Journal of Purchasing & Supply Management: Kostas Selviaridis, Martin Spring

The dynamics of business service exchanges:
Insights from logistics outsourcing

Kostas Selviaridis
, Martin Spring
1
Department of Management Science, Lancaster University Management School, Lancaster, LA1 4YX, UK
a r t i c l e i n f o
Article history:
Received 3 June 2008
Received in revised form
5 December 2009
Accepted 15 December 2009
Keywords:
Business services
Qualication
Governance dynamics
Contracts
a b s t r a c t
This paper offers insights about the dynamics of business service exchanges. We draw on the interaction
approach, contracting theory and the notion of qualication fromeconomic sociology to develop an analysis
frame for such dynamics. We then apply this frame to a single, longitudinal case study. Contrary to the
extant service supply literature assuming that service denitions remain (or should remain) xed
throughout the purchasing process, our ndings suggest that, under high uncertainty conditions, the service
exchange object is (re)shaped through iterative cycles of stabilisation and destabilisation. This study also
reveals a connection between service denition and relationship governance dynamicsuncertainty and
opportunism risks related to service destabilisation can be managed through dynamic deployment of
relational, contractual and economic mechanisms. This paper also contributes to our understanding of the
contract as basis for interaction and openness and offers an extension of qualication theory to complex
business-to-business (B2B) service settings.
& 2009 Elsevier Ltd. All rights reserved.
1. Introduction and literature review
The continuing trend towards specialisation and outsourcing
of goods and services is well documented (e.g. McIvor, 2005;
Domberger, 1998) and business services such as accounting,
management consulting, information technology/system (IT/IS)
and logistics form a large proportion of rms acquisition of external
resources (Axelsson and Wynstra, 2002; Vining and Globerman,
1999). This has become global in scope, with companies shifting
service activities to low-cost economies such as India, China and
Eastern Europehence the terms off-shoring and near-shoring
(Youngdahl and Ramaswamy, 2008; Sako, 2006; Jahns et al., 2006;
Axelsson et al., 2005). Facing such a global marketplace, buying
companies often need to deal with changing decision-making
contexts and increasingly complex offerings. Service providers, with
different business backgrounds and capability sets, bundle core
offerings with value-adding services in their attempt to differentiate
from competition and secure higher prot margins. Despite all this,
there is relatively little research in business services from a
purchasing and supply management perspective (Ellram et al.,
2007; Wynstra et al., 2006; Carter and Ellram, 2003).
Existing service supply research focuses on problems asso-
ciated with denition and evaluation of offerings, treating
denition of service requirements as the starting point of the
purchasing process (e.g. Fitzsimmons and Fitzsimmons, 2006).
Little is known, however, about how complex services actually
develop and evolve throughout the purchasing process, from
setting the initial requirements to adapting the offering after
contract award. This paper attempts to ll this gap by offering
a dynamic conceptualisation of business service exchanges. The
focus is on understanding and explaining how the object of
service exchange is shaped and reshaped and the role of
underlying relationship governance mechanisms (contractual,
economic, relational). This combination of analytical frames has
not, thus far, been applied to services purchasing. The approach is
deployed and developed in a longitudinal case study of the
process of buying third party logistics (3PL) services. Like other
industries (e.g. IS outsourcing), the logistics market has grown in
complexity, with providers bundling transport and warehousing
solutions with value-added services (e.g. contract manufacturing,
procurement). However, such bundled offerings are far from well
dened (e.g. Bask, 2001) and often customised. Hence these
parallels, it is suggested, allow extension of the insights developed
here in the 3PL context to other complex business-to-business
(B2B) services. In the remainder of this section we critically
review the relevant literature and present the research questions.
1.1. Business services outsourcing
Existing research focuses on do or buy decision frameworks
(e.g. Barrar et al., 2002; Barragan et al., 2003), the purchasing
process (e.g. Day and Barksdale, 1994) and, to a lesser extent, on
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Journal of Purchasing & Supply Management
1478-4092/$ - see front matter & 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.pursup.2009.12.007
Corresponding author. Tel.: +44 1524 594673; fax: +44 1524 844885
E-mail addresses: k.selviaridis@lancaster.ac.uk (K. Selviaridis),
m.spring@lancaster.ac.uk (M. Spring).
1
Tel.: +44 1524 592739.
Journal of Purchasing & Supply Management 16 (2010) 171184
performance evaluation and relationship management (Lee, 2001;
Klepper, 1995). Overall, the process of (out)sourcing appears to be
the dominant issue (Mahnke et al., 2005), with studies focusing on
the description of stages, procedures and tasks involved in
purchasing business services (see Fig. 1). Researchers appear to
be more interested in the pre-contract stages of requirements
specication and service supplier selection (Feeny et al., 2005;
Day and Barksdale, 2003; Stremersch et al., 2001) and pay little
attention to post-contract adaptations and interactions between
client and service provider (Wynstra et al., 2006; Kern and
Willcocks, 2000).
These studies often draw on established theoretical perspec-
tives such as transaction cost economics (TCE), resource-based
view (RBV) and agency theory to explain service outsourcing
phenomena, in sectors such as IT/IS, telecoms and logistics
services (e.g. Mahnke et al., 2005; Watjatrakul, 2005; Marshall
et al., 2007; Logan, 2000). They focus mainly on the make or buy
decision and present a rather static view of outsourcing. Theories
of industrial networks, social exchange and relational contracting
are also applied to buyerservice provider relationship manage-
ment (e.g. Laing and Lian, 2005; Kern and Willcocks, 2000;
Skjoett-Larsen, 2000). However, most of these approaches are
used on a piecemeal basis without serving any broader research
objective and, as a result, they offer little back to theory in terms
of its potential extension, renement or testing. Integration and
cross-fertilisation of theoretical perspectives could provide more
robust explanations covering the outsourcing process in its
entirety, from decision making to design and management of
service outsourcing relationships (Selviaridis and Spring, 2007;
Mahnke et al., 2005).
The service supply literature has, for some time, emphasised
problems regarding the denition and evaluation of service
exchanges, given the presumed difculty in writing specications
and contracts for services as compared with manufactured
goods (Alstr om and Nordin, 2006; van Weele, 2005; Allen and
Chandrashekar, 2000; Fitzsimmons et al., 1998). Ahlstr om and
Nordin (2006) identify four problem areas: the development of
service specication and contracts, the denition of service
processes, service implementation and supplier transition and
the control of end-user interfaces. Ellram et al. (2007, 2004)
pinpoint difculties relating to inadequate service denition,
problematic service measurement and potential supplier oppor-
tunism. Research in the area of professional services (e.g. Mitchell,
1994; Day and Barksdale, 1994) suggests that their purchasing is
problematic in the sense that evaluation of offerings is very
difcult both ex ante, where clients have indeterminate or even
unclear expectations, as well as ex post due to the existence of
credence qualities (Emons, 1997), hence the importance, in such
cases, of supplier reputation (Gl uckler and Armbr uster, 2003).
Buying companies should, nonetheless, strive for clear specica-
tions and detailed contracts to control service performance and
avoid supplier opportunism (Ellram et al., 2007). The dynamics of
service exchange is, however, underplayed, it being assumed that
the offering is dened at the outset of the process. Very little is
known about how exchanged services take shape and how/why
they are reshaped during both the pre- and post-contract phases
(Wynstra et al., 2006; Day and Barksdale, 1994).
There is also very little attention to the role of contractual and
economic governance mechanisms with regard to the formation
and evolution of business service exchanges. Reference to
relational, trust-based mechanisms (e.g. Laing and Lian, 2005)
should be complemented by consideration of contractual and
economic aspects of the exchange, since such aspects (e.g. asset
investment requirements and price/volume changes) often play
an important role in explaining the dynamics of business service
exchanges (Harrison, 2004; Kern and Willcocks, 2000; Halldo rs-
son and Skjoett-Larsen, 2006). Contractual design is an important
research area because it determines the extent to which parties
can adapt the exchange while, at the same time, minimise
uncertainty and avoid opportunism (Mahnke et al., 2005).
1.2. Purchasing logistics services
3PL is dened as the organisational practice of outsourcing
logistics activities to reduce costs and/or enhance customer
service (Christopher, 2005). The literature on 3PL purchasing
mainly focuses on provider selection criteria (e.g. Menon et al.,
1998) and on normative procurement process frameworks. Three
such frameworks are outlined here. Andersson and Norrman
(2002) compare the purchasing process between commoditised
(e-freight exchanges) and advanced logistics services. They nd
that denition of service requirements appears to be more
difcult, criteria for 3PL selection extend far beyond price
considerations and contracts are much more detailed when
buying advanced logistics solutions (Andersson and Norrman,
2002). Sink and Langley (1997) emphasise process issues such as
need identication, formation of cross-functional buying team,
development of selection criteria and service implementation.
Bagchi and Virum (1998) also emphasise process, but their
framework is wider in scope than the previous two, dealing with
post-contracting issues such as performance measurement.
Such studies are useful insofar as they describe the typical
buying process and focus on individual stages and procedures
such as provider selection. However, they appear to be weakly
theorised and based on some problematic assumptions: (a) the
buyer has complete knowledge of its requirements, facing low
need and market uncertainty, (b) the buyer can, without
problems, convey such requirements and information to suppliers
for the purposes of service design and (c) service requirements
and design assumptions remain xed. Such assumptions can be
severely challenged in practice, as lack of information often
necessitates iterative service specication/design (Lynch, 2000)
and relationship renegotiation in the post-contracting period
(Halldo rsson and Skjoett-Larsen, 2006). Some authors (Sink and
Langley, 1997; Andersson and Norrman, 2002) do hint at the non-
linear nature of exchange denition, but they stop short of
providing empirical evidence and addressing the issue in detail.
Specify
service
Select
supplier
Agree
contract
Implement
service
Measure
service
Pre-contract phase Contracting Post-contract phase
Fig. 1. Business services (out)sourcing process.
K. Selviaridis, M. Spring / Journal of Purchasing & Supply Management 16 (2010) 171184 172
In addition, there is little written regarding the role of contractual
and economic aspects of logistics service exchanges (Halldo rsson
and Skjoett-Larsen, 2006). Existing contributions consider the
importance of formal contracts for relationship management and,
indeed, describe contractual provisions (e.g. Lambert et al., 1999;
van Hoek, 2000), but they do not link contracting to buyer and
provider efforts to (re)dene the exchange object.
In this sense, as for services outsourcing in general, the extant
3PL research underplays the dynamics of clientlogistics provider
exchange: how and why the service exchange object is shaped
and reshaped throughout the purchasing process (Selviaridis and
Spring, 2007) and how uncertainty and opportunism risks
associated with such change are managed within the developing
business relationship.
1.3. Research aim and questions
The service supply literature appears to have long underplayed
the dynamics of service exchange denition. More recent studies,
however, attempt to address this gap; Lindberg and Nordin (2008)
argue that the degree of service objectication and clientprovider
relational proximity varies during the process. For instance, the
service features are only temporarily codied when the contract is
agreed. The contractual specication, however, may not fully reect
the way the service is delivered in terms of buyersupplier personal
chemistry, supplier expertise and capabilities; such properties
typically emerge through interactions among buyers, suppliers and
service users (Lindberg and Nordin, 2008). This suggests that
attempts to productise complex offerings by writing specications
and well-crafted contracts may not be a panacea and equal attention
should be given to post-contract interaction and service adaptation
(Wynstra et al., 2006). Also, the buyer may be facing high market
uncertainty or may have limited knowledge about its needs and
requirements when initiating the outsourcing process (Ellram et al.,
2008). Alternative denition methods (e.g. output-based service
specication), complex contracting and close, ongoing interactions
with the service provider may be used in such instances, either in a
mutually exclusive or complementary fashion, as relationship
governance mechanisms to deal with uncertainty and risk of change
(Ellram et al., 2008; van Weele, 2005; Axelsson and Wynstra, 2002).
This paper builds on the above insights and seeks to under-
stand the dynamics of service exchange denition by posing three
key questions:
(1) How does the object of service exchange take shape?
(2) How and why is the service exchange object reshaped?
(3) How do service exchange denition dynamics relate to relation-
ship governance and its dynamics?
The rest of the paper is organised as follows. Section 2 develops
the theoretical frame of reference. Section 3 discusses key
methodological choices. Sections 4 and 5 present an extended
analysis and discussion of the case focusing on service exchange
object dynamics and the role of relationship governance and its
dynamics, respectively. Section 6 concludes the study and points
out theoretical and managerial implications as well as further
research opportunities.
2. Interaction, contracts and qualication
To pursue the research questions we draw on three areas of
theory, the industrial marketing and purchasing (IMP) interaction
approach, some aspects of contracting theory and the notion of
qualication, taken from economic sociology. We see these as
complementary perspectives that help us to provide a fuller
explanation of the dynamics of service exchange.
2.1. Interaction approach
This area of theory is introduced rst as it is perhaps the most
familiar and perhaps the most obvious. Given our conceptualisa-
tion of logistics service provision as an extended, dynamic
process, rather than one characterised by a small number of
discrete decisions such as make-or-buy and supplier selection,
the interaction approach (H akansson, 1982; H akansson and
Snehota, 2002) is well suited as a basis for explanation. As the
IMP research tradition is well established and well known in the
purchasing and supply eld, the discussion here is mainly
intended to identify specic points of departure for the present
research.
Above all, the interaction approach emphasises the business
relationship, rather than the individual transaction or decision,
as the analytical unit. The relationship is seen as a stream of
exchange episodes and buyersupplier interactions such that no
individual exchange can be understood without reference to the
broader relationship (Ford et al., 2003). Episodes are seen as part
of larger structures that change over time through changes in the
way actors, resources and activities (ARA) are connected to each
other; business relationships (and broader networks) can be seen
as simultaneously embodying process and structure, as well as
stability and change (Axelsson and Easton, 1992). The interaction
approach has been extensively applied to the sourcing of products
and business services (e.g. Axelsson and Wynstra, 2002; Gadde
and H akansson, 2001). Axelsson and Wynstra (2002) in particular
have discussed a relation-oriented approach to business services
sourcing, whose main features include a long-term orientation,
supplier co-operation, adaptation and value creation along with
cost reduction targets.
2.2. Contracting theory
The industrial networks literature has tended to underplay the
contractual and economic dimensions of business-to-business
relationships. They are assumed to be present, but their function
in terms of relationship governance and support has remained
largely unexplored (Harrison, 2004). Nevertheless, as Kern and
Willcocks (2000) submit, contracts are very important in out-
sourcing. In recognition of this gap, there have recently been
attempts to examine how contractual design can help establish a
framework for guiding ongoing interaction in business relation-
ships (Mouzas and Ford, 2006). The time factor inherent in such
situations has important implications for contracting, since it
introduces environmental uncertainties, effort monitoring and
investment issues (Lyons, 1996), meaning that there is no
prospect of writing a complete contract. In his early analysis,
McNeil (1980) understood this in his distinction between discrete
and relational contracting. Discrete contracting focuses on the
immediate exchange and seeks to develop a complete specica-
tion, foreseeing all contingencies; the future is thus brought into
the present (presentiated, in McNeils term). On the other hand,
relational contracting emphasises the continuity of exchange
relationships. Precise specications and measurement systems
are still important, but planning work also entails developing
supporting structures and processes that allow renegotiation in
cases of changing circumstances. Post-contracting exibility is
essential due to the existence of interdependencies between
contracting parties and the expectations for future co-operation
(McNeil, 1980).
McNeils approach was associated with Williamsons transac-
tion cost economics (TCE) analysis (e.g. Williamson, 1985). TCE
analysis suggests that bounded rationality and opportunism
coupled with uncertainty and small numbers bargaining are
responsible for severe contractual problems. When these pro-
blems are particularly severe, vertical integration governance by
hierarchy is the solution. When they are less severe, considera-
tions of the levels of asset specicity, transaction frequency and
uncertainty lead to a decision about the most appropriate type of
contract, from a complete classical contract enforced by the
possibility of litigation, to a knowingly incomplete relational
contract, where emphasis is put on adaptation and relationship
continuity (Williamson, 1991). Such analyses present this as a
one-off exercise in reading off the correct contract type for these
given parameters so as to minimise transaction costs arising from
the risk of opportunistic behavior. There has recently been
increased interest in the comparative performance of relational/
trust-based and contractual governance mechanisms. Generally
speaking, there seems to be a disagreement in the literature, with
contract and trust being regarded either as substitutes (e.g. Lee
and Cavusgil, 2006; Ferguson et al., 2005) or complements
(Lazzarini et al., 2004; Poppo and Zenger, 2002; Luo, 2002); or
even as both substitutes and complements (Woolthuis-Klein
et al., 2005). This literature stream offers some insights but
appears also to mistakenly conate contract types with relation-
ship types (see Williamson, 1985). Moreover, the extent to which
articial contrasts between formal contracts and trust can be
useful is debatable in the sense that all transactions, even the
simplest ones, have both discrete and relational dimensions that
cannot be easily isolated (Collins, 2003).
Early empirical evidence (Macaulay, 1963) suggests that, even
if relatively complete contracts exist, contracting parties often do
not use them to enforce their rights, even in circumstances of
apparently serious breach. Rather, they often act to solve practical
problems and maintain continuity of the relationship. This
empirical evidence calls into question the search for the correct
contract. Developing this view, Collins (1999, p. 129) discusses
three normative frameworks that can be used to evaluate
contracting practice:
The business relationshipaction oriented towards relationship
continuity.
The economic dealaction oriented towards economic self-
interest.
The contractfocus on formal contractual rights and obliga-
tions.
At any time in the interaction between parties in a contractual
relationship, according to this view, behavior is oriented to one or
other of these frameworks, and may make no sense at all in terms
of the others. So, action oriented towards the business relation as
reference point aims at ensuring relationship continuity as well as
developing and preserving trust. The economic deal, on the other
hand, focuses on establishing economic incentives and managing
risks that result from the transaction. The contract, in turn, orients
action based on the identication of rights and obligations that
are included in formal agreements, isolating the transaction from
its economic and social context. It treats any commitments as
absolute undertakings that cannot be revised until the agreement
itself is revised (Collins, 1999).
2.3. Qualication
Qualication is a concept with a long pedigree in economic
sociology (Musselin and Paradeise, 2005). Broadly, it refers to the
process that takes place by which products, services and employ-
ees are dened and evaluated so that they can be exchanged. The
qualities of a prospective employee may be temporarily stabilised
in a CV, for example, to make exchange in a labour market
possible. Callon et al. (2002) adopt this approach to products and
services; qualication temporarily stabilises the product or
service in order for it to become the object of economic exchange,
thereby, for Callon et al. (2002) becoming an economic good. A
product/service is seen as having a career, going through cycles
of destabilisation and (temporary) stabilisation of its character-
istics. The (re)qualication process takes place through interac-
tion between the product/service and agents such as suppliers,
customers and professionals that denes its qualities through
adjustment, iteration and transformation (Callon et al., 2002;
Callon and Muniesa, 2005). Various writing and re-writing devices
such as documents describing service production processes,
quality procedures or questionnaires handed out to customers
play an important role in the (re)qualication process (Callon,
2002). Such writing and re-writing is performative, as it not only
describes a pre-existing reality but it also transforms and
constructs it (Callon, 2002).
Callon points out that qualication is necessary even for
relatively simple consumer products exchanged in a brief
transaction in a supermarket. In the buying and selling of complex
business services then, it seems likely that signicant effort may
be required to (temporarily) stabilise service offerings (Araujo and
Spring, 2006). But we do not have any empirical evidence of how
this takes place. In contrast with such an approach, the discussion
of Callon and Muniesa (2005) appears to imply that the
qualication process ends at the point of exchange, where the
product/service is detached from the seller and enters the buyers
world in a way that transacting parties need no further
interaction, they become instantaneously quits (Callon and
Muniesa, 2005).
2.4. Summary
The last of these three theoretical areas the notion of
qualication (Callon et al., 2002) is particularly helpful in
addressing the rst of the research questions, relating to the
initial shaping of the object of exchange. This and the subsequent
re-shapings forming research question two are effected in part
through means of contracts, and so the second theoretical
perspective, from the contracting literature (Collins, 1999), comes
into play. This draws attention to contracts as an important part
of the shaping process, but also provides a way to examine how
the contract is used in counterpoint to the deal and the
relationship, as the exigencies of practical and economic reality
make the contract unworkable, in the short term at least. This
gradually broader and longer perspective is then augmented by
the use of the interaction approach (H akansson, 1982), which,
while downplaying the contractual aspect, is a powerful way to
make sense of business interactions over extended periods. This
approach, then, complements the qualication and contractual
approaches to allow the analysis of the third research question,
concerning the interplay of governance mechanisms over the
period studied.
3. Research methodology and research design
The study, informed by the theoretical perspectives outlined in
the previous section, seeks to nd how complex services are
shaped and reshaped in business-to-business relationships. To do
this, a single extreme case was used, one in which uncertainty
of various sorts was very pronounced. In this way, it was felt,
the maximum opportunity would be given for the various
possible theorised mechanisms and behaviours to make them-
selves manifest. Furthermore, a longitudinal approach was
adopted, consistent with the focus of the study on service
exchange dynamics. This section explains this research approach.
3.1. Methodological choices and the single case approach
The ontological and epistemological position adopted here is
broadly in line with a critical realist philosophy (Sayer, 1992). This
advocates the existence of a multi-layered social ontology:
events/actions and experiences that stem from them (and can
be empirically observed) are generated by certain causal mechan-
isms that reside in the deep, real domain and that may not
necessarily be observable or in phase with events and experiences
that they create (Ackroyd and Fleetwood, 2000). The epistemo-
logical aim of critical realist-oriented research is, by posing how
and why questions, to understand and explain causal mechan-
isms that contingently produce phenomena observed in the
empirical domain (Harrison and Easton, 2004; Tsoukas, 1989).
It is typical to advocate the use of case research in circum-
stances where relatively little is known about the phenomena
under investigation (Dubois and Araujo, 2007; Voss et al., 2002)
and, certainly as far as service exchange dynamics are concerned,
that applies here. The emphasis placed on the dynamics of service
exchangein the research questions posed and in the theory
adoptedalso suggested that a longitudinal case study would be
appropriate (Bartezzaghi, 2007; Matthyssens, 2007; Easton, 2000;
Leonard-Barton, 1990). And, although we had initial views as to
the theoretical approaches that would be helpful, these were not
xed before the empirical research began; in other words, there
was an iterative process of relating theory to data and vice versa
(Dubois and Gadde, 2002; Ragin, 1992).
A single case design was used. This allowed greater depth
rather than breadth of analysis (Easton, 2000), maximising the
likelihood of understanding and explaining service exchange
dynamics and the underlying causal mechanisms giving rise to
them (Tsoukas, 1989; Flyvbjerg, 2006). The single case analysis
was used as inspiration (Siggelkow, 2007) to develop theory; it
helped in developing the conceptual argument but it did not
provide the sole justication for it, since equal emphasis was put
on building the theoretical frame of reference (Dubois and Araujo,
2007), drawing on rich theoretical resources (Weick, 2007).
Furthermore, the FurnitureCoLSPCo case was selected because
it exhibited certain extreme conditions (Easton, 2000; Tsoukas,
1989), or characteristics (Siggelkow, 2007), which signicantly
depart from the extant literatures assumptions; namely, low
market uncertainty when outsourcing, a buyer who knows what it
needs, and detailed specications and contracts. Recent research
has challenged such assumptions (Lindberg and Nordin, 2008;
Ellram et al., 2008); in the present research then, the case was
chosen for good theoretical reasons (Dubois and Araujo, 2007) to
uncover and examine the phenomena in more detail.
The choice of an extreme case, while increasing the likelihood
that certain causal mechanisms will be revealed via empirically
observable phenomena, may also raise concerns about generali-
sability. Our concern here is with what Flyvbjerg (2006, p. 228)
calls the force of example concerning causal mechanisms rather
than formal, law-like generalisation regarding the empirically
observable events that such mechanisms contingently give rise
to. Hence, to some extent, generalisability is in the eye of the
beholder; readers will judge how much the causal mechanisms
revealed here may be present and active in other settings. These
might include other cases of logistics outsourcing, but also other
situations involving the procurement of complex services such as
information systems outsourcing, where buyers and service
providers also devote signicant effort for dening and evaluating
the exchange object (Flowers, 2004).
3.2. Data collection and analysis
Data were collected through semi-structured interviews and
review of organisational documents. Ten interviews with service
provider managers from various functional departments (see
Appendix A) were conducted to increase richness and accuracy of
accounts and reach a theoretical saturation point (Voss et al.,
2002). Open-ended questions were used to gain an overview of
service offering and relationship governance dynamics (Yin, 2003)
and to capture the interviewees interpretations regarding key
events of the sourcing process (Hammersley and Atkinson, 1983).
The interview guide is presented in Appendix B. The process was
followed through retrospective accounts of contracting, comple-
mented by real time data on service delivery, adaptation and
relationship renegotiation. All interviews were recorded and
transcribed, with their duration ranging from 2 h to 45 min.
Interviews with the client were not possible because of access
restrictions. However, this was compensated by gaining full
access to several organisational documents, most of which were
produced by the buyer rm: buyers project background reports,
the invitation to tender (ITT) specication, letters of intent/
indemnity, the contract agreement, implementation plans, per-
formance measurement records as well as service provider project
les and service proposal presentations. All these documents
proved pivotal in reconstructing the key events of the contracting
process and triangulating interview accounts (Marshall and
Rossman, 1999; Jick, 1979). In particular, email exchanges and
minutes of meetings between the FurnitureCo team and service
provider managers as well as trade press releases were carefully
analysed to shed light on the buyers side and to check the
accuracy of service provider interview accounts.
Data collection and analysis were treated as parallel activities
following a systematic combining approach (Dubois and Gadde,
2002). Data were managed and analysed with the aid of the
qualitative analysis software ATLAS.ti. A database with quota-
tions, codes, memos and documents was developed using the
software. Coding was informed by the initial theoretical orienta-
tion; however, as analysis proceeded, codes were also being
revisited in an iterative manner (Dubois and Gadde, 2002). Initial
codes were assigned to quotations and document sections
focusing on the (re)qualication process (e.g. service qualica-
tion, destabilisation, service re-qualication). However, addi-
tional data collection helped uncover new aspects of the case (e.g.
ongoing service denition effort and impact of economic dimen-
sions), which led to consideration of additional theoretical
perspectives (e.g. interaction approach and Collins framework).
The same document parts and quotations were then re-coded
taking into account that such theories and additional codes were
developed (e.g. ongoing interaction, economic deal). Within-
case analysis tables were also constructed manually (e.g.
comparison of service characteristics before and after the
adaptation project, see Table 2) following Miles and Huberman
(1994).
4. Case study: FurnitureCo and LSPCo
4.1. Overview of the FurnitureCoLSPCo contract
FurnitureCo sells home and ofce furniture products and
related accessories. In order to enter the UK market, the company
initiated a process for buying third party logistics services.
According to the ITT document, the appointed logistics partner
would support supply chain operations in the country for a
minimum period of ve years. As the LSPCo Design Manager
explained, the FurnitureCo buying team (CEO, UK Chief Operating
Executive and Head of Logistics) did not specify any rigid
requirements and timescales for potential suppliers and put
emphasis on supplier expertise and collaborative solution devel-
opment instead. LSPCos Business Development (BD), Operations
and IT departments worked closely with the client buying team in
order to specify service requirements and to develop and
implement a service solution that was highly customised to
FurnitureCos needs. LSPCo was to act as single-source provider of
logistics services in the UK, being responsible for management
and execution of warehousing, bulk transport, home deliveries
and call-centre operations.
In exchange for the award of an 8.5 year contract, LSPCo
invested in dedicated resources, including a multi-functional
distribution centre (DC) and a eet of bulk transport and home
delivery vehicles. LSPCo employees were to perform a wide range
of activities, including processing of store orders, transportation
planning, as well as managing end customer complaints and
store-related queries through a call and customer service centre.
There was also to be a dedicated account management team. Six
months after the contract went live, the rms had to adapt the
service in terms of activities, resources and costs because of
design assumptions and sales/volume forecasts, which proved to
be wrongnotably, sales were much less than forecast. The
following two sections examine the development of this service
before and after contract award, respectively.
4.2. Service denition, design and contracting
Before service delivery began, there was an intensive period of
buyerprovider interaction to dene the service offering and its
related activities/processes, resources, systems and service levels.
One extreme condition of the case (Flyvbjerg, 2006) was the
buyers great uncertainty as to what service would be required.
The FurnitureCo buying team was entering a new market, and so
had no history of UK sales data that could inform the logistics
service specication. Hence the solution had to be based on sales
forecasts, budgeted volumes and the store opening plan, as well as
extrapolation from data from their domestic, Nordic operation. In
response, the buying team adopted a relation-oriented approach
to the purchasing process, putting emphasis on exploitation of
supplier expertise and joint development of logistics capabilities.
The ITT document was very broadly dened, stabilising the
required service activities, resources and expected outputs
(e.g. 7-day home delivery service, customer pre-calling activity)
only in much aggregated terms and providing little data.
Moreover, the majority of these plans/budgets were subject to
change and thus indeterminate at the time. According to the
FurnitureCo ITT document:
Suppliers are requested to develop highly exible solutions on
the understanding that further work would be required in
order to nalise logistics requirementsce.
LSPCo interviewees stressed the inadequacy of the assignment
specication, which was not helpful in understanding client
requirements and developing a solution accordingly. As the LSPCo
BD manager explained:
ythe ITT, if its that you want to call it, was four pages long,
contained more words than numbers. It wasnt detailed at
allythe information was virtually lacking. So it was towards
us to try to extract as much information from them as we
could about their business and their requirements.
This indeterminacy led to destabilisation of the ITT specica-
tion. A series of six meetings/solution presentation sessions
within a period of 3 months served to revisit, rene and adjust
key service parameters and activities and resources required, e.g.
warehouse location/capacity and call centre activity scope (see
Table 1). All meetings were attended by the FurnitureCo UK Chief
Operating Executive and the Head of Logistics, who were making
the decisions, along with the companys CEO. From the LSPCo side,
meetings were attended by a mix of senior and mid-level
managers: the BD, Commercial and Managing Directors and BD
Senior and Design Managers, were present in all meetings.
Depending on the meetings agenda, additional managers such
as the Warehouse Design team, IT Director and Systems Manager,
and the Commercial Manager were involved. In addition to this
series of meetings, LSPCo senior and middle managers visited
several times the Nordic DC operation and met with the
FurnitureCo Supply Chain Director, DC Manager and Systems
Managers and collected information related to service design (e.g.
ERP functionality and warehousing processes). All nal decisions
had to be approved by LSPCo senior management. The two parties
were going back and forth, reviewing operational data, design
assumptions and requirements. The LSPCo Design Manager
commented on the process:
It wasnt black and white, it was grey. Between us we had to
keep going back and conrming this, conrming that. It was
Table 1
LSPCoFurnitureCo service offering revisions during the contracting process.
Meetings Service offering revisions
First (Week 1)
Second (Week 2) Revision of FurnitureCo stock holding policy (60
days more efcient)
Change in proposed DC location and increase in
number of HDCs to 3
Decision to use FurnitureCo ERP system
Reduction in proposed cost by 10%
Five year contract term
Third (Week 4) CC depot management in service scope
Proposal for 3 national DCs and 4 HDCs
Long-term leases and break clauses
Implementation plan and budgets outline
Fourth (Week 11) Previously proposed DCs rejected by client and
search for less expensive options
Alternative DC locations proposed (2 DCs)
LSPCo requests system and process modications
Reduction in capital investment (20%)
Ten year contract proposed by LSPCo
Fifth (Week 12) Minimisation of capital commitment requested by
FurnitureCo (1-year leases)
Change in proposed DC location (two DCs)
Systems review and WMS/ERP modications
specied in detail
Potential postponement of opening fourth UK store
Sixth (Week 14) Service design excludes fourth store
Stock holding adjusted to 60 days (80 days max)
Short term break clauses for DC leasing
Further reduction in capital commitments by 70%
(compared to fourth meeting)
Additional customer service activities
Further work is required to map operational
processes and adapt IT systems
very much us creating the information and playing it back to
themymaking assumptions and then having them validated
by them.
Table 1 shows some elements of the iterative process by which
the service activities and resources were temporarily stabilised in
order to form the initial contract. For instance, during the rst
meeting, LSPCo proposed to use their home delivery and ware-
house management information systems as key resources for the
solution, but the client rejected this. According to the minutes of
the respective FurnitureCoLSPCo meeting:
The FurnitureCo CEO and Head of Logistics want LSPCo to use
the in-house system. LSPCo need to understand its function-
ality and submit a proposal with required adaptations and
development of interfaces with LSPCo systems.
Adaptations to buyer systems focused predominantly on home
deliveries and call centre operations. Also, additional activities not
included in the initial assignment specication were transferred
to the 3PL provider during the processmanagement of a
customer collection (CC) depot and customer service activities
in terms of handling store- and product-related queries.
Crucially, the parties also revisited capital investment assump-
tions that in turn impacted on logistics resource levels and led to
further destabilisation of service features. LSPCo initially based
their service proposition around a national DC and two supporting
regional depots (RDCs). According to the BD teams analysis, this
was optimum because it minimised operational costs. However, it
was rejected by FurnitureCo managers, who stressed the
signicance of commercial exibility. According to an email
exchange between the FurnitureCo Head of Logistics and the
LSPCo BD Manager, the former stressed:
ywe need to understand, as next stage, solution options for
property permutations and space utilisation gures and how
they impact on capital expenditure. Our aim is to maximize
stock cover with the least possible capital requirement.
More specically, minimum capital investment was required
to deal with the risk of non-achievement of projected sales
volumes in the UK (and this initial caution proved to be justied).
Hence, the parties eventually agreed to adopt a two-DC solution
with lower investment costs and shorter lease periods. As the
LSPCo BD Manager conrmed:
ythe reason there were many [presentation meetings] was
that we had to go through the iterations of low operational
costs versus high capital investment and risk.
The revised offering resulted in a 70% reduction in capital cost
and introduced break clauses enabling the parties to terminate
the lease of warehouse facilities after the rst year of operation, if
necessary. Such exibility however affected the warehousing
service design and initiated a new cycle of discussions regarding
the FurnitureCo stock-holding policy. According to the Warehouse
Design Manager, all alternative DC options considered were,
compared to the original one, lower in height and thus an
increased warehouse footprint was needed to accommodate the
projected stock levels. Because of this capacity issue, the parties
eventually adopted a two-warehouse solution, with LSPCo
convincing the client to consider a stock level reduction in the
medium term. Many details regarding home delivery, call centre
and warehouse picking activities/processes were left open to be
agreed at a later stage, as they were linked with the required ERP
system adaptations.
Based on this series of meetings and further contractual
negotiations, the parties eventually arrived at a service specica-
tion that detailed activities/processes (e.g. call centre and
customer service scope), resources (e.g. two DCs and three HDCs,
modied ERP system) and service levels (e.g. 99.5% of deliveries
within time window). This was appended to the contract
agreement. At this stage, then, the service (and associated
activities, resources and costs) was temporarily stabilised and
made tradable (i.e. qualied). Documents such as the buyers ITT,
providers service proposals and contracts drafts served as
important (re)writing tools in this process of service qualication,
since they enabled successive renement or even transformation
of the service. Final service specications (e.g. KPIs, budgeted
costs) were written down in the contract agreement.
4.3. Post-award service delivery and adaptation
The contractual specication was a means for temporarily
stabilising the service exchange object. However, as already
described, the service solution was built on forecast sales volumes
and the UK store-opening plan provided by the client. According
to all LSPCo interviewees, during the rst few months after the
contract went live, it became evident that sales targets were
optimistic and logistics volumes were overestimated. The store
opening programme was delayed, with the rst store opening 6
months after signing the contract with LSPCo and undertaking the
investment in logistics resource infrastructure. Also, the agreed
Table 2
LSPCoFurnitureCo activity and resource adaptation per service offering aspect.
Service
elements
Contractual specication Post-contract adaptations
Warehousing Two national DCs
Product receipt, quality
control and put-away
Storage of furniture products
and associated accessories
Order processing and returns
Customer collection depot
management
Stock management (90120
days of stock)
Closure of one of the DCs,
40% reduction in storage
capacity
Additional racking to DC for
bulky products
Stock-holding levels to be
reduced (60 days)
Reduced staff levels
Bulk
transporta-
tion
Bulk transport eet
Seven-day transport plan
Double shift replenishment
of stock from the DCs to
stores, CC and HDCs, as well
as from store to store
Five-day transport schedule
Single-shift store delivery
schedule
Increased vehicle utilisation
(max. double shifts)
Reduction in vehicles (by
eight) and driver levels
Home
deliveries
Seven-day delivery service
Application of zonal delivery
schedule (double-shift am/
pm deliveries)
Two-men delivery to the
room of customer choice
Removal of packaging, light
assembly and proof of
delivery
Returns management
Five-day delivery service
Single-shift for am/pm
deliveries
Staff level reductions
Reduction in delivery vans
Possible increase in order
delivery lead time
Call centre
and
customer
service
Store order receipt
Booking home delivery slots
Pre-home delivery
notication calling
Rescheduling home
deliveries
Dealing with stock- and
customer-related queries
Customer complaints
management
Store- and product-related
queries and complaints to
be transferred back to
FurnitureCo personnel
Possible reduction in call
centre agents
ERP modications to be implemented by a specialist software
provider were severely delayed. As the FurnitureCo Head of
Logistics wrote to the LSPCo Operations Manager at the time
[email exchange]:
Congratulations for your attitude during the IT meeting. We
are condent that LSPCo will provide the IT logistics plan, but
there is lack of condence in the software providers
capabilityyLSPCo should be prepared to use the ERP system
as it is.
The above entailed changes in denition of service processes/
systems (e.g. picking process, order processing, home delivery
slots, etc.), destabilised the contractual specication and created
additional nancial strain for the client. Although LSPCo managers
were increasingly concerned about FurnitureCos nancial stabi-
lity, they remained rm in their intention to support them in their
start-up period. As the LSPCo Commercial Manager commented at
the time:
Obviously FurnitureCo are still trying to nd their feet in the
UK market, they are trying to establish themselves and
increase their sales revenue and obviously this will take a bit
of time as they are a new business into the UK. And what that
means for us is that we need to react to changes in their sales
forecasts and the service they are offering to their customers.
The parties jointly initiated an operational review, intended to
adapt the exchange and identify opportunities for operational cost
reduction. LSPCos BD team analysed the actual sales data and
volumes so as to understand their impact on logistics infra-
structure utilisation. Based on this review exercise, LSPCo
developed a revised service proposal suggesting reduction in
activities and resource levels, e.g. reducing the home delivery
offering to 5 days, instead of 7, and transferring some customer
service activities back to the client (see Table 2). These
suggestions were initially rejected by FurnitureCo senior
management, who expected that sales targets would be hit in
the light of an upcoming consumer spending spree period.
However, the clients expectations were not met; LSPCo-
proposed adaptations were eventually accepted and estimated
to reduce operational costs by 50%. As the LSPCo Design Manager
explained at the time:
We have to do some more work because we built our resources
for more sales than they are actually getting at the moment, so
we are going to have to re-adjust that and try and make it
more cost-effective; it is the big challenge for us.
The adapted service solution resulted in a signicant reduction
of logistics resources and assets. For instance, warehousing
capacity was reduced by 40% (by removing one of the DCs), the
bulk transport eet was reduced by eight vehicles and there was
also a signicant reduction in home delivery resources (e.g.
single-shift delivery, reduction in delivery vans).
As the Warehouse Design Manager commented on the review
project at the time:
I have recently attended a meeting [with FurnitureCo] to see
how they [and] we can adapt the solution and get rid of
excessive capacity. So if we take into account the current
situation, the only option would be to reduce the amount of
logistics resource.
The LSPCo Operations Manager also commented:
We built a large logistics infrastructure which was designed to
support four stores with approximately x millions worth of
sales. The reality is that they [FurnitureCo] have only opened
three stores and their sales are somewhat half of that so we,
as a logistics partneryinstigated a number of changes within
our service that would ultimately benet the client because it
would reduce their logistics spend.
Overall, the sales/volume uncertainty, the provisional design
and the incomplete contractual specication entailed signicant
destabilisation of service exchange denition post-contract. Due
to the inaccuracy of sales forecasts, the buyer and the service
provider interacted closely to adapt service activities, resources
and costs. Performance measurement records, revised service
proposals and, eventually, amendments to contractual specica-
tion were important (re)writing devices to realise such adapta-
tions. The service was re-qualied and re-made tradable through
the amended contract.
5. Analysis and discussion: the dynamics of service
specication and governance
The previous sections have examined how the service was
shaped and reshaped before and after contract award. This section
focuses on the interplay between service exchange denition
dynamics and relationship governance dynamics, i.e. the relative
Partnership
approach to
solution design
FurnitureCo
min capital
investment
request;
changes in
service specs
Letters of
intent &
indemnity
issued to
LSPCo
Contract
negotiations
Risk
reduction e.g.
FurnitureCo
guarantor
Systems not
ready in time
Delays in
store opening
plan
Contract
signed
First store
opens
Exchange
starts
Payments to
LSPCo
delayed
Service
adaptation &
payment
structure re-
negotiation
Design (11 months) Management (on-going)
Relationship
Deal
Contract
Contract
amendment &
implementation
of adaptations
Qualification
Re-qualification
Collaboration to
manage uncertainty
Managing financial risk &
securing benefits
Formal obligations
& rights agreed
Collaboration to deal
with implementation
problems
LSPCo emphasis on
long-term economic
viability & benefits
Changes effected to
continue trading
relationship
Fig. 2. Dynamic deployment of governance mechanisms in the service (re)qualication process.
importance of the business relationship, the economic deal and
the contract at specic points in time in managing uncertainty
related to potential and actual destabilisation.
In this case, different governance mechanisms were deployed
during different stages of the purchasing process (see Fig. 2).
According to the ITT document, FurnitureCo wanted to form a
partnership with a logistics supplier from the outset, at that stage
emphasising collaboration and long-term orientation to manage
uncertainty in relation to the new market context and service
requirements. LSPCo also emphasised relationship building and
trust development with the clients decision makers at that stage.
Close bonds with FurnitureCo senior management were necessary
to understand the clients needs and business requirements and
reduce uncertainty. During the solution design stage, though, both
parties change their emphasis towards the economic deal in
order to manage their nancial risks and secure economic benets
in terms of margins and capital investment levels. FurnitureCo
rejected the original LSPCo proposal so as to minimise capital
investment, which then entailed further destabilisation of service
features denition (see Section 4.2). LSPCo rened its solution
accordingly on the expectation that it would be awarded the
contract. At the same time though, and in exchange for their
service development efforts, LSPCo requested some assurances
and FurnitureCo issued a letter of intent. Quoting from the
document (FurnitureCo Executive Chairman):
We conrm our intention to place an eight-year contract with
LSPCo for the provision of distribution, warehousing and home
delivery services on behalf of our UK customersyIt is the
intention of both parties to minimise exposure to high capital
expenditure in the initial contract period and thus the
operational solution must be designed accordingly. LSPCo
shall not enter into any commitments or expenditure on our
behalf without our approval and this will be subject to
separate indemnity letters.
One month later, FurnitureCo issued a letter of indemnity,
acknowledging that the service provider would need to make
resource investments to deliver the service. These letters of
intent/indemnity were used to protect service provider against
the nancial risks related to the implementation investments
because the client was obliged to fully compensate the service
provider for these investments if parties did not agree to the
contract. (Halldo rsson and Skjoett-Larsen, 2006 discuss such uses
for letters of indemnity.) During the negotiations stage parties
kept their focus on economic self-interest and risk reduction. The
parties allocated investment risks (e.g. LSPCo liable for HDC
leasing agreements) and service failure liabilities (e.g. upper
product loss/damage limit). LSPCo, at that stage, insisted that the
contract would stipulate that the provider was appointed as an
exclusive contractor in exchange for its long-term commitment
and dedicated investments, so as to reap any long-term economic
benets resulting from potential future FurnitureCo growth in the
UK. A third party guarantor was also included in the agreement to
protect the service provider against possible nancial failure of
the clients UK venture.
At the contracting stage, the parties shifted their emphasis
towards the contractthey exchanged several drafts of the
agreement focusing on the establishment of legally enforceable
obligations and rights regarding their commercial relationship
and the service characteristics (e.g. resource investment). Both
parties perceived this as an important task before commencing
the exchange. The contract also included provisions/clauses to
deal with potential service destabilisation (e.g. variations in
activity/resource levels). After contract signature, and amid
implementation delays, the provider and client focused on the
business relationship in order to overcome problems and ensure
relationship continuity. Due to the delays in the FurnitureCo store
opening plan, LSPCo slowed down the resource schedule (e.g.
hiring staff and installing equipment) and adapted its systems and
operational processes due to delays to the requested ERP
specication modications.
As we have seen, the operation commenced 6 months after
contract signature due to delays in the opening of the rst store.
This delay, coupled with the fact that sales targets did not
materialise, resulted in FurnitureCo experiencing nancial strain
and consequent late payments. A TCE-inspired reader would
expect to see LSPCo shifting to the contract to use contractual
safeguards and secure compensation benets (Williamson, 1985).
However, they did not. Despite FurnitureCos breach of contract,
LSPCo decided against enforcing the contract and worked closely
with FurnitureCo to restructure the economic deal to ensure
long-term economic viability of the relationship. As we have seen
(Section 4.3), this led to signicant change of the service
specication in terms of activity/resource levels. As the LSPCo
Commercial Manager argued at the time:
ythe main challenge for us is to be able to support them and
at the same time manage our risks, particularly in terms of
cash ow, if they are not successful as a business. Because
there is no benet to us to offer them a service that they
cannot afford, we have to work in partnership with them
to support them in this initial start-up period. I would say
that this is an adventure for us, it is different from other
contracts.
The LSPCo Operations Manager conrmed this by
commenting:
ywhen FurnitureCo rst failed to pay us on time, we could
have reached for the contract and stood behind the contract
and say look, you are not doing this and this. Would that have
helped the relationship? Noywould that have held us in good
state for the next eight and a half years? No!.
The provider, then, did not use the contract to initiate
litigation action against the client, but parties did refer to
contractual clauses to adapt the service and self-regulate their
relationship. The adaptation in service activities and resources
proposed by LSPCo and the restructuring of the deal was enabled
by exible contractual provisions, which created a framework
for renegotiation. (This is similar to the ndings of Mouzas and
Ford, 2006.) More specically, according to the LSPCo Commer-
cial Manager, a services variation clause allowed a negotiated
reduction in asset levels (e.g. warehouses and staff) and relevant
cost adjustments, and this was facilitated by 1-year break
clauses in the leasing agreements for DCs and other logistics
equipment. The parties also used the contractual review
mechanism to adjust the service annual budget and operational
costs. The contract was based on an open-book charging mecha-
nism that made it easier to adapt monthly service charges based
on revised volumes. However, the parties had to renegotiate
the payment scheme, since the original one specied a xed
provider fee as percentage of annual budgeted costs. As the LSPCo
Operations Manager conrmed, the parties xed the fee as a
percentage of the actual operations cost (rather than the
budgeted one) in order to protect FurnitureCo against under-
achieved sales in the short term.
The contract was used not to enforce safeguards, but to
facilitate service re-qualication. After agreeing the adapta-
tions and amending the contract accordingly, the parties put
emphasis on implementing the required activity and resource
changes in order to continue trading. These changes were
implemented by the provider rm in the expectation of continuity
and long-term economic benets. As the LSPCo Commercial
Manager put it:
ywhat got us through this isnt the contract; what got us
through are the capabilities of the operational management
and their relationship with the customer and then also the
directors and their relationship with the customerythe
contract is just an enabler, the contract doesnt say how you
do certain things. The contract is just a framework within
which you work.
In this sense then, although temporary stabilisation of the
service in terms of the contract made it possible at the point
of contract award for the two parties to enter into a formal
commercial transaction, other forms of stabilisation were impor-
tant at other times. Almost as soon as the contract was signed,
it became apparent that the delays and low sales volumes made
the commitment to facilities unsustainable in terms of the deal.
Hence there was a re-stabilisation of warehouse capacity, payment
structures, delivery patterns and so onresources and activities, in
industrial network terms. This re-stabilised resource and activity
pattern deviated from the contractual commitment, but made the
deal viable again. But this is not to say that the contract was
useless; in its role as plan (Collins, 1999), or framework, in the
terms of the LSPCo Commercial Manager, the contract provided a
reference point against which to understand what changes would
be necessary. In turn, the lumpy reality of resource and activity
decisions (Penrose, 1959) one warehouse or two? deliveries in
5 days or 7 days? one shift or two? set the terms in which future
re-qualied service denitions might be expressed.
6. Conclusions and implications
The case used in the study provided extreme conditions such
as high requirements uncertainty for the buyer, in order to more
effectively reveal the shaping and reshaping of a complex service
offering. The pattern of stabilisation and destabilisation, and
of interplay between the three governance mechanisms shown
in Fig. 2 might, in broad terms, be characterised as exactly the
opposite of that assumed in much of the services procurement
literature (Zheng et al., 2008). To simplify, but not unduly, this
literature assumes that the process starts with a stabilised,
detailed specication of what is required, with parties focusing
on dening the contract, proceeds to nd a deal that works for the
two parties and then, perhaps, a relationship develops between
the parties to the contract, once there are credible commitments
(Williamson, 1985) and demonstrations of competence and
goodwill trust (Sako, 1992).
6.1. Conclusions
In the following, we revisit the research questions posed at the
introduction in the form of brief conclusions. With regard to
RQ1and RQ2, we found that the service exchange object was
shaped and reshaped in iterative cycles of temporary stabilisation
and destabilisation, i.e. through the process of service (re)quali-
cation. Contrary to much of the extant service purchasing
literature assuming that services are dened at the outset and
remain xed throughout the purchasing process in all instances,
our ndings suggest that service denition in B2B exchanges can
be a more iterative and ongoing process. Service characteristics,
activities and resources were temporarily stabilised at specic
stages of the contracting process (e.g. ITT specication), but
revisited as data and design assumptions were rened and
operational and commercial requirements changed. The study
suggests that the high requirements and market uncertainty, high
supplier uncertainty due to lack of information, incomplete
assignment specications and invalid design assumptions led to
destabilisation in the pre-contract period. The contractual
specication was a means for temporarily codifying the service
and making it tradable, but further service destabilisations and
adaptations were needed post-contract. In keeping with the
critical realist ontological position adopted, in other service
denition settings where these contingent conditions exist, we
suggest that similar cycles of stabilisation and destabilisation may
present an effective way to adapt what is actually done by the
service provider for its client, whilst maintaining secure reference
points against which the service can be adjusted.
Furthermore, our data provide support for Callons (2002) claims
regarding the importance of writing and re-writing in shaping
objects of exchange in service settings. Here, the ITT document, the
(revised) service proposals and the (amended) contract served as
important tools for service (re)qualication, successive renement
or even transformation of service and associated activities and
resources and, nally, as Araujo and Spring (2006) also suggest,
temporary stabilisation of the exchange object.
Regarding RQ3, our study reveals a connection between service
denition dynamics and relationship governance dynamics. In
B2B markets, services are exchanged within relationships be-
tween buyers and service providers that need to be governed to
manage both uncertainty (in requirements, market or perfor-
mance) and the risks of opportunism arising from destabilisation.
In this study, as in other recent ones (Lewis and Roehrich, 2009),
the client organisation opted to outsource a complex service
despite conditions of high uncertainty as to requirements and
market size. This is contrary to Williamsons (1991) predictions,
but necessary because of a lack of the required internal
capabilities/resources (McIvor, 2008). Ellram et al. (2007) argue
that under such circumstances the perceived risk of opportunism
is high; however, the present study supports empirically Collins
(1999) analysis, as uncertainty/opportunism risks related to
potential and actual service exchange destabilisation are managed
through the dynamic deployment of governance mechanisms
(relationship, deal and contract), depending on the relative
weight given to each mechanism at specic points in time. When
emphasis is on the relationship, priority is given to long-term
orientation to manage uncertainty, as well as close collaboration
to adapt the exchange and ensure continuity. Emphasis on the
economic deal means that priority is given to nancial risk
management and long-term economic viability and benets,
whereas focus on the contract prioritises risks hedging and
temporary stabilisation of the service to make it tradable. It is
noteworthy that our ndings emphasise long-term economic
benets over short-term gains and relationship continuity over
contract enforcement, even under a high uncertainty situation. As
Collins (1999) also argues, contractual safeguards may not be
invoked to reap short-term compensation benets. However, the
study conrms recent research (Mouzas and Ford, 2006;
Woolthuis-Klein et al., 2005) suggesting the contract may be
used as a reference point for ongoing interaction insofar as it
specically provides for service adaptation and business relation-
ship co-ordination.
Furthermore, it seems that shifts from one governance mechan-
ism to another can, in themselves, be performative, in that such
shifts can precipitate changes on the ground in service specica-
tions and associated resources and activities. For example, shift-
ing from the relationship to the deal to manage nancial risks
related to potential destabilisation (minimum capital expenditure
requirement) led to further service denition destabilisations and
renements (e.g. warehousing specications). Also, switching from
the contract to the relationship to manage destabilisation of
implementation plans (post-contract) resulted in certain changes in
denition of service processes and systems. In the same vein,
shifting from the relationship to the deal to manage economic
risks related to poor sales instigated further destabilisation and
adaptation of service activities/resources.
6.2. Theoretical implications
The study has theoretical implications in two areas. First, we
extend the notion of qualication as found in economic sociology,
especially as set out by Callon and colleagues, to encompass
successive technical and economic interactions engaged in over
an extended period by the same two economic actors. This
contrasts with the characterization in Callon et al. (2002), which
emphasises the type of qualication that occurs in consumer
marketsa relatively brief, typically one-off stabilisation that
enables a transaction to take place. The study reported here
suggests repeated stabilisations and re-stabilisations in the face of
uncertainty and changing circumstances on both sides of the
relationship. Callon (2002) also emphasises the role of textual
procedures in the stabilisation of offerings. While we are at pains
to point out that writing devices such as contracts are indeed very
important here, it is also important to see that stabilisations take
place in other domains, and that stabilisation in one domain
permits destabilisation in another. So, as well as stabilisation at
the point where the contract is agreed and signed, there is also a
kind of stabilisation at the point where, for example, a signi-
cantly reduced commitment to warehouse capacity is put into
effect (only being reected contractually after the event). One
might also suggest the whole contracting process began by
stabilisation of the relationship, in that LSPCo was effectively
selected as the preferred supplier before any detail had been xed
in terms of contracts or physical resources.
The second area is related. The study offers insights on how the
qualication notion (i.e. stabilisation/destabilisation) might differ
from the concept of adaptation as used within the IMP interaction
approach (H akansson, 1982). We have noted that the IMP and
industrial networks literature has tended to downplay the role of
contracts. In the original IMP interaction model, one of the types
of episode was information exchange; in turn, an example of
this is given as the terms of an agreement. This is as close as the
model comes in mentioning contracts and, if that is indeed what
can be inferred from the word agreement; it seems a rather
passive and limited conception of the role of contracts. Our study
suggests an ontological shift, somewhat in keeping with the
Actor-Network Theory roots of Callons work, which accords the
contract a role more active than mere carrier of information. It
becomes a participant in the interaction process; economic actors
write the contract, but the contract then controls actors and
shapes their identities and activities in the relationship.
We should also point out that our perspective on contracts
differs from the work of Mouzas and Ford (2006) on so-called
umbrella agreements (one of few examinations of contracting
within the IMP literature). The breadth and exibility of these
agreements allow for adaptation within the bounds of the
contract. Our study, in contrast, suggests another way in which
the role of contracts can be understood from an industrial
networks perspective. LSPCo and FurnitureCo did not leave their
contract couched in very broad terms, but used the contracting
process as a way to narrow down the service specication in
considerable detail and shape and temporarily stabilise the
required service activities and resources. The contract, once it
became clear that it was inappropriate, nevertheless provided
a point of reference and a basis for planning (and adapting)
resources and activities that were more appropriate. This was
achieved through specic clauses that allowed variations in
volumes, service activity/resource levels and costs. So, contracts,
even more tightly specied and less relational ones, have a
potentially important role to play in relationships that are
relatively open and trusting, providing a basis for the dialogue
that promotes openness and trust. Once again, this points to the
fallacy of conating relationship type with contract type. It seems
that the role of contracts in the wider interaction process, as
theorised in the industrial networks literature, has been down-
played especially when considering the function of contracts as
tools for (re)qualifying services. Contracts and contracting seem
to not only temporarily stabilise and describe services but they
also contribute to their transformation and evolution through
(re)writing (Callon, 2002).
6.3. Managerial implications
The ndings suggest two main implications for practitioners.
Firstly, in high uncertainty outsourcing situations, where needs and
requirements are evolving and volumes/cost forecasts are incom-
plete, managers should place equal emphasis between developing
precise specications ex ante and establishing comprehensive review
processes for service and exchange relationship adaptation. Such
exibility can be achieved through establishing both extra-contrac-
tual and contractual review mechanisms. For example, frequent
(e.g. weekly) review meetings and information exchange during
the service design stage as well as performance review projects in
the post-contract period can help revisit and rene the service
specication. Framework contracts also include review clauses and
provisions for service specication variations. Secondly, a relational
purchasing approach based on mutual adaptation, long-term
orientation and collaboration may be more appropriate than a
transactional approach, based on competitive tendering, to out-
source complex business services. However, such focus on a single
or limited number of suppliers should be complemented by serious
consideration of contractual design aspects to hedge against
uncertainty and potential opportunism and ensure the economic
viability of the relationship. As shown, the contract can serve as a
planning tool, even with high exibility in the business relationship,
providing a basis for dialogue and adaptation. The contract may not
be invoked if the business relationship meets its objectives, but the
contract must be in place anyway to be able terminate the
relationship if needed.
6.4. Limitations and further research
Despite offering in-depth insights about service denition
dynamics and related governance dynamics, this single-case
study cannot claim to have generated widely generalisable
results. In line with a critical realist position, however, it is
suggested that similar mechanisms (qualication/re-qualica-
tion) would exist in other settings, but they would produce only
contingently certain observable phenomena (e.g. changes in
contractual specication). Further research is needed to more
systematically examine when, how and why these mechanisms
are actuated. Selecting multiple cases from different industry
settings and outsourcing contexts could help achieve this.
Examples include: a) cases exhibiting low levels of buyer need
and market uncertainty and (b) cases featuring preference to
contractual over relational governance mechanisms to deal with
uncertainty. In this way the conditions (Tsoukas, 1989) based on
which the causal mechanisms operate to produce the phenomena
observed (e.g. contract litigation) would be revealed.
A related limitation is that the study sidestepped instances of
business service relationship dissolution (Halinen and T ahtinen,
2002). Future research should incorporate such cases to examine the
relative role of the relationship, the deal and the contract in
dealing with risks of service destabilisation, e.g. whether contractual
safeguards are invoked to protect against opportunism, and, if yes,
how the contract is used to terminate the business relationship. A
nal limitation is the fact that buyer rms managers were not
interviewed. Despite triangulating provider interviews with buyer-
produced documents, the case focused more on the service provider.
Future empirical research should emphasise the buyers view of the
(re)qualication process, especially when dealing with multiple
suppliers in a competitive tendering setting. In such cases the buyer
may have well-developed service level agreements based on
extensive outsourcing experience (e.g. re-contracting for services
on an annual basis) or standard contractual templates in place (e.g.
public sector contracting). It is hoped that the above suggestions will
lead to an extended/rened theory for understanding and explaining
business service exchange dynamics.
Acknowledgements
The authors would like to thank Luis Araujo, Bj orn Axelsson,
Deo Sharma, Henrik Agndal, Finn Wynstra as well as the Associate
Editor and two anonymous reviewers for constructive criticisms
and comments that helped in improving the manuscript. We also
acknowledge opportunites to present earlier versions of this work
at a research seminar at Stockholm School of Economics, Sweden
(June 2008) and the 2007 IMP Conference in Manchester, UK. The
authors are responsible for all remaining shortcomings.
We are grateful to LSPCo managers for their willingness to
participate in the study.
This work was facilitated by nancial support from the
Department of Management Science, Lancaster University Manage-
ment School and, in the case of Martin Spring, an AIM Research
Fellowship in Services, ESRC Grant number RES-331-27-0036.
Appendix A. List of interviewees
Interviewee job title Functional
department
LSPCo Senior Manager (Home Deliveries) BD
LSPCo Logistics Design Manager (Home
Deliveries)
BD
LSPCo Logistics Design Manager (Home
Deliveries)
BD
LSPCo Commercials General Manager Commercial and
Legal
LSPCo Commercials General Manager Commercial and
Legal
LSPCo Senior Contract Manager
(FurnitureCo account)
Operations
LSPCo Senior Contract Manager
(FurnitureCo account)
Operations
LSPCo Senior Business Systems Manager IT
Appendix B. Interview themes
Background Information
Interviewee details (name, job title, department and years with
company)
Organisation information (industry, core business, products/
services, annual turnover and market share, key customers/
suppliers, organisational structure/role of interviewee)
Client relationship and service offering
Overview of the client relationship
Formation, development and evolution of client relationship
Clients supply chain and logistics process
3PL providers service scope
Business development process: designing, selling and mana-
ging the service
Contracting process
Overview of the process
Service specication and design
Understanding client needs/intra- and inter-rm interactions
Service implementation approach
Contractual and economic negotiations
Contract
Contract agreement: structure and content
Service level agreements/KPIs
Payment structure
Use and functions of the contract
Post-contract exchange
Service delivery
Performance measurement
Service offering adaptation
Relationship renegotiations and management
Role of contract in service adaptation
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