PBC in Service Triads

Recently, there has been an increasing interest in outcome-based or ‘performance-based’ contracts both in practice and in the academic literature. Traditional contracting literature, however, has focused on the context of a dyadic buyer-supplier relationship. Little or no research has been done on performance-based contracting in triadic relations, where a buyer contracts a supplier to deliver services to the buyer’s customers.

For example, if a software company outsources its helpdesk services to a third-party call-center, the service interaction is between the customer and the call-center, not between the customer and the software company, even though the customer has a contractual relationship with the software company. Other instances include manufacturers of capital equipment using maintenance service providers to work directly for end-users, as well as many third-party logistics settings. Public transportation services are provided to citizens by service providers under specific government contracts (concessions).

Our project uses and extends prior literature, in particular classical transaction cost, agency and management control theories, and the emerging literature on inter-organisational triads, to study the antecedents and effects of contractual and relational governance, in the specific context of performance-based contracts in buyer-supplier-customer triads.

The project is generously co-funded by the research foundation of the Dutch Association for Purchasing Management (NEVI), and runs for the period 2010-2015. It consists of several sub-projects:

The effects of Performance Based Contracts on Innovation (Regien Sumo; supervision: Dr Wendy van der Valk and Prof dr Arjan van Weele)

In the service triads discussed above, service partner and customer act as co-producers of the service, thereby excluding the buyer from the service encounter. As customer contact mostly resides in the service encounter, the buyer is thus highly dependent on the service partner, not only for final customer satisfaction but also for customer-induced innovation and organizational learning. Appropriate contractual and relational governance of the moment of truth between service partner and customer is thus imperative for successful component service sourcing, as it is the only way that the buyer can shape and influence the encounter.

In such triadic settings, there has been an increasing interest of organizations in performance based contracts (PBC). PBCs are increasingly being used in the context of inter-organizational service relationships and suggested to positively affect innovation. They underline the outcome of the service rather than stating how to deliver it: as a consequence of this flexibility, PBCs leave more room for innovation. As confirmed by several authors, by allowing the partner to determine how to best accomplish the work, PBCs promote new and improved ways of delivering the performance. Nevertheless, though researchers agree on the positive effects of PBCs on innovation, current literature provides no guidance on how PBCs foster innovation. 

Organizing performance contracts to manage service triads (dr Gerrit Rooks)

The idea behind this subproject is simple and not brand new. A written contract is just a piece of paper with some ink. It is a tool in the hand of managers. Much work in organization theory focuses on effects of contracts, although contracts in themselves have no effect. In this project we question the notion that contractual safeguards and incentives alone provide the formal governance mechanisms that underlie triads. The coordinated actions of managers working with a contract make the difference in performance. In this subproject we therefore focus on the organization of contracting. 

In the project we argue that the interface between buyer and supplier in a triad is of crucial importance for the governance of the triad. Complex performance contracts need to be supported by an appropriate parallel coordinating mechanism. This can be a liason person, task force, or when interdependencies and moral hazards are very high, more formal steering committees.  To test our framework we are now planning to carry out a large scale empirical survey.

Contracting Capabilities and the use of Performance Based Contracts (supervision: Prof dr Finn Wynstra)

Through performance-based outsourcing of components of their service delivery, the service sector employs complementary capabilities of the market and enlarges its own value proposition to end customers. But which capabilities does the buying organization need to acquire, access, develop and dissipate over generally long contracting periods to outsource effectively?

This research project explores the area of contracting capabilities through longitudinal case studies in the Dutch public sector. Contracting capabilities are defined as those capabilities of analysing situational characteristics of outsourcing, selecting the optimum contract specification method, designing the appropriate contract (ex-ante), and managing, adjusting and eventually terminating the contract effectively (ex-post) - in short, those organizational capabilities aimed at creating sustainable competitiveness from the PSM function through successful outsourcing.