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Title: The handling of risks induced by performance-based contracting in service supply chains
Authors: Strien, J van
Keywords: agency theory
defense and aerospace
Performance-based contracting
Service supply chains
service industries
risk management
Issue Date: 15-Sep-2016
Publisher: Open Universiteit Nederland
Abstract: Performance-based contracting (PBC) plays an increasingly important role in the defense industry of the USA. In PBC, risk is an essential consideration as PBC changes the nature of risk and its allocation. This shift in risk raises important questions concerning the identification and management of risks under PBC. To date, little empirical research has been carried out on the management of risk under PBC. The problem statement of this study is: What factors influence the service provider’s willingness to take PBC-induced risks and how are these risks managed in a service supply chain? Insight in these factors could enable the customer and service provider to improve their relationship, service performance and future contracts. Seven propositions were created, three on PBC characteristics and four on the factors influencing the willingness. Regarding the propositions on the PBC characteristics, the study supports that in PBC risk is transferred to the service provider, and the customer incentivizes the performance. The other two propositions could not be supported. In the current contract, the financial risks are not largely transferred to the service provider. Similarly, this study could not support the proposition that more PBC constituents in a contract, would led the service provider to behave more in the interests of the customer. The reason for this is that it is too early in the process to notice any behavioral change. Furthermore this is a transitional contract, step towards a full PBL contract. Concerning the factors influencing the service provider’s willingness, not all four factors found in the literature could be supported. The service provider’s performance attributability however, was indeed found to be a strong influencing factor. In addition, this study shows two methods on how this factor is managed: Service Level Agreements and exclusions. The factors on the service provider’s ability to transfer risk and to balance risk and reward across the SSC could only be partly supported. The cause for this, is that the contracts between the service provider and subcontractors could not be used for verification. The interview data however, did confirm these as influencing factors. Although all interviewees agree relational governance and trust is important in PBC, the studied documents don’t support this; the service provider is not given a large amount of control. During the study three more factors were found that strongly influence the willingness: the chosen growth path towards toward full PBC, the ability to make accurate forecasts and the length of the contract. Although these factors are not completely new in literature in relation to performance contracting, in this study their part is more prominent as their presence in present-day literature. This could be explained by the specific risk characteristics of this case. In the end, six factors were found affecting the service provider’s willingness. In addition, this study showed how these factors were handled in practice. A service provider and customer in a PBC relationship should take these six factors in to consideration. It’s recommended to replicate this study when the sustainment posture is in a full grown state. Furthermore, to conduct this study with other PBC relationships to compare the results. Moreover in a market situation where there is more competition to study the effects of competition on the influencing factors. It’s recommended to conduct a study where the transfer of risk to the subcontractors and balance risks across the service supply chain are studied in more detail. It’s recommended to study the lack of control of the service performance and to study how this risk is managed in other PBC relationships. This also applies to the factor of the chosen growth path toward full PBC.
Appears in Collections:MSc Management Science

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