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Business Process Management Journal
Analysis of management practices in performance-based outsourcing contracts

Bruna Omizzolo Lazzarotto, Miriam Borchardt, Giancarlo Pereira, Caroline Almeida,
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Bruna Omizzolo Lazzarotto, Miriam Borchardt, Giancarlo Pereira, Caroline Almeida, (2014) "Analysis of
management practices in performance-based outsourcing contracts", Business Process Management
Journal, Vol. 20 Issue: 2, pp.178-194, https://doi.org/10.1108/BPMJ-01-2013-0007
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BPMJ
20,2 Analysis of management
practices in performance-based
outsourcing contracts
178
Bruna Omizzolo Lazzarotto, Miriam Borchardt,
Received 8 January 2013
Giancarlo Pereira and Caroline Almeida
Revised 23 May 2013 Industrial and Systems Engineering Department,
18 June 2013 UNISINOS University, São Leopoldo, Brazil
Accepted 22 June 2013
Abstract
Purpose – Outsourcing-based performance practices establish goals for supplier performance and
compensation. The management of contracts based on performance is complex as is the alignment of
long-term relationship and indicators. The purpose of this research is to analyse the practices that
contracting companies utilise to manage outsourcing contracts with performance-based compensation.
Design/methodology/approach – Multiple case studies were conducted with five contracting
companies. Nine performance-based outsourcing contracts were analysed.
Findings – The selection and evaluation processes have been neglected by the buyers associated
with contracts that are over ten years old. The process of transferring activities relied on the
knowledge of employees. Management practices based on indicators and the adoption of results-based
compensation are commonplace in a number of contracts and are consistent with theory.
Originality/value – This paper identifies management practices that differ between what is
expected from the theoretical framework and what is observed in the actual examined contracts.
Opportunities for improvement have been identified mainly in the areas of supplier selection and
activity transfer; the use of pilot tests and the reengineering of the outsourced processes are suggested.
Keywords Outsourcing, Contract management, Contract manager
Paper type Case study
Introduction
Outsourcing consists of contracting out activities that are performed in-house to an
outside organisation that will perform them more competitively and with a higher
level of quality (Ghodeswar and Vaidyanathan, 2008; Freytag et al., 2012). Process
outsourcing is commonplace among organisations looking to simultaneously optimise
their internal resources and specialise in a specific function (Ghodeswar and
Vaidyanathan, 2008; Handley and Benton, 2009). This practice can provide
advantages such as cost reduction, improved agility and response capability, and
increased flexibility and innovation to organisations. These advantages translate into
a general increase in the organisation’s competitiveness (Kroes and Ghosh, 2010).
Critical drivers of outsourcing such as organisational initiatives, a focus on
improvement, financial and cost objectives, or growth objectives should be considered
by the buyer company before outsource a process (Ghodeswar and Vaidyanathan, 2008).
Business Process Management The steps required for the implementation of outsourcing are based on business strategy,
Journal
Vol. 20 No. 2, 2014
pp. 178-194 This research was conducted with support from CNPq/Brazil (Conselho Nacional para Pesquisa e
q Emerald Group Publishing Limited
1463-7154
Desenvolvimento) and UNISINOS University (Universidade do Vale do Rio dos Sinos), to which
DOI 10.1108/BPMJ-01-2013-0007 the authors express their gratitude.
business process re-design, project initiation and documentation, initial supplier training, Analysis of
configuration and integration (Agarwal and Bajaj, 2008). Potential risks of outsourcing management
include the outsourcing of functions that should not be outsourced, the selection of
an inappropriate supplier, a poorly negotiated contract, and decreased control over the practices
outsourced functions. The creation of a strategic plan should be considered by the buyer
company before the implementing of an outsourcing process (Mahmoodzadeh et al.,
2009). A good buyer-supplier relationship contributes to the success of outsourcing 179

(Greenberg et al., 2008). This type of relationship encompasses long-term cooperation,
the joint planning of sales strategies and operations, shared knowledge, the development
of innovative initiatives and continuously improvement to consolidate the company’s
market position (Rodrı́guez-Dı́az and Espino-Rodrı́guez, 2006). However, the power of
one company over the other may affect the relationship in the long run. Thus, companies
should try to develop alternatives to mitigate the power imbalance (Handley and
Benton, 2009). Despite the benefits to both the supplier and buyer in terms of the
core-business, reduction in costs, and flexibility (Kang et al., 2012) outsourcing practices
have been discontinued by some Brazilian companies after a few years due to poor
contracts (Braun et al., 2011).
Contracts describe management control structures, process, and transaction
characteristics (Greenberg et al., 2008). Performance-based contracts focus on the
achievement of expected results upon services delivery (Gruneberg et al., 2007).
Although performance-based contracts are advantageous to organisations, these
contracts tend to be more complex because the operational risk is shared among the
contracting parties (Robinson et al., 2008). This type of contract requires that all
associated parties understand the processes, competencies and resources required to
produce the desired return (Greenberg et al., 2008). Through incentives or sanctions, the
parties associated with the contract need to improve their performance during the
contract term (Braun et al., 2011).
In an outsourcing contract, power is closely related to trust and control. How
asymmetric power affects opportunism, trust in other parties and the content of the
contract needs to be investigated (Greenberg et al., 2008). A research opportunity is related
to understanding performance-based compensation and recognition processes for
outsourced processes (Busi and McIvor, 2008). The relation between contractual
incentives and how buyers manage their power over the supplier has represented a
research opportunity (Handley and Benton, 2009). As firms strive to meet complex
product and service requirements in a dynamic, international market environment, it is
critical for organisational control practices to be aligned with competitive outsourcing that
is based on performance; future research in this area is thus suggested (Kang et al., 2012).
Mutually beneficial outsourcing projects have recently been discontinued by some
Brazilian companies (Braun et al., 2011). Brazil, like other emerging countries, has
attracted many companies and the outsourcing of non-core business is not new there
(Ghodeswar and Vaidyanathan, 2008). These occurrences suggest the need to
investigate the practices used by contracting companies in Brazil (Greenberg et al.,
2008) to manage outsourcing contracts through performance-based compensation
(Busi and McIvor, 2008). Aiming to fill the gaps mentioned above, multiple case studies
were conducted with five buyers that outsource processes using performance-based
compensation. A total of nine performance-based outsourcing contracts were analysed.
These five buyers companies are located in southern Brazil and have been outsourcing
BPMJ their processes for at least six years. The nine analysed contracts are related to the
value stream processes of the companies’ end products, which involve higher risks
20,2 than non-core business outsourcing (Mahmoodzadeh et al., 2009).
The purpose of this research is to analyse the practices that contracting companies
(buyers) (Greenberg et al., 2008) utilise to manage outsourcing contracts that include
performance-based compensation (Busi and McIvor, 2008).
180 In the next chapter, the theoretical basis for this research is presented. Then, the
research methodology is explained in detail, followed by a presentation of the
examined cases. Finally, the findings are discussed and the practical implications of
this research are presented.
Literature review
An outsourcing strategy can create many benefits for organisations by reducing costs,
improving speed and responsiveness, reducing cycle times, improving innovativeness,
increasing flexibility and agility, and improving overall competitiveness (Kroes and
Ghosh, 2010). However, organisations must be aware of the inherent risks of
outsourcing.
The risks associated with outsourcing can be classified into three groups:
(1) operational risks related to decreases in the quality, cost, or speed of process
execution;
(2) strategic risks, such as the protection of intellectual assets, security, and
privacy problems; and
(3) composite risks related to long-term risks such as the loss of proficiency in the
performance of the outsourced processes in the future due to lack of knowledge
on Mahmoodzadeh et al. (2009) and Handley and Benton (2009).
All of these risks need to be mitigated if organisations are to receive the greatest
benefits from outsourcing strategies (Mahmoodzadeh et al., 2009).
The outsourcing process can be organised into three phases: pre-contract, contract
performance and post-contract (Ghodeswar and Vaidyanathan, 2008). Table I presents
each phase and the practices observed herein.
Special attention is devoted to the preparation of contracts. Contracts should
contain effective contracting practices, such as the determination of the level of service,
responsibility and roles, agreements and performance targets (Poppo and Zenger, 2002).
Penalties and rewards should be clearly established because these elements can
generate benefits with respect to the alignment of goals and can also mitigate strategic
risks (Handley and Benton, 2009). Contracts should be flexible and allow for changes
and/or increases in the scope of to be made in the long-term (Ishizaka and Blakiston,
2012). Contract management is important for reducing risks, increasing security and
ensuring good results while reducing the cost of outsourcing (Handley and Benton,
2009). Contract management based on indicators and quantitative measures helps to
clarify the objectives of the outsourcing operations for the external providers
(Silva-Domingo and Canet-Giner, 2010). Recognition practices and performance-based
compensation for the outside provider are beneficial to both contracting parties
(Burdon and Bhalla, 2005).
The co-creation of value is a relevant factor in maintaining the relationship between
the contracting parties. Co-creation implies cooperation between the customer and the
Phases Management practice Authors
Pre-contract A process to conduct an outsourcing operation to mitigate Momme (2002) and Ghodeswar and Vaidyanathan (2008)
the involved risks
Risk evaluation prior to contract execution Handley and Benton (2009)
Evaluation of technical competence
Evaluation of a company’s opportunity
Implications of outsourcing the processes
Evaluation of the cultural similarity of contracting parties Ishizaka and Blakiston (2012)
Confirmation of objectives
Evaluation of future plans
Establishment of a contract with effective contracting Handley and Benton (2009) and Ghodeswar and Vaidyanathan
practices (2008)
Roles and responsibilities
Compensation
Penalties and benefits
Service level agreement (SLAs)
Performance of the Supporting the transfer of activities Ghodeswar and Vaidyanathan (2008)
contract (to carry out the Follow-up after the initial period
contract activities) Registration and procedure of activities
Establishment of contract management process Mellewigt et al. (2007) and Silva-Domingo and Canet-Giner (2010)
Utilisation of indicators
Definition of periodic meetings
The contract as the basis for management
Establishment of recognition practices Burdon and Bhalla (2005) and Kim et al. (2007)
Compensation based on results
Establishment and maintenance of co-creation practices Braun et al. (2011) and Ishizaka and Blakiston (2012)
Shared gains
Active relationship management Ishizaka and Blakiston (2012), Silva-Domingo and Canet-Giner
Interim meetings (2010), Handley and Benton (2009) and Kakabadse and
Discussion and clarification of problems Kakabadse (2003)
Post-contract Evaluation of possible contract extension or termination Ghodeswar and Vaidyanathan (2008)
management
practices
identified practices
Summary of
181
Table I.
Analysis of
BPMJ provider, who work together as a team with the purpose of improving a product
20,2 and/or service (Braun et al., 2011). The posture of outsider providers, if focused on
continuous improvement, fosters a good long-term relationship (Ishizaka and
Blakiston, 2012). The management of the relationship with outside providers is one of
the major challenges in the successful implementation of outsourcing (Silva-Domingo
and Canet-Giner, 2010). The adoption of communication-fostering practices such as
182 periodic meetings reinforces trust between the partners and promotes the sharing of
risks, thereby strengthening the relationship between the contracting parties (Ishizaka
and Blakiston, 2012). Both top and middle management should be involved in managing
the relationship to affirm the strategic support of the company (Kakabadse and
Kakabadse, 2003).
In the post-contract phase an evaluation of a possible contract extension, and in
some instances, the termination of the contract is performed. Contract extensions
demonstrate the cyclical nature of contracts, which may or may not be extended in
light of the extent to which risks are managed during the execution phase by either the
contracting party or the outside provider (Ghodeswar and Vaidyanathan, 2008).
Methodology
Research method
This research analyses the managerial practices used by outsourcing companies to
manage outsourced operations with performance-based compensation. The case study
method was utilised. According to Voss et al. (2002), the case study approach is one of the
most appropriate methods for studying operating areas, particularly when a new theory
is being developed or when the goal is to improve knowledge of real and
contemporaneous events. According to Yin (2001), an important aspect of the case
study approach is that it utilise diverse sources of information because qualitative
methods tend to be inaccurate due to the difficulty involved in analysing the amount
of data.
Propositions
Based on the outsourcing phases identified on the reviewed literature (pre-contract,
performance of the contract and post-contract) and the management practices related
to each phase, we defined the propositions of this research (Table II). These
propositions guided the collection of the data from the field.
Sample selection
The analysis considered five companies in the B2B environment with a total of nine
outsourcing performance-based contracts. All companies have established a formal
quality system and are considered to be important players in their industries. After
selecting the contracting companies, nine contracts were chosen for examination.
The analysed contracts share some common characteristics:
.
performance-based compensation, i.e. the payment received by the suppliers is
commensurate with the achievement of certain goals;
.
duration of at least five years; and
.
the end object of the contract is associated with the value stream of the buyer’s
product in the logistics, direct production, or production support processes.
Phase Proposition Author that support the proposition Investigated topic
Pre-contract The process to outsource some operation is Ghodeswar and Vaidyanathan How the outsourcing was planned?
establish and includes definition of the (2008) Which factors were considered before the
improvement opportunities before the outsourcing outsourcing? How the suppliers were
selected?
A risk analysis, including the analysis of the Handley and Benton (2009) and How the risk analysis was done? How is the
dependency from the supplier, is formally done by Momme (2002) dependency from the supplier?
the contracting company
The objectives related to outsourcing are clearly Ishizaka and Blakiston (2012) Which factors were considered to define the
understand for buyer and supplier companies and objectives for the outsourcing?
both have a long-term perspective
The outsourcing contract establishes roles and Handley and Benton (2009) and How is the scope of the contract?
responsibilities, compensations, penalties and Ghodeswar and Vaidyanathan
benefits, and the level of the service (2008)
Performance of the After transferring activities, follow up by the Ghodeswar and Vaidyanathan How the contracting company follow up and
contract (to carry contract company and register of procedure (2008) support the supplier?
out the contract support the supplier to improve its performance
activities) The contract is the basis for management and has Mellewigt et al. (2007) and How the contracting company manage and
to establish the use of indicators and periodical Silva-Domingo and Canet-Giner evaluate the supplier performance?
meetings for evaluation of the supplier performance (2010)
Practices of recognition and compensation, related Burdon and Bhalla (2005) and How is done the recognition and
to the commitment and performance of the supplier, Kim et al. (2007) compensation of the supplier?
should be defined by the contracting company
Establishing and maintained practices of co- Braun et al. (2011) and Ishizaka and How the supplier co-create value with the
creation and sharing gains contribute to better Blakiston (2012) contracting company and how the gains are
performance of the supplier shared?
Continuous and active involvement of the Ishizaka and Blakiston (2012), Silva- How the managers establish and support
contracting managers supports long-term Domingo and Canet-Giner (2010), long-term relationship with the suppliers?
relationship Handley and Benton (2009) and
Kakabadse and Kakabadse(2003)
Post-contract The criteria for an evaluation of a possible contract Ghodeswar and Vaidyanathan How the contracting company evaluate the
extension or termination must be established and (2008) extension or termination of the contract?
known by the supplier
Propositions
management
practices
183
Table II.
Analysis of
BPMJ The objects of the contracts are: metrology, industrial maintenance, internal logistics
20,2 and the receiving and manufacturing of shoe sole and children’s footwear. The
characteristics of the companies and their respective contracts are listed in Table III.
Data collection and analysis

The contracts and indicators were analysed. Based on the proposed topics for
184 investigation that are presented in Table II, the managers of the nine outsourcing
contracts were interviewed. Interviews were conducted according to the
recommendations of Ryan et al. (2009). All respondents were interviewed in person
by the researchers. The respondents were provided by the buyer companies and
needed to have at least six months of experience as outsourcing contract managers.
The profile of each outsourcing manager is presented in Table IV. Each interview
lasted approximately 1.5-2 hours and was transcribed or tape recorded.
Document analysis was conducted on the contracts with outside service providers
as well as performance reports. The analysis was conducted for triangulation purposes
and confirmed accuracy of the data collected in the interviews. In this manner, the
internal validity of the research was reinforced. Finally, the collected data was
compiled and analysed through tables and schema.
Limitations
A limitation of the present research was that the contract managers from the external
providers were not interviewed. Likewise, the practices used to extend and/or
terminate the contracts, which are contemplated in the post-contract phase, are not
within the scope of to this research.
Findings
Contracts C7 and C8 do not have employees residing with the suppliers. For those
contracts that do have residing employees, the number and representativeness of the
employees differ (for example, in Contract C2, the residing employees account
for 9 percent of the organisation’s headcount, whereas in Contract E, the residing
employees account for just 0.005 percent). All of these variations result from the
fact that the management practices discussed in this article vary from one contract
to another.
The degree of dependence between contracting parties (buyer and supplier) also
exhibits distinct characteristics among the reviewed contracts. Companies C and D
declare that they depend heavily on their suppliers because they do not possess an
internal structure or even the internal capability to perform the required services.
In these cases, when production volume is low, the companies help their suppliers
make payroll payments until a certain production volume is re-established. In contrast,
Companies A, B and E state that their degree of dependence is low and that if
necessary, they could perform the processes or transfer them to another outside
provider. According to these organisations (A, B and E), the processes are technically
simple and easy to find in the marketplace.
The ways in which the outsourcing partnerships were established are distinct and
relate to the time when they were initiated. Among the contracts established over ten
years ago, there was little or no evaluation of benefits and risks. The managers of
Contracts C1, C2, C3, C4 and C5 state that during the pre-contract phase, only economic
Analysis of
Company Company characteristics Contract characteristics
management
Company A Multinational electric/electronic company Contract 1 (C1) – Contract started 11 years practices
Produces thermal and air conditioning ago – currently with one residing
systems. Market share leader in its employee, who accounts for 0.01 percent of
industry. 400 employees. Brazilian plant is the contracting company’s (buyer)
74 years old. Turnover of about headcount. The contracting company 185

US$60 million per year performs metrology
Contract 2 (C2) – Contract started 12 years
ago – currently with 32 residing
employees, who account for 9 percent of
the contracting company’s (buyer)
headcount. The contracting company
performs industrial maintenance
employees, who account for 22 per cent of
performs internal logistics and receiving
services
employees, who account for 7 percent of
performs international logistics
Company B Multinational automotive company Contract 5 (C5) – Contract started 9 years
1,500 employees. National leader in its ago – currently inactive; it had 100
industry. Supplies the biggest residing employees, who accounted for 6
automotive companies in Brazil and percent of the contracting company’s
other countries. Turnover of about (buyer) headcount. The contracting
US$4 billion per year company performs industrial maintenance
Contract 6 (C6) – Contract started eight
years ago – currently with five residing
employees, who account for 0.031 percent
of the contracting company’s (buyer)
headcount. The contracting
company performs international
logistics
Company C Medium-sized Brazilian footwear Contract 7 (C7) – Contract started
manufacturer and retailer 12 years ago – no residing employees.
About 15,600 employees distributed The contracting company manufactures
across seven units in Brazil. The shoe soles
company has seven different shoe
brands and four franchising groups.
Important player in the Brazilian
market
Company D Medium-sized Brazilian Contract 8 (C8) – Contract started 11 years
footwear manufacturer and ago – no residing employees. The company Table III.
retailer manufactures children’s footwear Company and contract
(continued) descriptions
BPMJ
Company Company characteristics Contract characteristics
20,2
Exports to 65 countries. The company has
its own franchising chain. Important
player in the global market focussed on
exportation
186 Company E Multinational agricultural machinery Contract 9 (C9) – Contract started six years
company ago – currently with four residing
900 employees in the studied plant. employees, who account for 0.005 percent
Supplies the Brazilian market and exports of the contracting company’s (buyer)
to more than 30 countries. Important headcount. The contracting company
Table III. player in its industry performs metrology
Has worked
Contract Previous for the
manager outsourcing outside
Company Contract Educational background experience experience provider?
Company A Contract C1 Mechanical engineering 1.8 years Yes Yes

Contract C2 Mechanical engineering 8 months No No
Contract C3 Business administration 4 years Yes Yes
Contract C4 Business administration 2 years Yes No
Company B Contract C5 Mechanical engineering 3 years Yes Yes
Contract C6 Business administration 1 year Yes Yes
Company C Contract C7 Business administration 12 years No No
Table IV. Company D Contract C8 Business administration 8 years No No
Manager characteristics Company E Contract C9 Mechanical engineering 8 months Yes No
evaluations were performed because there were few companies providing

those services. The situation of Contract C9 is completely different. In this case, the
company conducted a thorough evaluation of the supplier’s capabilities, analysed
the supplier’s background, conducted practical tests and implemented a probation
period before the contract was signed. According to the manager, all of these steps
contributed to increasing the confidence in the outside provider.
Regarding the transfer of activities to an outside provider, this process was generally
unstructured in the contracts, established over ten years ago. In the older contracts
the transition consisted of transferring the workforce previously employed by one
contracting company (the buyer) to the other contracting company (the supplier).
In Company A, a descriptive manual was prepared to support the outside provider
in the performance of the outsourced activities. The contracts that were less than
ten years old include better structured transfers: standard operating procedures were
prepared to help with the transfer of activities and only a few employees were required to
move from the buyer to the supplier.
Regarding the formal outsourcing relationship, there is a formal contract in almost all
cases, with the exception of Contract C2. In the case of Contract C3, the manager does not
know if there is a contract, and Contract C7 was in the process being prepare when the
interview was conducted. The managers state that the contracts are of a commercial Analysis of
nature. There is concern regarding continuous decreases in service prices through management
increased productivity. Thus, there are contract provisions stipulating a 5 percent annual
increase in productivity. The buyer never loses on the deal, and in some cases, the buyers practices
pressure the suppliers to sacrifice short-term profitability for the promise of long-term
profitability. A feature of all of the contracts is that they tend to be generic; most of them
do not contain specific clauses concerning management practices, performance 187

indicators, benefits or rewards. All of the interviewees stated that they do not utilise
the contract as a management tool because they have good relationships with their
partners and trust them. According to the manager of Contract C1, “if the management is
based on the contract, the provider is not a partner; such a relationship is stressful”.
With respect to management practices, there is a great similarity among the
contracts. Indicators of quality performance, cost and delivery are used to evaluate
suppliers. In three cases, these indicators are aligned with the buyer’s evaluation
systems, and the same tools are used. Although there are defined indicators, some of the
contracts do not include periodic evaluations, routine evaluations or the establishment
of actions. The exceptions are Contracts C6, C8 and C9, whose managers state that
they convene with the supplier on a monthly basis to evaluate performance. The
contract manager at Company B said that no monitoring of the supplier took place
for nearly ten years; the monitoring practice had been reinstated approximately six
months ago.
Some differences were observed in the contracts with regard to relationship
management. In Contracts C2 and C4, the relationship has deteriorated. In the case of
C4, this was a result of inattention and a low level of supplier monitoring. In the case of
C2, the buyer feels that the supplier is not suitably responding to requests for
improvement, although improvement could also be achieved through more effective
contract management. In Contracts C1, C3 and C6, a more stable situation was
observed. According to the managers, the relationship is positive and both contracting
parties work hard to preserve it. In C7, C8 and C9, stable relationships and a strong
partnership were observed. Despite management changes and crises, the contracts
remain intact. Observed practices include monthly meetings with company
management; mutual cooperation, such as the concession of loans; management
support; and a sense of trust.
With respect to the co-creation of value and the search for continuous improvement,
recent initiatives are included in the contracts. In all the contracts there is no financial
incentive for the partners to develop and directly contribute improvements to the buyer
company’s processes even though the supplier’s employees interact with the buyer’s
processes. Only Company A has a continuous improvement program to benefit the
supplier’s employees. According to the managers, improvement initiatives are
welcome, and the suppliers are responsible for taking advantage of these initiatives to
maintain a good relationship and customer satisfaction.
Discussion and analysis

In all the reviewed contracts, with the exception of C9, the evaluation, approval,
contract negotiation and relationship management phases, although established, were
presented in a non-structured form. The competence of the supplier received the least
attention from the contracting companies (buyers) during the pre-contract phase.
BPMJ This was observed even when the buyer depends on the supplier to manufacture its
20,2 products. Only in Contract C9, the newest one, was there a careful examination of the
supplier’s competence in performing the contractual activities. However, the structure
and analysis of the outsourcing operation should be designed and developed in a
planned way to minimise risks (Momme, 2002; Ghodeswar and Vaidyanathan, 2008;
Handley and Benton, 2009).
188 The process of transferring activities, which is primarily observed in contracts that
were implemented over ten years ago, required the employees of one contracting party
(the buyer) to transfer to the other contracting party (the supplier). This transfer,
although apparently successful, is associated with considerable risk. The employees
who formerly performed the activity might not want to move to the supplier. Neither a
selection process for the supplier nor a process redesign to optimise the process that is
being outsourced, as proposed by Ghodeswar and Vaidyanathan (2008), was observed.
Another point in which the findings depart from theory is that the managers do not
use the contract as a day-to-day tool for managing their partners (Mellewigt et al.,
2007). The two fundamental functions of contracts are the coordination and control of
the relationship between the two organisations. However, the interviewees stated that
they do not manage based on the contract because of their rapport with their partners
and their trust relationship.
Two points where theory and practice converge are the utilisation of performance
indicators for contract management and performance-based compensation. According
to Silva-Domingo and Canet-Giner (2010), the utilisation of quantitative measures helps
people to fully grasp the expected goals. Another advantage of this approach is that the
relationship becomes more professional and emotions are removed from the process.
Performance-based compensation and the use of indicators motivates people to achieve
their objectives, which is ultimately beneficial to the buyer-supplier relationship
(Burdon and Bhalla, 2005; Kim et al., 2007).
Contract management has proven to be important in the maintenance of an
outsourcing relationship (Ishizaka and Blakiston, 2012). In Contracts C2 and C4, the
buyer stopped managing the contract for some time, which made the supplier feel
detached from the organisation. This type of situation can give the supplier the
impression that the buyer does not care about and lacks direction with respect to the
relationship. This is most evident in Contract C2, although the manager disagrees
that little attention has been paid to the contract. The other contracts establish practices
that strengthen the relationship, such as periodic meetings, discussions and joint
problem solving. A positive characteristic of contracts is the posture of continuous
improvement that the buyer can promote through inclusion of productivity. This
practice could be emphasised with the incorporation of the co-creation concept presented
by Braun et al. (2011), which is not currently present in any of the examined contracts.
A factor that contributes to the successful management of an outsourcing initiative,
according to the research, is the outsourcing process experience of the supplier’s
contract manager. A comparison among the cases demonstrates that the managers
who had previous experience with external service providers can more easily handle
conflict situations and better understand the buyer’s difficulties, thus enhancing the
relationship. This factor is not examined in this study, but it is certainly an item worth
investigating in future research.
Table V presents an analysis of the extend to which the companies adhered to the Analysis of
theoretical propositions. Some deployment of the propositions considering the management
practices presented in Table I and the field findings were done to facilitate the analysis.
Four degrees of adherence were considered. practices
Non-existent (the practice was not observed in any contract), little (the practice was
observed in at least one contract), moderate (the practice was observed in two to four
contracts) and high (the practice was observed in more than four contracts). 189
As a contribution to management practice, it is recommended that companies
understand the benefits and risks related to the outsourcing of an activity. A thorough
analysis of the outsourced activity can represent an opportunity for improvement and
optimisations. New layouts, the elimination of waste, reorganisation processes
contribute to the long-term relationship between contracting companies and suppliers.
Contracts based on performance establish variable compensation according to
performance. However, in most cases, the power of the contracting company in the
partnership is much superior to that of the supplier. In order to remain the contract, the
buyers may experience some losses in the short-time, with the expectation of achieving
profitability in the long-term. It is important to monitor this situation if the proposal
involves a long-term relationship and commitment.
Constant and periodic evaluation and relationship development enhance the
suppliers willigness to participate and provide more than what is established in the
contract. Companies that encourage the supplier’s employees to participate in their
continuous improvement program mentioned that the motivation of these employees is
significant and that they achieved mutual collaboration between the buyer and
supplier.
We studied contracts ranging from six to 15 years in age in companies situated in
southern Brazil. In these cases, the contracts were not used as management tool. Trust
and long-term relationship seems to be more relevant than formal contracts. Whether
this situation is affected by cultural behaviour or long-term partnerships was not
investigated. Future research could identify the use of contract as management tools in
other regions or countries.
In the studied cases, the contract renegotiation was not well defined. This can be
consequence of long-term relationships, with the contracting company understanding
that the supplier’s performance is acceptable. However, we suggest that this point be
investigated in the future through comparison with other scenarios and cultures.
Conclusion
The purpose of this research was to investigate the management practices used in
performance-based outsourcing contracts. To accomplish this, the study employed the
multiple case study methodology. Five B2B companies and nine contracts were
analysed. This research was motivated by the prevalence of gaps between theory
(Busi and McIvor, 2008; Ishizaka and Blakiston, 2012) and practice in outsourcing
management, which often result in dissatisfaction and breaches of contracts
(Robinson et al., 2008; Braun et al., 2011).
With regard to management practices, buyers often neglected the buyer selection
and evaluation processes in contracts lasting longer than ten years. The process of
transferring activities has relied on the knowledge of employees. These two aspects are
not consistent with what has been proposed in theory. Management practices for the
20,2
190
BPMJ
Table V.
Alignment between
and company practices

theoretical propositions
Phase Proposition Adherence Application of practices by the companies
Pre-contract The process of outsourcing some operation is establish and Little The process steps are noticeable, but they are
includes the definition of the improvement opportunities non-structured
before outsourcing begins
A risk analysis, including the analysis of the dependence on Little Economic evaluation is predominant
the supplier, is formally conducted by the contracting
company
Technical competence evaluation Moderate Application of tests and probation period
Evaluation of the company’s opportunity High Evaluation of the company’s background
Implications of outsourcing the processes Moderate Focus on the economic feasibility of outsourcing
The outsourcing related objectives are clearly understood Non- This practice is not evident
by the buyer and supplier companies and both have a long- existent
term perspective
The outsourcing contract establishes roles and Moderate Generic contracts established with a focus on
responsibilities, compensation, penalties, benefits, and the legal obligations
service level
Roles and responsibilities Low This item is not thoroughly discussed because it
causes discomfort between the contracting
parties
Compensation High Defined method of compensation; variable pay is
predominant
Penalties and benefits Moderate Penalties for breach of contract and damage to
company assets
Service level agreements (SLA) High Qualitative description of the object of the
contract
Contract performance After the transfer of activities, follow up by the contract Moderate Tracking based on people
(carrying out the contract company and establishment of procedure to support the
activities) supplier improving its performance
Follow-up on the initial outsourcing periods High Transfer of employees from buyer to supplier
Registration and procedure for activities Moderate Preparation of descriptive memos and written
procedures
(continued)
Phase Proposition Adherence Application of practices by the companies
The contract is the basis for management and establishes High Almost all contracts present a management
the use of indicators and periodical meetings to evaluate the process
supplier’s performance
Utilisation of indicators High Application of at least one indicator; normally
there are cost, delivery time and quality
indicators
Periodic meetings Moderate Some companies set a monthly meeting for
presenting results and actions
The contract as the basis for management Non- This practice is not evident
existent
Recognition and compensation practices related to the
commitment and performance of the supplier should be
defined by the contracting company
Recognition Low Informal recognition; the maintenance of the
contract is considered to be recognition
Results-based compensation High Value established for service unit/product.
Possibility of increasing gains with operating
efficiency
Establishment and maintenance of co-creation practices Moderate Productivity clauses
and the sharing of gains to contribute to better performance
of the supplier
Shared gains Non- This practice is not evident
existent
Continuous and active involvement of the contracting Moderate Companies concerned with the relationship
managers supports the long-term relationship
Follow-up meetings Moderate Monthly meetings, but it is the supplier
who takes the initiative
Discussion and clarification of problems Low Registration of problems in reports and
joint analysis
Post-contract The criteria for evaluating possible contract extension or Non- This practice is not evident
termination must be established and known by the supplier existent
management
practices
Table V.
191
Analysis of
BPMJ contract performance phase among the companies are consistent with theory. In most
20,2 cases, management is based on indicators and compensation is based on results.
The greatest discrepancy between practice and theory is that the contract is not used
as a management tool.
The research findings represent opportunities for contract managers to improve
how contracts are managed. These opportunities include placing: a greater focus on
192 buyer selection using established criteria and methods, taking greater care when the
contracts are being prepared to prevent them from being generic and taking greater
care in the process of transferring activities to the supplier so that this process will not
depend entirely on the employees of the supplying company.
This research attempted to increase the knowledge on outsourcing while
understanding that this discussion is not yet complete. Topics such as the perspective
of the suppliers, the analysis of the practices and behaviour of suppliers that account for
the success of outsourcing contracts and in-depth discussions of profiles of contract
managers are some items that still need to be investigated in order to further
comprehend the outsourcing process.
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About the authors

Bruna Omizzolo Lazzarotto graduated in administration course at UNISINOS University –
Brazil (2008) and has been pursuing a Master’s degree in production engineering and systems at
the same university. She is currently a distance classes tutor at the UNISINOS University and
Coordinator of quality at Midea Carrier. She has experience in administration with an emphasis
in production management. Bruna Omizzolo Lazzarotto is the corresponding author and can be
contacted at: bruna.laz@ig.com.br
Miriam Borchardt, PhD, earned her doctorate in industrial engineering. She is currently a Professor
and Researcher in the Industrial and Systems Engineering Department at UNISINOS University.
BPMJ Her experience as a Researcher and Practitioner has focused on quality management, service and
manufacturing operations management, and sustainability.
20,2 Giancarlo Pereira, PhD, is an Industrial Marketing Consultant. His experience as a
Practitioner includes projects in the footwear, apparel, and automotive industries. Dr Pereira
currently holds the position of Researcher at UNISINOS University and has been researching
service operations, industrial marketing, and value co-creation.
Caroline Almeida graduated in administration at UNISINOS University and has been
194 pursuing a Master’s degree in production engineering and systems at the same university.
She is currently an Academic Analyst for PhD courses at UNISINOS University. She has
experience in administration and operations management, with an emphasis on service
management.
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explorative case study of the purchasing process of professional ICT-services. Journal of Purchasing and
Supply Management 21:3, 220-227. [CrossRef]
3. YoungAa Ryoo. 2015. A Study on the Assurance Method of the Efficiency of Local Finance : Focusing
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Analysis of management practices in performance-based outsourcing contracts

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2009). A good buyer-supplier relationship contributes to the success of outsourcing 179

Phases Management practice Authors

Phase Proposition Author that support the proposition Investigated topic

Data collection and analysis

74 years old. Turnover of about headcount. The contracting company 185

Company A Contract C1 Mechanical engineering 1.8 years Yes Yes

evaluations were performed because there were few companies providing

do not contain specific clauses concerning management practices, performance 187

Discussion and analysis

and company practices

Phase Proposition Adherence Application of practices by the companies

About the authors

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