IMPROVING CONTRACTUAL PERFORMANCE:
Considerations of contract management capacity
26th of January 2015 Tim Wijnsma Student number: 1788159 Parkweg 141B 9727HB Groningen Tel: +31 (0)654252593 timwijnsma1@gmail.com
Master thesis MSc. Supply Chain Management
First supervisor: dr. K. Scholten
Second supervisor: dr. H. Broekhuis
University of Groningen, Faculty of Economics and Business
P.O. Box 800, 9700 AZ Groningen
Acknowledgements
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Abstract:
Purpose - This thesis is aimed towards enhancing the understanding of contract management,
by providing insights in the interaction between contract management capacity, the employment of governance mechanisms and contractual outcomes.
Design/methodology/approach - An explorative multiple case study has been conducted at
one of the largest companies within the oil and gas industry in the Netherlands.
Findings – Appropriateness of contract management capacity positively influences the
contract outcomes by facilitating the needed resources. Human resources within contract management capacity and their knowledge, skills, experience, and competences have shown to be the critical factor for making contract management effective.
Practical implications – Results have shown that considerations of contract management are
of importance as they influence the outcome of the contract. Ensuring and making use of the available capacity can lead to increasing performance of contract management.
Originality/value – This study is the first study to consider contract management capacity in
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Contents
1. Introduction ... 4
2. Theoretical framework ... 6
2.1 Contract management ... 6
2.2 Governance mechanisms within contract management ... 7
2.3 Contract management capacity... 10
3. Methodology ... 13
3.1 Research design and setting ... 13
3.2 Data Collection ... 14
3.3 Data analysis... 17
4. Results ... 18
4.1 Appropriateness of contract management capacity ... 18
4.2 The interrelatedness of human resources throughout contract management ... 21
4.2.1 Influence of human resources on governance mechanisms ... 21
4.2.2 The importance of skills and competences ... 23
6. Conclusion, implications, limitations & future research suggestions... 27
6.1 Conclusion ... 27
6.2 Implications for theory and practice ... 28
6.3 Limitations... 29
6.4 Further research suggestions ... 29
References ... 31
Appendix I: Interview protocol contract managers / supervisors ... 36
Appendix II: Excerpt coding tree ... 38
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1. Introduction
Buyers and suppliers use formal contracts as safeguards for correct and on time delivery of services and products. Formal contracts, however, often fail to achieve the anticipated outcome. Between 2005 and 2010 Market Cap (2010) conducted a large study which showed that over 80 percent of the investigated large-scale IT-projects dealt with budget overruns, deadline extensions and overall problems in meeting contractual agreements. Furthermore, findings show that most of the projects could have actually been performed according to the contract, if the contract would have been managed effectively. Contract management is defined by Trent (2007, p135) as “the process of ensuring that the parties fulfill the requirements, expectations, and terms and conditions of the legally agreed to contract”. To do so effectively requires contract management capacity (Brown & Potoski, 2003; Joaquin & Greitens, 2012). The definition of contract management capacity is derived from the definition of organizational capacity from Madden et al., (2014) and Aldrich & Ruef (2006), and refers to: the resources used by the organization to achieve its contractual agreements and satisfy the stakeholder expectations. Next to contract management capacity, literature (Arranz & de Arroyabe, 2012; Liu, Luo, Liu, 2009; Neumann, 2012; Caniëls et al, 2012; Poppo & Zenger, 2002) suggests that governance mechanisms play a role in the contract outcomes. It remains, however, unknown how exactly these factors influence the effectiveness of contract management and the outcomes of the contract (Brown & Potoski, 2003). Furthermore it is unknown how the influence of these two factors changes over time as the process of managing the contract progresses. Understanding this is important, their influence has the potential to improve contract management performance.
5 with sufficient capacity are able to position themselves better against the pitfalls of contract management (Brown & Potoski, 2003).
While the role of governance mechanisms has received considerable attention in literature (Caniëls, Gelderman, & Vermeulen, 2012; Poppo & Zenger, 2002; Sánchez, Vélez, & Álvarez-dardet, 2013; Hendrikse, Windsperger, 2009), theory on contract management is sparse. Particular the link between effective contract management, contract management capacity and governance mechanisms remains unclear. The aim of this study is therefore to explore how contract management capacity influences the application of governance mechanisms and ultimately contractual outcomes.
By applying a multiple case study approach, we make three key contributions. This study contributes to literature firstly by providing insights in the underlying mechanisms of contract management. Exploring the role of contract management capacity and governance mechanisms allows us to determine valuable insights in the relationships of the constructs and ultimately effective contract management. Secondly, we enhance knowledge in the undeveloped area of contract management capacity. Increasing knowledge in this area is of importance, as there are still many contractual agreements that fail to achieve the anticipated outcome and literature does not yet describe why they do so. Considering contract management capacity, can therefore provide an important contribution to literature. Thirdly, this study provides purchasing managers with important insights on how the practice of contract management could be improved, how contract management can be more effective in achieving the contractual agreements. These findings can help managers to prevent inter-organizational exchanges from failing and ultimately achieve the anticipated results.
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2. Theoretical framework 2.1 Contract management
Contract management refers to the activities that both buyer and supplier comply with the terms and conditions of the established contract (Reid, 2010). Hence, while a contract sets the goals, the management of the contracts makes sure that the goals are achieved.
The definition of contract management that will be used throughout this thesis is the definition by Trent (2007, p.135). Remarkable is that this definition not only incorporates the requirements and terms and conditions of the legally agreed to contract, but also the expectations. In this thesis, only the requirements, expectations, and terms and conditions of the legally agreed to contract that are made explicit in writing are being considered, so non-explicit expectations and requirements are not taken into consideration.
The definition of Trent (2007) is not clear on when the process of contract management starts. Literature identifies different starting points; Van Weele (2014) argues that contract management starts when the internal customer identifies a need and supplier selection begins. This thesis, however, argues that contract management begins after the signing of the contract. This corresponds with the Monzcka (2007), who argues that the actual contract management starts after signing the formal contract, as this is where the real work begins. Furthermore it reflects the definition of contract management as defined above better. This definition implicitly suggests that the agreement is already in place as contract management is aimed towards ensuring that the parties fulfill all aspects of the agreement.
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2.2 Governance mechanisms within contract management
Governance mechanisms can play a key role in reducing opportunistic behavior and improving performance of contracts, as they provide safeguards against opportunism that may arise in a contractual agreement between a buyer and supplier (Arranz & de Arroyabe, 2012; Liu, Luo, Liu, 2009; Caniëls, Gelderman, & Vermeulen, 2012; Jap & Ganesan, 2000). Hence, they play a major role in effective contract management. (Control) mechanisms can be defined as systems and procedures developed to enhance performance to attain the desired goals (Srivastava and Teo, 2012; Kirsch et al. 2002). Exercising this control can motivate suppliers to deliver the requirements of the buyer (Srivastava and Teo, 2012; Kirsch et al. 2002).
In literature a distinction has been made between two main types of governance mechanisms, relational and formal governance mechanisms (see table 1 on page 9 for an overview of literature that divides between relational and formal governance mechanisms) (Caniëls, Gelderman, & Vermeulen, 2012; Lee & Cavusgil, 2006; Poppo & Zenger, 2002; Wallenburg & Schäffler, 2014). While the aim of formal governance is to reduce opportunistic behavior by making promises and obligations explicit (Poppo & Zenger, 2002), the aim of relational mechanisms is to exchange information, share ideas and initiatives, resolve conflicts and problems through consultations and discussions and participate in decision making, to reduce unwanted actions and behavior of the supplier (Arranz & de Arroyabe, 2012; Liu, luo, liu, 2009). Relational governance relies more on the ongoing relationship and mutual trust for deciding in situations, rather than following the contract very closely (Srivastava and Teo, 2012). It is argued that relational governance can be useful in overcoming the adaptive limits of formal governance and can be complementary to formal governance in the face of unforeseen and conflict situations (Poppo & Zenger, 2002, Arranz & de Arroyabe, 2012). Nevertheless, the aim of both types of mechanisms is ultimately the same: governing the contractual agreement in order to avoid and overcome problems in achieving the anticipated outcome, thereby contributing to the effectiveness of contract management.
2.2.1 Relational Governance mechanisms
8 the essence of relational governance as relational governance mainly relies on social norms, the establishment of trust, and a shared understanding between parties (Srivastava and Teo, 2012). Relational governance is argued to work as follows: over time, the buyer and supplier try to build, test and substantiate the existence of a mutual relationship. This forming of a relationship and social bonds are argued to increase commitment which stimulates a cooperative relationship. The then established trust, relational norms and shared understanding are argued to be effective safeguards in controlling the contractual agreement, as both parties are less inclined to display unwanted behavior (Srivastava and Teo, 2012; Seabright, Levinthal, Fichman, 1992). Relational norms and trust are argued to be the main relational mechanisms (Arranz & de Arroyabe, 2012; Liu, Luo & Liu, 2009).
Relational norms are defined as the expectations of the parties involved that they will act in such a way that they will assist each other during the length of the relationship (Vandaele, Rangarajan, Gemmel, & Lievens, 2007, Joshi & Campbell, 2003). Examples of relational norms are: flexibility, solidarity, information exchange, mutuality and role integrity (Heide & John, 1992; Ness & Haugland, 2005; Caniëls et al, 2012). They in turn enforce the obligations and promises of the contractual agreement (Neumann, 2010; Poppo & Zenger, 2002).
2.2.2 Formal governance mechanisms: outcome based & behavior based
“Formal governance mechanisms are generally understood as formal (written and standardized) procedures and statements used by managers to monitor and influence the behavior and activities in an inter-organizational exchange” (Sánchez et al., 2013, p302). Contracts are central to most supply arrangements, as they foresee in a legally binding framework stipulating the rights, duties and responsibilities of both buyer and supplier (Zheng, Roehrich, Lewis, 2008; Srivastava and Teo, 2012). Contracts have multiple aims such as, bringing parties together, and providing legal evidence of the nature of the agreement and the specifications agreed upon (Carmén et al., 2011). Other formal control mechanisms, such as supplier performance measurement, are aimed towards monitoring the ongoing exchange (Poppo & Zenger, 2002). Formal governance mechanisms are either outcome or behavior based mechanisms.
9 e.g. asking the supplier to keep additional inventory (Neumann, 2010). By focusing on such outcomes, the customer can signal to the supplier what objectives it considers most vital (Celly & Frazier, 1996). This process of monitoring and controlling is an ongoing and dynamic process requiring sufficient capacity. In contrast to outcome based governance mechanisms, behavior based mechanisms are concerned with the processes, tasks, and activities that lead to the desired end results (Celly & Frazier, 1996; Van Weele, 2014). Behavior based mechanisms refer to the specification of methods, procedures and approaches for executing the tasks that are described beforehand (Srivastava and Teo, 2012). Thus behavior control is implemented through mechanisms that specify wanted behavior, or those that allow the controlling party to evaluate the behavior (Choudhury, Sabherwal, 2003). Behavioral based mechanisms are able to prevent problems by improving supplier performance. Finally, behavior based governance mechanisms were found to highly rely on the availability of sufficient contract management capacity (Celly & Frazier, 1996)
Hence, organizations employ governance mechanisms to ensure effective contract management as they help to ensure the agreed upon outcomes are met. It has to be considered though, that contract management is not static but is a process and evolves over time (Trent, 2007). This is also the case in employing governance mechanisms. Poppo and Zenger (2002) find for example that managers started using a higher level of social norms (relational governance) as their contracts became increasingly customized (formal governance). Hence, the required governance mechanisms and capacity for employing them changes during the processes of managing a contract. Thus contract management also depends on the right management capacity (Joaquin and Greitens, 2012). Furthermore organizations might be better positioned to avoid pitfalls and enhance the effectiveness of contract management by investing in contract management capacity (Brown and Potoski, 2003). Availability of contract management capacity is argued to help in monitoring performance and strong negotiating (Brown and Potoski, 2003).
This suggests that the need for contract management capacity changes and intensifies over time as the process of contract management progresses. It is, however, not known specifically how this need changes over time and what organization can do to make sure that they still will achieve the anticipated outcome.
Author(s) Year Aim Relational governance Formal / transactional (Behavior/Outcome) Arranz, N., De Arroyabe, F.
2012 Study effect of governance mechanisms on the performance of
exploration and exploitation joint research and development projects
10 Caniëls, M.C.J., Gelderman, C.j., Vermeulen, N.P.
2010 Study the interplay of contractual incentives, authority and
relational governance.
X X
(X/X) Contracts, refer to price
agreements and incentives (outcome) and
authority which refers to rules and procedures
(behavior) Celly, S.K.,
Frazier, G.L.
1996 Enhance the understanding of outcome-and behavior-based
coordination efforts of supplier personnel in relationships with distributors
X (X/X) Jap, S.D.,
Ganesan, S.
2000 Examine how a retailer might better manage the hold-up
potential of these transaction-specific investments through the use of three control mechanisms: supplier‟s TSI, relational norms, formal contract.
X X
Kumar, A., Heide, J., Wathne, K.
2011 Examine how a manufacturer‟s governance of an external
supplier relationship affects its performance toward a downstream retail customer.
X
Lee, Y., Cavusgil, S.T.
2006 Examine the effect of governance structure on alliance
performance.
X X
(Formal governance is referred to under the term
contractual governance) Li, J.J., Poppo,
L., Zhou, K.Z.
2009 Examine the impact of relational and contractual mechanisms
and examines their impact on foreign subsidiaries‟ acquisition of tacit and explicit knowledge from local suppliers
X X
Neumann, K. 2010 Explain how ex ante governance decisions in
interorganizational relations can be reasoned by deconstructing opportunism and considering their ex post impact on the development of trust and relational mechanisms
X X
(X/X)
Pilbeam, C., Alvarez, G., Wilson, H.
2012 Establish what is known regarding how supply network
governance leads to network outcomes, what mechanisms underlie this relationship and how context impacts it.
X (Relational referred to as informal governance) X Poppo, L., Zenger, T.
2002 Examine whether formal contracts and relational governance
function as complements X X Vandaele, D., Rangarajan, D., Gemmel, P., Lievens, A.
2007 Investigate the governance mechanisms in buyer-seller
exchanges, the relationship between these mechanisms and the corresponding impact of these governance mechanisms on the performance of the relationship
X X (referred to as contractual) Wallenburg, C.M., Schäffler, T.
2014 Examine how the nature of the interplay between different
forms governance is affected by answereing the question of whether formal control is legitimized, namely by the social contracts inherent to the alliance or not.
X X
(X/X)
Table 1: Overview of literature on governance mechanisms that adopt the distinction between relational and formal governance mechanisms. If (X/X) is noted then articles divide formal governance also in outcome and behavior based 2.3 Contract management capacity
11 are employment of skilled personnel (human resources), capital (financial resources), efficient procedures (structural or process resources), knowledge of technology, brand names, trade contracts, etc. (Wernerfelt, 1984). Several resources have been identified in literature to play a role within contract management. These are discussed in the following sections.
The first aspect is human resources, which is defined by Barney (1991), as training, experience, judgment, intelligence, relationships and insight of individual managers and workers in a firm. Wright, McMahan & McWilliams (1993) define human resources as: the pool of human capital under the firm‟s control in a direct employment relationship, where Wright, Dunford & Snell (2001), define human resources as the knowledge, skills, and abilities that the employees have. Since in literature no definition of human resources within contract management is given, the working definition in the thesis is as follows: the human capital under the firm‟s control in a direct employment relationship working in the area of procurement and contract management. Celly & Frazier (1996) found that insufficient availability of human resources has a negative influence on the employment of governance mechanisms. This in turn negatively influences the outcomes of contractual agreements, thereby jeopardizing the effectiveness of contract management. Celly & Frazier (1996), however, have not indicated which aspects of human resources are particularly needed for the employment of governance mechanisms. Joaquin & Greitens (2012) stress the importance of training and experience of staff in contract management, without, however, indicating training and experience in which aspects is most important.
The second aspect is the financial resources of an organization. Romzek & Johnston (2002), find that financial resources are critical to successful contract management. Financial resources affect the capacity of the organization to fund other resources such as staff and their training (Romzek & Johnston, 2002). Financial resources in this respect can thus be e.g. the money available for the hiring of the right human resources, the money available to be able to employ governance mechanisms, or the money available to buy information systems that play a role within contract management. Hence, financial resources can be defined as the capital available within a company for contract management. Financial resources are thus mainly considered important to contract management, as they can facilitate the availability of the other necessary resources (Romzek & Johnston, 2002).
12 indicates that a well-designed information infrastructure supports a company in managing contracts and furthermore it implicates that investing in infrastructural resources might lower the need for other resources. Next to that, it is argued that an automated contract management system can cut expenses, manage business risks and increase revenue (Laursen, 2002). An automated contract management system refers to network based platform‟s that make contract accessible to each person in an organization that needs the information (Laursen, 2002). Such a system could also generate automatic warnings when the amount spent during the contract, will exceed what is agreed upon, signaling the need for action of a contract manager.
The fourth aspect is structural or process resources. Clearness on the structure and processes within contract management is necessary, as quality and consistency tend to be compromised when no formal process map or definition is in place for the contract lifecycle (Bigos, 2008). Van Weele (2014) argues that how communication and information exchange is organized across parties is important to contract management. An effective structure creates more understanding and facilitates decision-making. Without clearness on structure misalignment in objectives between the stakeholders are likely to occur (van Weele 2014). Based on the former, structural resources can be a clear division of tasks, roles, responsibilities and processes regarding contract management.
Contract management capacity is on the basis of the former theory argued to consist out of human, financial, infrastructural, and structural/process resources. Hence, organizations need to have the right contract management capacity (human, financial, structural and infrastructural resources) to be able to employ governance mechanisms in the right way and ultimately manage a contract effectively. Celly & Frazier (1996) find that the success of governance mechanisms was negatively influenced by a lack of human resources, this in turn negatively influenced the outcomes of the contract. It remains however unclear, how contract management capacity influences the application of governance mechanisms and ultimately contractual outcomes. Furthermore relational and formal governance mechanisms attempt to prevent or overcome problems in a different way. This might implicate that the different mechanisms propose a different need for capacity as well. The building of trust for example may require another form of capacity than making obligations explicit and propose behavioral patterns.
13 influence, or through governance mechanisms, or through a combination of the both. Moreover within the different types of contract management capacity it is not yet described which key factors contribute and through which mechanisms they do so. This study aims to gain insights by studying how the process of contract management changes over time and how this is influenced by contract management capacity and governance mechanisms. As literature is still undeveloped on the topic at hand, this case study research is also aimed towards exploring if there are any additional variables within contract management that have not been addressed in literature yet, but do have the potential to influence the outcomes of a contract. The above discussed literature leads to the following conceptual model:
3. Methodology
3.1 Research design and setting
While there has been much research on governance mechanisms (Caniëls et al., 2012; Jap & Ganesan, 2000; Poppo & Zenger, 2002; Sánchez et al., 2013; Wallenburg & Schäffler, 2014), the area of contract management is rather ill defined. Given the exploratory approach and the aim of creating a better understanding and providing more in-depth insights into the role of contract management capacity, a multiple case study design was particularly suited for this research (Yin, 2009). Performing a multiple case-study provides the opportunity to gather rich data about the topic at hand and gain a more in-depth understanding of the interactions (Yin, 2009) between contract management capacity, governance mechanisms and ultimately contract management effectiveness and the underlying mechanisms.
The unit of analysis for this case study is a contract. Multiple contracts were selected based on whether the contractual outcomes were considered to be effective, somewhat effective or ineffective, combined with selection on what type of governance mechanisms
14 were used in managing the contracts. Selection was done on the basis of these variables as capacity is considered to have an influence on both outcomes and employment of governance mechanisms. Contracts were considered effective when all or almost all explicit goals were achieved while encountering relatively little to no problems during the process. They were considered somewhat effective when the goals were partly achieved with problems, and ineffective when goals were not achieved and significant problems arose. Selecting different cases based on the effectiveness of outcomes and use of governance mechanisms, allowed for comparisons and the studying of differences in underlying mechanisms between cases. In total three cases were selected, one where the outcomes were regarded as ineffective (case 1), one that was somewhat effective (case 2), and finally one that was effective (case 3). The replication logic (Yin, 2009) used was as follows: between the cases that differed in outcome effectiveness theoretical replication was used, thus differences were expected. An overview of the different cases and their characteristics can be seen in table 2 on page 16.
The research took place within the Nederlandse Gasunie, which is the company that is responsible for the transport of the Dutch natural gas and “green gas” within the Netherlands and the northern part of Germany. The Nederlandse Gasunie is an interesting research subject because of the large number of contracts and the actual problems they encounter. It procures mainly in a project-based fashion. Since projects have a fixed time period and outcomes of contracts were thus often already known, the contract management of the project could be well evaluated and could therefore lead to interesting insights on the research topic at hand. It thus allowed for retrospective cases as for research of current cases. Furthermore, researching contracts of different projects is interesting because of the fact that projects possess significant technical complexity, financial risks, complex decision making, and one of the biggest challenges within projects is overcoming opportunism (van Weele, 2014). Finally, as the company was very interested in the topic of contract management themselves, they were more than willing to cooperate and open to share the necessary information and data. The industry in which the Nederlandse Gasunie operates is particularly unique. Within the oil and gas industry the Nederlandse Gasunie has a monopolistic position. They are the only organization in the Netherlands providing the transport of gas to individuals and organizations across the country.
3.2 Data Collection
15 were complemented with the study of multiple archival sources such as: contracts, emails, and other documents regarding the contract management.
16 Table 2: Overview of cases and involved interviewees
Case 1 Case 2 Case 3
Interviewees (First number refers to case, second number refers to contract manager) Contract Manager 1.1 Contract Manager 1.2 Contract supervisor 1.1 Contract Manager 2.5 Contract manager 2.6 Contract Manager 3.3 Contract Manager 3.5 Contract Supervisor 3.2
Length of interviews Average 45 min. Average 45 min. Average 45 min.
Other sources of data used Formal contracts
Information systems with documents regarding the contracts and management
Formal contracts
Information systems with documents regarding the contracts and management
Formal contracts
Information systems with documents regarding the contracts and management Case selection - Ineffective in achieving
anticipated outcomes. - Only relational governance used (trust, relational norms)
- Somewhat effective in achieving anticipated outcomes.
- Limited use of relational governance (trust) and formal governance (service level agreements)
Effective in achieving anticipated outcomes. Combined with both formal (supplier
performance measurement system, KPI‟s, supplier improvement initiatives) and relational (trust, relational norms) governance used.
Financial Importance Low*
*Spending low in comparison with other contracts
Low Medium*
*Spending represents over half of the money spent on ICT
Strategic importance Medium*
*Not a contract with top priority but also not a contract that can be neglected.
Important
*Important in the day to day activities of Gasunie
Medium
Relationship already in place before signing contract Yes - Considered to be good Yes - Considered to be problematic Yes - Considered to be good
Power of supplier Equal
No significant power differences
High
Powerful position supplier.
Equal
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3.3 Data analysis
Data analysis was started simultaneous with the data collection, to benefit from insights as they emerged and to make sense of the data that was gathered (Tippmann, Scott, Mangematin, 2014; Miles and Huberman, 1994).
18 The interviews were transcribed using Inqscribe. The advantages of the software are that it was possible to assign interviewee names to a specific function of the keyboard, which made it easy to switch between people who were talking. A second advantage is that the software creates timestamps when, which increases transparency as it provides a clear overview of which person said what at what moment in time during the interview. The transcribed data was coded using the program “Atlas.ti”. This allowed managing the data analysis systematically and consistently. The coding was done manually, but the software allowed for re-coding and (re-)arranging the data as the analysis progressed.
First a within case analysis was conducted for each case separately and after that a cross-case analysis. Differences were expected between the cases as they differ in contract outcome.
4. Results
The results of the within case analysis are presented in table 3. The extensive case narratives are presented in appendix III. The next paragraph will present the main findings and patterns that were identified in the cross case analysis.
Case 1 Case 2 Case 3
Human resources
- Knowledge & experience present - Skills & competences present
- - - +/- + + Financial resources + + +
Infrastructural Resources perceived as helpful - - +
Structural resources
- Roles and responsibilities clearly defined - Escalation model clearly defined
- + + + + + Relational Governance Mechanisms
- Trust - Relational norms + + +/- - + + Formal Governance Mechanisms
- Outcome Based - Behavior Based - - +/- - + +
Meetings perceived useful - +/- +
Outcomes Ineffective Somewhat
effective
Effective
Table 3: overview of within case analysis
4.1 Appropriateness of contract management capacity
19 between the cases. Because human resources is highly integrated with the (use of) the other resources, it is discussed lastly to highlight the importance.
In all three cases financial resources are a non-limiting factor, meaning that financial resources are perceived to be available in abundance. The abundant availability is mainly the result of the Nederlandse Gasunies‟ unique and monopolistic position in the industry. Contract supervisor 2.2 argues “And that is a cultural thing. And it is largely driven by the fact that money never was a real issue here. It was always, well, we'll fix it". The perceived unlimited availability of financial resources has led to a culture where focus was no longer on the contractual agreements, but on the relationship. Contract managers rather solved any arising problems by paying extra, than confronting the supplier with non-compliance to the contract, as is illustrated by supervisor 2.2 “Gasunie has issues with having to confront suppliers, they find that difficult. Since money is not really a problem and he is only asking that much extra, well let's go for it''. This is also illustrated by contract manager 1.1 “So it was a give and take relationship in a way. But when I think of it right now, if you don’t get any complaints about the money then mmm”. On the other hand, contract supervisor 2.2 also says “Well if money is an issue, you should manage your contract”, indicating that abundance or inappropriateness leads to not managing a contract. Hence, appropriate availability of financial resources stimulates focus on contract management.
20 your whole team, so it is something Ad and I can see, but we can't share it. So we cannot put this in our document information system because everyone can see it then. So these are the difficulties that we have”. The disability to share the documents with the whole team, leads to not everybody having the same knowledge and understanding about the contract. This may lead to different interpretations by different team members of the contract, which hampers uniform contract management. A somewhat different picture evolves from case 3, where contract manager 3.5 perceives Ariba as a helpful administrative system: “If I exceed a certain spend and I fire more orders than the contract amount allows, every contract has an amount that I'm allowed to spend, then I get a warning. That's a form of contract management as well. It's a form of contract management I really want. Also because later I can go back to see and do some spent analysis. And I want spent analyses as well. That's the administrative side of the things”. Hence, infrastructural resources have the potential to enhance contract management provided the functionality is appropriate to the need of the contract managers.
21 good guys and we show Gasunies' teeth”. This has proven to be helpful as contract manager 2.3 argues that splitting the escalation has enabled the project leaders to maintain a good working relationship with the supplier. In case 1 the escalation structure also has proven to be helpful as contract supervisor 1.1 argues “that's because of my position within Gasunie […]if I'm getting involved then they know something is wrong. And only that one phone call sometimes helps. Because then the behavior of some people might change”. Provided that responsibilities are clearly described the organizational structure supports contract management and is considered appropriate. Also the escalation model employed is appropriate throughout all cases, because it supports day-to-day contract management and contributes to achieving the anticipated outcomes.
4.2 The interrelatedness of human resources throughout contract management
The data analysis has shown that appropriateness of capacity is of significant influence on the contract management process and outcomes. Furthermore, human resources within contract management is such an important factor that it cannot be discussed in terms of appropriateness alone. The following paragraph will discuss the importance of human resources more in-depth.
4.2.1 Influence of human resources on governance mechanisms
The first pattern that has been found is that human resources play a key role in the employment of formal governance mechanisms. In all cases difficulties in developing and employing a right set of key performance indicators (outcome-based governance mechanism) have been observed. This difficulty can be explained by looking at the human resources. Contract supervisor 1.1 “One of the missing things is the correct KPIs. Sometimes too much and sometimes not the correct ones because they didn't think enough about what will make the contract a success and what do you need for the KPIs”. Next to that supervisor 1.1 responds to the question “If you already have a relationship with the supplier where you would say I completely trust the supplier because he always performed really well, do you also then think it is still necessary to really define KPIs?” with the answer that KPI‟s are always necessary as otherwise employees will start to manage based on a feeling, where they need to steer on facts, “There will be feelings and not correct KPIs that are really necessary to manage the contract”. An explanation of the disability to develop a right set of KPI‟s can be found in the in-depth knowledge of the contract managers on the formal contract. The contract and
22 understood the real form of the contract and the scope and everything. And the internal client was as well still figuring out, he was involved though, but still it had to form. It was difficult for me, because I was not there when you talk about the vision and you talk about how to make and how to do it and then they hand it over to me and I had to form it”. Because contract manager 1.1 was not involved in the development of the contract, the understanding of the strategy, goals and spirit of the contract were not there. Then contract manager 1.1 argues that you can still employ a standard set of KPI‟s, however “If they (KPIs) don’t match with the drivers of your contract then can still with these KPI’s it can go wrong, because you’re not steering on the right drivers”. This is a problem which is organization wide as contract manager 1.1 answers to the question if steering was done on KPI‟s “for us, as
Gasunie it is really difficult to get the titles right”. The development of KPI‟s is problematical throughout the organization as can also be seen from cases 2 and 3. In case 2 only service level agreements are used to steer on. Both contract managers have no in-depth knowledge about the original intention or spirit of the contract as the contract was already established before they got involved. In case 3 contract manager 3.6 was involved in setting up the contract, which has made the contract easier to work with. However, although the knowledge of the contract was present, they still lacked the experience to develop the right set of KPIs. Contract manager 3.5 explained, “So and the KPIs we agreed on with the supplier, is this a correct set of KPIs to steer on, how we content about the contract? And to be honest, they have more experience to determine the KPIs than we have because they service a lot of customers. So they often help us to make the KPI’s”. The development of KPIs, in turn led to the development of another formal governance mechanism (behavior based), i.e. a supplier performance measurement system, by which the suppliers are graded based upon their
performance. Furthermore they (Gasunie and supplier) jointly analyze the results and look for better ways to deliver and to improve the suppliers‟ performance, in order to jointly create more value for both parties. Hence, not merely analyzing results, but considering the process by which they are achieved.
23 from steering only on the relationship, rather than on the contractual outcomes. Considering the contractual outcomes of the three cases, it is observed that not steering on formal
governance next to relational governance, leads to not achieving the anticipated outcomes (Case 1 and 2). While in case 3, where the lack of knowledge and experience on formal governance is bypassed by involving the supplier in the development of correct KPI‟s, the anticipated outcomes are achieved.
4.2.2 The importance of skills and competences
Another pattern that is observed in cases 1 and 2 contract managers are lacking skills and/or competences for effective communication. This led to contract management meetings being perceived as not helpful or constructive, whereas in case 3 the meetings were perceived to be constructive.
The importance of communicative skills and competences in contract management was illustrated by contract supervisor 2.2 in an additional meeting organized to clarify some aspects of the interview. The supervisor argues that contract management is done by people and how well they are able to manage a relationship with the supplier. This impacts the outcome. Whereas contract supervisor 2.2 also argues that an important part of this relationship is managing the contractual agreements. In the original interview contract supervisor 2.2 argued, when asked which capacity was missing, “Skills, competences and time”. It remained however unclear what skills and competences were missing and how this influenced contract management. In the additional meeting contract supervisor 2.2 explains being able to manage a contract depends on the following (communication) skills: firstly, being able to listen. By being able to actively listen and being empathetic, arising problems and their origin can be detected on time and the need of the internal customer can be better understood. The second skill is the ability to address during a meeting the own important points and the ability to explain them clearly. This will provide clarity for all parties involved during the meeting. The third skill is to maintain a good atmosphere with the supplier, while on the same time you are negotiating. This can be achieved by knowing what the key points for both parties are and being agile enough to move around and not hold on to your own points too strong. A fine example of lack of these skills can be found in case 2, where the problems could not be solved during regular meetings. Escalation not only to the next
24 This is also shown in other cases. In case 1 contract supervisor 1.1 argues “I hope and I am almost sure, that the future will prove, that Contract Manager 1.2 is more capable to have proper discussions with the internal clients to get good things on the table”. When asked why the supervisor thought contract manager 1.2 would be more capable than contract manager 1.1, supervisor 1.1 argues “He has some capabilities and skills that I think will help in a situation like this […]It's the way how contract manager 1.2 goes into discussions, how manager 1.2 handles problems. That's important”. That the manager possesses these skills is argued to be a result of having more experience in handling contracts, not only from the clients‟ side, but also from the suppliers‟ side. Both contract manager 1.1 and 1.2 argue that they feel that the meetings that are held with the internal customer and the supplier are not helpful, mainly because the internal customer is lacking the required knowledge. This lack of knowledge, argued by contract manager 1.2, leads to Gasunie not being able to challenge the supplier enough during the meetings to perform as is required in the contract.
An illustration of how an open and proactive communication may prevent issues from escalation can be seen in case 3. In the contract a clause is incorporated that Gasunie may take over personnel from the supplier, but it was intended for incidental cases. Then the ICT-department grew and Gasunie took over ten people of the supplier, which would have caused problems but because contract manager 3.5 was able to listen and feel that this was a sensitive issue on the other side, the contract manager argues “So then I took the initiative to start to talk to the supplier 'Okay now we have a situation where we both are not happy' in a sense that we're not sticking to the spirit of the contract. On paper it was okay but still there's a spirit behind the contract how we want it done. We never had the intention to take on 10 people. And on paper they couldn't complain. Actually they didn’t. Other than when I started this talk that account manager told me 'okay now you're hiring from us and you tell us all the time to give you our best people, I won't do that anymore'. Understandable. We actually punished that good behavior by taking over those people. That didn't feel right either. So and that was for me the major issue that gave a lot of work in CM”. So, the skills of the contract manager prevented problems from occurring and by that maintaining the required quality standard. Hence, the lack of the right skills and competences in cases 1 and 2 led to poor outcomes, whereas their presence in case 3, prevented problems from occurring while at the same time securing the contract outcomes.
25 The limited amount of literature on contract management capacity suggests that successful contract management is dependent on sufficient capacity. This would lead organizations to be better positioned in avoiding problems and pitfalls within contract management (Brown and Potoski, 2003; Joaquin and Greitens (2012). The definition of Madden et al (2014 and Aldrich & Ruef (2006) of organizational capacity refers to the resources, knowledge and processes used by the organization to achieve its goals and satisfy shareholder expectations. The former literature suggests that availability and use of capacity are necessary for successful contract management. The main findings, however, have shown that not mere availability and use determine success or failure, but that the resources should be appropriate for the organization and its users.
Within Gasunie financial resources never have been a critical or scarce. According to Romzek & Johnston (2002) financial resources are critical to successful contract management as they facilitate other necessary resources such as staff and their training. The findings, however, demonstrate that the abundant availability of financial resources for contract management, caused negative effects on contract outcomes. The sheer unlimited availability of financial resources has caused a shift in focus from managing the contractual agreements, to managing the relationship. This finding forms an addition to the research of Romzek & Johnston (2002).
A proper functioning contract management system contributes to the oversight of contracts and supports the department which is concerned with the compliance of the contract (Centafont, 2014; Boulay, 2011). Findings indicate that within Gasunie the infrastructural resources used for contract management are inappropriate to the need of the users. The information in the systems is not available to all persons who need to have the information (case 2) and the system allows internal customers to get around the agreement in place (case 1). Hence, the findings are in line with the research of Centafont (2014) and Boulay (2011). The advantages of an automated contract management system as described by Laursen (2002) i.e. cut expenses, manage business risks and increase revenue, are not realized within Gasunie as the contract management system is only considered helpful for the administrative side of contract management.
26 where they were clearly defined. Within Gasunie a clear escalation structure is present which has proven to be effective across all cases.
Findings indicate that human resources is the key capacity factor in contract management. Human resources constitute knowledge, experience, skills, competences, training and intelligence as defined by Barney (1991). Due to a lack of literature on human resources within contract management it was unknown in which way which factors influenced the employment of governance mechanisms and ultimately the contract outcomes. This case explorative case study provides some insights into which aspects of human resources are of importance. These are skills and competences on the one hand, and knowledge and experience on the other hand. Both are discussed in more detail below.
Communicative skills and competences are essential assets for contract managers. Contract managers have to be able to make the internal customers‟ needs explicit, have to listen in an active manner and must have the ability to move their standpoint according to developments and possibilities. In case 1, a switch was made form one contract manager to the other, due to a lack of competences perceived in contract manager 1.1. This is contrasted highly by case 3, where the contract manager communicates proactively and does prevent problems from occurring, thereby realizing the contractual outcomes.
27 changes over time (Trent, 2007), it is inevitable that personnel changes occur. It should be safeguarded that the “required knowledge” is transferred in a formal and complete way.
Poppo & Zenger (2002) were the first to argue that formal and relational governance mechanisms serve as complements rather than substitutes. The added value of the
combination of relational, formal outcome based (KPI‟s) and behavior based governance mechanisms is clearly shown in case 3. Where the employment of relational governance (established trust and relational norms) was complemented with outcome based (KPI‟s) as well as behavior based (supplier improvement initiatives) governance mechanisms, which led to achieving the anticipated outcome. This contrasted case 1 strongly, where the focus was solely on relational governance. Steering on relational governance alone, leads to not steering on the contractual agreements which is disastrous in achieving the anticipated outcomes. The complementary view of Poppo & Zenger (2002) is thus confirmed, but the stress that it puts on capacity i.e. human resources with the right knowledge and experience should be
considered.
6. Conclusion, implications, limitations & future research suggestions 6.1 Conclusion
28 finally the other types of resources i.e. financial, infrastrucutral and structural should be appropriate for the contracts and contract management. Opposing to human resources, these types of capacity mainly have a facilitating role in the process. When the needed functionality is present in the infrastructural resources, it can assist in the administrative side to contract management e.g. performing spent analysis and providing spent warnings, and assist contract management by providing a platform for formal governance mechanisms. Financial resources should be appropriate so they can facilitate needed resources, as shown, an abundance leads to a shift in focus away from managing contractual agreements and outcomes. Structural resources contribute to effective contract management by providing clearness on roles and responsibilities. Clear responsibilities e.g. financial responsibility enables the contract manager to develop a vision and take the needed decisions. Clearness on roles, has shown to contribute by providing an escalation structure for examples, which has proven useful in overcoming problems. Based on the findings and conclusions the following propositions are established:
P1. Capacity should be available and appropriate to the contract management need in order to achieve the anticipated outcomes.
P2. Human Resources are the key success factor in doing effective contract management. P3. Skills and competences have a strong influence on the communication within contract management, which in turn influences the contract outcomes.
P4. In-depth knowledge of the contract and experience of contract managers are necessary to be able to successfully develop and employ formal governance mechanisms in order to achieve the anticipated contractual outcomes.
6.2 Implications for theory and practice
29 potential to better position companies against risks of contractual agreements, this research provided specific insights into how contract management capacity relates to contractual outcomes.
Practically, this research contributes to the knowledge on the different aspects of contract management capacity. The research has provided insights into the relative importance of different aspects of capacity. Therefore it might enable contract managers to make better decisions on capacity investments and on the allocation of capacity. Furthermore, since it has been demonstrated that some aspects of human resources seem to be critical succes factors, e.g. skills and competences, the research may have implications for the selection of personnel involved in contract management. Furthermore by considering contract management capacity and the influence on governance mechanisms, contract managers may be able to lower the risk involved in contract management.
6.3 Limitations
This research has the following limitations; firstly, the focus has been on the internal perspective of contract management capacity, therefore considering the internal supply chain. There is, however, the possibility that contract management capacity on the supplier side also has an influence on the success of achieving the anticipated outcomes of a contract. Considering the full supply chain can contribute to a more complete overview of the influence of contract management capacity. Researching the capacity from the supplier side was not feasible for this research and forms a limitation to this study. Secondly, due to time constraints, only three cases have been researched. This limited amount of cases leads to limited generalizability of results. Finally, as the study performed is qualitative in its research method and the data analysis is done by a single researcher, the measurement of the different constructs may be influenced. Method bias may lead to misinterpreted conclusions (Burton-Jones, 2009).
6.4 Further research suggestions
31
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36
Appendix I: Interview protocol contract managers / supervisors
A. Were you involved in making this contract (e.g. negotiating, setting the terms and conditions)?
- If you were not involved, how and when was the contract handed over to you?
- Was there already a relationship in place with the supplier, before this contract started? - If a relationship was in place, for how long? And was this regarded to be a good
relationship?
- Would you say that this relationship influenced the way contract management was done? - If yes, how did this influence contract management for this contract?
B. Where there issues in this contract? If so, can you describe the main issues in detail? - What did you do to overcome these problems?
- Did these issues influence the outcome of the contract?
- Do you feel that you were provided with everything that was needed to overcome these problems?
- If there were little to no issues, why do you think there were so little problems?
C. What went really well in managing this contract? Can you describe an example in detail? - What was in your opinion the main reason that this went so well?
D. If you are looking back at the management of the contract, do you feel that there were enough resources to manage the contract successfully?
- Can you give specific examples of resources you think are important in managing a contract?
-Were these resources needed to overcome the issues or problems that this contract had? - How do you feel that capacity influences the overall outcomes of the contract?
E. Can you describe in detail how the contract and the management of the contract has changed over time?
- What has changed?
- What was important in managing these changes?
37 F. Looking back at the process of managing the contract, are there things that you would
have done differently?
38
Appendix II: Excerpt coding tree
O ver al l t he m e: gov er n anc e m ec h ani sm s Second order categories: usage of governance mechanisms
First-order codes: representative data
Use of formal contract in contract management
“I hope I never have to look at it” [Do you often look at the contract?] (Contract Supervisor 1.1)
“If there is a problem, yes I have to read it, normally not the whole contract” (Contract Supervisor 1.1)
“I was involved in the making of the contract. So for the last years, all the issues that arouse, we tried to write it down in the contract. So it is nice to work with the contract now. There are also new issues again, of course you cannot write all the small things down. It is not like I read the contract every few weeks‟‟ (Contract manager 3.6)
“If things are going well then I would like to forget about the contract management. Normally a contract you have it in your file cabinet and you don‟t need it, but at the moment when you do have a problem, then you take it out and read what was agreed upon and then you need it. But in good periods you don‟t need it and forget it” (Contract manager 2.3)
“We put the contract away and I am dealing with you. Well we also made agreements here, in this contract. And we forget them. Funny enough the suppliers don‟t forget them. So we are always put on a disadvantage, because they are much more professional in that respect than we are” (Contract Supervisor 2.2)
Usage of other formal governance mechanisms both outcome and behavior based mechanisms
“We have even set up a small system called SPM, supplier performance measurement, through SPM we measure them every quarter and we talk with them about it every quarter” (Contract Manager 3.5)
“Yes we do supplier improvement, I mentioned SPM” (Contract manager 3.5)
We made our KPI‟s to see how we do service performance management. And the KPI‟s we agreed on with the supplier, if it was the correct set, and to be honest, they have more experience to determine the KPI‟s than we do, because the serve a lot of customers. So they often help us” (Contract Manager 3.5)
“Well, we have very detailed SLA‟s, service level agreements, and the SLA explicitly tells what the expected response times are” (Contract manager 2.5)
[How would you normally govern a relationship with your supplier, what kind of methods do you use?] “difficult question I must say, that I can‟t answer it, says a lot already I think. And now I am thinking of what I can say, but that says all I think” (Contract manager 1.2) Focus contract
manager/supervisor on relational governance
“I am not really a person that really follows the exact letter or papers that are involved” (Contract manager 1.1)
“I am more in the relationships, that is what I like and that is where I focus on” (Contract manager 1.1)
