Performance-based contracting: a literature review and future research directions

Abstract

This paper aims to provide a review and synthesis of the performance-based contracting (PBC) literature across academic disciplines. It also seeks to examine how the operations and supply management (OSM) discipline in particular relates to PBC studies in other study fields. The research is based on a systematic literature review of 241 peer-reviewed articles across disciplines, published between 1985 and 2014. A classification framework of PBC research is proposed, addressing key aspects of PBC design and management: performance specification and evaluation, the design of incentives and their impact on supplier behaviour and risks allocation depending also on the risk attitudes of buyers and suppliers. The comparative analysis of literature by discipline helps identify current empirical and theoretical limitations of relevant OSM studies. The paper concludes that future OSM research should expand its theoretical framework and empirical focus to better understand PBC design and management. Eight specific suggestions for future OSM research are offered, e.g. examining the potential of PBC as means for managing sustainability and innovation goals of supply chains. The paper helps advance OSM research in this area by providing a structured overview of definitions, theories, conceptual frames, methods and empirical studies from other disciplines.

Keywords:

• performance-based contracting
• service procurement
• business services
• systematic literature review
• operations and supply management

Acknowledgments

We are grateful to the Editor, Associate Editor, and three anonymous reviewers for their constructive feedback that helped improve the manuscript.

Kostas Selviaridis gratefully acknowledges the support provided by the Department of Industrial Management and Logistics, Lund University. A large part of this study was conducted in Sweden and it has benefited in multiple ways by interactions with former colleagues in Lund.

We are also indebted to Dr Wendy Van der Valk (School of Economics and Management, Tilburg University, Netherlands) for her detailed and insightful comments on several drafts of the paper. Early versions were also presented in a research seminar at Rotterdam School of Management (RSM), Erasmus University, in May 2012 and at the 20th Annual IPSERA Conference in Maastricht, Netherlands, April 2011. We are grateful to the events’ participants for their feedback and improvement suggestions.

Last but not least, we would like to thank Esmee Arends (M.Sc. graduate from RSM) who assisted us during the collection, coding, and classification of articles.

We are responsible for all remaining errors and omissions.

Notes

1. Outcome-based contracting has a long, rich history. As an example, performance-based contracts between the British government and private ship owners and operators were implemented for the transportation of British and Irish convicts to Australian colonies in the late eighteenth century (see Sturgess 2005).

2. As a complementary way to identify the historical pattern in the use of the term performance-based contract and PBC, we used Google Books NGram Viewer. When entering phrases into the Google Books Ngram Viewer, it displays how often those phrases have occurred in a corpus of books over the selected years, controlling for the total number of books published per year. While ‘performance-based contract’ did not show any hits, ‘PBC’ resulted in hits only after 1980, with a steep increase around 1985 (from 1984 to 1985, its use tripled, and then increased five-fold in 1986).