Creating complementarity:

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Master thesis

Creating complementarity:

The facilitating role of

supplier performance management

By

Ineke Jansman

June 22, 2015

University of Groningen

Faculty of Economics and Business

MSc Supply Chain Management

Name: I.D. Jansman

Student number: s1998099

E-mail: i.d.jansman@student.rug.nl

Supervisor: dr. H. Broekhuis

Co-assessor: dr. J. T. van der Vaart

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Acknowledgements:

Writing this thesis would not have been possible without help of others, and therefore I would like to thank some people. First of all, Dr. Manda Broekhuis, for her creative input, continuous enthusiasm and constructive feedback, which triggered me to critically look at my own work. Dr. Taco van der Vaart, for challenging me with his questions when writing the research proposal. Moreover, Stenn Westrik, for the feedback on my preliminary research proposal(s).

My gratitude goes to Margriet Visscher and Rob Posthuma, for the opportunity to conduct research at Gasunie and for their valuable input and help during data collection. Furthermore, I would like to thank all interviewees from Gasunie and the contractors for their participation. Overall, I would like to thank all members of the Gasunie FPC team for their support and many cups of coffee.

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Abstract:

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1. Introduction

Currently, resources critical to the success of a firm increasingly lie outside the firm’s direct control (Hamel, 1991; Tate et al., 2009). This is the case when companies decide to outsource certain activities to another party. In doing so, the performance of the buying organization becomes more or less dependent on supplier performance (Lindgreen et al., 2013; Cao and Lumineau, 2015). Organizations employ contracts to define those interorganizational relationships and to reduce risk (Tate et al., 2009: p. 57). However, in the contract management phase they often struggle when determining how to effectively manage those relationships (Liu et al., 2009; Vandaele and Gemmel, 2007). This means that when buyer-supplier relationships form, buying companies are often seeking to find an appropriate configuration between on the one hand using strict and formal arrangements on the process and output of the product or service that has to be delivered, and on the other hand letting informal practices lead the development of the relationship, in order to make collaboration run smoothly and build up a trustful and pleasant relationship. Finding an appropriate configuration between transactional and relational governance mechanisms is important since it increases overall satisfaction (Cao and Lumineau, 2015) and relationship performance (Cao et al., 2013), which can be defined as the suppliers’ performance, for example in terms of quality, cost and timeliness (Cao and Lumineau, 2015).

Contract management is the phase that starts when the contract has become effective and in which companies start searching for an appropriate governance structure. On an operational level, it is the ‘the process of ensuring that parties fulfill the requirements, expectations, terms and conditions agreed upon in the contract’ (Trent, 2007: p. 135). Monitoring and evaluating supplier performance is a major aspect of contract management (Turner and Simister, 2001; van Weele, 2014), because it can function as a tool that provides feedback on whether the agreed goals and the ways to achieve those goals are reached (Cousins et al., 2008). Metrics used to assess supplier performance should be clearly defined and tracked so that the buyer can ascertain that the supplier satisfies requirements (Cao et al., 2013). A broader definition of supplier performance management (SPM) is that it is used to affect positive change in the supply chain, systems and processes (Amaratunga and Baldry, 2002). In this sense, it could be argued that monitoring and managing performance aspects is useful for both maintenance and improvement of buyer-supplier relationships. So, SPM and contract management are closely interwoven. It remains, however, unclear what the role of SPM could be when seeking for an appropriate governance structure after the establishment of a contract. This study is aimed providing insights into how SPM could help in determining the right configuration between relational and transactional governance.

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7 However, nowadays buying companies tend to rely more and more on relational governance (Vandaele et al., 2007; Lindgreen et al., 2013) as contracts may signal a lack of trust, which is viewed as being harmful for cooperative inter-organizational relationships (Yang et al., 2011; Cao and Lumineau, 2015). Moreover, overly relying on transactional governance leads to inflexibility (Cao et al., 2013). On the other hand, focusing merely on relational governance without using the underlying contract, is risky, because it could result in either not achieving the anticipated outcomes or achieving them on different terms (Wijnsma, 2015: p. 27), relationships take extensive time and resources to develop (Dyer and Singh, 1998) and it is likely to be abused with opportunism. In addition, dense social ties in economic exchanges may restrict firms from new information and new opportunities (Uzzi, 1997; Gargiulo and Benassi, 2000; Poppo and Zenger, 2002: p. 710).

For years, there has been a debate in literature on how relational and transactional governance interact and whether they are either substitutes or complements (Poppo and Zenger, 2002). Cao and Lumineau (2015) conducted a meta-analysis and concluded from the contradictory findings in literature that relational and transactional governance act as complements rather than substitutes, and jointly increase performance. Giving careful attention to how different governance mechanisms can be used as complements makes that long-term relationships can contribute to joint value creation (Ness and Haugland, 2005). However, current literature falls short on providing concrete tools or ways that companies could use or follow to achieve such a complementary governance structure. This makes it hard for companies to find a proper governance structure in order to reap the benefits of complementarity and enhance performance. This may retain them from actively tuning their governance mechanisms to activate complementarity.

This study builds upon the work of Cao and Lumineau (2015). Moreover, it extends current literature on contract management as demonstrated by Van Weele (2014), by relating it to SPM. The aim is to reveal the role of SPM when seeking for an appropriate complementary governance structure in the contract management phase. Exploratory case studies will be conducted to detect how SPM can function as a tool to activate or enhance the complementary nature of relational and transactional governance. Since a study of Simpson et al. (2002) indicates that almost half of the buyers do not have a formal supplier evaluation system in place, this study could aid practitioners in developing SPM systems that aid in structuring the use of the two governance mechanisms in order to more optimally govern the relationships with their suppliers.

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2. Theoretical background

Outsourcing has become an important business approach, and a competitive advantage may be gained as products or services are produced more effectively and efficiently by outside suppliers (Yang et al., 2007: p. 3370). Much has been written on inter-organizational relationships (IORs) (Ring and Van de Ven, 1994) and it can be argued that buyer-supplier relationships are a type of IOR (Cao and Lumineau, 2015: p. 20). Appropriate management of these relationships is of importance since the extent to which both parties judge a relationship to be efficient and fair leads to motivations to continue or terminate the relationship (Ring and Van de Ven, 1994). Therefore, control mechanisms need to be in place during contract management to be able to judge the relationship between two parties.

2.1 Contract management

Contract management is the process of ensuring that the reality of an agreement matches or exceeds the expectations in the agreement (Trent, 2007: p. 135). It is concerned with all activities carried out in order to guarantee and manage the contract (Hodenpijl, 2014). The contract management phase starts after the formal contract is signed (Monczka, 2008), see Figure 1. It is preceded by the contracting phase, which consists of identification and specification of a need, identification of potential suppliers, selection, negotiation and finally, singing the contract (Ellram et al., 2004: p. 26). During contracting the first contact and negotiations on contract terms take place, so at the start of the contract commitments are made and expectations have raised at both the buyer and supplier side. Klein Woolthuis et al. (2005: p. 835) mention that 'contracts may be envisaged as the sedimentation of the negotiation and commitment stages that partners go through. In this interpretation, contracts can be seen as both the basis and outcome of cooperation’. The basis is established when the contract is signed, and eventually the contract influences how the relationship is managed.

Figure 1: Contracting and contract management phases (Van Weele, 2014)

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9 At the start of a contract there is a degree of risk and uncertainty for the parties involved. As the contract proceeds, both parties learn from experience and the risk may start to decline as the original contract assumptions come to be tested. However, it often happens that slipping standards go unnoticed. Therefore, there is a need for measurement and monitoring of performance against the contract and other types of agreements (CIPS, 2013). Contract management activities aim at assessing supplier performance to determine whether the agreed goals and the ways to achieve those goals are met (monitoring and control or ‘expedite’, see Figure 1). The information that results from these evaluations can be used to improve both the quality of the deliverables of the supplier and the management of the relationship (Van Weele, 2014), that means how these parties relate to each other (follow-up and ‘evaluation’, see Figure 1). Having a clear insight in the performance of the supplier allows for evaluation and improvement of the current situation. Besides that, tracking and documenting performance, which generally takes place on an operational level, provides input for the tactical and strategic level (NEVI, Inkoopproces publiek), where the focus is on management of the overall relationship (Reid, 2010). This demonstrates a need for two types of performance metrics in contract management: metrics focused on the deliveries or output of a process and metrics focused on the relationship with a supplier. Supplier performance management will be addressed more in depth in section 2.5.

As mentioned before, companies deploy different mechanisms and practices to manage their contracts and with that, govern their IORs. In literature, the most well-known and used mechanisms are relational and transactional governance (Griffith and Myers, 2005; Vandaele et al., 2007). Because business process outsourcing can offer both strategic and nonstrategic benefits, but comes along with distinctive risks, organizations must carefully design these governance mechanisms and their mutual influence (Rai et al., 2012).

2.2 Transactional governance

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10 frequency of the transaction (Williamson, 1985; Klein Woolthuis et al., 2005). However, the rigid application of contracts may negatively impact the flexibility of the cooperation and cause trust deterioration (Faems et al., 2008).

Contracts can have different forms and serve different purposes (Monczka, 2008; Schepker et al., 2014). Whether you use prevention-based or promotion-based contracts determines how the elements of the contract will impact the exchange and relationship between firms. By using a promotional role, formal contracts do not have to provoke distrust (Weber and Mayer, 2011). In line with this is the claim that contracts increasingly function as coordinating and adaptation mechanisms, instead of just safeguarding (Schepker et al., 2014). In general, the following three main functions of contracts can be distinguished:

 Safeguarding/control: mitigating against opportunistic behavior (Williamson, 1985), and minimizing exchange hazards like moral hazard and adverse selection (Schepker et al., 2014), which could increase transaction costs (Zhou and Poppo, 2010). Achieved with contractual completeness and allocation of decision rights;

 Coordination: focuses more on the positive, what do we want to achieve and how (Klein Woolthuis et al., 2005), or in other words, promotion-framed contracts (Weber and Mayer, 2011). Coordination paves the way for efficient collaboration (Lumineau and Henderson, 2012). It is achieved by assigning roles and responsibilities, setting milestones, providing for monitoring of processes (Schepker et al., 2014);

 Adaptation: suitable when facing uncertainty (Schepker et al., 2014), anticipating and making provisions for problems that may occur during execution of a project (Argyres and Mayer, 2007: p. 1069) and adapt to unforeseen events (Luo, 2002). Achieved with provisions for adaptation to environmental contingencies, like payoff schemes that depend on environmental circumstances.

The other way to manage buyer-supplier relationships is relational governance. This governance type will be outlined in the following section.

2.3 Relational governance

Relational governance can be defined as ‘the extent to which a relationship is governed by trust, flexibility, solidarity, information exchange, fairness, and informal rules and procedures’ (Cao and Lumineau, 2015). The relational perspective focuses on interfirm relationships as they evolve over time and over transactions (Faems et al., 2008). Uzzi (1997) distinguished three key relational governance constructs:

 Trust;

 Information exchange;

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11 Cooperative norms can be regarded as the shared belief and expectation of two parties that they must work together to achieve mutual goals (Baker et al., 1999) and form the fundament for the three aforementioned relational constructs (Cai and Yang, 2008). It is stated to be very important to constantly collaborate with suppliers in a healthy atmosphere, as suppliers’ progress could mean buyers’ organizations’ progress (EdgeVerve, 2014).

Trust is a frequently mentioned term in literature when it comes to relational governance, and it can be considered as an important relational aspect according to Griffith and Myers (2005) and Lamothe and Lamothe (2012). It refers to positive expectations regarding the other party in a risky situation (Lewicki et al., 2006; Rousseau et al., 1998; Faems et al., 2008). Many authors use trust as a measurement for relational governance (e.g. Yang et al., 2011; Klein Woolthuis et al., 2005). Furthermore, information exchange can be regarded as an important relational construct (Cao et al., 2013). Poppo and Zenger (2002) mention that information sharing in combination with commitment helps avoiding the potentially high costs of exchange hazards. These authors also highlight that norms of cooperation and mutual adaptation of both parties provide the flexibility to cope with uncertainties that arise in the exchange, like conflicts and changes in the external environment. Here, relational governance complements the adaptive limits of contracts by fostering continuance of the exchange. This is in line with the assumption of bounded rationality in TCE: bounded rationality puts in place the need for relational governance (Cao and Lumineau, 2015), since it expands (generally incomplete) contracts.

Cao et al. (2013) express the goal of relational governance as satisfying changing business needs. Therefore, the main functions of relational governance are ensuring trust between parties, which increases the likelihood of behaving in the partner’s or relationship’s interest rather than one’s own, exchanging information, jointly resolving conflicts and participating in decision making to foster shared expectations, which reduces uncertainty and ambiguity (Luo, 2002).

Neither an overemphasis on transactional nor an overemphasis on relational governance is beneficial to outsourcing performance (Cao et al., 2013; Lindgreen et al., 2013). Therefore, a closer look should be taken on how the two mechanisms interact; this will be done in the following paragraph.

2.4 The interplay between relational and transactional governance

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12 other when they are balanced (Cao et al., 2013). Such a balance should be in place before complementarity can be activated and lead to synergistic outcomes.

The aforementioned authors describe how such a balance can be achieved. This was done with a process of adjustment, going back and forth between the two types of governance. The balance led to enhanced efficiency, standardized processes, reduced operational costs and increased visibility. To be able to determine when such an optimal balance is achieved, ongoing evaluations have to be in place. Furthermore, they emphasize that the balance should be dynamic and that it could change over time based on various factors. Therefore, a contingency approach should be kept in mind when looking at configurations of governance structures (Huber et al., 2013).

The above line of reasoning provides the basis which shows that both relational and transactional governance are of importance when managing interorganizational value exchanges. Table 1 provides an overview of studies supporting the complementary relationship between relational and transactional governance.

Table 1: Overview of literature on the complementary nature of governance mechanisms

Article Method Setting Performance outcome (Y/N) Subsequent

(1)* or joint (2)** impact on performance One-way (3) or mutual (4) relationship between governance mechanisms or aspects Poppo and Zenger (2002) Survey Outsourced IS services Y

Satisfaction with exchange performance (cost, quality and responsiveness) 2 4 Klein Woolthuis et al. (2005) Case research IORs in technical innovation Y Relationship outcome

(technological success, the degree to which the project remained within budget and time and the degree to which partners were able to solve problems within the relationship) 1 4 Vandaele and Gemmel (2007) Survey Security services companies Y Customer-based evaluation of exchange performance (such as overall satisfaction, willingness to recommend and future purchase intentions) 1, 2 Liu et al. (2008) Survey A manufacturer and its distributors in the Chinese household appliances industry Y

Direct value (the supplier makes long-term delivery promises for the products delivered; the supplier can offer complete coverage of the products the distributor requires; the products delivered by the supplier have good functionality)

2 Cai and Yang (2008) Survey Buyer-supplier relationships in the Chinese manufacturing Y

Supplier performance and subsequently buyer satisfaction

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13 industry Faems et al. (2008) Case research Exploratory R&D alliances N 4 Goo et al. (2009) Survey IT outsourcing relationships in South Korea N 3 Charterina and Landeta (2010) Survey B2B relationships in Spanish machine (tools) manufacturing Y

Product innovativeness and subsequently business performance 1 3 Ren et al. (2010) Survey Automobile dealers in China Y

Relationship performance (the retailer’s perception of the degree to which inter-organizational exchange activities are both effective and efficient)

1 3 Zhou and Poppo (2010) Survey Buyer-supplier relationships in Chinese manufacturing N 4 Han et al. (2011) Survey Interfirm exchange relationships in the Chinese pork supply chain N 4 Yang et al. (2011) Survey Random sample of supplier firms in varying Chinese industries Y

Relationship outcomes (long-term orientation and opportunism)

1 3 Burkert et al. (2012) Survey Domestic vs international buyer-supplier relationships Y

Customer commitment and customer satisfaction 1 3 Caniëls et al. (2012) Case research Single case study in the Norwegian offshore oil and gas industry Y

Project outcomes (costs, timely delivery and achieved quality)

1

*Subsequent : contract or contractual arrangement influence relational governance or trust (or vice versa), which in turn influences the performance or outcome of the relationship

**Joint: relational and transactional governance both directly influence performance

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14 between relational and transactional governance. Klein Woolthuis et al. (2005) were the first ones to use case studies in order to gain deeper insights in how the two governance mechanisms interact. In literature, propositions have been formulated that explain how the governance mechanisms complement one another. These can mainly be found in the articles with a ‘3’ or ‘4’ label in Table 1. The explanations can be categorized as one of the two components of complementarity distinguished by Huber et al. (2013): compensating and enabling. Compensating means that one mechanism compensates for the weaknesses of the other, enabling means that one mechanism creates conditions that facilitate the other mechanism. The explanations of how the two governance mechanisms complement each other can be read in Table 2.

Table 2: Summary of complementarity between relational and transactional governance

Relational Transactional

Enabling - Trust may be needed as a precondition for negotiating and drawing up a complex contract (Klein Woolthuis et al., 2005: p. 833) - Relational dynamics at operational and managerial levels determine how the contract is applied (Faems et al., 2008: p. 1072)

- Relational governance promotes/facilitates the exercise and refinement of formal contracts, because the buyer and supplier can work together to learn from the prior experiences and revise the contract with mutual agreement (Han et al., 2011: p. 314; Huber et al., 2013)

- Trusted relationships can evolve in the process of crafting contracts (Huber et al., 2013)

- The initial contract design substantially influences relational dynamics at

operational and managerial levels (Faems et al., 2008: p. 1072)

- Customized contracts specify contingencies, adaptive processes and controls likely to mitigate opportunistic behaviour and thereby support relational governance (Poppo and Zenger, 2002) - Promotion-based contracts complement relational governance in transactions requiring flexible, creative and cooperative behavior (Weber and Mayer, 2011) - Transactional governance may help firms to look for cooperative negotiations. In this way, the contract is a driver of behaviors not only to prevent negative outcomes, but also to promote cooperation (Lumineau and Henderson, 2012: p. 392)

Compensating - Formal governance is typically insufficient to

manage a relationship because of its inability to specify up front all possible contingencies in detail. Therefore, managers choose relational governance to safeguard specific investments from premature and costly termination (Han et al., 2011; Cao et al., 2013: p. 188)

- The use of social mechanisms can play a role in complementing the adaptive limits of formal contracts (Poppo and Zenger, 2002; Goo et al., 2009)

- Transactional governance compensates for the safeguarding limits of relational

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15 Often, the two types of complementarity are present at the same time, as illustrated by the following finding: ‘formal contracts provide institutional frameworks guiding the course of cooperation, while cooperation overcomes the adaptive limits of contracts’ (Luo, 2002; Yang et al., 2011: p. 88).

According to Caniëls et al. (2012: p. 120), trust and relational governance are only beneficial for project outcomes when they are accompanied by contractual incentives and control systems. Those control systems will be addressed in the following section.

2.5 Supplier performance management

Performance management can be described as consisting of five activities: selecting performance variables, defining metrics, setting targets, measuring and analyzing (Forslund, 2007; Forslund and Jonsson, 2009). Derived from this, two main phases can be distinguished in SPM (Sundtoft Hald and Ellegaard, 2011):

 Definition of key objectives to be measured and the selection of performance measures;

 The use of those metrics: the way performance data are collected, reviewed and acted upon. Performance measurement is the evaluation of effectiveness and efficiency of completing a given task (Mentzer and Konrad, 1991; Prahinski and Benton, 2004) and performance management is the actual use of those performance measures to effect positive change in the organization and supply chain (Amaratunga and Baldry, 2002).

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16 Identifying the appropriate criteria for supplier performance evaluation has significance in improving supplier performance, since unless the right criteria are considered, even the most sophisticated method for performance measurement will not be of any use (Dey et al., 2014). Using multiple performance measures allows for assessing whether safeguarding, coordination, and adaptation are achieved and whether these and other objectives lead to enhanced feelings of success in the relationship (Schepker et al., 2014: p. 214). Besides these transactional aspects, there should also be attention for the buyer-supplier relationship (Trent, 2007; Cousins et al., 2008). Performance metrics should be able to measure partnership and collaboration: an effort is needed to draw a clear picture of the relationship (Arzu Akyuz and Erman Erkan, 2010; Gunasekaran et al., 2001). Relationship quality offers a potential metric by which relationships can be measured and compared. A firm may rate all of its collaborative suppliers, using this metric in order to benchmark those relationships (Nyaga and Whipple, 2011). So a distinction can be made between ‘classic’ metrics focused at the evaluation of the deliverables of the supplier (output and process) and ‘new era’ metrics focused at the evaluation of the relationship between the buyer and supplier (Arzu Akyuz and Erman Erkan, 2010).

2.6 Research question(s)

Some evidence can be found on the relationship between the two types of governance and the role an SPM system can have in governance structures, these are as follows. Well-developed service level agreements (SLAs), which are generally part of a contract, provide a way to measure a supplier’s performance (Goo et al., 2009). Building these formal performance monitoring and reporting systems is important, because it forces the contractor to fulfill its responsibilities (Yang et al., 2009: p. 684). Moreover, when performance measurement is difficult, more complex contracts are needed, specifying service levels or facilitating the monitoring of a supplier’s behavior. This enables buyers to more accurately measure and reward productivity. However, the supplier’s experience of working with the buying company should be considered as well during evaluation, as it might reveal obstacles and room for improvement (CIPS, 2013). Besides that, desirable performance by the supplier might be encouraged through informal, social control (Das and Teng, 2001), using the supplier’s commitment to the buyer’s goals, values, and behavioral expectations (Jaworski, 1988; Smets et al., 2013). This shows that trust is valuable for the supplier’s performance. A consequence of such a trusted relationship, is that formal meetings go more smoothly because the supplier understands what the other party actually wants. This in turn facilitates agreement on more appropriate key performance indicators and service levels, which are then formalized in the contract (Huber et al., 2013).

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17 cooperative relationships with those suppliers. Overall, supplier performance management helps building mutually beneficial relationships with suppliers (EdgeVerve, 2014).

As can be read, SPM is a major and critical aspect of contract management. However, literature falls short on examining the role of SPM when seeking for governance structures in contract management. This leads to the following research question.

‘How can the complementary nature of relational and transactional governance be activated or enhanced by the use of supplier performance management?’

Three subquestions can be derived from this, based on the examined literature: 1. How to set up KPIs when aiming for complementarity?

2. What should be the content of those KPIs to generate complementarity? 3. How to use the SPM system to activate or enhance complementarity?

For the content of KPIs, a distinction will be made between two types: type 1 and type 2 metrics. Those are based on the differences revealed by Arzu Akyuz and Erman Erkan (2010).

 Type 1 metrics are KPIs focused on the evaluation of the deliverables of the supplier (output and process based);

 Type 2 metrics are focused on the (two-way) evaluation of the relationship between a buyer and supplier.

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3. Methodology

3.1 Research design and case selection

To be able to answer the research question, case study research was conducted. Doing case study research allows to answer ‘how’ questions and is suitable when a phenomenon has to be studied within its real-life context (Yin, 2009). Studying the phenomenon in its natural setting is important, because underlying mechanisms and can be discovered when taking the context wherein governance structures develop into account. Moreover, this study will serve as an illustration (Siggelkow, 2007) by taking complementarity to a next level when linking it with SPM. Gathering rich data by means of interviews, document analysis and observations can gain insights in how SPM plays a role in creating complementarity in contract management. Although literature on governance mechanisms and performance management is extensive, the relatively unexplored field of contract management in combination with SPM asks for explorative studies, aimed at the generation of new knowledge (Voss et al., 2002). Since the focus of this study was gaining insights in how SPM could function as a mechanism generating complementarity in the governance structure of a buyer-supplier relationship, the unit of analysis can be defined as the development of a governance structure in a buyer-supplier relationship (with the latter often called contractor).

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19 contracts. Therefore, a detailed study of the role of SPM in the development of a complementary governance structure could be conducted.

3.2 Case descriptions

At the moment the researcher joined the company, the contracts had just been signed and included a clause that specific KPIs would be determined within three months after the date of establishment. This means that the first renovation works had already started when there were no KPIs in place yet. This caused some uncertainty at the responsible purchaser: ‘It would be good to develop the KPIs

together, in cooperation instead of just dictating what the contractor should adhere to. But of course this depends on your position. We have to make a choice between setting and using KPIs directly from the beginning and keep them to that strictly, or first let those contractors prove themselves, let them show that they can do. Then take it a step further and develop KPIs throughout the contract, aimed at how can we work better, how can we utilize the contract in a better way. We did an audit at all contractors during contracting so we know they are good, but of course there is the danger of missing the boat when not monitoring strictly right from the beginning.’ This demonstrates the trade-off the

company faces when determining how to structure the relationship from the moment the contract gets effective. Therefore, the purchasing department is curious of how the contractors look at Gasunie as a partner and how they would like to see performance management.

The project is a European tender, which is a form of contracting used for government procurements that exceed a certain budget. Since Gasunie is a publicly owned company (Aandeelhouders, 2015), it has to adhere to this legislation. Gasunie established a framework agreement with the three contractors, which is an umbrella agreement that sets out the terms (particularly regarding quality, price, rules and procedures) under which individual contracts (call-offs) can be made throughout the framework contract period. The tender started in the summer of 2014 and the contracts where closed in February 2015. Selection of parties during contracting was based on quality and price. The work is divided over the contracted parties by means of mini-tenders: different subprojects within the project are assigned to one of the parties based on competition. The party that offers the lowest price, ‘wins’ the subproject, which consists of bundles of gas delivery stations that have to be renovated. This is a common way of doing business for large companies in different (public) sectors (Europese regelgeving, 2015), like the gas industry.

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risky’ and ‘in the preparation we already need to think of where the risks are and where should be (tight) control’ (purchaser 1).

Case 1: The development of a governance structure between Gasunie and contractor 1

Performance on operational evaluations in previous contracts

Lowest Highest In between

Challenges contractor based on the contracting phase

Low Medium High

Table 3: Case selection criteria

Similar results regarding the deliveries in the project, that means the accomplished renovations, are expected from the different parties. However, the road to get to those renovated gas delivery stations could differ largely among the contractors, based on the differences outlined in Table 3. Therefore, theoretical replication determined further analysis of the cases.

For all three contractors, there were some doubts at the beginning on how they arranged their internal organization and on the division of tasks, responsibilities and authorities. These doubts had different causes, namely finishing a reorganization caused by an acquisition of a subsidiary company (case 1), the alignment of roles between divisions spread over two different countries (case 2) and the alignment of interests between two companies participating in a joint venture (case 3). Gasunie sees the challenges and the associated risks they bring as being larger for case 2 than case 1, and larger for case 3 than case 2. An explanation of what the challenges as mentioned above and in Table 3 consist of, can be read in Appendix A.

Some descriptive data of the research sample can be found in Table 4.

Case 1 Case 2 Case 3

Country of origin contractor

The Netherlands Germany/The Netherlands

The Netherlands

Length of relationship >10 years 5 years >10 years

Size in market Large Small Large

Yearly expenses1 _High _Low _High

Dependency of Gasunie Medium High Low

Table 4: Descriptive data of the research sample

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3.3 Data collection

When conducting research, two principle informants were in place. These informants, a purchaser and a procurement manager, guided the researcher through the organization and provided valuable information contributing to research design. Moreover, they helped getting in touch with the right interview-participants.

In each case, data collection included multiple methods and multiple sources: this increases validity (Eisenhardt, 1989; Voss et al., 2002). First of all, exploratory unstructured interviews were planned with the two principle informants. These were aimed at collecting data on the (history of the) cases and getting to know the contracted parties in the selected project. A semi-structured interview was conducted with the contract manager of Gasunie, which also served as a pilot to see whether the interview protocol (see Appendix B) was constructed properly. Thereafter, interviews where held with the contract managers of the three suppliers. Moreover, interviews were conducted with the construction manager and the lead supervisor of Gasunie. The interviews lasted between 60 and 75 minutes. A separate interview protocol was developed for more focused and in-depth interviews on KPIs and SPM in general with four Gasunie employees: procurement manager 1 and 2 and purchaser 1 and 2 (see Appendix C). Those interviews took between 30 and 40 minutes. All interviews were audio recorded and transcribed directly or soon after the interview, using the software Express Scribe Transcription. The transcribed interviews were sent to the interviewees for verification. Besides answering the questions of the interview protocol, the contractors also filled out a survey (see Appendix D), which was aimed at gathering more (quantitative) information and had the purpose of verification of the answers interviewees gave on the interview questions. This survey was sent to the interviewees afterwards, which allowed them to carefully think about their answers.

The interview questions were based on the surveys from Vandaele and Gemmel (2007), Han et al. (2011), Liu et al. (2007) and Zhou and Poppo (2010). Since these surveys consist of statements, they were translated to questions to be able to use them in the interviews. The survey that was sent afterwards was constructed from questionnaires of NEVI and the aforementioned authors. Table 4 provides an overview of the informants and methods used per case.

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Single case Embedded case 1 Embedded case 2 Embedded case 3

Interviewees - Purchaser 1 - Purchaser 2 - Procurement manager 1 - Procurement manager 2 - Contract manager - Construction manager - Lead supervisor Contract manager contractor 1 Contract manager contractor 2 Contract manager contractor 3 (company A) and proposal manager (company B)

Documents - Selection guide - Tender guide

- Framework agreement - General terms and conditions - Gasunie technical standards (GTS) - Field notes* - Audit report contracting phase - Improvement plan - Survey (1) - Audit report contracting phase - Improvement plan - Survey (1) - Audit report contracting phase - Improvement plan - Survey (2) No. of interviews 7 1 1 1 No. of documents 6 3 3 4

* Some field notes also contained information about the different contractors

Table 5: Interviewees and documents per case

An overview of the definitions of the variables in this study and their operationalization can be found in Table 6.

Variable Sub-variable Definition/operationalization

Transactional governance The extent to which roles, obligations, responsibilities,

contingency adaptation, and legal penalty are specified in formal agreements and the subsequent use of those formal agreements (Cao and Lumineau, 2015)

- Appendix B part 2 - Appendix D part 2.2

Safeguarding Having specific, well-detailed formal agreements that precisely define how disagreements will be resolved

(Schepker et al., 2014)

- Appendix D part 2.2, questions 10-11

Coordination A contract that defines the roles and responsibilities of each party and how each party is to perform (Zhou and

Poppo, 2010)

Adaptation A contract that defines what will happen in case of an event occurring unplanned (Schepker et al., 2014)

Relational governance The extent to which a relationship is governed by trust,

flexibility, solidarity, information exchange, fairness, and informal rules and procedures (Cao and Lumineau, 2015)

- Appendix B part 3 - Appendix D part 2.1

Trust Positive expectations regarding the other party in daily practice and in risky situations (Faems et al., 2008)

- Appendix D part 2.2, questions 8-9 Information

exchange

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(Poppo and Zenger, 2002)

- Appendix D part 2.2, questions 6-7 Joint

problem-solving

Problems that arise in the relationship are treated as joint responsibilities (Vandaele and Gemmel, 2007)

Complementarity Positive reciprocal relationships between relational

governance and formal contracts (Poppo and Zenger,

2002)

- Appendix B part 4 - Appendix C part 3

Enabling One mechanism creates conditions that facilitate the other mechanism (Huber et al., 2013)

- Appendix C part 3

Compensating One mechanism compensates for the weaknesses of the other mechanism (Huber et al., 2013)

- Appendix C part 3

Supplier performance management

Setting KPIs Definition of key objectives to be measured and the selection of performance metrics (Sundtoft Hald and

Ellegaard, 2011) - Appendix C part 2 - Appendix D part 3.1

Content KPIs Type 1 and type 2 metrics (based on Arzu Akyuz and Erman Erkan, 2010)

- Appendix B part 4 - Appendix D part 3.2 Using the SPM

system

The way performance data are collected, reviewed and acted upon (Sundtoft Hald and Ellegaard, 2011)

- Appendix B part 4 - Appendix C part 2 - Appendix D part 3.2

Table 6: Main variables and their measures

3.4 Data analysis

Research quality was assured as shown in Table 7 (Yin, 2009).

Indicator Phase Practices

Construct validity Data collection - The use of multiple data methods (triangulation):

interviews, questionnaire, document analysis, observations - Review of interview data by sending the transcripts to the interviewees for verification

Internal validity Data analysis - Conduct a coding process with descriptive and interpretive codes and eventually pattern matching activities

- Coding schemes serving as input for within- and cross-case analyses to eventually establish a chain of evidence

External validity Case selection The use of theoretical replication for case selection, as could be seen in Table 3

Reliability Data collection - The use of an interview protocol (see Appendix B and C)

- Development of a database to store all transcripts, documents and field notes

Table 7: Practices to assure research quality

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24 so, coding software Atlas.ti was used. Coding was done by means of a three stage process: descriptive, interpretive and pattern coding (Miles and Huberman, 1994). From the start, descriptive and interpretive codes were used that were derived from the variables outlined in section 2 (see Appendix F). They were related to ‘relational governance’, ‘transactional governance’, ‘complementarity’ and ‘SPM’. Some codes could not be assigned to one of those variables and were therefore put in the category ‘other’. During the coding process, more codes emerged, which are mainly focused on describing previous experiences. Past experiences of all four parties involved (Gasunie and the three contractors) turned out to be very important for interviewees’ current views on contract management and SPM.

The codes assigned during the coding process were elaborated upon by establishing interpretive codes, to describe the coded quotations. Moreover, the coded quotations where examined to find out how SPM, governance mechanisms, and complementarity relate. An excerpt of a pattern coding scheme can be found in Table 8.

The answers from the survey, which were scores on a 5-point Likert scale, were analyzed by taking the average of the scores assigned to the constructs representing relational and transactional governance. This resulted in visualizations of the governance structures that contractors would prefer (shown in the findings section). Subsequently, a validity check was executed by counting for each case the amount of coded quotations belonging to each of the two governance mechanisms. This resulted in a graph (see Figure 5). This method allowed for a comparison of the conclusions of the researcher (assigned codes) with the answers given by interviewees, and mitigates the risk of biased conclusions (Yin, 2009).

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Descriptive code Interpretive code Quotation

SPM

Goal SPM KPIs facilitate complementarity (enabling)

‘Look at what is in the contract and bring it to life with relational governance. KPIs help to measure that, those are the tools’ (procurement manager 1)

‘When we did not make use of KPIs yet, we had meetings with suppliers, but they had no clue. Now I experienced that with KPIs we do have good conversations with suppliers and we see through those KPIs that some suppliers have to improve their performance. In the past, we would have said something about that too, but not in such a binding way’ (purchaser 1)

Setting KPIs Good collaboration can result from the contract, brought to life with SPM (enabling)

‘I think you can give a good description of the relationship you intend in the contract. That should be translated to KPIs to be able to judge it’ (contract manager contractor 1) ‘When developing common goals and setting KPIs

together, you generate a collaboration that allows the supplier to remind the buyer of his responsibilities or things that still have to be done’ (purchaser 2) Content KPIs Different KPIs enable

the presence of both governance

mechanisms (enabling)

‘Performance, output-based KPIs, and you need to have something in the relational area, just as a trigger to talk about it’ (procurement manager 2)

Using SPM system SPM can be used to influence the

governance structure

‘Currently it is experienced as an evaluation system: that says something about the relationship you have together’ and ‘The renovated gas delivery station will get there anyway, but it is about how you get there’ (contract manager Gasunie)

‘The evaluation form can create a bridge between on the one hand assuring that formal agreements are met and on the other hand collaboration, by filling it in together with the construction team and talk about how both parties see the relationship’ (lead supervisor)

‘It is a trade-off between judging contractors on their KPI grades or having an optimal collaboration by discussing progress together’ (purchaser 1)

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4. Findings

Within case analysis was applied to all three embedded cases. Previous experiences from Gasunie and the contractors will be addressed, since these experiences eventually lead to the current contract and have an influence on the governance structure that will develop in this project. Moreover, a closer look will be taken on KPIs and how the governance structure could be complementary. Finally, the role of SPM in complementarity is treated.

4.1 Case 1

4.1.1 Background – previous experiences

The different informants within Gasunie all address the long working experience they have had with contractor 1. On a strategic level, close ties have been established throughout the years. Procurement manager 1 states that contractor 1 is a solid and reliable partner. However, other informants state that this party has the tendency to always try to get the best out of it, to see how far they can go with the intention to save or earn (more) money where possible. There is a general feeling that they do things ‘behind the back’ of Gasunie. An example is not keeping safety rules as strict as set by Gasunie, ‘we

do not need to put a fence over there, it only takes time and money’ (construction manager), while that

is a formal procedure to guarantee safety. Another illustration of opportunistic behaviour is given by the construction manager: ‘They put a lot of time and effort in analyzing documents, to look where

there is room for interpretation. Where risks are. And then they carefully think of whether they should announce it to Gasunie now, or ‘keep it’ for a later moment and then come up with a proposal with a list of exclusions’. This contractor conducts a lot of different work for Gasunie, which makes that there

is a great deal at stake in the relationship. Purchaser 1 argues that ‘we are quite dependent on them for

pipe-laying activities’. The construction manager gives a possible explanation: ‘it is possible to play those games at the lower hierarchical levels, because there are such close ties on a higher level’. This

is supported with the following comparison: procurement manager 1 (operating at the tactical-strategic level) mentions that it is a reliable and trusted partner, while purchaser 1 (tactical) and construction manager (tactical-operational) explain why this party cannot be trusted blindly. The size of this contractor makes that the company has power in the market and can afford to act aggressive towards other contractors. Because of their behaviour, a Gasunie employee states that they are not that far developed in terms of collaboration as the other two contractors are, ‘this party still needs those hard

and detailed agreements, since we as Gasunie need to have something to enforce them upon what was arranged’. So, Gasunie is used to safeguard itself with detailed and extensive formal agreements to

keep tight control. Monitoring is very important. In case of problems, this party often says: ‘we have a

problem, can you provide a solution?’. There is a lot of improvement possible in the buildup of

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27 From the contractor point of view, ‘Gasunie is a triple A customer, they are part of the lifeblood of our

company’ and ‘Gasunie is a reliable customer, they ensure continuity’. The contract manager of

contractor 1 party emphasizes that trust is the basis for collaboration. Moreover, he states that ‘there

is a lot of improvement needed, before you can even be able to speak of collaboration’. They argue

that this will be beneficial for both parties, because there is much to earn. There needs to be intrinsic motivation and willingness to collaborate. Currently when facing problems, joint problem solving goes well. However, this should be expanded to collaboration in day-to-day activities. Moreover, the contractor gives a possible explanation for their behaviour as experienced by Gasunie. There were some situations the past where Gasunie had set rules that turned out to be impossible to use in practice. It took the contractor a lot of time and effort before those formal rules were adapted such that they suited practice. Moreover, the contract manager of contractor 1 mentions that ‘Gasunie often blows

hot and cold’. They solve this by being flexible: ‘as a contractor you have to be flexible to deal with that’. Purchaser 1 confirms that things tend to take a lot of time internally, because there are always

many departments involved in such projects, which makes communication and decision making sometimes inefficient and information ambiguous.

4.1.2 Complementarity in contract management

Different factors could be discovered that could shape the governance structure in this specific relationship. These are outlined below.

According to the contractor, there should be more information exchange: ‘we are not omniscient, but

neither Gasunie is’. Buyers and suppliers should make better use of each other’s experience. This also

counts for the other contractors: ‘if you sum up all knowledge those parties have there will be a

collection of people with so much experience’. This is a potential that should be used in a better way.

Moreover, this contractor wants to be involved in the earlier phases of projects, because it can prevent certain problems to occur. This was illustrated with a situation from the past: there was a mistake in a contract which eventually lead to delays at the contractor side. This could have been prevented by setting specifications together. Sometimes the contractor feels submissive: Gasunie often tells them they do not want to have a certain employee of their company at a work (at an operational level). However, when the contractor does not like a certain Gasunie employee, it is not done to mention that. They think twice before they dare to say that. But ‘if you collaborate more, there will actually be an

opportunity to say this’.

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28 see a relationship in which collaboration leads the daily work. ‘In daily practice the contract is

supposed to be in the closet’. Complementarity is reached in this case by means of enabling. The

contract contains the common goals and a roadmap for how to work together, captured in KPIs. Therefore, those KPIs enables the use of relational governance. A visualization of the proportion of each governance type can be found in Figure 2.

Figure 2: Visualization of the scores assigned to both governance mechanisms in case 1

4.1.3 Developing KPIs and the content of KPIs

The contractor wants to be involved in the setting of KPIs, by giving proposals for appropriate indicators and deciding together with Gasunie which KPIs should be chosen. ‘Developing KPIs is a

common goal.’

According to this contractor, the goal of SPM, is steering on efficiency and performance improvement. KPIs should aim to achieve this. The contractor emphasizes the need for an open culture between contractors and customers, which is needed to get to ideas and improvements. This can be increased by stimulating the sharing of information. ‘An organization is as good as the quality of its

communication and collaboration. There is much to win when better managing communication by learning people how they can more effectively work together’. The contractor would appreciate a ‘type

2’ metric, since they regard the relationship as something very important in contract management.

Preferred metrics (goals) Type 1: Safety, quality, efficiency and the undertaken initiatives for improvement of all performance indicators, also on an operational level

Type 2: Improvement and deepening of the relationship. Does not have to be based on a grading from 0 to 10, high and low is also a possibility. The goal is finding consensus, that is measurable

Supplier specific proposal Separate KPIs for each subproject (assigned after a minitender)

Table 9: Focus/content of KPIs contractor 1

4.1.4 Using the SPM system

According to this contactor, there should be obligations in both ways. ‘You should assess each other’. The story behind the values given to KPIs is very important, otherwise there is the danger that they

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29 become goals, instead of tools. This is illustrated with a situation from the past, which occurred when the previous SPM system was still in place: ‘The communication within our company was graded

insufficient. This grade was based on an incident which caused a delay in the project. Of course that should not have happened, but it is not fair to base a judgement on a certain performance aspect over half a year on one incident’.

After assessment, the findings of both parties should be discussed. If the relationship is good then a common judgement will follow and both parties will take action accordingly. KPIs should be measured and shared monthly and evaluated twice or four times a year (depending on the KPI). If needed, that is also the moment to adapt the indicators, such that they (better) suit the current situation.

‘A KPI is a living document’.

4.2 Case 2

4.2.1 Background – previous experiences

Gasunie has least experience with contractor 2, compared to the other two contractors. This contractor behaves very complacent to Gasunie, since they still have to prove themselves in the market they recently entered and are willing to grow. They already earned high levels of trust with the work they deliver, since ‘they are the only party within this project I know that can do the total scope of work for

this project’ (contract manager Gasunie). Purchaser 1 confirms this by saying that ‘we do not monitor this party on certain activities in another contract, while we strictly monitor the other involved parties’. The construction manager indicates that this contractor often scores higher on evaluations at

the operational level than the other two contractors. This company is considered most collaborative in the sense that ‘they always think one step further’. Moreover, he introduces the distinction between organizational levels: ‘the main differences between those three contractors are caused by company

policy: on a top management level certain decisions are taken, which are translated to concrete actions at lower levels’. The management of contractor 2 is characterized by ‘keeping its promises, working properly according to the rules and procedures of Gasunie, and recognizing the benefits of networking’. The fact that this party is so open and honest might be because of the fact that ‘there are no tight and long-established social ties (yet) on the strategic level’. Procurement manager 1 states

that ‘this contractor wants to earn respect to eventually get more work. They want to please us,

something we don’t recognize at the other parties’. He refines this by saying that these high levels of

trust are in place ‘until proven otherwise’, meaning that over time, this contractor might change their behaviour more towards that of contractor 1. Contractor 2 might be ‘afraid to get a bad evaluation and

therefore accommodate to a large extent’ (construction manager). This demonstrates their willingness

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30 The contractor looks at Gasunie in the sense that they say: ‘Strategically, it is an important contract

and important work. If we need to let some customers go, Gasunie will definitely not be one of them’.

They are actively trying to reduce their dependency by contracting other customers: ‘In 1,5 years we

changed our portfolio from 90% Gasunie works to 40%’ (contract manager contractor 2). Moreover, it

gets clear that this contractor does not feel comfortable with the way of contracting Gasunie often applies (tendering), since it causes a lot of variability and uncertainty in their workload over time.

4.2.2 Complementarity in contract management

The contract manager (of contractor 2) admits that they have to adhere to Gasunie rules, but they need cooperation to execute the works properly. ‘If there is no aim for collaboration, then the relationship

with a customer will generally be one-off.’ Moreover, the contract manager of contractor 2 speaks

extensively of their uncertainty regarding Gasunie. They feel insecure about the messages of Gasunie on the scope of the work in this project. The uncertainty is mainly expressed in the contractor’s questions about investments. They want to invest in order to grow and develop themselves, but they need more clarity from Gasunie. ‘If we would know sooner what the future will bring from Gasunie

side, we would know better what to expect and what to invest in. We sometimes get confused of the mixed signals from your side.’ So, timely and correct information exchange should be in place,

according this contractor. Moreover, continuity is an issue. This has mainly to do with the prices they offer: ‘we know our prices are too high. We want to generate volume in work. But if we lower our

prices to do so, we will not be able to raise them anymore. It is dangerous to start at a low price level’. They express their doubts about developing KPIs and evaluation systems, because it is not

worth the effort if they do not have work on a consistent basis. An important insight is the fact that they openly share these feelings of uncertainty with Gasunie. The contractor appreciates open and honest communication. ‘It is a piece of uncertainty I rather share than not share.’ The cohesion between buyer and contractor is addressed, in the sense that ‘if you work efficiently, things are going

more efficient for us as well’. Moreover, this contractor too points at more contractor involvement in

the planning phase. When doing so, they would be better able to plan the works in their company on the long-term. It would resolve part of the uncertainty they currently face.

At this moment the contractor considers the relationship as mainly relational and would like to keep it that way. Based on experience they know how to treat each other. They ‘can never make more money

than start the work today and finish it tomorrow’, so they aim at executing projects as fast and as good

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sign this contract if it was not a Gasunie contract. But we know you and therefore treat this contract accordingly’.

The conclusion is that this party does emphasize the use of relational governance in contract management (see Figure 3). The ultimate goals that should be attained are registered in the contract. So, complementarity is achieved by having a relationship that is mainly grounded on relational governance with SPM compensating for the lack of transactional governance by functioning as a mechanism that assures the achievement of contractual goals, which is mainly important from the Gasunie point of view. The road to get there will be paved with relational elements: trust, understanding each other and frequent contact such that all relevant information is shared.

Figure 3: Visualization of the scores assigned to both governance mechanisms in case 2

4.2.3 Developing KPIs and the content of KPIs

According to subcontractor 2, the goal of SPM is expressed as ‘monitoring efficiency and whether

goals are achieved’. The idea is that you agree upon KPIs together, such that there is a common

starting point. The expectations from both sides should be summarized in KPIs. In those KPIs, there should be a focus on the relational part, to see how the relationship is considered and what the input is from each company. ‘Just talking about it contributes to the development of the relationship.’ Moreover, there should be a tendency towards continuous improvement.

Preferred metrics (goals) Type 1: Quality, planning adherence, flexibility

Type 2: Collaboration. Establishing such a KPI makes it easier to talk about the relationship. Being able to deliver quality, is dependent on collaboration. Therefore, you should evaluate it each time

Supplier specific proposal Focus on standardization: integration by aligning different activities to establish a better collaboration

Table 10: Focus/content of KPIs contractor 2

4.2.4 Using the SPM system

Contractor 2 mentions that you should start off with a few basic KPIs and then, dependent on how the contract develops and the issues you face in the light of performance, take a look at where is room for improvement. Evaluations should be program-based instead of project-based. The latter one has the

Creating complementarity:

Master thesis