Fostering incremental and radical innovation through performance-based contracting in buyer-supplier relationships
Sumo,Regien van der Valk,Wendy Bode,Christoph van Weele,A.J.
Sumo,Regien
van der Valk,Wendy
Bode,Christoph
van Weele,A.J.
Abstract
Purpose While anecdotal evidence suggests that performance-based contracts (PBCs) may foster innovation in buyer-supplier relationships, our understanding of the underlying mechanisms is limited to date. This study draws on transaction cost economics and agency theory to develop a theoretical model that explains how PBCs may lead to innovation. Design/methodology/approach Using data on 106 inter-organizational relationships from the Dutch maintenance industry, we investigate how the two main features of PBCs—low term specificity and performance-based rewards—affect incremental and radical innovation. Findings We find that term specificity has an inverse-U-shaped effect on incremental innovation and a non-significant negative effect on radical innovation. Furthermore, pay-for-performance has a stronger positive effect on radical innovation than on incremental innovation. Our findings suggest that in pursuit of incremental innovation, organizations should draft contracts with low, but not too low, term specificity and incorporate performance-based rewards. Radical innovation may be achieved by rewarding suppliers for their performance only. Originality/value Our findings suggest that in pursuit of incremental innovation, organizations should draft contracts with low, but not too low, term specificity and incorporate performance-based rewards. Radical innovation requires rewarding suppliers for their performance only.
Description
Date
2016
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Journal ISSN
Volume Title
Publisher
Research Projects
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Journal Issue
Keywords
innovation, outsourcing, operations improvement, maintenance management, collaboration, process improvement, SDG 9 - Industry, Innovation, and Infrastructure
Citation
Sumo, R, van der Valk, W, Bode, C & van Weele, A J 2016, 'Fostering incremental and radical innovation through performance-based contracting in buyer-supplier relationships', International Journal of Operations & Production Management, vol. 36, no. 11, pp. 1482-1503. https://doi.org/10.1108/IJOPM-05-2015-0305