Benefits and uncertainties of performance‐based contracting in manufacturing industries: An agency theory perspective

Abstract

Purpose

In view of a lack of understanding of the consequences of performance‐based contracting (PBC), this paper aims to reveal deeper insights into the mechanisms inherent to PBC and explore which benefits and uncertainties may result for providers and customers.

Design/methodology/approach

Conducting a comprehensive literature review and drawing on insights from agency theory as a framework, the auhtors analyzed a broad range of academic publications on the benefits and uncertainties of PBC and developed testable propositions from the provider's and the customer's perspective.

Findings

With PBC, in comparison to the conventional selling and supporting of machinery or equipment, the manufacturers are more likely to acquire customers for highly innovative technologies, to increase their profit, and to improve customer loyalty. Manufacturers, however, have to deal with uncertain revenues and costs which affect their profit. The customers are more likely to receive increased performance at decreased costs. Concerning the performance, however, the customers enter into an uncertain relationship of dependence.

Originality/value

This is the first paper to analyze the benefits and uncertainties of PBC in manufacturing industries systematically from an agency theory perspective. The paper further develops extant research by outlining the mechanisms of PBC and relating the benefits and uncertainties that are scattered over a broad body of literature. The paper proposes several promising avenues for further research.

Citation

Hypko, P., Tilebein, M. and Gleich, R. (2010), "Benefits and uncertainties of performance‐based contracting in manufacturing industries: An agency theory perspective", Journal of Service Management, Vol. 21 No. 4, pp. 460-489. https://doi.org/10.1108/09564231011066114