Fable
In the clock repair shop, standardization and outcome-based pricing are two different battles
In the town there was an old clock shop that specialized in repairing large clocks for wealthy families. Every clock was different, and for each repair the master first spent three days taking it apart to study it, then five days fixing it. Charges were by the day, with a minimum of eight days' wages per clock. The master was skilled but slow, taking only a dozen or so jobs a year, and the shop barely got by.
Apprentice Xiao Zheng discovered that sixty percent of failures were the same problem—worn mainsprings. He ordered standard mainsprings from the blacksmith and drew a disassembly and reassembly flowchart. From then on, replacing a mainspring went from five days to one, regardless of clock type. Customers paid according to the new price list: a flat rate for standard mainspring replacement, and special faults still billed by the day. Xiao Zheng called this productized service—turning the standardizable parts of a service into fixed components.
The shop's business improved, but the master was still struggling with one thing: some rich people said, I don't care how you repair it, I only care whether the clock keeps accurate time and whether it will stop again within a year. If you can promise in the contract that failures within one year are your responsibility, I can pay an annual fee. The master thought this made sense, but the accounts were hard to calculate - if he took on one hundred clocks and every one broke each year, he would lose everything.
Xiao Zheng and his master calculated three months of data and found that the clock repair records they had accumulated over two years could be used to calculate the average annual occurrence rate of each type of failure. Based on this they set the annual fee, not telling customers how much the mainspring cost or how much labor cost, only how much it cost per year for the clock to be accurate. Longtime customers signed the contract readily and did not ask what parts were used.
At this point, the master suddenly understood: productized service cut their repair time from five days to one, but they still charged per clock repair; service-as-software turned them from clock repairers into clock accuracy service providers, charging an annual outcome fee. Both actions happened in the same shop, but the ledgers were completely different—the former measured efficiency, the latter measured risk.
Interestingly, some customers only want the productized service and not the annual contract—they pay each time a spring is replaced, and come back when it breaks. Other customers sign the annual contract first and enjoy stable, clockwork reliability. The master serves both, but the contracts are kept strictly separate.
At the year-end audit, the master pointed to two stacks of contracts and said to Xiao Zheng: standardizing your work and underwriting results are two mountains. Climbing the first doesn't mean you can climb the second.