Exercising control over supplier performance

The belief that firms can be more efficient and effective when they concentrate on core activities and let specialist service providers take care of the rest has made outsourcing the provision of services a rapidly rising trend: from 2001 to 2009, the worldwide services outsourcing market grew from $65 billion to $110 billion, and it is forecasted to reach $130 billion by 2013.

With this increasing reliance on third-party services, what can companies do to ensure that they receive high quality? Control offers a critical differentiator between positive and negative supplier performance. But, whereas the application of informal control to improve supplier performance is well established, the effect of formal control appears profoundly equivocal, yielding both positive and negative effects on supplier performance.

Supplier performance depends not on the deployment of formal control but rather on the mode of formal control and its interaction with service type and informal control.
The authors of this study draw from organisational control, service operation, and social psychology literature to posit that supplier performance depends not on the deployment of formal control but rather on: (1) the mode of formal control (output control vs. behaviour control) being used and its interaction with (2) service type (mass vs. professional) and (3) informal control.

Complex Interactions

The results of surveys of 252 service buying organisations indicate that output control interacts with service type to determine perceived supplier performance (PSP). Buyers’ reliance on high output control has a positive effect on PSP in mass service exchanges, while this effect becomes negative in professional service exchanges.

The effect of the interaction of behaviour control and service type also depends on the presence of informal control. Buyers’ reliance on high behaviour control exerts a more positive effect on PSP in professional service exchanges than in mass service exchanges, but only in the presence of informal control.
These findings have key implications for both theory and practice.

Managerial Implications

This study provides multiple insights for managers seeking to improve supplier performance in their inter-firm service exchanges. Different modes of formal control are not sufficient; the type of service exchange and the presence of informal control are also critical to the success of the relationship. In general, noting the costs associated with control programmes, managers would be well advised to proactively identify or create contexts that support ongoing formal control initiatives.

Related article

Stouthuysen K. Slabbinck H. Roodhooft F. 2012. Controls, service type and perceived supplier performance in interfirm service exhanges. Journal of Operations Management. 30 (5).

& Rankings

Equis Association of MBAs AACSB Financial Times