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

Norrman, Andreas LU and Selviaridis, Kostas LU (2014) In Supply Chain Management 19(2). p.153-172
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... (More)
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. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Supply chain management, Risk management, Service industries, Performance-based contracting, Service supply chains, Transport and distribution, Agency theory
in
Supply Chain Management
volume
19
issue
2
pages
153 - 172
publisher
Emerald Group Publishing Limited
external identifiers
  • wos:000334323700004
  • scopus:84897107071
ISSN
1359-8546
DOI
10.1108/SCM-06-2013-0216
language
English
LU publication?
yes
id
f36cf7e8-4e8a-494c-a275-9983b0c917e7 (old id 4378646)
date added to LUP
2014-04-02 14:56:44
date last changed
2017-11-12 03:48:14
@article{f36cf7e8-4e8a-494c-a275-9983b0c917e7,
  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.<br/><br>
<br/><br>
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.<br/><br>
<br/><br>
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.<br/><br>
<br/><br>
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.<br/><br>
<br/><br>
Practical implications – The study suggests ways in which providers can increase their capacity to bear and manage financial risk related to PBC design.<br/><br>
<br/><br>
Originality/value – The paper identifies factors that influence provider willingness to bear financial risk induced by PBC in service supply chains.},
  author       = {Norrman, Andreas and Selviaridis, Kostas},
  issn         = {1359-8546},
  keyword      = {Supply chain management,Risk management,Service industries,Performance-based contracting,Service supply chains,Transport and distribution,Agency theory},
  language     = {eng},
  number       = {2},
  pages        = {153--172},
  publisher    = {Emerald Group Publishing Limited},
  series       = {Supply Chain Management},
  title        = {Performance-based contracting in service supply chains: a service provider risk perspective},
  url          = {http://dx.doi.org/10.1108/SCM-06-2013-0216},
  volume       = {19},
  year         = {2014},
}