Applying performance-based contracts for service outsourcing

Applying performance-based contracts (PBCs) for outsourcing services is usually challenging. The performance of an outsourced service provider is often not only dependent on the effort that the service provider puts in, but also on the behaviour of the firm that’s buying the service. New research from Professor Finn Wynstra at Rotterdam School of Management, Erasmus University (RSM) and his co-authors has helped them to develop a novel approach to buyer-supplier contracting, using collaborative key performance indicators (KPIs).

Collaborative KPIs not only evaluate and reward the performance of suppliers, but also the customer's behaviour. In this way, performance-based contracting can also be applied to settings where supplier and customer activities are interdependent. In contrast, traditional contracting theories suggest that output controls are not effective under such conditions.

In this new collaborative KPI contracting process, the performances of both supplier and customer (the company that’s buying the service) are measured using a set of specific indicators. The process promotes collaboration by using a defined collaborative process, and by focusing on end-of-process indicators. Wynstra’s study demonstrates that collaborative contracting – meaning defining, monitoring, and incentivising the performance of specific processes at both parties in the buyer-supplier relationship – can help alleviate the limitations of traditional performance-based contracting. This is particularly true when the supplier's liability for service performance is difficult to verify.


Starting with a workshop for everyone

Collaborative KPI contracting emphasises the interrelations between process and outcome. Transparency of the process is key, and the approach begins with all stakeholders participating in a causal diagramming workshop. Choosing suitable collaborative KPIs and designing the process to define and measure them are just the first instances of improved decision-making achieved by this approach that uses greater transparency.

The approach can also enable further redesign of the delivery of services. In the case studies by Wynstra and his co-authors, operational performance started to improve during the intervention, not just after it. In fact, the quality of the contracting relationship started improving from the first day of the intervention.


Buyers supporting suppliers?

Even if the buying firm is not the final customer, it has an important role in supporting the performance of the supplier in two ways. First, in supporting the supplier in successful operational delivery of the service. This is reflected in the development of operational and enabling KPIs for the buying firm. While the actual KPIs will differ according to the type of service, Wynstra and his colleagues suggest that because of the co-productive nature of business-to-business services, this supporting role is found in many services.

Second, the buying firm is commercially supporting the supplier’s business, particularly its efficiency in serving the buying firm and/or final customer. This is a typical feature in many outsourcing relations, although rarely made explicit. Applying collaborative KPIs here will make this role more tangible too.


Novel approach

““The collaborative ‘KPI contracting’ approach is the core design artefact in our study, but we have also described in detail the analysis, development, and implementation process that was adopted; both for the initial design case and the two subsequent evaluation cases. The novelty of this process of collaborative service design may be limited; it largely relies on existing tools and methods, such as system dynamics modelling. Still, the integrated, and collaborative intervention process – that is, jointly involving buyer and supplier representatives especially from the shop floor – is a novel approach.””

says Wynstra.

The process of collaborative service design is crucial in successfully developing and implementing the collaborative KPI contracting approach and is highly context-dependent. Most tangibly, this contextualisation takes place in identifying and selecting which buyer-facing and supplier-facing KPIs to apply. The process provides a structured approach for achieving contextualisation. In sum, the integrated combination of the collaborative KPI contracting approach itself and the collaborative service design to develop and implement the approach in each specific case makes this concept inherently transferable.

Making sure the collaborative KPI contracting approach is implemented effectively relies on two important ideas. First, that services are indeed co-produced by buyer and supplier; this means that good performance can only be achieved through close collaboration between both sides.

Second, senior management should take a close and genuine interest in the detailed interactions at the operational level. This is the level at which stakeholders interact most closely and at which collaboration needs to be seamless.

““Based on our current knowledge, we see the collaborative KPI contracting approach being applicable to various types of outsourced services that are characterised by extensive buyer-supplier coproduction and complexity. The efficacy of the approach is positively affected by the presence of financially driven contracts, low operational performance, and mistrust in the relationship between buyer and supplier,””

Wynstra concludes.

Read the article, H. Akkermans, W. Oppen, J.Y.F. Wynstra & C. Voss (2019). Contracting outsourced services with collaborative key performance indicators. Journal of Operations Management, 65 (1), 22-47. Digital Object Identifier: 10.1002/joom.1002


Rotterdam School of Management, Erasmus University (RSM) is one of Europe’s top-ranked business schools. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam – a vital nexus of business, logistics and trade. RSM’s primary focus is on developing business leaders with international careers who can become a force for positive change by carrying their innovative mindset into a sustainable future. Our first-class range of bachelor, master, MBA, PhD and executive programmes encourage them to become to become critical, creative, caring and collaborative thinkers and doers. Study information and activities for future students, executives and alumni are also organised from the RSM office in Chengdu, China.

For more information about RSM or this article, please contact Danielle Baan, Media Officer for RSM, on +31 10 408 2028 or by email at

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