TY - JOUR

T1 - Performance-based contracting for advanced logistics services

T2 - challenges in its adoption, design and management

AU - Selviaridis, Kostas

AU - Norrman, Andreas

PY - 2015

Y1 - 2015

N2 - PurposeThe 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/approachA multi-case design was adopted. Three cases of logistics service providers were selected based on purposive sampling. Data were collected through 38 semi-structured interviews and review of 43 documents such as contracts and customer target letters.FindingsKey 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/implicationsThe study empirically contributes to extant logistics service provider 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 implicationsThe study presents implications for logistics provider managers regarding how the observed PBC challenges can be overcome.Originality/valueThe study unearths several challenges of PBC for advanced logistics services, particularly in connection to contract management and re-design.

AB - PurposeThe 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/approachA multi-case design was adopted. Three cases of logistics service providers were selected based on purposive sampling. Data were collected through 38 semi-structured interviews and review of 43 documents such as contracts and customer target letters.FindingsKey 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/implicationsThe study empirically contributes to extant logistics service provider 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 implicationsThe study presents implications for logistics provider managers regarding how the observed PBC challenges can be overcome.Originality/valueThe study unearths several challenges of PBC for advanced logistics services, particularly in connection to contract management and re-design.

KW - Logistics service providers

KW - Agency theory

KW - Performance management

KW - Incentive alignment

KW - Business services

KW - Contract management

KW - Performance-based contracting

U2 - 10.1108/IJPDLM-11-2014-0267

DO - 10.1108/IJPDLM-11-2014-0267

M3 - Journal article

VL - 45

SP - 592

EP - 617

JO - International Journal of Physical Distribution and Logistics Management

JF - International Journal of Physical Distribution and Logistics Management

SN - 0960-0035

IS - 6

ER -