Hidden costs in different stages of advanced services – A multi-actor perspective of performance based contracts

Abstract

Performance based contract (PBC) is an innovative advanced service strategy for offering product service solutions. PBC aims at increasing customer value and reducing the costs of operations. However, manufacturers incur unquantifiable hidden costs while implementing PBC. This paper uses agency theory and service-dominant logic to build a theoretical framework to study the hidden costs of PBCs. The research uses a multiple exploratory case study approach to unravel the drivers of hidden costs during the design, delivery and adaptation phases of PBC. This paper derives findings from five PBCs from the UK defence industry. The analysis reveals four major hidden cost drivers (supplier relations, contract complexity, customer relations, and cost estimation problems) of PBC. The research refines the theoretical framework by linking the hidden cost drivers, PBC life cycle stages and engagement of the service network partners. It develops a set of propositions for guiding future research and managerial practices.