Performance-based contracting: contextual factors and the degree of buyer supplier integration

Abstract

Purpose Performance-based contracting (PBC) links pricing with performance objectives in service business relationships. Although interest in PBC has surged recently, there is still great uncertainty about the risks, opportunities and challenges. This paper aims to provide a deeper understanding of the contextual factors of PBC and how providers assess them. Design/methodology/approach This paper includes conducting a multiple-case study evaluation and analyzes data from 21 cases. Risks, opportunities and contextual factors are identified through interviews, and the case data are analyzed with several methods, including Borda count and cross-tabulation. Findings The results show that the most important factors of PBC are clear responsibilities, clear performance indicators, transparent measurement, cooperative culture and a precise utilization profile of core assets. Surprisingly, incentives are of minor perceived relevance. The analysis supports the differentiation of PBC into two subcategories: lean (low integrated) and customized (high integrated) PBC. Research limitations/implications While many studies stress the uniqueness of PBC in accordance with the “one-size-does-not-fit-all” mantra, this research differentiates the standardized PBC from a customized one. The findings face the limitations of case study research and qualitative data analysis in general. Practical implications Practitioners are provided with guidance to develop either a customized or a standardized PBC. Originality/value Previously, broader empirical insights have still been rare; thus, this paper contributes to the PBC literature, as it provides data from multiple cross-industry cases. The findings (e.g. the minor relevance of incentives) stand in contrast to parts of the academic literature and contribute also to the wider service management field.

Do control mechanisms always promote collaborative performance: the role of formal institutions and business ties

“…In addition, these rapid policy changes have pushed business partners to develop flexible strategies to cope with the new situation. Unfortunately, executing a contract involves strict compliance with rules and regulations, which can lead to organizational rigidity (Glas and Kleemann, 2017;Luo, 2002). Thus, it is not easy for business partners to quickly adjust and adapt to changing policies.…”

“…Contracts are essential to promote collaborative interfirm relationships and drive performance (Achrol and Gundlach, 1999;Glas and Kleemann, 2017). When designing contracts, firms are generally motivated to include elements that can improve their performance (Faems et al, 2008;Li et al, 2019;Luo, 2002;Poppo and Zenger, 2002;.…”

“…In addition, partners involved in business ties prefer a flexible, casual cooperative mode with many personal relationships mixed in Fang et al (2011). However, contractual execution, which requires partners to perform the cooperation procedures in accordance with the established contract terms (Luo, 2002;, is a slightly rigid, systematic and depersonalize operation mode (Glas and Kleemann, 2017). Thus, the prerequisites, working atmosphere and collaborative pattern of these two mechanisms are quite different between business ties and contract execution.…”

“…In previous research, scholars have primarily focused on contract design, partly neglecting contractual execution, leading to conflicting results on the effectiveness of contracts. Contracts have become useful tools for ensuring interfirm cooperation in emerging countries (Glas and Kleemann, 2017;Heide et al, 2007;Luo, 2002), but their use has also highlighted the problem of inefficient contracts (Sheng et al, 2011). The reason may be that signed contracts are not executed well (Kashyap et al, 2012).…”

Behind the length of contract during market transitions

“…A comprehensive (long) contract also provides a formal enforcement mechanism for the protection of specified rights and obligations that are otherwise not clearly specified under the law (Williamson, 2002; Mayer and Argyres, 2004; Reuer and Ariño, 2007; Mooi and Ghosh, 2010; Tangpong et al , 2010; Glas and Kleemann, 2017; Jiang et al , 2017). In contrast, an incomplete (short) contract may bring about ambiguity, which creates potential space for shirking responsibility and hinders the ability to coordinate activities (Luo, 2002; Carson et al , 2006; Mooi and Ghosh, 2010).…”