Contract Management Improving relationship performance by the ‘right’ function of a contract and the ‘right’ interplay between contractual and relational governance

Master thesis

Contract Management

Improving relationship performance by the ‘right’ function of

a contract and the ‘right’ interplay between contractual and

relational governance

By

Saskia Vlap

March 30, 2017

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Abstract

Purpose: Contracts can have three different functions: safeguarding, coordination and adaptation. This function influences the development of contractual and relational governance and the way of governance influences relationship performance. The interplay between contractual and relational could take a complementary or substitution perspective. In the relationship between the function of a contract and the interplay is not investigated yet, but might explain how relationship performance can be improved. The aim of this research is to explain how the function of a contract and the interplay between contractual and relational governance can improve relationship performance. Design: A multiple case study is conducted. Multi-source data collection involved 12 semi-structured interviews with buyers and suppliers and document analysis of contracts and supplier evaluations. Findings: Contractual governance based on a contract with a dominant safeguarding function complemented with relational governance seems to results in the relatively highest relationship performance. Due to the pre-defined procedures and processes, the contract is easy to implement and require limited contract management. The pre-defined procedures and processes improve relationship performance by creating clarity about expectations and the way of working. Contractual governance based on a contract with a dominant safeguarding function that substituted for

relational governance seems to result in the relatively lowest relationship performance (limited satisfaction levels). Other factors might also increase elements (such as transaction cost) of relationship performance, for example product complexity increases transaction cost, the use of a standardized contract and the use of parent company contract. Standardized and parent contracts are general contracts which require more alignment of agreements. Further research is needed to investigate this.

Originality : This research creates more understanding of how a contract function influences the way of contract management. The dominant function of a contract influences the interplay as well as the transaction costs. Moreover, the dominant function of a contract can have a direct effect on

3 Content page Abstract ... 2 Preface ... 5 1 Introduction ... 6 2 Research Framework ... 8 2.1 Relationship performance ... 8

2.2 Contract functions and contractual governance ... 9

2.2.1 Safeguarding function ... 9

2.2.2 Coordination function ... 10

2.2.3 Adaptation function ... 11

2.3 Relational governance ... 11

2.4 Interplay between contractual and relational governance ... 12

2.5 Influence of contract function on interplay and relationship performance ... 12

2.5.1 Safeguarding ... 13 2.5.2 Coordination ... 13 2.5.3 Adaptation ... 13 3 Research Design ... 15 3.1 Case study ... 15 3.2 Research setting ... 15

3.3 Unit of Analysis and Case selection ... 15

3.4 Data collection ... 16 3.5 Data analysis ... 17 4 Findings ... 20 4.1 Function of a contract ... 20 4.1.1 Safeguarding ... 20 4.1.2 Coordination ... 20

4.2 Influence of dominant function on the interplay in contract management ... 21

4.2.1 Safeguarding ... 21

4.2.2 Coordination ... 22

4.3 Influence function on relationship performance ... 23

4.3.1 Safeguarding contracts and influence on relationship performance ... 23

4.3.2 Coordination contracts and influence on relationship performance ... 24

4.4 Influence function and interplay on relationship performance ... 25

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4.4.2 Safeguarding function with substitution perspective ... 26

4.4.3 Coordination function with complementarity perspective ... 26

5 Discussion, conclusions and recommendations ... 28

5.1 Discussion ... 28 5.2 Limitations ... 30 5.3 Conclusions ... 30 5.4 Recommendations... 31 References ... 33 Appendices ... 36

Appendix A. Characteristics: Function of a contract ... 36

Appendix B. Interview guide ... 37

Appendix C Closed questions ... 39

Appendix D Supplier evaluation ... 40

Case A ... 40 Case B ... 44 Case C ... 48 Case D ... 52 Case E ... 56 Case F ... 60

Appendix E Operationalisation variables ... 64

Appendix F Visual patterns of relationships between variables ... 66

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Preface

The completion of this thesis would not have been possible without help, advice and support of others. First of all, I would like to thank my supervisors of the University of Groningen. Dr. Manda Broekhuis for her input, advice and feedback which kept me continuously critical at my own work. Dr. Kirstin Scholten for her feedback on my research proposal. Secondly, I would like to thank Company X, and especially Erik Kroeze, for giving me the opportunity to conduct my research at this company, for providing all necessary information and all relevant contact details of suppliers. Also, I would like to thank all interviewees for their time and effort to share information with me. At last but not least, I would like to thank my family and friends for support and believing in me during my master thesis. Enjoy reading.

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1 Introduction

Buyers and suppliers are signing contracts in order to agree on exchange promises. During the contracting phase, buyers and suppliers have to make decisions about for instance the intent and complexity of a contract (Lumineau and Malhotra, 2011). Those decisions influence the total costs of managing a contract, the flexibility within the contract and the room and need for the development of relational factors (Lumineau and Malhotra, 2011). The development of relational factors has been receiving more attention throughout the years, since buyers and suppliers recognize the advantages of a mix of contractual and relational factors (Lindgreen, Vanhamme, van Raaij and Johnston, 2013; Kim and Choi, 2015; Boulay, 2013) and how a mix contributes to performance (Poppo and Zenger, 2002; Schepker, Oh, Matynov and Poppo, 2014). Some authors state that is it currently more about managing relationships rather than managing contracts (Poppo and Zenger, 2002; Schepker et al., 2014).

Contractual governance highlights the importance of managing formal contracts, while relational governance is about trust and relational norms in buyer-supplier relationship (Cao and Lumineau, 2014; Poppo and Zenger, 2002). The interplay between contractual and relational governance in contract management has often been studied, resulting in different outcomes. Recent studies suggest the validity of a complementarity perspective (Cao and Lumineau, 2014; Liu et al., 2009 ; Poppo and Zenger, 2002), since contractual governance might create commitment to cooperate, which contributes positively to relational governance. However, other authors found that relational governance substitute contractual governance, since contractual governance might result in more conflict, less commitment and distrust, which do not contribute positively to relational governance. Substitute contractual governance for relational governance improves relationship performance by minimizing transaction costs (Dyer, 1996; Huber, Fischer, Dibbern and Hirschheim, 2014).

These mixed findings triggers the question if there are additional factors that influence whether a complementarity or substitution perspective seems favourable in managing contracts. In this research, it is investigated whether the dominant function of the contract is such a factor. This research focuses on the influence of the dominant function of a contract and if and how this contract function influences the interplay between contractual and relational governance, as well the

combined effect of function and interplay on relationship performance. Schepker et al. (2014) argue that scholars should focus on the functionality of contracts, because a shift from contract only as a safeguard to economic risk to more coordination and adaptation is visible. Regarding Lumineau and Malhotra (2011) different types of contract require other types of management. These types of management might influence the development of relational governance and therefore influence relationship performance as well.

Relationship performance refers to costs of managing the contract and buyers’ and suppliers’

satisfaction with their relationship. Both elements seems related: the lower the transaction costs, the more satisfied buyer and supplier and the higher relationship performance (Jobin, 2008). As

grounded in literature, a complementarity perspective results in a higher relationship performance, but in which cases a substitution perspective results in a higher relationship performance is not clear (Poppo and Zenger, 2002). A better explanation of how contractual and relational governance interact with each other is needed to explain how satisfaction and relationship performance could be improved (Cao and Lumineau, 2015).

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of contracting relationships and aid adaptation to unforeseen circumstances (Schepker et al., 2014). The use of one function of a contract compared to others might result in a higher performance, but how this influence is affected is not empirically investigated yet. Moreover, the influence of the function of a contract on relationship performance might be influenced by the interplay between contractual and relational governance. So, organisations and academics do not know what benefits could be achieved using one perspective over the other when it comes to improving relationship performance. Therefore, the research question is:

- How do both the function of a contract and the interplay between contractual and relational governance influence relationship performance?

Providing insights in how the main functions of a contract influence the interplay between contractual and relational governance, and both influence relationship performance is the main focus of this research. This research creates more understanding of how a contract function influence the way of contract management. This influence explains why contractual and relational governance complement or substitute each other. Moreover, the function of a contract can have a direct effect on relationship performance. Buyer and supplier define their objectives in the contracting phase and might be satisfied when the objectives are achieved, regardless of the contract function.

For organizations it is of growing importance to know how relationship performance can be

improved. The practical contribution of this research is to improve the contract management phase for buyer and supplier, as the transaction costs of managing the relationship can be minimized by applying the right interplay between contractual and relational governance (Jobin, 2008). Both parties will benefit from an improved buyer-supplier relationship, which results in a higher satisfaction and relational performance (Cao and Lumineau, 2015).

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2 Research Framework

2.1 Relationship performance

The main aim of a buyer-supplier relationship is to connect a buyer’s buying activities with a supplier’s selling activities. Relationship performance includes transaction costs and both buyers’ and suppliers’ satisfaction, since the performance of all members should contribute to the overall performance (Chen and Paulraj, 2004; Lai, Pai, Yang and Lin, 2009). Buyers’ and suppliers’ satisfaction is the convenience with supplier performance. Supplier performance relates to how well a supplier supplies the required products to the buyer in terms of quality, delivery, responsiveness, cost and technical support (Wu, Choi and Rungtusanatham, 2010). Improving relationship performance is largely realized by the supplier, since buyers are satisfied with the relationship if the supplier meets or exceeds the buyer’s expectations (Chen and Paulraj, 2004; Oosterhuis, 2009; Praxmarer-Carus et al., 2013). Higher satisfaction levels increase relationship performance.

Transaction costs are determined by three dimensions: the frequency of transactions, the degree of relationship-specific investments, and transactional uncertainty (Maher, 1997) (table 2.1). First, the frequency of transactions is the number of transactions between buyer and supplier. “The more frequent a transaction is, the higher the transaction costs, the lower the relationship performance” (Jobin, 2008, p.23).

Second, the relationship-specific investments consist of physical- and human-capital investments (Williamson, 1979). Physical assets refer to the use of co-specialized assets, which are customized for a particular purpose (Jobin, 2008). Human assets refer to an employee’s development of organizational skills or knowledge (Jobin, 2008). Non-specific items do not have cost-bearing

consequences and few hazards, since buyers can easily switch to other suppliers (Williamson, 1979). But, idiosyncratic investments do have cost-bearing consequences and have therefore more hazards. The higher the idiosyncratic investments, the higher the transaction costs and the lower the

relationship performance.

Third, transactional uncertainty are the problems raised from unforeseeable changes surrounding an exchange (Jobin, 2008; Poppo and Zenger, 2002), related to payment and delivery. Uncertainty arises from the difficulty in predicting the actions of the other party in the relationship (Zaheer and Venkatraman, 1995, p. 377). Since “Transactions conducted under certainty are relatively

uninteresting” (Williamson, 1979, p. 253), certainty do not require attention and time. So, higher uncertainty results in higher transaction costs and lower relationship performance (Jobin, 2008). Thus, the total transaction costs are high when the frequency of transactions are high, the relationship-specific investments are idiosyncratic and the transactional uncertainty is high. Increasing transaction costs decreases the buyer satisfaction and the relationship performance (De Vita, Tekaya, Wang, 2010). Since the overall goal of a buyer-supplier relationship is to add value to the activities, the amount of transaction costs have to be considered (Voß and Schneidereit, 2002). An overview of the indicators is given in table 2.1.

Relationship performance

Indicators Components

Satisfaction of supplier Convenience of supplier with contractual and relational governance and supplier performance

Satisfaction of buyer Convenience of buyer with contractual and relational governance and supplier performance

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Transactional uncertainty Unforeseeable changes surrounding an exchange (payment and delivery)

Table 2.1 Relationship Performance

The relationship performance is influenced by the interplay of contractual and relational governance (Cao and Lumineau, 2015). Both contractual and relational governance are elaborated in the next sections.

2.2 Contract functions and contractual governance

Contractual governance is mainly characterized by the real contract, which makes it a formal

structure (Huber et al., 2014). Contracts represent agreements between parties to perform particular actions in the future (Boulay, 2013; Poppo and Zenger, 2002; Rai et al., 2012; Schepker et al., 2014). Contracts may define outputs to be delivered, specify monitoring procedures and detail duties, rights and contingencies (Cao and Lumineau, 2014, p. 15; Huber et al., 2014). Contracts help to define and align expectations between buyer and supplier, but vary by definition in intent and complexity: from standardized to customized contracts and from incomplete to complete phrasing of task execution and output (Lumineau and Malhotra, 2011; Schepker et al., 2014). Therefore, contractual governance refers to ‘the extent to which a buyer-supplier relationship is governed by a formal and written contract which explicitly stipulates the responsibilities and obligations of each party’ (Abdi and Aulakh, 2012; Ryall and Sampson, 2009 in Cao and Lumineau, 2014, p.17).

Once the contract is designed, contractual governance is about the management of the contract in the relationship (Abdi and Aulakh, 2014). Contract Management can be defined as “the process of ensuring that the parties to a legally agreed-to contract fulfil the requirements, expectations, and terms and conditions of the agreements” (Trent, 2007, p.135). Contractual governance consist of monitoring and enforcement of contract (Lumineau and Malhotra, 2011; Williamson, 1979). Monitoring is to ensure that both parties fulfill the agreements, while enforcement is to sanction a partner that does not fulfill the requirements (Jobin, 2008). It suggested that when the transactions assumptions and shared understanding are not aligned, the contractual governance will be high (Jobin, 2008). Contracts require different types of contract management, since contracts can have three different functions (Lumineau and Malhotra, 2011).

Schepker et al. (2014) reviewed 16 studies to identify these contract functions and describe that contracts can have three different functions: safeguarding, coordination and adaptation. Although each function has its own objective and characteristics, contracts can include, more or less, different functions. Safeguarding, coordination or adaptation is not the sole function of a contract, since a trade-off in the purpose of a contract have to be made (Schepker et al., 2014). Thus, a contract has often one dominant function, which can be supported by one of the other functions.

2.2.1 Safeguarding function

The traditional view of the function of a contract is the safeguarding function. The main aim of a contract, from a safeguarding perspective, is to safeguard partners’ investments under several conditions (Mayer and Argyres, 2004; Schepker et al., 2014). Those conditions include three factors: contractual completeness, complexity and safeguarding provisions. Research on contractual

completeness shows the more detailed and complete contracts results in a mitigation of exchange hazards. Research on complexity shows when the complexity of a contract increases, stronger mechanisms are defined and enforced to safeguard their investments. Research on safeguarding provisions shows that when contracts have a large number of clauses, those clauses function as guidelines and safeguarding devices.

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The types of agreements which are included in the contract safeguarding provisions about the assignment of property rights, termination rights, and processes for dispute resolution (Schepker et al., 2014)

The safeguarding perspective is suitable for buyer-supplier relationships in which it is important to secure their investment and mitigate exchange risks. The characteristics of each function of a contract are summarized in table 2.2.

Safeguarding Coordination Adaptation

Main aim Safeguard partners’ investment

Coordinate contracting relationships

Adapt to uncertain environments

Mechanism Control Coordination Adaptation

Objective Reduce: - Opportunism -Conflicts in the exchange between buyer and supplier

-Clarify expectations and responsibilities

-Monitor processes -Reduce misappropriation of assets

-Create tolerance zones for unexpected events

-Provide procedures to use when changes are identified Type of agreements Safeguarding provisions: -assignment of property rights -unilateral early termination rights -Processes for dispute resolution

-Assigning roles and responsibilities

-Providing for monitoring of processes, project schedules and milestones -Designating project managers

-Aid adaptation by allowing the relationship to adapt if unforeseen circumstances arise

Characteristics of managing the contract

-Low monitoring and enforcement (Jobin, 2008; Williamson, 1979)

- Monitoring based on pre-described rules and procedures (Schepker et al., 2014)

-Examine and resolve problems based on contractual governance (Schepker et al., 2014) -Contract management based on allocation and application of control rights (Schepker et al., 2014)

-Recurrent monitoring and enforcement (Jobin, 2008; Williamson, 1979) -Alignment of

agreements because of interface of activities and division of labor (Faems et al., 2008)

-Examine and resolve problems based on relational governance (Schepker et al., 2014) -Contract management based on application of provisions (Schepker et al., 2014)

-Occasional monitoring and enforcement (Jobin, 2008; Williamson, 1979)

-Only referring and managing the contract in case of changes(Schepker et al., 2014)

-No strict monitoring of contract terms as there are none unexpected events (Mayer and Argyres, 2004). -Respond to problems based on contingency planning (Schepker et al., 2014) -Contract management based on application of payoff schemes (Schepker et al., 2014)

Table 2.2 Functions of contracts and contract management

2.2.2 Coordination function

Another view is the coordination function of a contract. The main aim is to formally coordinate the contracting relationship. Those contracts prevents misappropriation of assets, but also promote coordination across firm boundaries (Schepker et al., 2014).

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than outcomes. The types of agreements which are included in the contract are about assigning roles and responsibilities, providing for monitoring of processes, project schedules, and milestones, and designating project managers (Schepker et al., 2014, p.213).

The coordination perspective is suitable for ongoing relationships in which uncertainty and

complexity arises due to the contract. High levels of coordination are required when uncertainty and complexity is high, due to activities relating to the division of labor (Dekker, 2004, Gulati & Singh, 1998 in Schepker et al., 2014; Faems et al., 2008).

2.2.3 Adaptation function

The adaptation function is the least recognized in the literature review of Schepker et al. (2014) compared to the safeguarding and coordination function. The main aim is to aid adaptation to uncertain environments in order to protect the relationship against disturbances (Mayer and Argyres, 2004). The adaptation contract provide procedures to use when changes are identified (Schepker et al., 2014, p. 213).

The objective of the adaptation contract is twofold. On the one hand, contracts may identify payoff schemes that depend on environmental circumstances to alleviate the risks of environmental uncertainty. On the other hand, contracts may include provisions, in the form of contingency planning, for adapting to environmental contingencies The types of agreements which are included in the contract are about aid adaptation by allowing the relationship to adapt if unforeseen

circumstances arise.

The adaptation perspective is suitable for relationships with uncertainty due to changes or volatility in demand or supply or due to resolution of or learning from uncertain, complex projects.

Due to human bounded rationality, contracts are never complete (Cao and Lumineau, 2015; Hsuan, Skjott-Larsen, Kinra and Kotzab, 2015; Rai et al, 2012). This incompleteness, accidentally or

deliberately, has three possible consequences for the management of the contract: cost reduction, increased flexibility and the encouragement of the development of relational governance (Lumineau and Malhotra, 2011). Thus, the extent of incompleteness of a contract may influence the

development of relational governance according to Lumineau and Malhotra (2011). Hence, in the next section the relational governance will be outlined.

2.3 Relational governance

Relational governance is the extent to which a buyer-supplier relationship is governed by trust and relational norms and can therefore be seen as the informal structure (Huber et al., 2014). Relational governance has a value-added function (Olander et al., 2010), since the relation can mitigate exchange hazards and react to unforeseen events which are not covered by the contract (Cao and Lumineau, 2015; Huber et al., 2014). Those social processes promote norms of flexibility, solidarity and information exchange, which results in better cooperation (Poppo and Zenger, 2002)

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Relational norms refers to shared expectations, assumptions and business about the behaviour of the other (Abi and Aulakh, 2014; Cao and Lumineau, 2015). Norms determine the appropriate behavioural guidelines during the social interaction (Gundlach and Achrol, 1993; Heide, 1994; Ferguson et al., 2005 in Olander et al., 2010).

2.4 Interplay between contractual and relational governance

Contractual and relational governance can either substitute or complement each other. Despite that both perspectives are recognized in different articles (Abdi and Aulakh, 2014; Cao and Lumineau, 2015; Huber et al., 2014; Poppo and Zenger, 2002; Schepker et al., 2014; Rai et al., 2012), most studies found a complementary perspective. The findings of Cao and Lumineau (2014), Olander et al. (2010) and Poppo and Zenger (2002) show a complementarity perspective in which relational and contractual governance should be combined to support mutual benefits for both buyer as supplier. The complementarity perspective states that relational and contractual governance contribute together to relationship performance. According to Schepker et al. (2014), if buyer and supplier specify safeguards and sign a contract, both buyer and supplier commit to behave cooperatively. This commitment will result in the development of relational governance (Olander et al, 2010). The communication between buyer and supplier increases, which facilitates greater collaboration. Moreover, due to the incompleteness of contracts, relational governance promotes continuity in the buyer-supplier relationship, which is necessary to act to unforeseen circumstances. Thus, contractual governance serves as a general framework for managing the buyer-supplier relationship, while daily activities are regulated by relational governance (Boulay, 2013).

On the contrary, the findings of Rai et al. (2012) show that relational and contractual governance operate as substitutes. Although the article of Rai et al. (2012) is one of the few articles who found a substitution perspective, some other authors wrote about substitution arguments. This perspective states that focussing on contractual governance might result in more conflict, less knowledge

exchange, less commitment and distrust of the exchange partners (Boulay, 2013; Olander et al, 2010; Poppo and Zenger, 2002; Rai et al., 2012). Those outcomes conflict with relational governance. If buyer and supplier not focus on contractual governance, buyer and supplier show stronger

commitment to the relation (Boulay, 2013) and relational governance is more present in the relation (Olander et al., 2010). From that perspective, contractual governance is at best an unnecessary expense and at worst counter-productive (Poppo and Zenger, 2002, p. 708). Relational governance is less expensive compared to contractual governance, in which the risk of conflict, low knowledge exchange , low commitment and mistrust is not taken.

The relation between the function of a contract and the interplay between contractual and relational governance is not clearly described in current literature. Since both the function of a contract and the interplay between contractual and relational governance influence the relationship performance, the link between the different functions of a contract and the type of substitute or complement

dimension will be explained in the next section.

2.5 Influence of contract function on interplay and relationship performance

Current literature fails to relate the function of a contract and the interplay to relationship performance. Therefore, this section 2.5 builds on previous literature and connects the main

variables based on solid assumptions and reasoning. To explain how relationship performance can be improved, this section describes how the function of a contract may influence the interplay between contractual and relational governance and the resulting effects on relationship performance. The next sections hypothesize 1) how the function of a contract might influence the interplay between relational and contractual governance, 2) how the function of a contract might influence relationship performance, and 3) how both the function and the interplay might influence relational

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2.5.1 Safeguarding

The dominant safeguarding contract might influence relationship performance, based on the

following reasoning. In a safeguarding contract, monitoring provisions are included in the contract to provide behavioral control (Schepker et al., 2014). Only one-time contractual governance might be enough as the pre-described rules and procedures are unambiguous ad invite to a simple and infrequent monitoring process. This might imply that contractual governance occur solely in case of enforcement issues. If problems arise, which are not covered in the contract, buyer and supplier need to meet up. It is expected that transaction costs are high, because of frequent transactions due to the easiness to order. Transaction costs are also high for idiosyncratic relationship-specific

investments, since buyer and supplier guarantee (a return on) their investment in the contract in order to promote relationship specific investments (Maher, 1997). Exchange hazards are mitigated due to the strong safeguarding mechanisms and therefore buyers and suppliers are willing to make idiosyncratic investments (Schepker et al., 2014). Transaction costs are low for transactional uncertainty, because the actions of the other party are easy to predict due to mechanisms in the contract. Concluding, the safeguarding function results in the following relationship performance: frequent transactions, idiosyncratic relationship-specific investments and low transactional uncertainty.

In safeguarding the focus is on actual agreements, this implies that contractual governance is more important compared to relational governance. Yet, the interplay between contractual and relational governance can influence the relationship performance as well. Relational governance often

complements contractual governance, which increases relationship performance. A good

relationship will make transactions easier, will improve the willingness to make an investment and reduce transactional uncertainty when conflicts arise.

2.5.2 Coordination

In a coordinating contract, often processes are monitored rather than outcomes as the focus of the agreements is on who does what in the process instead of what the outcome should be. Recurrent contractual governance is required as a lot of communication is needed to align interface of activities and divide labour (Schepker et al., 2014). Besides that, exchanges might occur in case of enforcement issues. In those situations, coordinating provisions are included in the contract to communicate productively (Lumineau and Malhotra, 2011). It is expected that transaction costs are medium because of medium frequency of transactions, due to the alignment of agreements during ordering. Transaction costs are also medium due to mixed relationship-specific investments, because not all investments are guaranteed in this type of contract. When both buyer and supplier make

relationship-specific investments, both parties has a motive to cooperate (Schepker et al., 2014). Transaction costs are also medium for transactional uncertainty, because the actions of the other are reasonable to predict since roles and responsibilities are assigned. Buyer and suppliers did not plan for potential problems, but react to problems (Schepker et al., 2014). Concluding, the coordination function of a contract results in the following relationship performance: medium frequent

transactions, mixed relationship-specific investments and medium transactional uncertainty. A complementarity perspective increase relationship performance. Relational governance is required to execute the contract. Contractually, its agreed upon who is responsible for what, and a good relationship is necessary for clarification of underlying expectations and task division.

2.5.3 Adaptation

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frequency of transactions, because the contract contains only contains procedures to adapt to uncertain environments, which creates not a solid base for high transactions volumes. Transactions costs are also low due to non-specific relationship-investments. It is assumed that both buyer and supplier would not make specific investments, due to the limited provisions in the contract.

Transaction costs are high due to high transactional uncertainty, because the adaptation contract is designed to handle high uncertain environments. When there is less agreed upon in the contract, the more the degree of uncertainty increases (Williamson, 1979). Concluding, the adaptation function of a contract results in the following relationship performance: not frequent transactions, non-specific relationship-specific investments and high transactional uncertainty.

Relational governance is of more importance compared to contractual governance. So contractual governance can be substituted for relational governance. The development of relational governance will make exchanges easier and reduce uncertainty when conflicts arise. Due to the limitedness of the contract, relational governance can take over contractual governance.

Contractual governance Relationship performance Interplay Function Management Frequency of

transactions

Relationship-specific investment

Transactional uncertainty

Safeguarding Low High Idiosyncratic Low Complement Coordination Recurrent Medium Mixed Intermediate Complement Adaptation Occasional Low Non-specific High Substitute

Table 2.3 Expected relationships between functions of a contract, interplay between contract and relation and relationship performance,

Using a complementarity perspective increase relationship performance in safeguarding and coordination contracts, but substitution increase relationship performance in adaptation.

Figure 2.1 Conceptual model

Relationship Performance -Transaction costs

(Frequency of transactions, relationship specific investments, transactional uncertainty) -Satisfaction of buyer -Satisfaction of supplier Function of a contract - Safeguarding -Coordination -Adaptation Interplay between

contractual and relational governance in contract management

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3 Research Design

3.1 Case study

A multiple-case study was conducted to study contract management between buyer and supplier in its natural setting. A case study is a history of a past or current phenomenon, drawn from multiple sources of evidence (Leonard-Barton, 1990 in Karlsson, 2009). Case study provide rich data which explains the underlying mechanisms in contract management. Rich data was needed to explain why and how relationship performance is influenced by the variables. The type of case study is theory refining, since existing theories are used to refine theories on how contracts and relationships between buyer and supplier are managed.

3.2 Research setting

This research was conducted at a medium-sized company that executes maintenance and service activities in the technical automation, electrical engineering and mechanical engineering sector. The company is a subsidiary of a large multinational parent company. Contracts between buyer and suppliers exist on two different levels. First, a contract may be closed between the parent company and the supplier, because some supplier supply different subsidiaries of the parent company. In all other cases, a contract between the subsidiary and the supplier was closed.

In this company, the dominant function of contracts varies. Besides that, the relationships between buyer and supplier varies, which might influence relationship performance. Based on the supplier evaluation (Appendix D) that the buyer executes to measure supplier performance, some suppliers have room for improvement in which contractual governance might play a role. Suppliers with an order volume of at least 50 order lines or €50,000 a year are evaluated. The order lines represent an order for a number of products for one product type.

3.3 Unit of Analysis and Case selection

The Unit of Analysis is the contract management between buyer and supplier, because this study investigated in how the function of a contract and the interplay between contractual and relational governance increase relationship performance. Those aspects were examined, all from both buyer and supplier perspective.

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Case A Case B Case C Case D Case E Case F

Case selection Dominant function (as perceived by buyer)

Safeguarding Safeguarding Coordination Coordination Coordination Coordination

Dominant function (as perceived by supplier)

Safeguarding Safeguarding Safeguarding Coordination None Coordination

Minimal requirements Contract

signed at

Aug 2015 Dec 2015 Jan 2012 Jan 2012 Feb 2010 Feb 2010 Order volume -order lines -purchasing value 180 €18,337.03 3968 €274,151.10 3119 €745,775.99 3200 €763,278.687 10904 €1,972,830.49 7642 €12,124,175.30 Supplier evaluation ✓ ✓ ✓ ✓ ✓ ✓

Table 3.1 Case selection criteria

The purposeful sampling of cases was based on the dominant function of a contract, because functions might explain a difference in relationship performance. Although an adaptation contract was initially selected, this contract turned out to have mainly a coordination case during the interviews. This resulted in a sample of two cases in which safeguarding is the dominant function (cases A and B) and four cases in which coordination is the dominant function (cases C, D, E and F). By selection cases with different function, contrasting results for predictable reasons are expected.

3.4 Data collection

Data collection methods were (a) document analysis and (b) 12 interviews. Table 3.2 provides an overview of data sources per research variable. How each variable is operationalised is presented in Appendix E. How each data source contributed to each case is presented in table 3.3. Using multiple sources of evidence, results in triangulation in which construct validity can be guaranteed.

Research variables

Data sources

Contracts Closed questions Interview Supplier evaluation Dominant function of a contract ▪ ▪ ▪ Contractual governance ▪ ▪ ▪ Relational governance ▪ Interplay ▪ Relationship Performance ▪ ▪ ▪

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Data Sources Case A Case B Case C Case D Case E Case F

Contract subsidiary ▪ ▪

Contract parent company ▪ ▪ ▪ ▪

Closed questions buyer and supplier ▪ ▪ ▪ ▪ ▪ ▪ Interview buyer 1 ▪ ▪ Interview buyer 2 ▪ ▪ ▪ Interview buyer 3 ▪ Interview supplier (accountmanager) ▪ ▪ ▪ ▪ ▪ ▪ Supplier evaluation ▪ ▪ ▪ ▪ ▪ ▪

Table 3.3 Overview of data sources per case

Interviews were semi-structured with the possibility for the interviewee to explore themes within the topic that was discussed. The interview guide is presented in Appendix B. Semi-structured questions were supplemented with closed questions (Appendix C) to encourage discussion. In total 12

interviews were conducted: 6 different suppliers and 3 different buyers. Buyer 1 was interviewed for cases A and B, buyer 2 for cases C, D and E and buyer 3 for case F. The interviews were audio

recorded and transcribed. Table 3.4 shows the subsequent steps in data collection and data analysis.

Table 3.4 Subsequent steps in data collection and data analysis.

3.5 Data analysis

The aim of this research was to find relationships between: 1) the dominant function of a contract on relationship performance, 2) how the dominant function of a contract influences contract

management and more specifically the interplay between contractual and relational governance during contract management and 3) the interplay between contractual and relational governance on relationship performance. In total, 12 interviews were transcribed and both interview data and documents were analyses. Three steps were used to analyse the data: descriptive coding,

interpretive coding and pattern coding (Miles and Huberman, 1994). First, descriptive coding was used to label the data based on a list of codes. This list was created based on the main variables in this research as described in chapter 2: 1) dominant function of a contract, 2) relational governance, 3) interplay between contractual and relational governance and 4) relationship performance. After the first round of coding, the data with a code on each main variable was further analysed by interpretive coding. The interpretive coding is displayed in Appendix E. At last, pattern coding was used to find similarities and differences between cases. An excerpt of the coding tree is displayed in Appendix G.

Research steps

1 Selection of relevant cases based on case selection criteria 2 Document analysis to measure

a. “Frequency of transactions” by the number of orderliness

b. “Transactional uncertainty” by Supplier Evaluation (3) Delivery reliability ‘(7) Communication and solution-orientation’

3 Interviews with buyers and suppliers to a. Discuss contractual governance b. Discuss relational governance c. Discuss interplay

d. Discuss relationship performance 4 Within-case analysis

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The document analysis was based on three documents: contracts, closed questions and supplier evaluation. First, the function of a contract was initially determined by the researcher based on Appendix A. Then the function of a contract is explored during the interviews to check whether both researcher and interviewees argue for the same function. Second, buyers and suppliers filled out 6 closed questions (Appendix C, questions 1-6) about the function of a contract. Questions 1-2 belongs to safeguarding, 3-4 to coordination and 5-6 to adaptation. An average per function is represented in figure 3.1, in which 1 is strongly disagree and 5 is strongly agree. So a high score on a function means a high inclusion of this function in the contract. At last, the supplier evaluation was used to have additional data about transactional uncertainty. Important factors are (3) delivery reliability and (7) communication and solution-orientation. Table 3.5 shows the relative scores of relational

governance and relationship performance.

Strongly strongly

disagree agree Safeguarding

Strongly strongly

disagree agree Coordination

Strongly strongly

disagree agree Adaptation

Figure 3.1 Perceived functions of contract based on closed questions

Low Medium High

Relational governance Absence of trust and relational norms

Presence of trust or relational norms

Presence of trust and relational norms Relationship Performance

19 year Relationship-specific investment No physical or human investments Physical or human investment Both physical or human investments Transactional uncertainty Problems with payment and delivery are communicated in time

Problems with payment or delivery are communicated too late

Problems with payment and delivery are not communicated Satisfaction

Satisfaction of buyer ≤10 between 10 and ≤12 >12 Satisfaction of supplier ≤10 between 10 and ≤12 >12 Supplier performance

(based on supplier evaluation)

≤60 between 60 and ≤ 75 >75

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4 Findings

4.1 Function of a contract

This section explains the contract functions of the cases, because the function is the starting point of this research. Different perspectives on the main function of a contract exist between buyer and supplier.

4.1.1 Safeguarding

In cases A and B, both buyer as supplier stated safeguarding as the main function during the interviews. Based on the closed questions, safeguarding is the main function in cases A and B according to the buyers (Figure 3.1). However, based on the closed questions of the supplier, case A found an adaptation function and case B scored even on all functions. Safeguarding is the main aim of the contract according supplier A due to the tank rental. Supplier A stated in the interview: “The reason why we sign a contract is to make a little profit, since a tank is rented for five years. Within these five years, the buyer should purchase at the supplier. The contract is just protection of our assets”. Aspects that are covered in the contract are maintenance, warranty, price agreements, property rights and rental of the tank. The buyer agrees on the safeguarding function, since the safeguarding provisions are the important part of the contract. “The contract is a protection of prices on a yearly basis” (Buyer A). Case B differs since the contract is limited and only contains price agreements. “The contract is a small arrangement about prices for the core assortment, discounts, bonuses and supply conditions and therefore it is quite sketchy” (Supplier B). Therefore, hardly any dominant function is found according to supplier B. There have been agreements made only about prices, although the contract in case A includes more provisions about property rights and warranty. The contract of cases A and B are between the subsidiary and the supplier.

4.1.2 Coordination

In cases C, D, E and F, it became clear from the interviews with the buyers that coordination was the main function of the contract, which is confirmed by the supplier in cases D and F. Case C mainly has a safeguarding function according to the supplier, whilst case E covers all functions equally. Based on the closed questions, coordination is the main function in cases C and D regarding the buyers and in case C regarding the supplier (Figure 3.1). On the other hand, safeguarding is the main function based on the closed questions in case D regarding supplier and case E regarding buyer. However, safeguarding is supported by coordination in case E regarding supplier. Adaptation is the main function based on the closed questions in case F regarding the supplier and adaptation is supported by coordination regarding buyer F. So, all cases cover a coordination function based on the closed questions.

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Buyers and suppliers fully agreed on the coordination function for cases D and F based on the interviews. In case D the contract creates clarity about expectations and the way of working. “The contract is a general framework which explains expectation, different formal roles, supply conditions and how they do business together (Buyer D)”. Contract D covers a little safeguarding too, since conditions are linked to prices. “Supply conditions are connected with pricing and payment (Supplier D)”. The contract of case F creates also clarity about expectations and the way of working and

communicating. Those aspects are covered in the contract. “Monitoring of purchased orders, contact persons, how they do business together and how they communicate and report to each other are aspects which are covered in the contract. (Supplier F)”. But contract F covers safeguarding too, since price and discount agreements are made. “We also make agreements about bonuses, returns, the scope, discounts and prices” (buyer F). Although the safeguarding function is covered in all contacts, coordination is the main function in cases C, D, E and F, because coordination prevails. The contracts of cases C, D, E and F are the parent company and the suppliers.

Concluding: different perspectives on the main function of a contract exist between buyer and supplier. The closed questions result in a variety of functions, whilst the interviews made a distinction between cases with a safeguarding function (cases A and B) and cases in which coordination was the dominant function of the contract (cases C, D, E and F).

4.2 Influence of dominant function on the interplay in contract management

In case B contractual governance is substituted for relational governance, but in all other cases contractual and relational governance complement each other. Contractual governance differs between the cases, but relational governance is high in all cases. Table 4.1 presents an overview of the importance of the governance structures and the interplay.

4.2.1 Safeguarding

In case A contractual and relational governance complement each other, while in case B contractual governance is substituted for relational governance. Due to clear pre-described rules and procedures in the safeguarding contract of case A, the buyer monitors the contract but does not need to enforce. In case of no news, this means good news. If everything goes well, it is not necessary to exchange information, because that is seen as a waste of time. Contract management is a yearly monitoring appointment about current affairs, (increase of ) prices and turnover. “Once a year a meeting is needed to discuss problems and expectations for the upcoming year” (Supplier A). Contract evaluation is limited during this appointment, because there is no tool to manage contracts. “The contract is in a folder. There is no tool to manage contracts” (buyer A). Although the limited contract management, buyer and supplier recognize contractual and relational governance as necessary. The contract create clarity about prices and safeguarding provisions, but relational governance is needed in case of rush orders and problem solving. Both buyers: “Calculations can easily be made based on the contract, but commitment and ad hoc respond is important for our organization. Those aspects are covered in the relationship, not in the contract” (buyer A) and supplier “Because of the presence of a good relationship, we can communicate problems to each other directly. Nevertheless, a contract is necessary to keep each other involved. Because of the contract, there is always a reason to start a conversation about the relationship. You can approach each other based on the contract. (Supplier A)” agree on the complementarity perspective. Without the contract it might be harder to discuss or communicate problems. Both contractual as relational governance contribute equally to relationship performance and therefore a complementarity perspective is found.

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procedures and the strategic approach. The strategic approach is about closer cooperation and the possibility to form partnerships. Contract evaluation is no topic during the yearly appointment. Because of the limited safeguarding function, buyer and supplier prefer relational governance over contractual governance. The contract is not necessarily needed, because the buyer prefers a good relationship over a contractual bonus and the supplier state that the current contract is lacking in implementation. “I prefer a good relationship over 1% bonus in the end of the year, so the contract can be substituted for the relation” (buyer B). “The current contract is lacking in implementation, so the relationship substitutes the contract” (Supplier B). The current contract does not mean that buyer B solely order at supplier B, but buyer B can also order at other companies. This means the added value of this contract for supplier B is low, because supplier B is one of the preferred suppliers of buyer B. Relational governance is necessary to make the contract executable and therefore contractual governance can be substituted for relational governance. “You should have a good feeling about the buyer or supplier, and that prevails in this relationship” (Supplier B).

In conclusion, the safeguarding function results in limited contract management for different

reasons. Case A requires limited management due to pre-described rules and procedures, but case B lacks those procedures and therefore also required limited management. The safeguarding function is not determinant in the interplay between contractual governance due to the different contents of those safeguarding contracts.

4.2.2 Coordination

In coordination only complementarity exist. Due to the division of labour and alignment of

agreement, coordination contract require monitoring and enforcement. Case D requires six visits a year while cases C, E and F require 12 visits a year. Those visits are about current affairs/performance (cases C, D, E, F), projects (cases C, D, E, F), tenders and turnover (cases C, D, E, F), product

development (Cases C and E), copper hedging (case F) and contract evaluation (Cases C and D). Only cases C and D aim to evaluate the contract once or twice a year, but do not always adjust the contract according to those evaluations since buyer and supplier have a good relationship. “Only major changes for the execution of the contract are adapted. Because of a good relationship, it is not necessary to adjust everything” (buyer C). Another reason for monitoring and enforcement is the use of general contracts of the parent company. Due to the generality of agreements in the contract, those agreements cannot be implemented directly. Those agreements need operationalisation, which results monitoring and enforcement. “The contracts are created by people who are not in daily operations, so operational agreements are not made” (supplier C).

All buyers and suppliers found a complementarity perspective, because contractual and relational governance are both necessary and contribute together to relationship performance. “A contract and the human factor are both necessary to execute the contract in order to achieve good results”

(supplier E), “We just have a good relationship, but if problems might arise it is clear how it is stated. The contract is a foundation we have and must be there” (Supplier D) and “It is good to have a legal back bone if problems might arise, but usually problems can be solved based on the relationship” (supplier F). Contractual governance is necessary due to the commercial impacts and intensity of ordering. Relational governance is necessary and preferred over contractual governance according to all suppliers and buyer D and E, because doing business is based on relationship and trust, not based on the contract. “It maybe sounds weird, because your thesis is about contract management, but the relationship is based on trust. We just know each other. We are working according to this contract, but I do not know the content so to speak” (buyer F). The importance of the governance structure differs in cases C and F regarding the buyer, because in case C contractual governance is more important and in case F contractual an relational governance are equally important. Buyer C

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of contractual and relational governance, seeing the facts that the contract is the starting point where the relationship builds upon. “The relation builds further on the contract, but you can always wave with the contract if problems might arise” (buyer F).

So, coordination contracts results in monitoring and enforcement, because 1) division of labour and alignment of agreements is needed due to the coordination content of the contract and 2) the parent contracts are general framework which require operationalization of agreements. The coordination function results in a complementarity perspective, since contractual governance is necessary, but relational governance prevails. Coordination contracts explains expectations, roles and

responsibilities, in which relational governance is necessary to execute the contract.

Case A Case B Case C Case D Case E Case F

Contractual governance

Management Low Low High Medium High High

Evaluation Low Low Medium Medium Low Low

Relational governance

High High High High High High

Importance governance structures

Buyer Equally Relational Contractual Relational Relational Equally Supplier Relational Relational Relational Relational Relational Relational Interplay Complement Substitute Complement Complement Complement Complement

Table 4.1. Overview contractual and relational governance and interplay

4.3 Influence function on relationship performance

Case A and B are safeguarding contracts and results in respectively medium and low relationship performance due to predictable reasons. Cases C, D, E and F are coordination contracts and results also in medium (cases C, D and E) and low (case F) relationship performance.

4.3.1 Safeguarding contracts and influence on relationship performance

Three factors determine the relationship performance: transaction costs, satisfaction of the buyer and satisfaction of the supplier. Transaction costs consist of frequency of transactions, relationship-specific investments and transactional uncertainty, which are further explained. First, case A have 180 orderlines, which results in low frequency of transactions. Case B have 3,968 orderlines, which results in medium frequency of transactions. The higher the frequency of transactions, the higher the transaction costs and the lower the relationship performance. So, based on the frequency of

transactions, the transaction costs are low for case A and medium for case B and therefore the relationship performance is respectively high and medium.

The second part of transaction costs is relationship-specific investment. A distinction has to be made between cases A and B, because supplier A made physical and human relationship-specific

investments but supplier B did not make any investment. Supplier A invested in the tank (physical) and in weld demonstrations and safety training (human). Due to the property rights and warranties in the contract, an idiosyncratic investment is done. Buyer A needed a training how to weld (safe) with the products of supplier A, so a weld demonstration and a safety training were provided by the supplier. Supplier B did not make an investment, because it is not necessary and the opportunities to make an investment are limited. Due to cost reduction and optimization of internal processes, supplier B created limited exceptions to daily operations. If it is necessary, the supplier is willing to make an investment, but it depends on buyer demand and decisions. An extended contract should be created if investments are made. Thus, based on the relationship-specific investments, the

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The third part of transaction costs is transactional uncertainty. The uncertainty about payment and delivery is low due to fast delivery and problem solving skills of both suppliers. Delivery problems might occur, but supplier B is willing to deliver products in an alternative manner. Therefore, both cases scores sufficient on the supplier evaluation criterion (3) delivery reliability and (7)

communication and solution-orientation. Reliable delivery and communication about problems and deviations decrease the uncertainty. In conclusion, based on transactional uncertainty, the

transaction costs are low for both cases and therefore the relationship performance is high. The buyers are satisfied with contractual governance, relational governance and supplier performance. The satisfaction levels of buyers are equal for contractual governance, relational governance and supplier performance: 4 out 5 (Table 4.2). Although the buyers are satisfied with contractual governance, there is room for improvement in both cases. Both contracts are initiated by the supplier and the buyers did not make any adjustments. Therefore, buyers might be lacking in including safeguarding provisions on the buyers side. Relational governance performs good because short communication lines exist and both suppliers help to solve problems and act quickly. Buyers are satisfied with the level of supplier’s performance. “Supplier A has a good product, good

performance and good fixed pricing” (Buyer A)” and “Supplier B is doing exactly what we want from ordering to delivery to processing of invoices” (Buyer B). So, the relationship performance based on buyers satisfaction is medium in cases A and B.

The satisfaction levels of the supplier is higher in case A compared to case B for contractual

governance, relational governance and supplier performance. Supplier A is satisfied with contractual governance, since it shows the willingness to cooperate. “The contract is an agreement of

cooperation (Supplier A)”. Supplier B is not satisfied, nor dissatisfied with contractual governance. Supplier B is satisfied with the prices for the core assortment, discounts, bonuses and supply conditions, but is dissatisfied with the lack of efficacy of the contract. The current contract does not include the exclusive supply of supplier B to buyer B, which is desirable according to supplier. Relational governance scores the highest in case A, because it is clear what buyer and supplier can expect from each other. Relational governance in case B scores good. Supplier B remarks buyer B as the largest customer, so supplier B has a high goodwill to buyer B. Both suppliers are satisfied with their performance, but modesty is a virtue. So, the relationship performance based on suppliers satisfaction is high in case A and low in case B.

4.3.2 Coordination contracts and influence on relationship performance

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Third, transactional uncertainty is low in all cases, except for case F which has medium uncertainty. Due to fast delivery (Cases C and D) or agreements about delivery reliability in the contract (Case E), uncertainty about delivery does not exist. Those provisions in the contract decrease transaction costs. Delivery problems might occur in case F. “Delivery problems are inherent to our manufacturing industry” (Supplier F). Those delivery problems are also visible in the supplier evaluation (3) delivery reliability, where supplier F scores insufficient. Buyer F communicates regularly with the office staff about delivery times, regarding supplier F. Supplier F tries to offer alternatives, shift deliveries or produce faster. Those problems are not communicated directly to the buyer and therefore, (7) communication and solution-orientation criteria of the supplier evaluation score insufficient. In conclusion, based on transactional uncertainty, the transaction costs are low for cases C, D and E, but medium for case F.

The buyers are satisfied with contractual governance, relational governance and supplier

performance (table 4.2). Buyers are most satisfied with relational governance. “Suppliers are reliable, have a large product portfolio and can deliver fast” (Buyer D). Reliability and fast delivery are

provisions in the coordination contract, so the contract provides a certain level of performance. Therefore, buyers are also satisfied with contractual governance. “Otherwise you should not have signed the contract” (buyer D). This increases the satisfaction of the buyers. So, the relationship performance based on buyers satisfaction is high in cases C and E and medium in cases D and F. The satisfaction levels of suppliers are medium for contractual governance, relational governance and supplier performance, but are lower in general compared to the buyer. It is a dangerous question for the supplier to judge the supplier performance, because “my emotion is included in answering this question” (Supplier C). Therefore, suppliers are restrained in answering this question. Suppliers are, regardless of the function of a contract, not excited when contracts have to be signed. “The contracting phase is not the best time with the customer for the representative” (Supplier C). So, the satisfaction of suppliers cannot be increased by contractual governance. For this reason, the relationship performance based on suppliers satisfaction is medium in cases C, D, E and F.

Case A Case B Case C Case D Case E Case F Satisfaction contract Buyer 4 4 3 3 5 4 Supplier 4 3 3 3 3 3 Satisfaction relation Buyer 4 4 5 5 5 4 Supplier 5 4 5 4 5 5

Satisfaction supplier performance

Buyer 4 4 5 4 4.5 4

Supplier 4 3 4 3.5 3 4

Total

Buyer 12 12 13 12 14.5 12

Supplier 13 10 12 10.5 11 12

Table 4.2 Satisfaction levels

4.4 Influence function and interplay on relationship performance

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4.4.1 Safeguarding function with complementarity perspective

Pre-defined procedures and processes of the safeguarding contract result in monitoring of those procedures and processes. In case of no news, it is good news. Since there is little bad news, the contract management is limited. By signing a contract, commitment to cooperate is given, which results in the development of relational governance. Because of the presence of relational governance, (1) problems can be solved quickly and (2) the supplier is willing to offer free training and weld demonstration. Those investments can also be made because of the safeguarding provisions in the contract. So, contractual and relational governance contribute equally to

relationship performance and therefore a complementarity perspective is found. Overall, this results in low frequency of transactions, high relationship-specific investments and low transactional uncertainty (table 4.3 transaction costs shows the findings for frequency of transactions, relationship-specific investments and uncertainty in this order). Further, due to buyers’ and

suppliers’ satisfaction with contractual governance, relational governance and supplier performance, the satisfaction of buyer and supplier is respectively medium and high. Moreover, in the case when the buyer is dissatisfied about the contract, the supplier is able to break the contract, create and sign a new contract due to the good relational governance and because the buyer is important to the supplier. In the end, the transaction costs are medium and the buyer and supplier are satisfied, resulting in medium relationship performance.

4.4.2 Safeguarding function with substitution perspective

The safeguarding contract is lacking some content and efficacy. Limited contract management is needed to align expectations and agreements, which are not fully included in the contract. Good relational governance is necessary to expand contractual governance, which makes the contract counter-productive and unnecessary expense. So, a safeguarding contract, which is not fully

implemented, stimulates a substitution perspective. This substitution results in dissatisfaction of the supplier, because the supplier prefers to manage on the contract only as this can guarantee

investment and supply. Because of the presence of relational governance and the facts that the buyer is important to the supplier, the supplier is willing to offer additional services that are not their core business. Overall, this results in medium frequency of transactions, low relationship-specific investments and low transactional uncertainty. Furthermore, due to lack of implementation of the contract, the supplier is dissatisfied with contractual governance. However, the buyer is satisfied with contractual and relational governance. In the end, the transaction costs are medium and the buyer is satisfied but the supplier is dissatisfied , which results in low relationship performance.

4.4.3 Coordination function with complementarity perspective

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Case A Case B Case C Case D Case E Case F

Contractual governance

Function Safeguarding Safeguarding Coordination Coordination Coordination Coordination Managemen

t

Low Low High Medium High High

Interplay Complement Substitution Complement Complement Complement Complement Relationship performance (RP) Transaction costs LHL MLL MLL MLL HLL HLM Satisfaction MH ML HM MM HM MM Total RP M L M M M L

Table 4.3 Relationship performance

In summary, cases B and F scores the lowest relationship performance due to respectively

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5 Discussion, conclusions and recommendations

5.1 Discussion

The mixed findings in the complementarity and substitution discussion, triggers the question if there are additional factors that influence whether a complementarity of substitution perspective seems favourable in managing contracts. The main research question of this paper is: “How do both function of a contract and the interplay between contractual and relational governance improve relationship performance?”. Providing insights in how the main functions of a contract influence the interplay between contractual and relational governance, and both influence relationship

performance is the main focus of this research. This research suggests three propositions: 1) How the dominant function influences contract management and interplay

This research shows that dominant safeguarding contracts result in less contract management, but dominant coordination contracts result in intermediate to more contract management.

Proposition 1a: If the dominant function of a contract is safeguarding, contractual and relational governance can both complement and substitute each other, depending on contract completeness. One safeguarding contract contains pre-defined procedures and processes, which are easy to implement and require less contract management. By signing a contract, commitment to cooperate is given (Olander et al., 2010), which results in the development of relational governance. The contract creates clarity about prices and safeguarding provisions, but relational governance is needed in case of rush orders and problem solving. Therefore, the safeguarding contract can be complemented by relational governance. Another safeguarding contract does not contain procedures and processes and is therefore lacking implementation and efficacy. Relational governance is needed to make the contract executable and therefore contractual governance is substituted for relational governance.

Proposition 1b: If the dominant function of a contract is coordination, contractual and relational governance complement each other.

Coordination contracts require more contract management due to the type of agreements. The agreements are about assigning roles and responsibilities, providing for monitoring of processes, project schedules, and milestones, and designating project managers (Schepker et al., 2014). Coordination contracts need more contract management to align activities, monitor processes and divide labour regarding coordinating provisions (Lumineau and Malhotra, 2011 and Schepker et al., 2014), in which relational governance is important. Contractual governance describes who is

responsible for what, but relational governance is needed for clarification of underlying assumptions. Thus, contractual governance serves as a general framework for managing the buyer-supplier

relationship, while daily activities are regulated by relational governance (Boulay, 2013). Therefore, coordination contracts are complemented by relational governance.

2) How the dominant function influences relationship performance

To achieve high relationship performance, low transaction costs (De Vita et al., 2010; Williamson, 1979) and high satisfaction levels of buyer and supplier (Lai et al., 2009) are needed. Transaction costs are low in case of low frequency of transactions (Jobin, 2008), low relationship-specific investments (Williamson, 1979) and low transactional uncertainty (Jobin, 2008; Williamson, 1979) Proposition 2a: If the dominant function of a contract is safeguarding, the transaction costs are medium and the satisfaction is low or medium.