Contracting for complex performance in markets of few buyers and sellers

Abstract

Purpose -The aim of the paper is to identify and review the impact and challenges of new contractual arrangements on UK military procurement and other limited or oligopolistic markets. Design/methodology/approach -The unit of analysis is the large-scale procurement programme. Two cases of major military platforms (naval and air defence) examine through-life maintenance or "contracting for availability" and build theory on procuring complex performance (PCP). Propositions are developed from the literature then tested and extended from the case analysis, supported by 35 interviews from buyer and supplier representatives. Findings -Examining UK military platform procurement reveals a perspective not present in fast moving high volume supply chains. In oligopolistic markets such as defence, the Ministry of Defence (MOD) represents a market of one, seeking ambitious and non-incremental innovation from the prime contractor during the procurement process. The new contractual arrangements show an increasing shift in responsibility to the prime contractor who coordinates service support and supply chain incentivisation over extended, often multi-decade platform lifecycles.Research limitations/implications -The cases were conducted separately and later compared. Whilst based on defence sources, the paper concludes with general recommendations for all public-private complex procurements and seeks to explore other industry sectors as part of further research into PCP. Originality/value -Examined from a theoretical and practical perspective, the cases reveal the challenges facing procurement in major public-private projects. The changing role identified reflects extended timescales and the quasi-market military procurement environment, compounded by current economic and politically charged conditions. Procurement by default increasingly plays a new shaping role in large-scale programme management driven by outcome-based contracting. Customers such as the MOD must re-evaluate their role under these new contractual arrangements, providing leadership and engaging with future contracting capability and innovation.

Supply chain alignment as process: contracting, learning and pay-for-performance

“…These incentives can take various forms e.g. a bonus /malus or a gain-/pain-share mechanism (Caldwell and Howard, 2014). …”

“…designing effective incentive systems (Caldwell and Howard, 2014). Compared to research using agency theory and TCE, which adopts a static view of contract design and alignment (e.g.…”

Alliance strategy: context, process, and requirements

“…Cost Economics theorizing, transactions with low volume and high specificity and complexity are increasingly organized across organizational boundaries (Caldwell and Howard, 2014;Ghoshal and Moran, 1996). Risks is shifted upstream the value chain, and organizations face major difficulty to define performance ex ante (Kleemann and Essig, 2013).…”

“…Intra-organizational complexity -rather than a presumed unequivocal internal structure -calls for deconstructing the notion of felt difficulty, and developing theories on its implications for business network innovation. For instance, some organization units may not applaud or engage actively in network-level change (Caldwell and Howard, 2014;Mahon, 2007). Finally, the steps may draw researchers towards tactical level network studies.…”

“…The content of images is more than a representation of how a network functions; it offers access to increasingly complex and rapidly developing knowledge of how value is created now and in the future. Industrial marketing concerns products and services that become increasingly technology-intense and complex (Caldwell and Howard, 2014;Yoo et al, 2012). Organizations partner to develop solutions for complex societal and sectoral challenges (Ranga and Etzkowitz, 2013).…”