Mitigating Shirking: Contracting Performance in Buyer-Initiated Service Triads

Buyers that operate in buyer-initiated service triads must deal with the repercussions of service suppliers failing to satisfy the buyer’s customer. Performance-based contracting (PBC) can be used to shift the risks associated with performance shortfalls to service suppliers. Attaining specified performance outcomes can, however, be highly uncertain in service triads where there are many factors outside the supplier’s control. In such situations of high outcome uncertainty, suppliers may be induced to shirk their responsibilities since the direct customer–supplier link inherent to triadic structures gives suppliers an opportunity to engage in shirking without being detected. According to established theory, PBC is less effective in such situations, and behavior-based contracting (BBC) is more effective in achieving performance outcomes that are satisfactory to buyers. However, these insights are based on the long-standing assumption that PBC and BBC are substitutes. This assumption has been criticized as not being representative of empirical reality. Therefore, this chapter studies whether combining these contracting approaches during the contract design and contract management phases mitigates shirking of responsibility by suppliers. Using a data set derived from a survey questionnaire, the chapter finds that combining PBC and BBC during the contract design phase does not reduce shirking. However, the results do reveal that responsibility shirking can be mitigated by combining PBC and BBC during the contract management phase. This study provides purchasing managers with new insights concerning how to use PBC to achieve satisfactory performance outcomes, even in uncertain contexts such as service triads.