Contracting outsourced services with collaborative key performance indicators

While service outsourcing may benefit from the application of performance‐based contracts (PBCs), the implementation of such contracts is usually challenging. Service performance is often not only dependent on supplier effort but also on the behavior of the buying firm. Existing research on performance‐based contracting provides very limited understanding on how this challenge may be overcome. This article describes a design science research project that develops a novel approach to buyer–supplier contracting, using collaborative key performance indicators (KPIs). Collaborative KPIs evaluate and reward not only the supplier contribution to customer performance but also the customer's behavior to enable this. In this way, performance‐based contracting can also be applied to settings where supplier and customer activities are interdependent, while traditional contracting theories suggest that output controls are not effective under such conditions. In the collaborative KPI contracting process, indicators measure both supplier and customer (buying firm) performance and promote collaboration by being defined through a collaborative process and by focusing on end‐of‐process indicators. The article discusses the original case setting of a telecommunication service provider experiencing critical problems in outsourcing IT services. The initial intervention implementing this contracting approach produced substantial improvements, both in performance and in the relationship between buyer and supplier. Subsequently, the approach was tested and evaluated in two other settings, resulting in a set of actionable propositions on the efficacy of collaborative KPI contracting. Our study demonstrates how defining, monitoring, and incentivizing the performance of specific processes at the buying firm can help alleviate the limitations of traditional performance‐based contracting when the supplier's liability for service performance is difficult to verify

How contracts and trust influence innovation in inter-organizational relationships: A necessary condition analysis

Purpose – The paper aims to empirically validate a recently developed typology to demonstrate that services that are similar in terms of technical content, but different with regard to how they are used by the buying company, require different buyer-supplier interaction processes. Design/methodology/approach – The paper conducts an embedded case study based on dyadic data collection to investigate the purchase of cleaning services by Netherlands Railways (NS) from two suppliers. These services differ with regard to how they are used by NS: as part of the value-proposition to customers (train and station cleaning) or as part of the support processes for NS (office cleaning). Findings – The paper finds that for a technically homogenous service, fundamental differences in required interaction arise as a result of different usage situations. These differences are reflected in the sourcing decision and the design of the service delivery management process. Research limitations/implications – Besides the general limits of single case studies regarding external validity, a specific limitation of the study is the limited number of supplier interviews conducted. Practical implications – In order to develop appropriate sourcing and service delivery management strategies, practitioners need to consider the use of the service purchased and how it relates to their value proposition. This research shows that pooling volume for services that are used differently may enable immediate price reduction but could reduce supplier performance and ultimately customer satisfaction. Originality/value – The case study and the validated typology complement the limited literature on the procurement of services transferred to the next level of customers in the supply chain

Performance-based contracting as an enabler of innovation

Abstract Organizations need to incorporate innovation into their businesses as the dynamic business environment is faced with globalization and large fluctuations in the economy. One of the ways to engage in innovation is through inter-organizational relationships. Unfortunately, interorganizational relationships frequently do not result in the expected performance and innovation. The primary way to govern inter-organizational relationships (IOR) is by means of a contract; yet, the majority of contracts are not conducive for innovation. A relatively new contracting type which is suggested to foster innovation is the performance-based contract. PBCs underline the outcome of the service rather than stating how to deliver it. As a consequence, PBCs leave more room for innovation. However, academic literature provides no guidance on how PBCs lead to innovation. By means of a literature review we develop a framework that outline how PBCs lead to innovation. We develop the statement that innovation hinges upon the collaboration between the partners, innovation incentives, and the provider's autonomy, creativity, and risk. These factors are enabled by the contract duration (long-term) of a PBC, its (low) specificity level, and reward schemes. Finally, relationship orientation and providers' risk averseness positively moderate the effects of contract duration on collaboration and providers' risk on innovation respectively