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Performance-Based Contracting for Advanced Logistics Services: Challenges in its Adoption, Design and Management

Selviaridis, Kostas LU and Norrman, Andreas LU (2015) In International Journal of Physical Distribution & Logistics Management 45(6). p.592-617
Abstract
Purpose

The aim of this paper is to explore key challenges of adopting, designing and managing performance-based contracts (PBC) for advanced logistics services, as seen by providers. The shift towards performance-based solutions has proved challenging since providers often struggle to link performance to their payment. Despite such managerial challenges, empirical research in this area has been limited.



Design/methodology/approach

A multi-case design was adopted. Three cases of logistics service providers were selected based on purposive sampling. Data were collected through 36 semi-structured interviews and review of 43 documents such as contracts and customer target letters.



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Purpose

The aim of this paper is to explore key challenges of adopting, designing and managing performance-based contracts (PBC) for advanced logistics services, as seen by providers. The shift towards performance-based solutions has proved challenging since providers often struggle to link performance to their payment. Despite such managerial challenges, empirical research in this area has been limited.



Design/methodology/approach

A multi-case design was adopted. Three cases of logistics service providers were selected based on purposive sampling. Data were collected through 36 semi-structured interviews and review of 43 documents such as contracts and customer target letters.



Findings

Key PBC adoption challenges include customer and provider intention to align their goals and incentives as well as their views on risk and reward sharing. Contract design challenges center around performance metric definition and weighting, designing performance monitoring systems that consider service co-production effects and help improve customer relationship, and designing incentives with appropriate intensity levels. Contract management challenges include fostering provider pro-activity, provider changes in terms of processes and resource investments, perceived fairness of designed incentives and contract re-design to allow for win-win relationship outcomes.



Research limitations/implications

The study empirically contributes to extant logistics services literature by identifying specific challenges that extend also beyond PBC adoption and design and cover contract management (and potential contract re-design). It also unpacks the notion of performance attributability by analyzing its role also in terms of contract and performance management as well as its potential effects on customer relationship management.



Practical limitations/implications

The study presents implications for logistics provider managers regarding how the observed PBC challenges can be overcome.



Originality/value

The study unearths several challenges of PBC for advanced logistics services, particularly in connection to contract management and re-design. (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
contract management, incentive alignment, third/fourth party logistics, performance-based contracting, performance management, business services, agency theory
in
International Journal of Physical Distribution & Logistics Management
volume
45
issue
6
pages
592 - 617
publisher
Emerald Group Publishing Limited
external identifiers
  • wos:000357391100004
  • scopus:84931075302
ISSN
0960-0035
DOI
10.1108/IJPDLM-11-2014-0267
language
English
LU publication?
yes
id
3ca4e897-306a-47d5-9b51-e7dd8e81eeec (old id 5053227)
alternative location
http://www.emeraldinsight.com/doi/full/10.1108/IJPDLM-11-2014-0267
date added to LUP
2015-08-20 16:01:44
date last changed
2017-11-05 04:18:01
@article{3ca4e897-306a-47d5-9b51-e7dd8e81eeec,
  abstract     = {Purpose<br/><br>
The aim of this paper is to explore key challenges of adopting, designing and managing performance-based contracts (PBC) for advanced logistics services, as seen by providers. The shift towards performance-based solutions has proved challenging since providers often struggle to link performance to their payment. Despite such managerial challenges, empirical research in this area has been limited. <br/><br>
<br/><br>
Design/methodology/approach <br/><br>
A multi-case design was adopted. Three cases of logistics service providers were selected based on purposive sampling. Data were collected through 36 semi-structured interviews and review of 43 documents such as contracts and customer target letters.<br/><br>
 <br/><br>
Findings<br/><br>
Key PBC adoption challenges include customer and provider intention to align their goals and incentives as well as their views on risk and reward sharing. Contract design challenges center around performance metric definition and weighting, designing performance monitoring systems that consider service co-production effects and help improve customer relationship, and designing incentives with appropriate intensity levels. Contract management challenges include fostering provider pro-activity, provider changes in terms of processes and resource investments, perceived fairness of designed incentives and contract re-design to allow for win-win relationship outcomes.<br/><br>
 <br/><br>
Research limitations/implications <br/><br>
The study empirically contributes to extant logistics services literature by identifying specific challenges that extend also beyond PBC adoption and design and cover contract management (and potential contract re-design). It also unpacks the notion of performance attributability by analyzing its role also in terms of contract and performance management as well as its potential effects on customer relationship management. <br/><br>
<br/><br>
Practical limitations/implications <br/><br>
The study presents implications for logistics provider managers regarding how the observed PBC challenges can be overcome.<br/><br>
<br/><br>
Originality/value<br/><br>
The study unearths several challenges of PBC for advanced logistics services, particularly in connection to contract management and re-design.},
  author       = {Selviaridis, Kostas and Norrman, Andreas},
  issn         = {0960-0035},
  keyword      = {contract management,incentive alignment,third/fourth party logistics,performance-based contracting,performance management,business services,agency theory},
  language     = {eng},
  number       = {6},
  pages        = {592--617},
  publisher    = {Emerald Group Publishing Limited},
  series       = {International Journal of Physical Distribution & Logistics Management},
  title        = {Performance-Based Contracting for Advanced Logistics Services: Challenges in its Adoption, Design and Management},
  url          = {http://dx.doi.org/10.1108/IJPDLM-11-2014-0267},
  volume       = {45},
  year         = {2015},
}