Outcome attributability in performance-based contracting: Roles and activities of the buying organization

Contracting outsourced services with collaborative key performance indicators

“…Particularly in service outsourcing, contractual governance may be applied in the form of performance‐based contracting (Essig, Glas, Selviaridis, & Roehrich, ; Guajardo et al, ). Performance may be measured in terms of asset or product availability or utilization or even customer satisfaction and monetary revenues (Nullmeier et al, ). Several studies on management control find empirical evidence for the favorable effects of output monitoring on customer‐supplier relations and supplier performance (Heide, Wathne, & Rokkan, ; Sumo, Van der Valk, Van Weele, & Bode, ; Tiwana & Keil, ).…”

“…Often, service suppliers are reluctant to work under such contracts, because services (in varying degrees) rely on customer inputs including actors (the customer firm or its employees), physical assets, and information (Chase, ; Sampson & Froehle, ). Suppliers themselves are thus not always fully in control of performance (Gruneberg, Hughes, & Ancell, ; Nullmeier et al, ; Selviaridis & Norrman, ). Agency theory (Eisenhardt, ) and other theories that study the tradeoffs between output‐based and process‐based controls (Ouchi, ) suggest that PBCs are indeed not feasible or not effective under conditions of outcome uncertainty.…”

“…Selviaridis and Norrman () argue that low performance attributability would require increased relational governance based on information sharing, collaboration, and trust, which in turn make service providers more willing to accept the risks of PBCs. Nullmeier et al () proposed that how information sharing by the buying organization, related to service delivery planning and monitoring, can help to mitigate some of the negative effects of outcome uncertainty on supplier efforts. One of the few recent theory testing studies in this stream finds evidence that for high‐volume routine services, information exchange and transparency can strengthen the already positive effects of output controls on supplier performance and, for low‐volume customized professional services, can alleviate some of the negative effects of output controls on supplier performance (Stouthuysen et al, ).…”

“…Services are often coproduced by supplier and customer, making their respective activities interdependent and their responsibilities difficult to separate (Chase, ; Narayanan, Jayaraman, Luo, & Swaminathan, ; Sampson & Froehle, ). Consequently, besides environmental uncertainty, the supplier also faces the behavioral uncertainty introduced by the buying firm (Nullmeier, Wynstra, & Van Raaij, ). This leads to a situation of double moral hazard (Bhattacharya, Gaba, & Hasija, ; Roels, Karmarkar, & Carr, ).…”

“…Various academic and management practice studies have recently proposed related yet distinct approaches. First, extensions of research on performance‐based contracting investigate the interplay between output controls and relational governance (Nullmeier et al, ; Selviaridis & Norrman, ; Stouthuysen et al, ) or the interaction of output and process controls (Cardinal, Kreutzer, & Miller, ; Handley & Gray, ). These studies, however, do not address how contracting (i.e., defining, verifying, and incentivizing) the buying firm's performance can address some of the limitations of traditional performance‐based contracting when the supplier's liability for service delivery performance is difficult to verify.…”