While service outsourcing may benefit from the application of performance-based contracts (PBCs), the implementation of such contracts is usually challenging. Service performance is often not only dependent on supplier effort but also on the behavior of the buying firm. Existing research on performance-based contracting provides very limited understanding on how this challenge may be overcome. This article describes a design science research project that develops a novel approach to buyer-supplier contracting, using collaborative key performance indicators (KPIs). Collaborative KPIs evaluate and reward not only the supplier contribution to customer performance but also the customer's behavior to enable this. In this way, performance-based contracting can also be applied to settings where supplier and customer activities are interdependent, while traditional contracting theories suggest that output controls are not effective under such conditions. In the collaborative KPI contracting process, indicators measure both supplier and customer (buying firm) performance and promote collaboration by being defined through a collaborative process and by focusing on end-of-process indicators. The article discusses the original case setting of a telecommunication service provider experiencing critical problems in outsourcing IT services. The initial intervention implementing this contracting approach produced substantial improvements, both in performance and in the relationship between buyer and supplier. Subsequently, the approach was tested and evaluated in two other settings, resulting in a set of actionable propositions on the efficacy of collaborative KPI contracting. Our study demonstrates how defining, monitoring, and incentivizing the performance of specific processes at the buying firm can help alleviate the limitations of traditional performance-based contracting when the supplier's liability for service performance is difficult to verify. K E Y W O R D Scollaboration, design science research, key performance indicators (KPIs), outsourcing, performance measurement, performance-based contracts, service procurement
IT outsourcing (ITO) remains a popular business practice, but many buyers and suppliers of IT services are caught in a vicious relationship spiral of low trust, bad collaboration and mediocre performance. This paper describes a novel process understanding of how vicious cycles work and suggests a new method for how they can be reversed into virtuous cycles. Based on the action research and complementary system dynamics simulation, this paper demonstrates how an ineffective ITO relationship between a European Harbour Authority and its main IT supplier ITCo was formed and, later, transformed. The method, involving collaborative redesign of service workflows, applied in this action research triggered the reversal of an otherwise downward relationship spiral. Both the empirical facts from the action research data and the system dynamics simulation data are provided as evidence. We conclude the paper with conceptual and methodological contributions as well as scope for future research.
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