothesis."
Ecological Economics 56 209– 225.
Chandler, A. D. (2001). Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge,
The Belknap Press of Harvard University Press.
Collaine, A., P. Lutz, et al. (2002). "A method for assessing the impact of product
development on the company." International Journal of Production Research
40(14): 3311 - 3336.
Cook, M. B., T. A. Bhamra, et al. (2006). "The transfer and application of Product Service
Systems: from academia to UK manufacturing firms." Journal of Cleaner
Production 14(17): 1455-1465
Cooper, R. G., S. J. Edgett, et al. (1998). Portfolio Management for New Products. Reading,
MA, Perseus Books.
Deng, L. and E. D. Williams (2011). "Functionality Versus 'Typical Product' Measures of
Technological Progress." Journal of Industrial Ecology 15(1): 108-121.
Dill, A. K., H. Birkhofer, et al. (2011). Property Rights Theory as a Key Aspect in Product
Service Engineering. International Conference on Engineering Design,
Copenhagen.
ENDREA (2001). ENDREA nomenclature. Linköping, ENDREA - Engineering Research and
Education Agenda.
Erkoyuncu, J. A., R. Roy, et al. (2011). "Understanding service uncertainties in Industrial
Product-Service System cost estimation." International Journal of Advanced
Manufacturing Technology 52(9-12): 1223-1238.
EU (2003). "Directive 2002/96/EC of the European Parliament and of the Council of 27
January 2003 on waste electrical and electronic equipment (WEEE)." Official
Journal of the European Union L 37: 24-39.
Furubotn, E. G. and S. Pejovich (1972). "Property Rights and Economic Theory: A Survey of
Recent Literature." Journal of Economic Literature 10: 1137-1162.
Gao, J., Y. Yao, et al. (2009). "Service-oriented manufacturing: a new product pattern and
manufacturing paradigm." Journal Intelligent Manufacturing 22(3): 435-446.
Goedkoop, M. J., C. J. v. Halen, et al. (1999). Product Service Systems, Ecological and
Economic Basics. Hague, Dutch Ministry of Housing, Spatial Planning and the
Environment.
Gonzalez, F. J. M. and T. M. B. Palacios (2002). "The effect of new product development
techniques on new product success in Spanish firms." Industrial Marketing
Management 31(3): 261-271.
Hanson, J. (1980). "A proposed paradigm for consumer product disposition processes."
Journal of Consumer Affairs 14: 49–67.
Hockerts, K. (2008). Property Rights as a Predictor for Eco-Efficiency of Product-Service
Systems. CBS Working Paper Series. Frederiksberg, Copenhagen Business School.
Isaksson, O., T. C. Larsson, et al. (2009). "Development of product-service systems:
challenges and opportunities for the manufacturing firm." Journal of Engineering
Design 20(4): 329 – 348.
Lay, G., G. Copani, et al. (2010). "The relevance of service in European manufacturing
industries." Journal of Service Management 21(5): 715-726.
Lay, G., M. Schroeter, et al. (2009). "Service-Based Business Concepts: A Typology for
Business-to-Business Markets." European Management Journal 27(6): 442-455.
Lifset, R. and T. Lindhqvist (1999). "Does Leasing Improve End of Product Life
Management?" Journal of Industrial Ecology 3(4): 10-13.
Lindahl, M., E. Sundin, et al. (2006). Integrated Product and Service Engineering – the IPSE
project. Changes to Sustainable Consumption, Workshop of the Sustainable
Consumption Research Exchange (SCORE!) Network, supported by the EU's 6th
Framework Programme, Copenhagen , Denmark.
Lindahl, M. and J. Tingström (2000). A Small Textbook on Environmental Effect Analysis.
Kalmar, Department of Technology, University of Kalmar.
Lindemann, U. (2011). Systems Engineering versus Design Methodology. The Future of
Design Methodology. H. Birkhofer. London, Springer: 157-167.
Martyrer, E. (1960). "Der Ingenieur und das Konstruieren." Konstruktion 12: 1-4.
Mathieu, V. (2001). "Service strategies within the manufacturing sector: benefits, costs and
partnership." Intermational Journal of Service Industry Management 12(5): 451-475.
Mont, O. (2004). "Institutionalisation of sustainable consumption patterns based on shared
use." Ecological Economics 50(1-2): 135-153.
Mont, O., P. Singhal, et al. (2006). "Chemical Management Services in Sweden and Europe:
Lessons for the Future." Journal of Industrial Ecology 10(1/2): 279-292.
Mont, O. K. (2002). "Clarifying the concept of product–service system." Journal of Cleaner
Production 10(3): 237-245.
Morey, E. and D. Pacheco (2003). "Prouct service systems: Exploring the potential for
economic and environmental efficiency."
Neely, A. (2007). The servitization of manufacturing: an analysis of global trends. 14th
EurOMA Conference, Ankara.
Oliva, R. and R. Kallenberg (2003). "Managing the transition from products to services."
International Journal of Service Industry Management 14(2): 160-172.
Olsson, F. (1976). Systematic Design. Lund, University of Lund. Doctoral Thesis.
Pahl, G. and W. Beitz (1996). Engineering Design: A Systematic Approach. London,
Springer-Verlag: 1.
Roy, R. (2000). "Sustainable product-service systems." Futures 32: 289–299.
Sakao, T. (2009). A View of Service, Quality, and Value for Sustainability. 12th International
QMOD Conference, Verona.
Sakao, T., C. Berggren, et al. (2011). Research on Services in the Manufacturing Industry
based on a Holistic Viewpoint and Interdisciplinary Approach. CIRP International
Conference on Industrial Product-Service Systems, Braunschweig.
Sakao, T., H. Birkhofer, et al. (2009). "An Effective and Efficient Method to Design Services:
Empirical Study for Services by an Investment-machine Manufacturer."
International Journal of Internet Manufacturing and Services 2(1): 95-110.
Sakao, T. and M. Lindahl, Eds. (2009). Introduction to Product/Service-System Design.
Springer's global publishing programme in engineering and management. London,
Springer.
Sakao, T., N. Napolitano, et al. (2008). "How Are Product-Service Combined Offers Provided
in Germany and Italy? – Analysis with Company Sizes and Countries -." Journal of
Systems Science and Systems Engineering 17(3): 367–381.
Sakao, T. and Y. Shimomura (2007). "Service Engineering: A Novel Engineering Discipline
for Producers to Increase Value Combining Service and Product." Journal of
Cleaner Production 15(6): 590-604.
Sakao, T., Y. Shimomura, et al. (2009). "Modeling Design Objects in CAD System for
Service/Product Engineering." Computer-Aided Design 41(3): 197-213.
Simpson, T. W., Z. Siddique, et al. (2006). Product Platform and Product Family Design:
Methods and Applications. New York, Springer.
Stahel, W. R. (1994). The Utilization-Focused Service Economy: Resource Efficiency and
Product-Life Extension. The Greening of Industrial Ecosystems. Washinton DC,
National Academy Press: 178-190.
Stalk, G. J. and T. M. Hout (1990). Competing Against Time - How Time-Based Competition
is Reshaping the Global Markets. New York, The Free Press, A Division of
Macmillan Inc.
Sundin, E. and B. Bras (2005). "Making functional sales environmentally and economically
beneficial through product remanufacturing." Journal of Cleaner Production 13(9):
913-925.
Toffel, W. M. (2008). Contracting for Servicizing.
Tukker, A. (2004). "Eight Types of Product-Service System: Eight Ways to Sustainability?
Experiences from Suspronet." Business Strategy and the Environment 13: 246 – 260.
Tukker, A. and U. Tischner (2006). New Business for Old Europe. Sheffield, Greenleaf
Publishing.
Ullman, D., G. (2002). The Mechanical Design Process. New York, McGraw-Hill Higher
Education.
Vargo, S. L. and R. F. Lusch (2004). "Evolving to a New Dominant Logic for Marketing."
Journal of Marketing 68(1): 1-17.
Wheelwright, S. C. and K. B. Clark (1992). Revolutionizing Product Development: Quantum
Leaps in Speed, Efficiency, and Quality. New York, Free Press.
Wilson, C. C., M. E. Kennedy, et al. (1995). Superior Product Development: Managing the
Process for Innovative Products: A Product Management Book for Engineering and
Business Professionals, Blackwell Publishers.
Windahl, C., P. Andersson, et al. (2004). "Manufacturing firms and integrated solutions:
characteristics and implications " European Journal of Innovation Management
7(3): 218-228.
APPENDIX 5
Lingegård (2011) Identification of Risks related to
Integrated Product Service Offerings of Rail
Infrastructure. Draft to be submitted during 2012.
Identification of Risks Related to Integrated
Product Service Offerings of Rail
Infrastructure
Sofia Lingegård
Draft
Linköping University
Environmental Technology and Management
Department of Management and Engineering
2011-11-15
I
II
1. Introduction
Among construction companies in Sweden, incentives for development, increased efficiency
and raised competence are low [1]. In Sweden, construction contracts are currently used to a
large extent, and have shortcomings concerning weak incentives for development of
procedures [2]. The over-detailed specifications cause major obstacles for the rail
infrastructure industry in terms of technical development [3]. There is clearly a need for
change, and it is now in the strategy of the Swedish Transport Administration (STA) to get as
much railway as possible for the money it spends. This includes increased productivity, level
of innovation and competition, as well as a will to think more from a life-cycle perspective
and increase cost efficiency. Changes in the business model is one of the strategies
mentioned to reach these goals [4].
Performance contracting could increase the drivers for change within the industry and
thereby increase cost efficiency and quality from a life cycle perspective [1]. This type of
contracting is also known as an Integrated Product Service Offering, or IPSO, and implies
that one actor has the responsibility to deliver a result and therefore has incentives to
optimize the use of energy and material [5-6]. An IPSO has a lifecycle perspective, and the
combination of products and services can be combined into an optimized solution for the
customer, as well as give the manufacturing company the possibility to have control over the
product throughout its whole life-cycle [7-8]. PSS provides the supplier with the opportunity
to increase the value of the solution for the customer by integrating components in new ways
[7], as well as incentives for the supplier to realize a more economical and environmental
development when considering the whole lifecycle [8]. More money spent on the
construction, and thereby improved quality, could result in reduced cost for maintenance
work. On the other hand, too high a cost for construction can never be motivated by future
savings for the maintenance cost [9].
New business models such as IPSO contracts create challenges such as uncertainty
concerning forecasting costs at the bidding phase of the contract [10]. With a business model
focusing on delivering a result, a lot of the risk previously carried by the user is now
assumed by the provider, and it can be difficult rededicating and controlling the risks and
uncertainties [6]. In this case the term “risk” is defined as the threat of loss from an
unwanted event, to include financial, performance or timescale loss [11]. Risk assessments,
including forecasting and economic development, are very important for these long-term
contracts and both the supplier side and the buyer side have to be considered [12]. For longterm performance contracts risks caused by uncertainties arise in the bidding stage [10]. Key
uncertainties for a IPSO contract are performance, operation, training, engineering,
affordability and commercial uncertainties [10].
1
In cooperation with the STA, the DORIS (Development of integrated product service
Offerings for Rail Infrastructure Systems) project investigates the potential use of IPSO
contracts for rail infrastructure. So far, only one such contract has been realized; this was
partly funded by private capital, and no such initiatives are currently planned. This limited
experience in the industry calls for more thorough research. In line with this, the aim of this
paper is to identify potential risk components when using IPSO for rail infrastructure for
both the provider and buyer perspectives. Furthermore, the paper seeks to investigate how
these risks can be potentially reduced or avoided.
2. Methodology
The concept of triangulation has been used throughout the research, using several different
sources of information [13]. Individual interviews as well as a group interview were
performed. This qualitative data was also validated using a survey.
2.1. Individual interviews
The initial steps of this research project were an introductory interview with a well-informed
employee at the STA, followed by a literature study. Subsequently, more in-depth interviews
with actors in the industry were performed, where a total of seven respondents from the STA
and seven respondents from the contractors participated.
The choice of respondents was made to get the overall picture of the industry and to gain
knowledge of both the buyer and the providers' perspectives and their interaction. The
criteria for the respondent selection at the STA were to include both representatives from the
Investment Division and the Traffic Division of the organization, as well as to focus on
people holding positions at a managerial level. This was a conscious choice, since an
overview of the organization and an understanding of the strategy and market was preferred
to contribute to the research. Apart from providing information concerning the research
topic, the initial clarification interview also provided potential respondents within the STA
that could be of interest for the interview study. Subsequently, the respondents themselves
suggested others as potential respondents during the course of the interview study.
A similar approach was used for the respondents at the contracting companies. The
respondents at the STA provided contact information to their contacts within the contractors’
organization. Almost all of the respondents from the contractors’ organizations worked in
the marketing or business divisions of the companies. These respondents provided
knowledge concerning the operations and strategies within their own companies, as well as
information regarding the relationship and interaction with the buyer, the STA. A few
respondents worked in the maintenance area, while others had an overall responsibility
which contributed to the total picture of the contractors’ perspective.
2
2.2. Group interview
The interview study provided information for this research question, but to gain more
knowledge on the topic a group interview was initiated. A group interview is a type of
interview that is appropriate for exploratory investigations, where deeper understanding for
the respondent’s perspective in a defined area is desired [14]. The purpose of the realized
focus group was to trigger a discussion between the respondents, since they represented
different perspectives of the studied topic. Those chosen represented important areas within
the STA: the Business developer for maintenance contracts and the Procurement Manager for
maintenance contracts from the Traffic Division, and a manager from the Investment
Division. The fact that these three respondents participated was a conscious decision; apart
from having knowledge on the topic, they also showed interest in the topic during the
interviews, as well as being outspoken and generous with their ideas and beliefs. For a group
interview, it is important to think through the group constellation as well as to not include
too many respondents [14].
2.3. Survey
The aim of the survey was not so much to retrieve new information, but more to validate the
results from the interview study and to try and make the respondents narrow down the most
important factors in the questionnaire that was sent out to them. This type of sample
selection for a survey can be seen as a "judgment" or "assessment" selection. Such a selection
is common in exploratory studies, and is based on respondents being chosen using certain
criteria [14]. In this case, the criteria were that the respondents had participated in the
interviews and were well-informed in the area.
The survey began with closed questions, where the respondents were asked to state their
name, organization and position. This means that the respondents were not anonymous and
that it was possible to connect the survey results with the interview results. The majority of
the questions, however, were scale questions, where the respondents were asked to grade the
answer on a scale from 1-5, where 1 = strongly disagree and 5 = strongly agree. The
respondents were asked to rank statements derived from the interviews on this scale. The
statements represented challenges for the current practice, benefits and challenges for PSS
contracts. Benefits for the current practice were asked using an open question, since not
enough information concerning this had been retrieved from the interview results. Most of
the respondents completed the survey, and the results could therefore be analyzed and used
to validate the information from the interviews. This was realized by determining that the
information was correctly understood and that the actors identified were in fact important
factors. Furthermore, the ranking of the factors is used as an indication of their in-group
relationship.
3
3. Modeling the rail infrastructure procurement
3.1. Traditional contracting
The STA is responsible for 80% of the total rail system in Sweden [15], and since 2001 the
contracts have been procured through competition [16]. This has resulted in a cost reduction,
but nevertheless costs are still increasing. It was concluded in a doctorial thesis [17] that the
railway industry needs to adopt new perspectives to start working with the environmental
management of products, and to set environmental requirements as early as in the product
design stage. The author also states that the work has been focused on environmental issues
found locally, and not on lifecycle perspectives, and that there has not been significant
pressure on the organization, internally or externally, to employ environmental life cycle
management. The STA has three types of contracts currently in practice: Design-Bid-Build or
construction contracts, Design-Build contracts and performance contracts.
Construction contracts or Design-Bid-Build contracts, where the procurer specifies what,
how and how much, are the most common contracts within the infrastructure construction
industry in Sweden [18-19]. The scope of the projects and the detailed design specifications
are realized by consultants on behalf of the STA and the contractor is obliged to realize the
project within the set time, price and standard level [20]. The choice of tender is mainly
based on the lowest price [21]. Figure 1 presents a schematic figure of the construction
contract.
RESPONSIBLE
STA/
Contractor
STA
Planning
Design
Procurement
Construction
Procurement
STA
Consultant
STA
Contractor
STA
Operations &
Maintenance
Contractor
EXECUTOR
Figure 1: A schematic diagram illustrating the construction contracts. The shaded part of the figure
shows the maintenance contracts that are described in Section 6.2. Modified figure [22].
Since 2005 performance contracts have been used for maintenance in Sweden, meaning that
the STA procures a set functionality of the track and the contractor decides appropriate
measures to take still considering regulations for the maintenance [16, 23]. It is a contract
with similar characteristics as a Design-Build contract since the contractor is responsible for
4
parts of the detailed design. The function is however set on a detailed level, far from an
overall function. Examples of functional requirement [24] p.11:
“The snow depth at the railway yards (…) is not to exceed 200 mm over the top edge of the
sleepers.”
“Clearing of snow around gears (…) on the railway yards is to be executed regardless of
snow depth so that full function can be achieved.”
The length of the performance contracts are 5 years, with an additional 2 years option, and
uses bonuses and penalties. The difference between maintenance and reinvestment is
different cost levels. Figure 2 presents a model illustrating the maintenance contracts.
Figure 2: A schematic diagram illustrating the maintenance contracts. The shaded part to the left in
the figure illustrates the construction contract for the facility that was described in Section 6.1.
Another type of building contract, described in Section 6.3 below, is also a possibility. Modified
figure [22]
A newer type of contracting for building rail infrastructure is the Design-Build contract
where the contractor is responsible for both the more detailed design phase as well as the
construction phase [9]. This provides an opportunity for the contractor to influence the
construction. Figure 3 presents a model of the Design-Build contract. The STA has the overall
responsibility until the construction phase where it is shared with the contractor that is in
charge of the detailed design. The overall design has already been decided by the STA with
the help of design consultants and performance requirements are set for the technical
standards but the way for which these requirements should be met is the contractors’ choice.
5
RESPONSIBLE
STA/
Contractor
STA
Planning
Design
Procurement
Construction
STA
Consultant
STA
Contractor
EXECUTOR
Figure 3: Schematic picture illustrating the Design-Build contract [25].
3.2. IPSO for Rail Infrastructure
An IPSO contract could be described as a design-build contract with a long-term
maintenance commitment, where both the design concerning the construction and the
maintenance were taken into account and integrated in the initial design phase. In this case
the functional requirements are on a higher level than for the Design-build and performance
contracts currently used for maintenance. An IPSO contract would include design,
construction as well as operations and maintenance, illustrated in Figure 4. The STA would
procure a function and would not specify in detail how the contractor should realize it, e.g.
“build a railway from A to B with C capacity and maintain it for X years. After the contract
period the railway should have Y required capacity.” According to the respondents the
initial planning of the stretch and the environmental evaluations would still performed by
the STA since this phase includes e.g. redemption of house and environmental impact
assessments that can make or break the whole approval and realization of the project. This is
not a risk the contractors are willing to take. The design of the construction and the
maintenance is however the responsibility of the contractor.
6
RESPONSIBLE
STA
STA/
Contractor
Procurement
Planning
STA
STA/
Contractor
Contractor
Design
Construction
Operations & Maintenance
Consultant/Contractor
Contractor
EXECUTOR
Figure 4: Schematic figure illustrating IPSO contract for rail infrastructure. Modified figure [22]
4. Identified risk factors
Seven respondents from the STA and seven respondents from the different contractor
organizations participated individually during hour-long interviews. Most of the
respondents have managing roles on different levels, and thus an overview of and strategic
insight into the organization, but some work on a more operational level. The respondents
hold positions such as Marketing Director, Business Developer, Procurer, and Investment
Manager. The workshop only included respondents from the STA with managing positions
in purchasing, maintenance and business development, providing all perspectives necessary
for a fruitful discussion. The respondents from the interviews and the workshop participants
identified different risk elements that they indicated as important for Product Service
Systems contracts for rail infrastructure. In this section, the risks have been divided into
three main groups to provide a more comprehensive view of the content. Table 1
summarizes the empirical results.
4.1. Market risks
The IPSO contract cannot be applied everywhere and for every project, since this type of
contracting is not suitable for all types of projects. The respondents almost unanimously
stated that it would be best that the new project was large enough that the contractors could
invest in a maintenance organization for the specific contract, and for it to be
administratively profitable. The current legal framework is so resource-demanding that,
according to the contractors, a large overhead is required to match it. If the contract involves
a reinvestment, both the STA and the contractors concluded that there would be too many
unknowns concerning the status of the construction. It would not be impossible to realize
such a project, but it would probably involve too much risk for the contractor and thereby be
too expensive for the STA. The contractors are of the opinion that the information concerning
the facilities lack sufficient detail for using IPSO for reinvestments.
7
The STA is concerned that the current market is already quite limited regarding the number
of actors, and that the maintenance contracts e.g. only receive around three tenders each.
Few contractors in Sweden could take on this type of project, but this could be compensated
for by international actors. However, these actors are in general not interested in projects
involving higher risk, and they could have difficulties with the management of their
subcontractors. A similar issue was raised concerning the survival of the national contractors
and their subcontractors as a potential risk for the long-term contracts. In the bidding
process, the STA has to take under consideration the long-term survival of the contractor as
well. A respondent from one of the major general contractors did not think the number of
contractors would decrease, but did believe the constellation would be different. The smaller
contractors will not be participating in the first bidding step, but will take part as
subcontractors. The opinion of the general contractor is that they are best suited to take on
the IPSO responsibility since they have more financial power and project management
competence, while the railway specific contractor believes they are fitting since they have the
technical competence.
What the contractors mean is that to increase the number of tenders for this type of project, a
compensation must be paid since it is expensive to do all the calculations needed. A risk
according to the contractors is that a part of the market would be locked for other contractors
for an extended period of time, threatening the survival of contractors that have established
themselves there geographically.
4.2. Contractual risks
The IPSO contract cannot be applied everywhere and for every project since this type of
contracting is not suitable for all types of projects. Even though IPSO contracts give the
provider more freedom to design the construction and to balance the costs between the
construction and maintenance phase, there are still several issues that need to be regulated.
The respondents did not have a common opinion about the time span of the contracts; the
interval of 10-45 years was mentioned. The contractors acknowledge that the longer the
contract is, the longer payback they have on the machines etc., but on the other hand a longer
contract implies higher uncertainty and risk. Some of the respondents mentioned that longterm contracts could potentially make the involved actors lose commitment and get trapped
in work procedures, which would not contribute to development. Renegotiations were
mentioned as a way to reduce the risk of these long contracts. The contractors found it
unrealistic to believe that there would not be any changes affecting the conditions of the
contracts during the time span of the contract. Changes in the regulations set by the STA
were mentioned as an example.
Another issue connected to the long-term contracts is the evaluation, both during the
contract and after. Respondents from the STA believe this will be difficult, especially since it
8
will take many years before the entire contracts can be evaluated. Both sides emphasize the
importance of finding appropriate values to measure, and that this could be complicated
since many different factors will have to be considered and the starting level has to be
established as well regarding how to measure the deviation.
When discussing pricing of these contracts, the respondents seem to prefer one fixed and one
adjustable part. It is in particular the contractors that prefer an adjustable part as a way to
decrease risk taking, e.g. if and when traffic volumes change. STA, on the other hand, is of
the opinion that if a contractor has the overall responsibility of the project, the price should
be as fixed as possible.
In general, the common opinion is that the part that has the best ability to calculate the risk
should carry it. The start of the contract would be when the design phase starts and the
process before including e.g. redemption of land and environmental issues would be the
responsibility of the STA. The contractors emphasize that the risk has to be possible to
calculate. Since the contractors are not used to putting a price on risk, and depending on the
method chosen, the price will be set too low or too high. The problem is that they do not
have any references; the outcome is unknown, since they have not used this type of
contracting before. The worst-case scenario for the contractors is if the calculation does not
match reality and they lose money during the duration of the contract. The STA thinks that
this could imply higher prices in the tenders since the contractors might want to protect
themselves from this risk. But not the contracts would not only imply a higher risk; they
would also generate opportunities, as a contractor describes below:
“If a contractor obtains a contract, this implies full responsibility including higher risk and larger
opportunities. As long as these two elements balance each other, this type of contract will not cause
any problem.”
Market coordinator, Contractor
The contractors were in general positive to using more transparency concerning risks and
costs if that provided better risk sharing:
“Transparency is a good way to provide a common picture of what the activities cost since this is an
area where the procurer many times is greatly uninformed.”
Business Area Manager, Contractor
Another contractor states that if all the risk is shuffled over to the contractor, no contractor
would be interested in a long-term contract where the risk is difficult to estimate. A third
contractor talks about the legal framework already existing for regulating risk that could be
continuously used. This respondent, however, emphasizes that an IPSO contract would
9
increase the risk, and to some extent this will be expensive, but that the price in total would
be lower for the procurer. Furthermore, the price would be controlled by the competition.
Another type of risk concerns the material used and the spare part handling within the
contract. Currently, the contractors are required to buy all material through the STA that is in
charge of the material storage. If the contractors themselves were to choose the material,
there is a risk according to the STA that different standards and types of material are used,
making the spare part handling difficult after the contracts have ended. Another issue is how
to value the specific material used by the contractor.
4.3. Organizational risks
In general, both the STA and the contractors believe that the STA would have the most
difficulty culture-wise to adapt the organization for IPSO contracts. The STA has one
Investment division which procures construction contracts while another division,
Operations, procures operation and maintenance contracts. From the interviews with
employees within these divisions it soon became obvious that these two divisions currently
do not have much interaction. They describe two different cultures, where the Investment
Division is project-based while the Traffic Division works in yearly cycles. The divisions
currently have separate budgets, which mean that no overall cost estimation is done for
building and subsequently maintaining the construction.
“It is difficult to motivate slightly higher construction costs to bring down the maintenance cost for
the construction since this would only show as a cost in the budget of the Investment Division. It
could even be that a cheaper solution is chosen for the construction to be within the project budget but
then results in higher cost for maintenance. We have to work as one unit and rewrite the standards for
investment to be able to work with IPSO contracts; if not it will be very difficult to motivate higher
investment costs to keep the maintenance costs down.”
Procurer,Traffic Division, STA
Furthermore, all the respondents describe the organization of the STA as extremely
technically-oriented and with an internal resistance towards change, while the contractors
talk about the STA in terms of tradition and being in need of an attitude change for these
types of contracts to have a chance. Related to this is the contractors’ worry about the STA’s
capability to judge the tenders for IPSO contracts, since this calls for a different way of
thinking and a long-term perspective. Both sides also clearly emphasize the need for the STA
to break old patterns and not interfere as much, both as a way to avoid conflicts and to avoid
the STA taking on responsibility that belongs to the contractor. On the other hand, one
respondent at the STA believes that this attitude can be found among the contractors as well,
but that it is not dependent on the company but more on the personality of individuals.
10
Another issue regarding competence that has been brought to attention from both sides is
the projection competence that most of the contractors do not have within the organization.
The STA uses consultants for this design phase, and the contractors would do the same to
start with but control the work more than the STA does. To achieve real innovation, the
contractors believe they need the design competence within their organization.
According to the STA, the fact that the contract would be long-term makes it important to
have good documentation and functioning information transfer. The importance of having a
common goal - and working together to reach it - was emphasized by both sides.
4.4. Summary of risks
Table 1 presents a summary of the three categories of risks and the uncertainties and
conditions that contribute to them; market risks, contractual risks and organizational risks.
The factors in the table have all been presented in sections above.
Table 1: Presents an overview of the empirical results including market risks, contractual risks and
organizational risks.
Market risks
Contractual risks
Organizational risks
Decreased competition
• Decrease in nr of contractors
• Market readiness for IPSO
contracts
Contracts content
• Suitable projects
• Material and spare part
handling
Supply chain disruption
• Long-term survival of
contractors and
subcontractors
Market lock-up
• Geographical region locked
for a longer period of time
Contract length
• Payback time vs. risk taking
• Uncertainties
The STA corporate culture
• Conservative
• Divided into two separate
divisions
• Lacking long-term perspective
for procurement
• Shortcomings in
documentation
Trust
• Risk-sharing
• Transparency
Risk-sharing
• No references for
calculations
• Inexperience
Competence
• STA’s capability to judge the
tenders
• Contractors’ design and
project management
competence
Pricing
• Fixed vs. adjustable price
• Risk for higher prices
Evaluation
• Long-term
• Concretize functionality
11
5. Discussion
In this section, the perspectives of both the buyer and provider, namely the STA and the
contractors, are discussed and the literature is used to confirm and/or suggest solutions or
actions for the risk factors related to IPSO contracts for rail infrastructure.
5.1. Influence on the market
Actors believe that IPSO contracts would work for new large rail infrastructure projects and
these are very few. The contractors’ reluctance to use IPSO for reinvestments is confirmed in
the literature, where it is stated that lack of historical data causes unpredictability [26]. On
the other hand, the lack of information also concerns new investments since all details about
the life cycle of the infrastructure have not been documented in detail. Some contractors see a
risk with IPSO contracts, since they would lock a market for a longer period of time, which
could be true for certain geographical areas.
During the course of these long-term contracts, market conditions will change and with them
changes within the supply chain are likely as well. Thus, one of the major uncertainties for
the supplier is actually supply chain disruption, and this fact has to be accepted and
accounted for from the supplier’s side [11]. It has also been stated that a formal relationship
is not enough for an IPSO contract, and for the partnership to be successful there is a need to
align the profit incentives between them [27]. This becomes even more important when
considering the fact that an IPSO contract likely requires both a general contractor and a
technical contractor.
If a general contractor takes the IPSO responsibility, that company would be dependent on a
technical contractor to build the actual tracks etc. as well as to maintain the construction. This
means that the incentives for the technical contractor have to be strong enough to realize the
work to the required standard. It would therefore be good if the technical contractor was
part of the design phase, since they would have the required knowledge and experience
needed to achieve technical development. If instead the technical contractor was to be the
main contractor, the dependency on the general contractor would not be as significant as in
the opposite case. This is because the technical competence is already within the
organization, and the general competence needed for the preparation before laying down the
tracks can be found more easily. Contractors in general do not have the project management
competence needed or the financial strength to pull off such a project. With this said, most of
the technical contractors do have corporate groups behind them which could support such a
constellation, even though the organization is not formed like that today.
One of the major concerns from the STA is that the already low competition on the market
would be even lower for the IPSO contracts. As suggested, a payment for the work related to
preparing a bid could result in more bids but it would also be necessary to revise the ways to
12
reduce the risk for the long-term contracts. Examples of this are introducing “soft terms” and
flexibility in the contracts as discussed in Section 5.2.
5.2. Complex contracting
Section 4.2 presented the results concerning contractual risks, and showed the advantages
and disadvantages for long-term contracts are many. The contractors’ main concern is their
increased responsibility for design, construction and maintenance, as shown in Figure 4.
According to the contractors, increased responsibility equals increased risk. This is
interesting since the IPSO literature states that an IPSO offering reduces unpredictability and
variability of demand during the contract time which makes risk reduction a driver for the
business model [28-29]. For the contractors a longer pay back time and more freedom, versus
a higher degree of risk for the supplier, are the main issues. By adding flexibility to the
contract using soft elements such as renegotiation, uncertainties may be managed [30]. This
was discussed during the interviews as a possibility. A renegotiation could also be a way for
the provider to improve the quality of the service [31]. Renegotiations could then reduce
some of the uncertainty, such as changes in traffic volume, which would have a great effect
on the wear and degradation of the tracks, but it is a factor that the contractor cannot
influence. At the same time, renegotiations could be a way of minimizing the risk of the
contractor losing commitment and getting trapped in work procedures, as described by
some of the respondents. Innovations and constant improvements can sometimes be
dampened by long-term contracts, since the provider is protected from competition for a
longer period of time [31]. On the other hand, the majority of the innovations would
probably be created in the design phase, but technical development could be used to
improve the maintenance procedures and methods during the duration of the contract. The
renegotiations could be seen as a fresh start within the contracts to maintain quality. This
would of course all have to be done within the regulations of public procurement; it is not
supposed to be a new public procurement process, but rather seen as a degree of flexibility
within the contract.
Another precautions for risk are performance indicators and the pricing structure [30]. Both
parties have indicated that the evaluation, both during the contract and afterwards, will be
difficult. Operationalization of the functional result of the contracts needs extra attention;
one important part of the contracts is to specify precise parameters so that it can be
determined whether or not the IPSO is satisfactory delivered [6, 32]. The actors are new to
this kind of thinking, and it is therefore expected they will require a long learning curve. This
is the reason flexibility in the contract is so useful, since it would provide opportunities to
correct non-functioning conditions etc. naturally. Due to the length of the contract, it will
take time before the entire project can be evaluated, and a residual value has to be
determined so that the two parties can work towards the same goal. The majority of these
considerations for uncertainties have to be dealt with already at the design phase and major
13
challenges are assumptions concerning equipment failure, prediction of maintenance
routines and communication problems with the customer [33]. This shows how important
transparency and information sharing will be for the IPSO contracts to work.
Managing the uncertainties for the whole life cycle at the bidding stage is challenging, and
the major inputs to calculate the cost are e.g. historical data, supplier inputs and user
requirements [34]. Risk of unpredictable costs can be reduced by access to resources, and the
trust in a relationship can be helped by sharing information [26]. In this case, the STA holds
information concerning the function of the rail infrastructure that would be very useful for
the contractors when calculating offers. Information concerning the infrastructure also has to
be shared throughout the length of the contract within the contractor organization. This
information, gained through knowledge and experience, could potentially be used to
reconfigure the design of the offering during the contract [34]. Furthermore, the contractor
has to be able to show the value of the facility in the end of the contract as well as to have
measures for evaluation during the contract; this would provide incentives for
documentation. These types of incentives are lacking in the form of contract used today,
where there is no information transfer between e.g. the maintenance contracts. This is a
probable cause to why the actors do not believe reinvestment is appropriate for IPSO
contracts, since there are too many uncertainties concerning the condition of the facility.
Currently, there are no incentives for information transfer along the life-cycle of the
infrastructure, since the life-cycle is broken down into several different contracts, as seen in
Figures 1 and 2. Different contractors execute different contracts, and there is no continuity.
The buyer and the provider in this case have different positions concerning the pricing of the
contracts. The buyer prefers a fixed price, probably because this would prevent any
unwelcome extra costs during the contract, while the provider prefers a more variable price
to reduce the risk. If the contracts would include pay per time, material and labor the
incentives for finding new solutions would not exist, since the provider would focus more on
delivering activities. With a fixed price, on the other hand, the contractor would improve
efficiency and effectiveness since it would be a self-motivating situation to do so [31].
According to the interviewed contractor, no contractor would ever take on the task of
delivering a long-term IPSO contract with a fixed price and no room for adjustments.
Therefore, a compromise would be preferable: contracts primarily regulated with a fixed
price, but with flexibility for smaller renegotiations and adjustments for factors that the
contractor could not affect, such as traffic volume and changes in regulations. Renegotiations
are done for similar contracts for UK defense industry, where the price is reviewed every
fifth year [35].
Finally, according to the STA the supply of material, components and products, is also a
potential risk for the IPSO contracts. If the contractors can freely choose the material they
want to use, how should the STA handle this after the end of the contract? If the STA would
14
procure a new maintenance contract using a traditional contracting form after the IPSO
contract, this would include the STA being in charge of the material supply, which could be
expensive if it involved non-standard material. On the other hand, the material for the IPSO
contract would have to conform to certain standards and regulations; the tracks and signals
systems need to be compatible with the trains. Another problem could be the risk of
obsolescence, with a technology or component no longer in use and unable to be purchased
[36]. This is a risk for the provider if a non-standard technology has been used in the
construction. The possibility for the contractors to use other types of material would
certainly provide more technical development and innovation, but the drawback is that
different types of construction and mixed systems would be used, and this could be hard for
the STA to manage. There is no evident reason for why the contractor would choose to use
non-standard material with strange spare parts, since this would increase the maintenance
costs. This consideration of material from the perspective of the STA could, on the other
hand, also be a matter of attitude and competence.
5.3. Organization overturn
Contractual issues are important, but there are also several concerns related to the
organization, as presented in Section 4.3, which need to be addressed when discussing IPSO
contracts. Only changing the business model and contracts would be insufficient, since the
relational issues are required and determined by the business needs [37]. A major hurdle in
this case seems to be the organization and culture at the STA, which lacks a long-term overall
perspective in combination with an internal reluctance to change and develop the process of
contracting. When large companies deal with change in the business model, a major part of
the challenge is related to the change of mindset within the organization and the need for
internal marketing [38]. Since the rail infrastructure industry in Sweden has one dominating
customer, and since this customer sets the rules for the market, the providers in this case
cannot change their business model unless this has been initiated by the STA. This means
that both the customer and the provider needs to have similar competences; the contractors
need skills to calculate and present an offer, while the STA requires skills to judge the
tenders and evaluate the outcome. As the market is today, the competence of designing is
with consultants, who can be considered a free resource on the market. Even so, the parties
still need competence to work with them. A multi-skilled and cross-functional team is
needed to produce the proposal [39], which in this case goes for both provider and customer.
Also, the service cost estimations requires cross-functional thinking to be able to make
effective cost estimations early in the development of the offering [33]. Therefore, it is
important that both parties work with a long-term perspective, and especially that the
Investment and Traffic Divisions at the STA increase their cooperation. This type of cultural
challenge has been observed within the defense industry in the UK, where the customer and
provider had different ways of thinking about maintenance routines, resulting in extra costs
to make up for the difference [35]. This implies the importance of working together and
15
understanding the other parties’ perspective. For the Swedish rail infrastructure industry, as
for the defense industry in the UK, a massive cultural change is needed [35].
The contractors doubt that the STA has the competence to judge tenders for IPSO, and also
believe that it will be very difficult for the STA to conform culturally to the new thinking
needed. Furthermore, there is an unspoken belief that the STA would try to shuffle all the
risk to the contractors’ side of the table. An IPSO contract would entail much more risk for
the contractor, an uncertainty that seems to frighten them. Previous research states that
providers need to develop new skills for understanding long-term risk as well as being able
to identify, evaluate and manage risk [39]. In this case, this goes for both provider and
customer due to the complex relations between the actors and the structure of the market.
Much of the risk can be regulated as discussed in Section 5.2, and this sort of negative
attitude towards the STA can be seen as an expression for the lack of trust between the
actors. The actors see themselves as parties with opposing interests. Long-term cooperation,
however, calls for common interests, shared risks and flexibility rather than making one side
take all the risk [30]. Within the defense industry in the UK, where similar contracts are used,
risk-sharing and transparency are explicitly encourage by the buyer [40]. The same research
concludes, on the other hand, that this is not easily implemented in practice due to the lack
of trust between the actors. The actors in the UK defense industry suggested open-book
relations as a solution to gain trust, but this type of relationship requires high levels of trust
to be implemented [40].
6. Conclusions
IPSO contracts would provide prerequisites for innovation and technical development as
well as contribute to a more efficient procurement process and a lower total cost for a rail
infrastructure project. However, this business model is new to the actors in the rail
infrastructure industry, therefore involving risks and uncertainties for all parties. The actors
believe that the IPSO contracts would mostly be appropriate for a larger new investment
project, where the risk for the provider is lower than for reinvestments. The reason behind
this thinking is increased uncertainties for reinvestments due to lack of documentation.
Currently, there are no incentives for information transfer between actors and projects, but if
this was to be changed, IPSO could be an option for reinvestments as well.
The contracts would require a significant cultural change within the STA, including both the
structure of the organization and the conservative attitude. Currently, the STA has the
function of a control organization, and would have to take a step back, requiring more trust
between the STA and the contractors. An interesting observation is that it is the organization
of the STA that is in focus when changes are discussed, and not the organizations of the
16
contractors, even though a major change in mindset is needed there as well. Changes within
the contractors’ organizations, however, are not seen as a problem by the actors.
Due to the extensive content of the contracts, both a general contractor and a technical
contractor specialized in rail infrastructure would be necessary to realize the project. For
such a constellation to work, incentives for both sides are important to avoid supply chain
disruption and inadequate quality. Another important issue to reduce the risk is the
operationalization of the result, and to determine precise parameters for evaluation and
control. A fixed price contract with flexibility, such as renegotiations and adjustment for
instance in traffic volume, would be a one way to arrange the payment according to the
majority of the actors. Furthermore, the freedom to use different types of components and
material could lead to both obsolescence and mixed systems that could be difficult to handle.
If IPSO contracts were to be used in Sweden, it would depend on how the contractors foster
this opportunity. They must either embrace the fact that more risk is involved and develop
the necessary skills and competence needed to identify and handle the risk in a strategic
manner, or take the problems as they come in more of an ad hoc way. It is a matter of
developing a competitive advantage, or perhaps having to deal with costly miscalculations.
6.1. Further research
The DORIS (Development of integrated product service Offerings for Rail Infrastructure
Systems) project has to date had a qualitative approach to the investigation of IPSO contracts
for rail infrastructure. The continuation of this research will be done in a more quantitative
way, where the improvement potential will be investigated using life-cycle assessment and
life-cycle cost analysis for environmental and economical calculations, respectively.
Additionally, further investigation and analysis of the functional requirements are needed
for an IPSO contract.
Acknowledgement
The author would like to thank the Swedish Transport Administration for financing the
research, and the respondents for contributing with their time and knowledge.
References
[1]
[2]
The Swedish Agency for Public Management, "Sega gubbar? En uppföljning av
Byggkommisionens betänkande " Skärpning gubbar!"," The Swedish Agency for
Public Management2009.
J.-E. Nilsson, A. Ihs, S. Leif, L. G. Wiman, and L.-G. Wågberg,
"Funktionsupphandling. Sammanfattning av kunskapsläget och rekommendationer
för fortsatt forskning," Swedish National Road and Transport Research Institute,
Linköping2006.
17
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]
[13]
[14]
[15]
[16]
[17]
[18]
T. Stenbeck, "Incentives to Innovations in Roas and Rail Maintenance and
Operations," Licantiate, Department of Infrastructure, Royal Institute of Technology,
Stockholm, 2004.
Trafikverket, "Trafikverkets strategi för drift och underhåll mars 2011," in Elmia
Nordic Rail Utställarseminarium 2011, Jönköping Sweden, ed: Trafikverket, 2011.
M. J. Goedkoop, C. J. G. v. Halen, H. R. M. t. Riele, and P. J. M. Rammens, "Product
Service systems, ecological and economical benefits," PricewaterhouseCoopers
N.V./Pi!MC/Storrm C.S./Pre Consultants, Netherlands1999.
A. Tukker and U. Tischner, "Product-services as a research field: past, present and
future. Reflections from a decade of research," Journal of Cleaner Production, vol. 14,
pp. 1552-1556, 2006.
T. Brady, A. Davies, and D. M. Gann, "Creating value by delivering integrated
solutions," International Journal of Project Management, vol. 23, pp. 360-365, 2005.
M. Lindahl, E. Sundin, A. Öhrwall Rönnbäck, G. Ölundh, J. Östlin,, "Integrated
Product and Service Engineering – the IPSE project," in Changes to Sustainable
Consumption, Workshop of the Sustainable Consumption Research Exchange (SCORE!)
Network (www.score-network.org), supported by the EU’s 6th Framework Programme,
Copenhagen, Denmark, 2006.
J. Nilsson, Nya vägar för infrastruktur. [New ways for infrastructure]. Stockholm,
Sweden: SNS Förlag, 2009.
J. Erkoyuncu, R. Roy, E. Shehab, and K. Cheruvu, "Understanding service
uncertainties in industrial product–service system cost estimation," The International
Journal of Advanced Manufacturing Technology, vol. 52, pp. 1223-1238, 2011.
J. A. Erkoyuncu, R. Roy, E. Shehab, and P. Wardle, "Uncertainty challenges in service
cost estimation for product-service systems in the aerospace and defence industries,"
in 1st CIRP Industrial Product-Service Systems (IPS2) Conference, Cranfield University,
UK, 2009, p. 200.
T. Alonso-Rasgado and G. Thompson, "A rapid design process for Total Care Product
creation," Journal of Engineering Design, vol. 17, pp. 509 - 531, 2006.
S. B. Merriam, Fallstudien som forskningsmetod (Case Study Research in Education). Lund:
Studentlitteratur, 1994.
P. Lekvall and C. Wahlbin, Information för marknadsföringsbeslut, 4 ed. Göteborg,
Sweden: IHM Publishing, 2001.
Banverket, "Banverkets årsredovisning 2008," The Swedish Rail Administration,
Borlänge, Annual report2008.
Banverket Produktion, "Banverket Produktion Årsrapport 2009," Banverket
Produktion2009.
N. Svensson, "Life-Cycle Considerations for Environmental Management of the
Swedish Railway Infrastructure," Doctorial Doctorial, Department of Mechanical
Engineering, Linköping University, Linköping, 2006.
J.-E. Nilsson and R. Pyddoke, "Offentlig och privat samverkan kring infrastruktur- en
forskningsöversikt," Swedish National Road and Transport Research Institute,
Linköping2007.
18
[19]
[20]
[21]
[22]
[23]
[24]
[25]
[26]
[27]
[28]
[29]
[30]
[31]
[32]
[33]
[34]
[35]
J. Nilsson, A. Ihs, L. Sjögren, L. G. Wiman, and L. Wågberg, "Funktionsupphandling:
Sammanfattning av kunskapsläget och rekommendationer för fortsatt forskning,"
VTI, Linköping, Sweden2006.
P. Pakkala, "Innovative Project Delivery Methods for Infrastrucutre," Finnish Road
Enterprise, Helsinki 952-5408-05-1, 2002.
R. Hedström, A. Ihs, and L. Sjögren, "Funktionsupphandling av väg- och banhållning,
Problem och möjligheter.," Swedish National Road and Transport Research Institute,
Linköping2005.
S. Lingegård, "PSS Contracts for Rail Infrastructure," in The R&D Management
Conference 28-30 June Norrköping Sweden, 2011.
Riksrevisonen, "Undehåll av järnväg," RiR 2010:16, 2010.
Banverket, "Entreprenadbeskrivning: Drift och underhåll av järnvägsanläggning
Västra Götaland," 6.41, 2009.
S. Lingegård, "Integrated Product Service Offerings for Rail Infrastructure: potential
benefits and challenges," Licentiate, Environmental Technology and Management,
Department of Management and Engineering, Linköping University, Linköping,
2012.
I. C. L. Ng and S. S. Nudurupati, "Outcome-based service contracts in the defence
industry-mitigating the challenges," Journal of Service Management, vol. 21, pp. 656674, 2009.
H. Lockett, M. Johnson, S. Evans, and M. Bastl, "Product Service SYstems and supply
network relationships: an exploratory case study," Journal of Manufacturing Technology
Management, vol. 22, pp. 293-313, 2011.
R. Oliva and R. Kallenberg, "Managing the transition from products to services,"
International Journal of Service Industry Management, vol. 14, pp. 160-172, 2003.
O. Mont, "Product-Service Systems: Panacea or Myth?," Doctorial dissertation, The
International Institute of Industrial Environmental Economics, Lund University,
Lund, 2004.
S. Nystén-Haarala, N. Lee, and J. Letho, "Flexibility in contract terms and contracting
processes," International Journal of Managing Projects in Business, vol. 3, pp. 462-478,
2010.
S. S. Panesar and T. Markeset, "Industrial service innovation through improved
contractual realtionship: A case study in maintenance," Journal of Quality in
Maintenance Engineering, vol. 14, pp. 290-305, 2008.
T. Alonso-Rasgado and T. G., "A rapid design process for Total Care Product
creation," Journal of Engineering Design, vol. 17, pp. 509-531, 2006.
P. P. Datta and R. Roy, "Cost modelling techniques for availability type service
support contracts: A literature review and empirical study," CIRP Journal of
Manufacturing Science and Technology, vol. 3, pp. 142-157, 2010.
H. Meier, R. Roy, and G. Seliger, "Industrial Product-Service Systems—IPS²," CIRP
Annuals - Manufacturing Technology, vol. 59, pp. 607-627, 2010.
P. P. Datta and R. Roy, "Operations strategy for the effective delivery of integrated
industrial product-service offerings: Two exploratory defence industry case studies,"
International Journal of Operations and Production Management, vol. 31, pp. 579-603,
2011.
19
[36]
[37]
[38]
[39]
[40]
F. J. Romero Rojo and R. Roy, "Obsolescence management for long-life contracts: state
of the art and future trends," International Journal of Manufacturing Technology, vol. 49,
pp. 1235-1250, 2009.
I. Thompson, A. Cox, and L. Anderson, "Contracting strategies for the project
environment," European Journal of Purchasing & Supply Management, vol. 4, pp. 31-41,
1998.
E. Sundin, G. Ölundh Sandström, M. Lindahl, and A. Öhrwall Rönnbäck, "Industrial
Challenges for Product/Service SYstems: Experiences from a large company
netowork in Sweden," in CIRP Industrial Product-Service Systems (IPS²) Conference,
Cranfield UK, 2009.
T. Brady, A. Davies, and D. M. Gann, "Creating value by delivering integrated
solutions," International JOurnal of Project Management, vol. 23, pp. 360-365, 2005.
T. Johnsen, M. Howard, and J. Miemczyk, "UK defence change and the impact on
supply relationships," Supply Chain Management: An International Journal, vol. 14, pp.
270-279, 2009.
20