Using a project-relation portfolio to distinguish
between preferred customers in projects
A case study on preferred customers in project-based firms
Master Thesis Supply Chain Management
Faculty of economics and business, Rijksuniversiteit Groningen June 24, 2019
Abstract
This research aims to clarify the gap in the literature on how preferred customer status is influenced by project-based work. Relationships in project-based firms are different than in continuous relationships due to: discontinuity of work, tender procedures and complexity of work. In order to research this, a case study was done in the infrastructure industry. Results showed that project complexity and project recurrence determine how project-based work influence preferred customer status. This research proposes a framework based on project complexity and project recurrence, to distinguish four project relation types. Each project relation type has different antecedents of customer attractiveness and supplier satisfaction. New general antecedents of customer attractiveness and supplier satisfaction were found which are specific to project-based organizations. These two findings contribute to literature regarding preferred customers and is applicable in practice for reverse marketing purposes or to help suppliers distinguishing who their preferred customer is.
Acknowledgements
1 Introduction
The construction and infrastructure industries are experiencing a period of economic prosperity, resulting in peak order levels. Annually, the Dutch government spends €9.5 billion on infrastructure projects (Ministerie-van-Financiën, 2019). The large number of such projects has created a shortage of infrastructure staff (“Bouwsector blijft groeien ondanks tekort aan personeel,” 2019). In turn, this has led to competition between project customers for suppliers’ resources, and specifically their human resources. A key advantage for companies in the competition for suppliers’ resources is preferred customer status (Pulles, Veldman, & Schiele, 2016). This status allows customers to obtain better resources from a supplier than other buying firms who are competing for the same resources (Pulles, Schiele, Veldman, & Hüttinger, 2016; Schiele, Calvi, & Gibbert, 2012; Steinle & Schiele, 2008). Infrastructure customers may be dependent on the specific capabilities and resources of a supplier for the completion of their projects (Cole, 2016). Therefore, it makes sense for infrastructure customers to desire a preferred customer status at their suppliers, to ensure that their suppliers prioritize their projects in a scarcity market.
project-based setting. The literature lacks information on how the phenomena of attractiveness, satisfaction and preferred customers work in a project-based setting.
This study contributes by building on the preferred customer framework of Schiele et al., (2012) and Pulles et al., (2016) in a project-based setting. The research question that will be answered is: How do the mechanisms of customer attractiveness, supplier satisfaction and preferred
customers work in a project-based infrastructure setting? In order to investigate these
2 Background
2.1 Preferred customers
Preferred customer status is well described in the literature for continuous buyer–supplier relationships. Preferred customer status takes the viewpoint of reverse marketing (Blenkhorn & Banting, 1991), where customers try to market themselves to suppliers (Vos, Schiele, & Hüttinger, 2016). A preferred customer is a buying firm which receives preferential resource allocation because it is attractive and satisfies the supplier more than other buying firms do (Schiele et al., 2012; Steinle & Schiele, 2008). The benefits of having preferred customer status are allocation of the best employees, sharing of the best and latest ideas, the attainment of more financial resources, first allocation of resources if a bottleneck occurs, and better access to resources and capabilities (Pulles, Schiele, et al., 2016; Schiele et al., 2012; Steinle & Schiele, 2008). Preferred customer status is beneficial if a buying firm wants to attain a better resource position than its competitors at its suppliers. Such a position is useful for a buying firm if there is competition for scarce resources (Nollet, Rebolledo, & Popel, 2012).
Preferred customer status has its origins in social exchange theory, which was developed by Thibaut & Kelley (1959) and Blau (1964). Social exchange theory argues that relationships have an expectation level, comparison level and an alternative comparison level. Relationships are initiated based on the expectation level of a relation. When a relationship is built, relational exchanges are made. These exchanges are compared to the comparison level. If the expectations of a relationship are met or exceeded, then a relationship is satisfactory (Pulles, Schiele, et al., 2016). The expectation level of a customer translated into customer attractiveness and the satisfaction level translated into supplier satisfaction (Schiele et al., 2012). Pulles et al. (2016) found in its research that supplier satisfaction is more important than customer attractiveness in obtaining preferred customer status.
2.1.1 Customer Attractiveness
potential, intimacy, relational fit, profitability and economic factors, risk factors, technological factors, dependence and trust (Aminoff & Tanskanen, 2013; Hüttinger et al., 2012; La Rocca, Caruana, & Snehota, 2012; Pulles, Schiele, et al., 2016).
2.1.2 Supplier satisfaction
Supplier satisfaction is the most important driver of the attainment of preferred customer status (Pulles, Schiele, et al., 2016). Supplier satisfaction is an outcome of relational behavior, and it is achieved when the expectations regarding a customer’s relational behavior are met or exceeded (Schiele et al., 2012). From a social exchange theory perspective, customers should meet or exceed expectations and perform better than a comparison level. The antecedents of supplier satisfaction are profitability, continuous income, relational behavior, reliability, operational excellence, trust, growth opportunities and innovation potential (Pulles, Schiele, et al., 2016; Vos et al., 2016).
2.2 Project-based work
Projects are temporary organizations that execute work for a customer (Dubois & Gadde, 2000). The project format is often used in construction, films and infrastructure (Ahola, Kujala, Laaksonen, & Aaltonen, 2013). Project-based work is often complex and unique. Therefore, customers rely on their suppliers’ expertise and capabilities for the successful completion of their projects (Martinsuo & Ahola, 2010). Dubois and Gadde (2000) argued that the formation of long-term relations within the permanent network is important for project performance. However, due to the characteristics and behaviors common in project-based work, it is difficult to build long-term relations (Razmdoost & Mills, 2016). The most important characteristics that can influence the antecedents of customer attractiveness and supplier satisfaction are:
- Discontinuity of work (Dubois & Gadde, 2000; Martinsuo & Ahola, 2010) - Singularity of projects (Cole, 2016)
- Subcontracting of work (Ahola et al., 2013; Hofman et al., 2009) - Tender procedures (Bemelmans et al., 2015; Dubois & Gadde, 2000) 2.2.1 Discontinuity of work
the supplier for several years (Martinsuo & Ahola, 2010). This uncertainty makes it difficult to build trust and commitment in a project buyer–supplier relationship (Martinsuo & Ahola, 2010).
2.2.2 Project singularity and complexity
Singularity is the degree to which a project is unique or generic (Cole, 2016). Complexity plays a central role in the singularity of a project: complex projects are often more singular. Project complexity is determined by two factors: organizational complexity and technological complexity (Baccarini, 1996). Organizational complexity refers to the vertical differentiation, horizontal differentiation and interdependencies within a project (Baccarini, 1996). Vertical differentiation is related to the number of hierarchical layers in a project (Baccarini, 1996). Horizontal differentiation is related to the number of different departments involved in a project (Baccarini, 1996). Organizational interdependence is the degree to which operational elements are interdependent (Baccarini, 1996). Technical complexity is defined in terms of the number and diversity in and/or outputs, the number of separate and different actions required to produce a project, and the number of specifically educated employees involved in a project (Baccarini, 1996).
Singular and complex projects are characterized by large numbers of technical experts and highly particular specifications that may even change during the project (Cole, 2016). Examples of highly singular projects are shipbuilding, the design of military aircraft and large-scale construction (Cole, 2016, p. 676). Projects that are generic are often recurring projects in which buyers and suppliers tend to adopt the same roles (Cole, 2016). Such projects are often seen in advertising agencies, in which suppliers repeatedly perform similar tasks for the same customer (Cole, 2016, p. 676).
2.2.3 Subcontracting
In construction and infrastructure projects, it is common for prime contractors to subcontract parts of the project to subcontractors (Hofman et al., 2009). A customer is therefore reliant on the prime contractor’s network for successful completion of the work (Hofman et al., 2009). It can occur that subcontractors are simultaneously competing and collaborating within a project (Dubois & Gadde, 2000). In the literature, this practice is called “coopetition” (Padula & Dagnino, 2007). Coopetition makes building relations between buyers and suppliers more complicated than in the case of regular relations.
2.2.4 Tender procedures
3 Methodology
3.1 Research design
This study aims to investigate and build on the theoretical framework of preferred customers in a project-based setting. The literature comprehensively describes what a preferred customer is and how this status can be obtained in normal buyer–supplier relations. However, the characteristics of projects create a different kind of buyer–supplier relation, whose influence on preferred customer status is not yet clear. Therefore, this study is predominantly explanatory and partly exploratory (Eisenhardt, 1989). To understand how the phenomena of customer attractiveness and supplier satisfaction lead to preferred customer status in a project-based setting, a qualitative study was conducted with suppliers in project-based setting. Qualitative research makes it possible to understand phenomena that need to be further explained or explored. In qualitative research, it is possible to ask additional questions if a phenomenon is not entirely clear. It was decided to focus more on supplier side in this study because it is suppliers’ perceptions of customer attractiveness and feelings of satisfaction that may lead them to award preferred customer status. The customer side is also researched, because customers receive the status and can report on the benefits. Also, they can elaborate on reverse marketing practices in projects. Therefore, multiple buyer–supplier relations have to be compared to determine how these mechanisms work. In order to yield valid data, a multiple case study design was selected (Yin, 2003). The unit of analysis in this study is ‘project-based buyer–supplier relationships’.
3.2 Research context and case selection
In order to investigate preferred customer status in project-based organizations, suitable cases are needed. The infrastructure and construction industries are characterized by project-based work and are therefore highly suitable for studies of project organizations (Bemelmans et al., 2015; Dubois & Gadde, 2000). A necessary condition for a study of preferred customer status is that the selected cases exhibit competition for suppliers’ resources (Pulles, Schiele, et al., 2016). At the time of writing, there is competition for suppliers’ resources in building and infrastructure companies (“Bouwsector blijft groeien ondanks tekort aan personeel,” 2019). These two conditions make the infrastructure industry a suitable research environment for the present study.
or government-owned companies are municipalities, provincial governments, electricity-, water-, and gas grid operators, and other government companies that report to the ministry of infrastructure. Some infrastructure customers, such as telecom organizations, can also be private. For the purposes of the present study, the respondents in the buying organization should be able to select suppliers or be closely involved in managing suppliers. Suitable roles for respondents in such buying (government) organizations include director, project purchaser and chief procurement officer.
Infrastructure suppliers can be found in construction, digging and engineering companies. Examples of such companies are roadbuilders, dike builders, rail builders, pipe and cable digging companies, technical installers, offshore builders and construction designers. For the purposes of the present study, the respondents in the supplying organizations should be able to award preferred customer status or manage customer relations. In infrastructure companies, these could be directors, product managers or sales representatives. In this study, 12 respondents from eight companies were interviewed. An overview of the respondents is provided in Table 3.1 below.
Case Respondent Type of organization Respondent’s role Buy/
Sup Staff size Turnover in million euros 1 1 Cable and pipe
infrastructure Strategy consultant Sup 230 50 2 2 Technical installer Regional director Sup 3,000 550 3 3 Rail infrastructure
builder Product market manager Sup 3,500 880 4 4 Cable and pipe
infrastructure
Interim manager of infrastructure suppliers
Sup Various Various 3 5 Rail infrastructure
builder Product market manager Sup 3,500 880 5 6 Municipality of the
Hague Project director Buy Various 670 3 7 Rail infrastructure
builder Project leader Sup 3,500 880 6 8 Network operator Chief purchasing
officer Buy 4,500 1,445 7 9 High-voltage grid
operator Head of a purchasing division Buy 3,400 4,176 3 10 Rail infrastructure
builder Chairman of the board Sup 3,500 880 8 11 Engineering company Director Sup 25 unknown 8 12 Engineering company Sales manager Sup 25 unknown
3.3 Data collection
Data were collected through semi-structured interviews. Semi-structured interviews, which use standardized questions, have the benefit of ensuring similar results, but they are also flexible enough to disclose underlying mechanisms (Blumberg, Cooper, & Schindler, 2011). Two interview guides were developed: one for buying firm members and one for supplying firm members. The two interview guides can be found in appendix 2 and 3. Prior to each interview, the interviewee received information about the interview. This information consisted of a summary of the study, its aim and the interview procedure, and can be found in appendix 1. Before the interview, the interviewees were asked to think about preferred customer scenarios. During the interviews, the respondents were asked whether they agreed for the interview to be recorded. Recordings were made to ensure the reliability of the interviews. The interviews were later transcribed from the recordings to serve as a basis for coding. The transcripts were sent to the interviewees so they could check whether the data were correct. This ensured the reliability of the data. The transcripts were added to or adapted at the respondents’ requests.
3.4 Data analysis
In order to analyze and interpret the data, the transcripts were coded using the three steps described in Corbin and Strauss (1990). First, the data were coded using an open coding procedure, in which individual observations, sentences, ideas and events were assigned names (Corbin & Strauss, 1990). The following step was axial coding. In this step, the data were put together in a new way and categories were linked (Corbin & Strauss, 1990). The final step was selective coding, in which core categories were linked to one another (Corbin & Strauss, 1990). After the selective coding process, the individual codes were sent to the respondents to be checked for correctness in order to eliminate possible biases of the researcher.
4 Results
4.1 Benefits
The within-case analysis shows various benefits that preferred customers could receive, similar to continuous relations. Most respondents in this research reported various benefits of this status. Of the 12 respondents, three respondents have a customer role and eight have a supplying role. Benefits reported by customers are shown in Table 4.1.
Respondent Benefits received by customers from a preferred-customer status 6 The best employees from a supplier are sent our project.
8 Suppliers create win-win situations and seek collaboration when a problem occurs. 9 Suppliers adapt to changing wishes of the customer and are more willing to do
relation-specific investments. Table 4.1
Suppliers have reported that they provide various benefits to their preferred customers. These benefits are shown in Table 4.2. The cross-case analysis shows that customers who received benefits from suppliers are in line with benefits that suppliers provide. This implies that such benefits are likely.
Respondent Benefits that suppliers give, based on a preferred customer status 1 The customer receives better agreements and deals.
2 We do relational investments for our preferred customers.
4 The best employees sent to the project of our preferred customer.
5 Receiving higher quality than regular customers and get first service if a bottleneck occurs.
7 Thinking along with the customers’ interests while working (doing a necessary job when you are on the project, for which there was no
agreement, but which prevents other hold-ups, to create a win-win situation) 10 Better employees are sent to our preferred customer, which create more
efficiency for the customer.
11,12 We share more information with this customer in a more efficient way, and we try to mutually improve our operations.
Table 4.2
4.2 Aspects that influence preferred customers in projects
perspective that a customer could provide a supplier. In this research, a future perspective of new projects from a customer is referred to as project recurrence.
After this comparison, a new within-case analysis was performed to create case descriptions. Cases were categorized in terms of complexity and project recurrence based on this analysis. The case descriptions and categorization can be found in Appendix 4. Respondents were asked to confirm the correctness of the case descriptions. Based on this categorization, cases were plotted in a matrix (Figure 4.1).
This matrix shows project complexity on the vertical axis and project recurrence on the horizontal axis, creating four quadrants: single complexity projects, recurring low-complexity projects, single high-low-complexity projects and recurring high-low-complexity projects.
Figure 4.1
4.2.1 Single low-complexity projects
No cases were found with single low-complexity projects. However, two respondents provided examples of single low-complexity projects. These examples were found in Case 5 (tunnel project municipality of the Hague) and Case 3 (railway builder). Low-complexity work is work requiring a medium amount of to no engineering and less-educated employees. The relation is always finite, because it is unlikely that the customer will return with a new project for that supplier. An example of a single low-complexity project is quoted here: “For example, I need
a tile path for my tunnel, of 50 m long and 4 m wide with tiles of 30cm by 30cm, 4 cm thick, in color RAL7001. As long as it is that I’m fine with all possible outcomes” (Respondent 6).
Simple singular projects cost little engineering effort, which is attractive because scarce resources such as engineers are not required, lowering costs. Reduced costs imply that suppliers can increase margins. Furthermore, such projects are attractive if associated with flexible planning. Given free planning, suppliers can optimize their workforce and machine utilization. Therefore, suppliers are satisfied with a simple singular project to fill gaps between other projects, maximizing utilization of employees and machinery.
Respondent 7 said the following: “Our cables and pipes division sometimes works for the
engineering office. When they want to design a tender project, they want to know what is in the ground. We dig for them sample ditches/groves, so they know where the cables are located underground. Such information is necessary for them, so they can describe a project in a good way. These are easy projects, with little expectations, and are very useful to optimize the capacity of my workforce.”
4.2.2 Recurring low-complexity projects
Low-complexity projects on a recurring basis can be found in Cases 1 (underground infrastructure), 4 (underground infrastructure), 6 (network operator) and 8 (engineering consultant). Typical examples of recurring low-complexity work are seen in Cases 1 and 4 in the underground infrastructure. Underground infrastructure companies are contractors that bury and connect electrical cables, water pipes and gas pipes. The work consists predominantly of digging, using machinery or manual labor. Such work is therefore relatively low in terms of complexity, supplying companies with work on a recurring basis with the same or similar customers. Cases 1 and 4 even have framework agreements with gas, water and electricity network operators. Case 6, who is such an operator, also confirmed that they work on a continuous basis with such suppliers in framework agreements, highlighting that projects are offered to suppliers on a recurring basis.
The reason for this is that suppliers have high fixed costs, which must be covered. Therefore, it is highly attractive if a customer can predict when new projects will arise and the workload these projects will entail. Such information allows a supplier to optimize its work schedule. Respondent 1 said the following: “There is an instant preference for a customer who thinks
along with the supplier. If there is a capacity problem, customers will automatically blame a supplier. But I as a supplier cannot predict when the projects come on the market. If a customer predicts work, a contractor can adapt its capacity to the new project.”
4.2.3 Single high-complexity projects
Single high-complexity projects can be seen in Cases 2 (technical installer) and 5 (municipality of The Hague). These projects are often one-off, unique and complex. Customers in such projects will likely only carry out such a complex project once or twice, implying that suppliers cannot count on future projects from these customers. A typical project is the Rotterdamsebaan in the Hague. The Rotterdamsebaan is a connection tunnel connecting a business area with the inner city. The project is regarded as a true one-off and highly complex project. The municipality of the Hague will most likely not need another complex tunnel project in the foreseeable future.
Due to this complexity and singularity, a project customer of this type does not have a good or bad reputation. Therefore, it is attractive if project customers hire reputable people in high-level functions, including project leaders. These reputable people can endow a project with a better reputation before the project starts, making it more attractive for suppliers. The complexity also implies that the project customer is dependent on the supplier for project designs. Designing these projects is time- and money-intensive for suppliers, with the risk of losing money when losing the tender procedure. Suppliers are satisfied if tender costs are covered by the customer, reducing the risk of losing millions of euros due to tender costs.
In the infrastructure business, it is important to have portfolio references, because suppliers must show to potential customers that they are competent in executing complex projects. This means if the supplier successfully finishes a project, it could add value to their portfolio. With the right portfolio, suppliers could win new projects. An innovative portfolio could entail becoming an expert in the field and receiving spin-off projects. Therefore, such highly complex and innovative projects satisfy a supplier if the project can be used as a reference project. Respondent 6 said the following regarding portfolio references: “Look at the Noord-Zuid metro
4.2.4 Recurring high-complexity projects
Examples of recurring high-complexity projects can be found in Cases 3 (railway builder) and 7 (high-voltage electricity network operator). This work can be described as highly complex and requiring engineers with university degrees to design projects. Customers and suppliers in such projects are often highly intertwined and mutually dependent. The customer of Case 7 reported that they only have a few suppliers who can execute their work. Furthermore, Case 3 is dependent on its single large customer, which is responsible for 80% of its turnover. Suppliers are barely able to execute other projects for different kinds of infrastructure, due to asset specificity and specifically trained employees. A typical project is the building of a new railway or a new high-voltage network.
Respondent 10 quoted the following on dependencies: “We have a problem as a contractor;
we have machines and people who are very specific to rail work. We cannot build roads or make concrete structures”
Due to high fixed costs, suppliers find it highly attractive if customers can predict work over a longer period. With such information, suppliers can adapt their organization based on upcoming projects in terms of upscaling or downscaling of staff and machines. This allows the organization to optimize planning and keep employee and machine utilization high. High utilization rates could lead to more profits for the organization, increasing satisfaction.
Technical complexity of the projects is high; therefore, suppliers often design the projects in the Netherlands. Due to many complex technical specifications, suppliers believe it is unattractive to be selected solely based on lowest price. The EMVI selection criteria (‘Economisch Meest Voordelige Inschrijving’ a Dutch variant of best-value procurement) is generally considered more favorable. Using such selection criteria, suppliers can be awarded for aspects such as good safety performance, shorter lead-time, innovations and reduced hindrance to the surroundings of the project.
“Preferably I would like to play a different game than a lowest price tender. I prefer ‘EMVI’ contracts (economic most valuable). In those contracts, you will not only be selected because of your lowest price, but also on things like planning, craftsmanship and machine
4.2.5 General antecedents to customer attractiveness and supplier satisfaction
Although there are differences among the various project types, there are also similarities that make project customers attractive and that satisfy a supplier. The findings in this subchapter are based on a cross-case analysis of all cases.
Tender-winning chances
Most respondents replied that a high tender-winning chance is attractive. Suppliers place much effort in tenders, and if their winning chances are low, they may not compete. Suppliers could make up to 10% of the entire project sum in tender costs. This implies that a supplier does a lot of work without being payed for it, leading to significant losses. In other words, having good odds in winning a tender is attractive for every project supplier.
“Suppliers make up to 10% tender costs, which implies if you do not win, that the money has to come from somewhere else. The costs are gigantic, I am not a fan of the process”-Respondent
9.
Fair risk-sharing
Infrastructure projects have difficulties in predicting risks. Many factors could potentially lead to very large cost increases. Such costs could come from unexpected, unforeseen events, including weather conditions or objects in the ground. Respondent 9, who is a customer, stated:
“Risks should be at the party who can best handle them.” This statement implies that customers
share the opinion of the suppliers that risks should be divided equally. It also suggests that customers may need to compensate a supplier if something unexpected occurs that neither supplier nor customer could predict.
“Before I start on a project, I cannot predict whether there is a centuries’ old roman treasure in the soil. If you stumble upon such an object, the work needs to stop, for archeological reasons. You want to know from your customer what he does when you find such unexpected events” (Respondent 1).
Profitability
customers believe that projects should be profitable for suppliers. Customers fear that if a supplier cannot generate profit, it will seek other ways to create profit, which could result in negative effects such as lower quality.
“If you want to be successful, everybody needs to make a profit. Contractors are private or stock-enlisted companies, and they have to work for their money. If they make a mistake, it will cost them money. If we offer them enough margins and we offer them enough work, they will invest in our relation, something that we think is very important. And if you don’t offer them a margin, the quality will go down. If you seek to eliminate all quality, seek the lowest price for everything and the quality is gone” -Respondent 9
Customers can collaborate and create win-win situations
Suppliers are satisfied when customers can create win-win situations and collaborate with the supplier on an operational level. Certain elements of a project may be easily arranged by the customer but are difficult for a supplier. Such actions could save the supplier much time, resulting in the earlier delivery of a project. Another type of win-win situation occurs when a supplier has a suggestion that improves the quality of the project. This may imply that suppliers must carry out extra work that the customer must pay for, but the customer could benefit from the higher quality. Respondents with a customer role were also positive towards creating win-win situations with the supplier, highlighting its importance.
“We worked for a tram company, who allowed us to hire their maintenance staff. They knew the little details, which allowed us to work faster and finish earlier. Also, with requesting permits, if the customer thinks along with us, we can become more flexible. Which could create win-win situations in which everyone profits.” – Respondent 7
Trustworthiness, transparency, good communications
“Can you talk a little slang? ‘Do what you say, because then you don’t lie.’ Be trustworthy and reliable as a customer” -(Respondent 3).
“I call it the three Cs: Communication should be clear and transparent, the conditions should be clear and the chemistry between people should be good. And the Cs of contracts and cost control are inferior and are only there to facilitate the main process” -(Respondent 6).
Reliability in payment
Customers should be reliable in terms of payments. Liquidity could be challenging for infrastructure companies as they have large fixed costs and need pay their staff before a project starts. Therefore, a reliable reputation is attractive, and reliable payments from a customer satisfy suppliers.
“Liquidity always causes tensions for a construction company. So, everything you do with liquidity is great for a supplier” -(Respondent 4).
“For suppliers, we are very attractive, because we pay well. We pay well, on time and in a reliable way since we are a government company. Suppliers always get paid within 30 days.”
-(Respondent 9).
4.3 Subcontracting
In most of the cases, the respondents stated that subcontracting in general does not influence the preferred-customer status. This is mainly because a customer cannot decide for the supplier who they should subcontract. Subcontracting is a typical job that the supplier does and for which it carries risks.
“Subcontracting is not a big influence, because there is only one main contractor who is responsible for its subcontractors. Our customers cannot prescribe us to work with certain subcontractors, since they are under contract with us” -(Respondent 7).
5 Discussion
5.1 Discussion of findings
The goal of this research was to find out how preferred customers are influenced by project-based work. Project-project-based work is different than continuous relationships due to its unique characteristics: discontinuous work, singularity and complexity of projects and projects that may be subject to tender procedures. Subcontracting was not found to influence preferred customer status because it is carried out by the supplier. The remaining characteristics create circumstances around customer attractiveness and supplier satisfaction that differ from those present in continuous relations.
The main contribution of this research is that it shows that project complexity and project recurrence determine how project-based work influences the preferred customer status. These two factors can be set into a matrix, which creates four quadrants in which a project type is characterized. The four project types are as follows: single low-complexity projects, recurring low-complexity projects, single high-complexity projects and recurring high-complexity projects. Each type of project has different combinations of customer attractiveness and supplier satisfaction antecedents, which are influenced by project complexity and recurrence. Based on the findings of this research it is possible to create a preferred customers relation portfolio, as in Figure 5.1.
The complexity of a project determines the project’s size, reward and risk. Complexity can be split into organizational complexity and technological complexity (Baccarini, 1996). Organizational project complexity has a weaker influence on preferred customer status than technological complexity does. A larger number of entities will create more internal buyer– supplier relations that have to align with each other, which can be difficult. Examples of relationships have to align include purchasing, project leaders, contract managers and operational functions. This relational complexity may explain, in part, the influence of project complexity on preferred customer status.
When projects become more technologically complex, they require more and a wider variety specialized employees (Baccarini, 1996). As technological complexity increases, it becomes more difficult for customers to develop technical specifications, since they may not know how to solve their problem. In such cases, customers can provide only functional specifications. Functional specifications describe the problem the supplier needs to solve, giving suppliers a great deal of freedom to design (Karlsson, Nellore, & Soderquist, 1998). In highly complex projects, the customer relies on the supplier for effective project designs and specifications. Specifications may even change during a project, which is a risk because different specifications can imply increased costs for the supplier and customer.
of winning a tender, it may put more effort into risk calculations, which may prevent costs increases.
Project recurrence is the other important factor that influences preferred customer status in projects. An explanation for this influence may be based on social exchange theory (Blau, 1964; Thibaut & Kelley, 1959), because if customers give out projects on a recurring basis, a supplier will expect future work from that customer. In this research, such expectation levels were created by framework agreements and customer–supplier dependencies. A supplier will be satisfied if such expectations are met or exceeded, with new projects from the customer. If the intention of the customer is short-term, the supplier will lower its expectations. Suppliers of such customers do not expect follow-up work. Therefore, if a customer does not offer a future project, the relationship is still satisfying. The difference in expectation levels for recurring projects could be an explanation for different antecedents of customer attractiveness and supplier satisfaction in projects.
The results of this research confirm that it is common for low-complexity projects to be procured against the lowest price, as was reported by Raz et al. (2002) and Dubois & Gadde (2000). Suppliers did not like this, because it limits their abilities to make a high margin on a project. The nature of low-complexity work is that it has clear specifications and many parties who are able to perform it, which leaves little room for suppliers to differentiate themselves from the competition, meaning that such projects will be procured against the lowest price. If customers want to make their project more attractive or want to satisfy their supplier, they can focus on the ‘recurring’ dimension. Customers should keep in mind that suppliers have high fixed costs and want to optimize their utilization rates. Helping a supplier in this way can lead to high supplier satisfaction levels. With this in mind, single projects can be made more attractive by offering the supplier freedom in the planning, so it can optimize its schedules and create higher utilizations.
5.2 Implications for theory
This research extends the current literature on preferred customers and project-based work. The research gap identified at the start of this research was how project-based work influences the preferred customer status. Customers can receive preferred customer status if they are attractive and satisfy their supplier (Pulles, Schiele, et al., 2016; Schiele et al., 2012). Previous research on preferred customer status focused on continuous relationships, which differ from project relationships. In the theoretical framework, four potential project influences that could explain why project-based relationships are different than continuous relationships were defined: discontinuity of work (Dubois & Gadde, 2000; Martinsuo & Ahola, 2010), singularity and complexity of projects (Baccarini, 1996; Cole, 2016), subcontracting of work (Ahola et al., 2013; Hofman et al., 2009) and tender procedures (Bemelmans et al., 2015; Dubois & Gadde, 2000). This research found that only discontinuity of work, singularity and complexity of projects, and tender procedures affect preferred customer status.
The main contribution of this research to theory is its finding that project complexity and project recurrence determine how preferred customer status is influenced by project-based work. With these two factors, it is possible to create a matrix with four quadrants that represent various types of project relations. Each project quadrant has its own characteristics of customer attractiveness and supplier satisfaction that could lead to a preferred customer status. Projects themselves are indeed different than continuous relationships (Pulles, Schiele, et al., 2016; Schiele et al., 2012; Vos et al., 2016), therefore new and different antecedents of customer attractiveness and supplier satisfaction were found. Although the validity of the findings is low due to the relative low amount of cases that a case study can provide, it provides a basis for future research on preferred customers in project-based firms.
This creates a situation in which a supplier is caught in a relationship and is not able to choose its preferred customer. Although the scenario of caught relations is not new, it was previously not associated with preferred customer status.
5.3 Implications for practice
This research found that there are preferred customers in infrastructure projects, and that such a status gives customers better access to a supplier’s resources. Examples of a better access to suppliers resources are: the best employees, more attention, being first served in the case of a bottleneck or relational specific investments. Such benefits could help a customer to enhance its performance on its projects.
The main contribution of this research is a framework that could help to categorize different types of project relations based on project complexity and recurrence. The framework consists of four quadrants: single low-complexity projects, single high-complexity projects, recurring low-complexity projects and recurring high-complexity projects. Each project type has its own antecedents of customer attractiveness and supplier satisfaction. It can be used by customers for reverse marketing activities, wherein the customer tries to sell its project to potential suppliers (Blenkhorn & Banting, 1991). Suppliers could use this framework to determine who is really their preferred customer with whom they should share their best resources. The following four sections reflect the four sections of the quadrant and show practical implications per project relation type. The implications are based on best practices of respondents, results of this research literature and actuality.
5.3.1 Single low-complexity projects
larger projects. Knowing that suppliers want to optimize their planning, it is attractive if a customer offers freedom in the planning of such a project. Projects could be so small that they are below tender boundary and can be awarded without a tender procedure.
5.3.2 Recurring low-complexity projects
In low-complexity recurring projects, it is important that the customer offers work on a continuous basis to the supplier, because the supplier has a certain expectation of future work. Suppliers find it highly attractive if a customer cooperates with the supplier in terms of capacity, for example, by releasing projects regularly over time, which creates a more stable demand. Stable demand allows a supplier to optimize deployment of resources. A supplier can also achieve high utilization rates working with a customer who gives the supplier freedom to plan a project between two other projects. Furthermore, given the low technical complexity, customers will often procure against the lowest price (Raz et al., 2002). Because complexity is low, it is difficult for a supplier to add unique value. Knowing that such projects will go to the lowest bidder, a customer can make a tender more attractive if they keep the supplier’s costs low. It might be attractive for the supplier if the customer provides detailed technical specifications to reduce the calculations a supplier has to make, hence lowering its costs and efforts. In such a scenario, the supplier could use its valuable and scarce highly educated employees for more valuable projects.
5.3.3 Single high-complexity project
Single high-complexity projects are high in risk, because before the project is awarded, the customer might not know what the solution to their assignment is. Such a customer relies on the supplier for solutions and specifications, which requires an investment of time and money. The customer should compensate the supplier for such activities. Another important aspect of such high-technology projects are that the specifications can change during the project, which will inevitably raise costs (Raz et al., 2002). In such cases it is always a question as to who should pay for such cost increases.
purchasing behaviors, are the reasons for the large losses for suppliers (Rijkswaterstaat, 2019). Therefore, such large singular and complex infrastructure projects are becoming less attractive for suppliers, since they are completely dependent on one project for profit. A customer can make its projects more attractive if it can show in some way that its project can be profitable for a supplier, and if it can seek quality selection criteria instead of the lowest bid.
5.3.4 Recurring high-complexity projects
In this category, customers and suppliers are dependent on each other due to the technological complexity. The suppliers might deliver to only one or few customers, and the customer might have few suppliers who can execute the work for them. The largest challenge in this category is how multiple suppliers and one customer can work with each other with all reporting good results to their board or ministry.
Given the high technical complexity, it is difficult for customers to know what the solution is to their assignment. The tech nature creates the same types of problems for recurring high-complexity projects as for single high-high-complexity projects. A project has to be designed, which brings large development costs that have to be covered by the supplier. If the customer wants competition among four suppliers, and it wants each supplier to design the same project, the customer should compensate suppliers for such costs. This reduces the risk of substantial losses if a tender is lost. Furthermore, projects should not be awarded solely on the lowest price, for two reasons. First, such a situation can lead to unrealistically low prices because suppliers want to win a tender, thus they keep utilization rates high. As a consequence, they must seek other ways to make a profit, resulting in unexpected costs for the customer or huge losses for the supplier.
5.4 Limitations and future research
This research created a new framework that helps to distinguish preferred customers in project-based firms, and it found new antecedents of customer attractiveness and supplier satisfaction. Although there is evidence that the proposed matrix can be used to distinguish preferred customer antecedents in projects, it could be improved with additional data. Future research could investigate other infrastructure branches, such as roadwork, hospitals, bridges, dikes, harbors and offshore infrastructure such as windfarms, pipelines and oil rigs. This could create a better spread of data, leading to a better understanding of preferred customer status in each of the four quadrants. The single low-complexity project quadrant, in particular, could benefit from more data, since no entire cases were found. Given the lack of data in this quadrant, the validity and reliability of the data is limited. Future research could focus on specific quadrants, so the different antecedents per project relation type would become clearer.
The research would also benefit from triangulation, where both sides of a buyer–supplier relationship are taken into account, creating more reliable data. Another limitation of this research is that the new antecedents of customer attractiveness and supplier satisfaction are based on data from the infrastructure industry, creating very specific antecedents that might not be relevant to all project-based firms.
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Appendices
Appendix 1 Interview protocol
Dear respondent,
Thank you for your consideration to contribute to the research. I am Gregor Möllers, 26 years old and I am a master supply chain management student on the Rijksuniversiteit Groningen. Currently I am writing my thesis on preferred customers in project-based firms, with Dr. Niels Pulles as a supervisor. Preferred customers are customers that have a better access to suppliers resources, compared to other customers. Previously preferred customers have only been researched in non-project organizations with continuous relationships. Project based relations are different compared to continuous relations due to: the discontinuity of work, uniqueness, subcontracting and tender procedures.
The entire research will consist of 10-16 interviews, the interview will take about 45 to 60 minutes. A week before the research, I will send you the research questions at this e-mail address. I would like to record the interview, to enhance the quality of the research and to make sure that your valuable efforts don’t get lost. The recordings will be transcribed and anonymized. When the transcriptions are finished, the recordings will be deleted, and you will receive a copy of the transcription. Please indicate if these transcriptions are correct or certain sensitive data needs to be removed. After this, I will make codes from these transcriptions and send them to you, to ensure that the codes represent what you meant in that sentence. Before the interview starts, I would like to hear from you if you agree with this procedure.
If you have any question regarding the procedure, feel free to ask. With kind regards,
Appendix 2 Questions for suppliers
1. Could you please tell me something about your role in your organization? 2. Does your organization have preferred customers?
a. How does your organization treat preferred customers differently? 3. Does your organization have non-project customers?
a. How are project customers different than non-project customers?
4. Is it correct that: ‘discontinuous’, ‘sub-contracting’, ‘tenderprocedures’ and ‘uniqueness’ describe project characteristics?
a. Are there other additional aspects?
5. How does the discontinuous aspect of projects influence the relation with the customer? a. Could you give an example of a relationship where you were satisfied with the
discontinuous aspect?
b. Could you give an example of a relationship where you were not satisfied with the discontinuous aspect?
c. How do preferred customers relate with this aspect? 6. How does sub-contracting influence the relation with customers?
a. Could you give an example of a relationship where you were satisfied with subcontracting?
b. Could you give an example of a relationship where you were not satisfied with subcontracting?
c. How do preferred customers relate with this aspect?
7. How do tender procedures influence the relation with the customer?
a. Could you give an example of a relationship where you were satisfied with tender procedures?
b. Could you give an example of a relationship where you were not satisfied with tender procedures?
c. How do preferred customers relate with this aspect?
8. How does ‘uniqueness’ of a project influence the relationship with the customer. a. Could you give an example of a relationship where you were satisfied with a
very unique project?
b. Could you give an example of a relationship where you were not satisfied with a generic project?
c. What are unattractive aspects?
d. How do preferred customers relate with this aspect?
Appendix 3 Questions for customers
1. Could you please tell me something about your role in the organization?
2. Do you see that certain suppliers give your organization a better access to their resources than other suppliers?
a. What do you receive from these supplier, that other suppliers? 3. Do you see that suppliers prefer a certain customer or project?
a. Could you explain how these suppliers give a different treatment?
4. Is it correct that: ‘discontinuous’, ‘sub-contracting’, ‘tenderprocedures’ and ‘uniqueness’ describe project characteristics?
a. Are there other additional aspects?
b. How do project suppliers differ from non-project suppliers?
5. How does the discontinuous aspect influence your preferred customer status? a. Could you provide examples of how discontinuity influences relations? 6. How does subcontracting influence your preferred customer status?
a. Could you provide examples of subcontracting that influenced a relationship? 7. How do tender procedures influence the preferred customers status?
a. Could you provide examples of tender procedures that influenced the relationship with suppliers?
8. How does the ‘uniqueness’ influence the preferred customer status?
a. Could you tell me something about generic projects and how it influences the preferred customer status?
b. Could you tell me something about unique projects and how it influences the preferred customer status?
c. Could you provide examples?
Appendix 4 Case descriptions
Case 1
Case one is a project organization that works in the underground infrastructure in The Netherlands. The company digs and buries pipes, cables for electricity and networks and waterlines. The work can be described as low to medium in technological complexity, but the surroundings create medium to high complex situations due to interdependencies. The company’s customers are predominantly network operators who want new cables or pipes in the ground and collaborate on a recurring basis. The company employs approximately 500 employees. The respondent helped the organization to create a new strategy, so it could serve its customers better.
Case 2
Case two is a large technical installer, that works on a project basis in infrastructure, industry, marine & offshore and utility. The company employs approximately 3000 people and has a turnover of 550 million euro. The respondent worked for the division industry as a regional director, this division employs 600 people and has a turnover of approximately 100-125 million per year. The work they do is considered to be technical complex and newbuild projects are often unique, also this organization is organizationally complex due to the interdependencies among different divisions. Customer relations can stop after completion, although for some technical installations they also do maintenance work.
Case 3
Case three is one of the four certified railway infrastructure builders in the Netherlands. The company employs approximately 3500 people and has a turnover of approximately 880 million euro per year. Within this company four respondents were interviewed: the board director, the product market combination manager of cables and pipes, the product market combination manager of over headlines and a project manager. The company relies for 80% on orders from the Dutch government task who is responsible for the Dutch rail network. With this customer they have a continuous relationship, since this customer provides a lot of projects for this company. Most of the work that they execute is technically complex and due to the amount of organizational divisions and interdependencies it is in organizational terms also complex. Case 4
with its surrounding parties. The underground project infrastructure often works in framework agreements with customers. Due to the large variety of cases from this respondent, no data on company size and turn over are mentioned.
Case 5
Case five was based on a large infrastructure project in the Hague which connects a business area with the inner city. Within this project two tunnels are drilled, to connect the two destinations. This project is highly technical complex and one-off. Also it is organizational very complex due to it being a building consortia with two main contractors and many subcontractors. Which create vertical and horizontal complexity as well as large interdependencies. The project customer is the municipality of the Hague, and the respondent is the project director. The municipality does not expect to have such a large project in the near future. The project size is estimated around 640 million euro.
Case 6
Case six is a grid operator that distributes electricity and gas on a regional level. The company is a project customer, puts 460-million-euro worth of projects in the market. The projects are predominantly new connections, replacements of connections and reconstructions, which often involve digging in the ground. The majority projects that they offer are low to medium in technical complexity and medium in organizational complexity. Sometimes they will offer higher complex work. The respondent for this case is the head of procurement. The work is offered on a rather continuous basis to a limited number of suppliers. The company employs 4.500 people and has a turnover of 1445 million euro.
Case 7
Case seven is a high voltage network operator in the Netherlands and Germany. The company is a project customer who puts annually 2,3 billion euros worth of projects in the market. The projects are complex and require highly specialized suppliers, with high technical abilities. The project organizations are medium to high in complexity due to interdependencies and due to multiple supplier divisions. They contracted four parties to execute work for them on a recurring continuous basis. The interviewed respondent is head of the purchasing division grid service and previously head purchasing of projects. The company employs 3400 people and has an annual turnover of 4167 million euro.
Case 8
mentioned in case seven or case six. They work on a rather recurring basis with their customers who often don’t have enough capacity or technical knowledge about high voltage networks. Therefore, the organizational complexity is medium. For this case the respondents consisted of director and the sales representative. The company employs about 25 people and has no public data about its turnover.
Summary table complexity and project recurrence:
Case Organizational complex Technical complex Overall complex Project recurrence 1 (Underground-infrastructure)
Medium Low/Medium Low/Medium High
2 (Technical installer) High High High Low
3 (Railway builder) High High High High
4 (Underground-infrastructure)
Medium Low/medium Low/Medium High 5 (Tunnel project the
Hague)
High High High Low
6 (Network operator) Medium Medium Medium High 7 (High voltage network
operator)
High High High High
Appendix 5 Codes
Resp Code
Single low complex projects
6 Single simple
project 6: Heel fanatiek eigenlijk, dat hangt af van de manier waarop je aanbesteed. Bij een kleiner werk, omschrijf je ‘dit moet het wezen’ en je kijkt naar de laagste prijs en vecht elkaar maar de tering. En dan zie ik wel wie het geworden is. Stel ik ik heb een tegelpad van 50 meter met tegels van 30 bij 30 en 4 cm dik in ral 7001, maakt me verder geen zak uit. Kijk maar, de laagste die wordt het.
7 Simple single project SS profitability CA little effort
7: wij doen vanuit kabels en leidingen veel voor ingenieursbureaus, en als zij dan een project hebben willen ze wel eens weten wat er in de grond zit. En dan graven wel proef sleuven voor ze. Zodat ze weten waar de kabels liggen, zodat ze een goede project omschrijving kunnen maken zodat dat later getenderd kan worden. Maar dan krijgen we de opdracht om onderzoek te doen, dat zijn dan kleine klusjes 15-50k klusjes. Maar die rendementen zijn dan heel hoog Q: de verdienste voor het werk is dan heel hoog
7: ja als je kijkt hoe weinig je daarvoor hoeft te doen dan is dat heel aantrekkelijk. 7 CA low
expectations CA Freedom in planning
A: en er wordt weinig verwacht, en bij onze klant willen ze enorme plannen hebben. En zij zeggen ik moet ‘dan’ weten wat daar alles ligt; succes we horen het wel.
7 SS Capacity
optimalization A: ja het is ook gewoon heel makkelijk, het is een ideaal stop werk als ‘tussendoor werkje’ zodat je je capaciteit en mensen aan het werk kan blijven houden. Resp Second order
code First order code
Continuous low complex projects
1 CA: prediction of projects SS: Optimization of utilization Work prediction Schedule optimization
4 SS: Optimization of utilization SS: Profitability Utilization of employees profitability
Het is ook gewoon dat je je mensen bezighoudt en dat je marge draait. Dat blijft in onze wereld echt HEEEL belangrijk!!
8 Long-term
contacts Temporary long term contract
Op den duur gaat men op nieuw iets op nieuw in de markt zetten. Het is wel een tijdelijk contract, maar contracten zijn vaak voor een lange periode ( 4-8 jaar).
1 Framework
agreement Framework agreements Less
competition
1: Het bedrijf had lange raamcontracten, in dit geval kiezen net beheerders 4-5 partijen die dit werk kunnen. Je hebt dan ook minder concurenctie. Het is geen markt waar je toetreed, eerder nog je hebt minder aannemers. Je hebt steeds minder kleine aannemers, ze willen liever aanbesteden aan grote partijen, dus je hebt minder last van concurrentie.
4 Long term
contract Long term contract Contract re-evaluation
Een voorkeurs klant hierin zou kunnen zijn een klant die niet steeds maar weer dingen extra gaat vragen. Als ik dan een voorbeeld mag geven uit de combi wereld, van de ondergrondse infra. Er liggen veel lange termijncontracten dat de opdrachtgevers steeds meer gaan vragen binnen het zelfde contract, maar er wordt nooit even over gesproken van ‘ik realiseer me dat ik veel meer vraag van jullie en dat dingen anders zijn; moeten we niet een keer praten over de prijs??’
11 Framework agreement SS continuity Framework agreement Continuity
Q: dat is eigenlijk om die projectmatigheid van jullie werk, om daar meer continuïteit in te waarborgen
11: Ja kijk als je een raam overeenkomst hebt dan kan je altijd bij ze op bezoek gaan want je hebt een overeenkomst met elkaar, dus je zoekt elkaar maandelijks op of een keer in de twee weken, dus het grote voordeel is dat je een verbintenis hebt met elkaar, het is niet meer vrijblijvend want je hebt een relatie met elkaar want je hebt iets ondertekend, dus je komt niet meer langs als zomaar leverancier maar als preferred supplier. Daardoor zit je op een andere manier aan tafel dan wanneer je acquisitie komt doen. 9 Framework agreement SS continuity Framework agreement Continuity
