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Performance-based contracting in service supply chains: a service provider risk perspective

Kostas Selviaridis (Department of Industrial Management & Logistics, Lund University, Lund, Sweden)
Andreas Norrman (Department of Industrial Management & Logistics, Lund University, Lund, Sweden)

Supply Chain Management

ISSN: 1359-8546

Article publication date: 4 March 2014

Abstract

Purpose

The performance of service supply chains in terms of service levels and cost efficiency depends not only on the effort of service providers but also on the inputs of sub-contractors and the customer. In this sense, performance-based contracting (PBC) entails increased financial risk for providers. Allocating and managing risk through contractual relationships along the service supply chain is a critical issue, and yet there is scant empirical evidence regarding what factors influence, and how, provider willingness to bear PBC-induced risk. This paper aims to address this gap.

Design/methodology/approach

The paper draws on agency theory and two cases of logistics service supply chains, in the food retail and automotive industries respectively, to identify key influencing factors. Data were collected through semi-structured interviews with 30 managers of providers and sub-contractors and review of 35 documents, notably contracts and target letters.

Findings

Four influencing factors were found: performance attributability within the service supply chain; relational governance in service supply chain relationships; provider risk and reward balancing; and provider ability to transfer risk to sub-contractors. The propositions developed address how these factors influence provider willingness to bear PBC-induced risk.

Research limitations/implications

The factors identified are external to the provider mindset and refer to the management of contractual relationships and service delivery interactions along the service supply chain. The paper contributes to agency theory by stressing the risk allocation implications of bi-directional principal-agent relations in service supply chains.

Practical implications

The study suggests ways in which providers can increase their capacity to bear and manage financial risk related to PBC design.

Originality/value

The paper identifies factors that influence provider willingness to bear financial risk induced by PBC in service supply chains.

Keywords

Acknowledgements

The authors gratefully acknowledge the support provided by the case companies. More specifically, they would like to thank all the managers and employees of LLPCo and 4PLCo for their generous participation and inputs. The authors are also grateful to Wendy Van der Valk (Tilburg School of Economics and Management) and Martin Spring (Lancaster University Management School) for their insightful comments on earlier versions of the manuscript. In addition, the authors would like to thank the participants of the EurOMA 2012 (Amsterdam, The Netherlands) and the IPSERA 2013 (Nantes, France) annual conferences for their constructive feedback and suggestions for improvement. The authors are responsible for all remaining errors and omissions. Received 29 June 2013 Revised 14 October 2013 20 December 2013 24 December 2013 Accepted 5 January 2014

Citation

Selviaridis, K. and Norrman, A. (2014), "Performance-based contracting in service supply chains: a service provider risk perspective", Supply Chain Management, Vol. 19 No. 2, pp. 153-172. https://doi.org/10.1108/SCM-06-2013-0216

Publisher

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Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited