Buyer-seller interaction patterns during ongoing service exchange

POINTS OF DEPARTURE Services constitute the main part of economic activity in developed countries around the world, where the service sector accounts for some 70% of aggregate production and employment in OECD50 economies. More specifically, finance, insurance and business services account for about 20 to 30 percent of value added in the total economy51. Consequently, the purchase of business services has become a substantial element in firms’ total acquisition of external resources. This partly comes from increased specialisation, growth of the knowledge economy and outsourcing of service-related activities, which cause the growth in services in general. Partly, it is due to the growing ‘servitisation’ of goods, which causes individual organizations to increasingly buy services rather than goods. Furthermore, business services are increasingly the focal point of attention for management in many organisations: on the one hand because Non Product Related items (a large part of which consists of services) are seen an area where substantial savings can be obtained, on the other hand since organisations are acknowledging that many of the services they buy (e.g. consultancy, IT, marketing) are actually quite strongly related to their primary processes. The topic of buying business services is however only just emerging as an area of academic interest. The number of publications in this area is growing, but has been limited in comparison with literature available on buying (industrial) goods. Furthermore, one of the main characteristics of (business) services is the fact that they are produced and consumed in interactive processes between buyers and sellers. These ongoing interactions, as opposed to the transactional purchasing process, have largely been neglected in research on buying business services. The research that has been dealing extensively with services and the interactions involved are the services marketing and more recently the services management disciplines; however, since long time, these disciplines have focused on consumer services. In light of the increasing importance of business services, also these disciplines are broadening their scope to include business services. The main objective of this research is to build and test theory on the ongoing interactions between buyers and sellers of various kinds of business 50 OECD is the abbreviation for Organisation for Economic Co-operation and Development. 51 Business services include amongst others rental of equipment and machinery; computer related activities and Research and Development. 294 services. As such, this research addresses the gap in purchasing and supply management literature regarding ongoing buyer-seller interaction. The first question that arises is to what extent different interfaces and interaction processes between buyers and suppliers of business services exist. Important areas of attention are Decision Making Unit (DMU) /Problem Solving Unit (PSU) structures (including boundary spanning roles), coordination mechanisms and communication processes (including what important issues are discussed in the buyer-seller dialogue) and critical supplier and customer capabilities in managing the interaction. A second research question is concerned with what interactions are most effective for a specific type of service. After developing an understanding of the first two research questions (theory building), the last part of this research aims at validation of these insights (theory testing). Theory building occurs through multiple empirical studies, in which the theory regarding variation in interaction is gradually built and tested. These empirical studies have been designed in a way that enhances analytical generalisation beyond specific companies or industries. Both service providers and manufacturers, with different kinds of production and different kinds of customers are involved. Furthermore, the studies involve multiple buying company business representatives, thereby enabling an analysis of the purchase of business services from an intra-organisational perspective. THEORETICAL UNDERPINNINGS First, a literature study was conducted to investigate the extant body of knowledge in the area of buying business services. This study showed that the scarce literature that is available focuses mainly on the initial stages of the transactional purchasing process (i.e. supplier selection): the ongoing interactions between buyers and sellers have remained largely unaddressed. Furthermore, these studies have mainly addressed one specific type of services. This focus on specific kinds of business services rather than on business services in general hinders the identification of generic patterns of ongoing interaction across the wide variety of services that organizations buy. Therefore, the focus for this research was on theories relating to these ongoing dealings between buyers and sellers, both within specific service encounters (or exchanges) and across service encounters (the ongoing business relationship). The Interaction Approach can be used to conceptualise these interactions. Variation in interaction first of all comes about in the key objective of interaction. Consequently, this puts requirements on the resources needed from both buyer and seller, in terms of the functional representatives involved and of buyer and supplier capabilities. The key objectives, functional representatives and capabilities are rather structural variables relating to the buyer-seller interface. Concerning interactive processes, communication is studied (including the key issues in the dialogue, which is strongly related to the key objectives and which functional representatives are involved) as well as adaptations (what kind of relation-specific investments/ changes buyer and seller make). Services marketing literature furthermore extensively deals with related topics like quality management and service delivery, which help to obtain a better understanding of what exactly goes on in service exchange episodes. Another area of attention in this research was to identify factors driving variation in interaction between buyers and sellers of business services. These driving factors can then be used to identify several groups of services for which effective interaction is likely to differ. Existing classifications of business services usually adopt a service provider’s perspective. Classifications of consumer services are abundant in services marketing literature; however, consumer goods (and services) are usually differentiated based on how they are purchased, whereas industrial goods (and business services) are typically differentiated based on how they are used by the buying firm. This differentiating factors echoes a driving factor brought forward in Interaction Approach studies into the ongoing interactions between buyers and sellers of industrial goods, which is the way in which the buying company uses the industrial good with respect to its own offerings. Based on this usagedimension, a classification of business services was developed identifying four types of services: ?? Component services, which are passed on to customers of the buying firm unaltered (i.e. luggage handling at the airport for an airline); ?? Semi-manufactured services, which are used by the buying firm as part of their offering to the buying firm’s customers (i.e. catering on the planes of an airline); ?? Instrumental services, which are used by the buying firm to change the way in which their primary processes are carried out (i.e. management consultancy to professionalise the purchasing department of an airline); ?? Consumption services, which are used in various support processes in the buying company (i.e. cleaning of the office buildings of an airline). To emphasise the origin and foundations of this classification, the labels used largely resemble the labels used in the Interaction Approach studies. Furthermore, Organizational Buying Behavior literature points out buyerperceived risk as a main factor driving buying behaviour. The usagedimension was selected as the main driving factor for the way in which distinct buyer-seller interfaces and interactive processes were designed (form of interactions); buyer-perceived risk was included as an analysis control that could help explain the extent to which distinct buyer-seller interfaces and interactive processes were designed. BUILDING A THEORY OF EFFECTIVE BUYER-SELLER INTERACTION The usage-based classification of business services was used in several empirical studies into the ongoing interactions between buyers and sellers of business services. Starting from the classification, the conceptualisation of interaction and the results of some exploratory studies into the presence of systematic variation in interaction, a first exploratory study comprised four services from three classes of the classification and with varying degrees of buyer-perceived risk at a manufacturing company. A second exploration comprised nine services from all four classes of the classification at two service providing buying companies. A third step in theory building involved the study of a successful and an unsuccessful service purchase for each of the four service types. Success here relates to the ongoing service exchange and was operationalised as the buying company’s level of satisfaction with the interaction process and the interaction outcome (i.e. result of interaction) relative to their expectations in advance of the purchase decision. The results suggest that the level of perceived risk influences the extent to which distinct interfaces and interaction processes are defined and designed. The level of perceived risk affects the extent to which different patterns of interaction can be identified: patterns are more clear for services characterised by high risk. Furthermore, these different theory-building activities have resulted in the development of effective (‘ideal’) patterns of interaction for each of the four types of business services52: ?? In the effective pattern for component services, the key objective is to make sure that the service to be purchased fits with existing service offerings. People knowledgeable about (end) customer requirements (marketing, or even from customers themselves) are involved in the ongoing interactions. The buying company translates these customers’ requirements, and coordinates and synchronizes the various elements of the service purchased with their own offerings. The supplier matches capacity with demand and deals with the buying company’s customers in the way the buying company wants them to. Communication concerns the requirements of customers, the fit of the service with the rest of the offering, and the customers’ evaluation of the service. ?? For semi-manufactured services, the key objective is to make sure that the service to be purchased becomes an integral part of the buying company’s offering to its customers. Like with component services, representatives of these customers are involved. Also production representatives are involved because the service has to be transformed for and adapted to the buying company’s processes rather than just its offerings. The buying company explains its processes and specific requirements to the supplier and 52 Since no systematic variation was found with regard to adaptations, this process is not included in the descriptions of effective patterns of interaction. understand the service provider’s offering and how it can be transformed. The supplier understands how their service is transformed; also, delivery reliability is highly important. Communication for semi-manufactured services mostly concerns customer requirements and the fit between the buyer and the suppliers (service) production processes. ?? For instrumental services, the key objective is to achieve the desired effect/ change in the buying company’s primary processes. Business development and process representatives are primarily involved in the ongoing interactions. The buying company is able to specify the desired change to certain processes; the supplier understands how the service will result in the desired effect on the buying company’s primary processes. Project management/ implementation skills are highly important buyer/ supplier capabilities. Trends and developments inside the buying company and the supply market are an important topic in the communication, as to align both parties both in the short and in the long term. ?? Finally, for consumption services, the key objective of interaction is to have the service fit with various support processes. The buying company is able to find good representation of the internal customers/ users of the service (which may be any functional department or all), and to clearly communicate their requirements. The supplier is able to develop efficient routines and to adjust its service to the specific situation of the buying company. Communication mostly concerns the daily activities and opportunities for improvement. TESTING A THEORY OF EFFECTIVE BUYER-SELLER INTERACTION The final round of empirical studies concerned testing the theory developed by investigating the relationship between the pattern of interaction and success in the ongoing service exchange. As a first step, a stringent relationship between interaction and success was opted for, thereby posing the effective pattern of interaction to be a necessary condition for success. Thus, in order to be successful in the ongoing service exchange, buying companies need to have a pattern of interaction that is (highly) similar to the effective pattern of interaction for that specific service type. This test is performed by means of case studies, whereby selection took place with regard to a specific value of the dependent variable (as opposed to sampling for variation in the dependent variable), i.e. success. Data had been collected on twenty-eight service purchases (both low and high risk) from nine buying companies, twenty-five of which were successful. It was then verified whether these successful cases also had interaction patterns that were highly similar to the effective patterns. This was the case but for one of the service purchases studied: for this case, the hypothesis that having a pattern close to the effective pattern of interaction is necessary for success is not rejected. Further analysis of this service purchase however led to the conclusion that this outlier could be accounted for the level of low risk involved: as a result, the service purchase was sufficiently successful despite the low fit between the observed and the effective pattern of interaction. In succession, the necessary condition hypothesis was tested for the individual service types. Non-trivial necessary conditions were found for component and consumption services. Nontrivialness of the necessary condition could not be established for instrumental services. Effective interaction is not a necessary condition for successful ongoing exchange of semi-manufactured services. MANAGERIAL RELEVANCE AND RECOMMENDATIONS The classification of business services in combination with the effective patterns of interaction for each service make up a typology of effective buyerseller interaction. This typology can be used by purchasing professionals (managers and consultants alike) to design new and improve existing interactions with their providers of business services. In the first situation, buying companies need to identify how they will use the service in order to determine appropriate key objectives and accordingly involve the relevant functional representatives in the ongoing interactions as well as develop the required capabilities to manage this interaction. Simultaneously, the buying company should look for appropriate capabilities on the side of the supplier. In the second situation, the typology can be used to audit and where necessary improve existing interactions with sellers of business services. Service providers can equally use this typology to analyse how each individual buying company applies their service, in order to address the right issues and people in its marketing, sales and exchange processes with the buying company. The research has furthermore identified a number of leveraging factors that help to be successful in the ongoing service exchange. The first of these factors is drawing up a specification with a sufficient level of detail. What level is sufficient is hard to say, but identifying all relevant stakeholders results in a more complete specification and furthermore includes how buyer and supplier will deal with each other during the contract period, both with regard to service delivery and the surrounding management processes. The second facilitating factor is active involvement from the side of the buying company in the start-up phase of the contract. Rather than leaving the supplier to perform their job, the service exchange is more successful if the buying company in the beginning actively monitors the daily dealings, so that any disturbances that occur can be eliminated and buyer and supplier remain aligned. A third facilitating factor is active contract management throughout the contract period: after the intensive start-up, the buying company should continue to monitor the contract. Finally, related to specifications, mutual and mutually agreed Key Performance Indicators and targets should be developed, which will be evaluated jointly at predetermined moments. It should be noted that some of these factors are strongly related to the initial stages of purchase process (i.e. specification and contracting). The extent to which these facilitating factors can be leveraged was found to strongly depend on the service-specific dimension of who to involve in the ongoing interactions. Finally, the rich descriptions of the large number of cases studied furthermore provides a variety of insights regarding difficulties associated with the transactional purchasing process for business services, as well as a range of best practices on how to cope with those difficulties. Examples are difficulties in specifying services (specifically professional services), performance measurement in services, and buying services through European Tendering. With regard to specifying services, four alternative specification methods could be identified in extant literature: specifying the input, the throughput (process), the output (technical performance) and the outcome (financial performance) specifications. The latter two are the most innovativ, yet also the most common. The empirical studies contain a variety of examples of buying companies using output and sometimes even outcome specifications. This has various advantages, among which making the supplier directly responsible for a certain result and only having to monitor this result (as opposed to the whole process)53. Related to this is the identification of innovative indicators to measure the performance of suppliers. Finally, although the European Tendering procedure is usually viewed as highly complex and tedious, especially for services, the results of the empirical studies in this dissertation show that buying companies that do most of the work upfront (before making a purchase decision) have less problems during the contract period. This is explained from the fact that these companies have thought about how they will deal with the supplier during the contract period, what problems may occur, how these problems should be solved, et cetera. The European Tender procedure, though not simple, obliges companies to perform a lot of such preparatory work. One of the companies, EIA, is obliged by law to use European Tendering for its sourcing activities: at the same time, this company is considered among the most successful in the sample. As such, the findings of this dissertation can be used for reflecting on one’s own business processes and making improvements. 53 Disadvantages relate to decreased transparency and uncertainty on whether the supplier is able to handle such specifications. SCIENTIFIC RELEVANCE AND AREAS FOR FURTHER RESEARCH This research has addressed three gaps in extant purchasing and supply management literature: 1) The research focuses on business services as opposed to consumer services, which have been and continue to be dealt with extensively in services marketing and service management research; 2) The research develops the notion of ongoing interactions between buyers and sellers of business services, which has been hardly addressed in purchasing and supply management research; 3) The research focuses on generic similarities and differences across various services rather than on specific services. Despite these merits of the research, a few critical comments need to be raised as well. An important criticism concerns data collection: while some buying companies were rather interested in involving their suppliers in this study, others were quite reluctant to approach suppliers. Consequently, data was collected at buying companies only, which has resulted in a one-sided view of patterns of interaction. The suppliers involved were not asked how they view the interaction with their customers. Including the supplier in future data collection efforts substantiates the findings regarding patterns of interaction and may furthermore result in additional insights regarding the buyer’s behaviour as well. Another limitation arises with regard to one of the data collection methods (self-administered questionnaire). Not all questionnaires were returned, as a result of which the data obtained through this method is not complete. A final limitation is related to the fact that our sample of cases is not equally distributed across all classes of the classification. Although the initial objective was to have a component, a semi-manufactured, an instrumental and a consumption service at each of the ten participating buying companies, it turned out to be difficult to for example identify component services at manufacturing companies. Thus, for some of the service types, the findings are based on a limited number of observations. Based on the results of this research, several areas for future research can be identified. First, continuing along the lines of research employed in this dissertation, future research could be aimed at obtaining a more detailed understanding of the mechanisms underlying how a more effective pattern of interaction results in success. Among the successful cases, quite some differences arose with regard to the degree of similarity between the observed and the effective patterns and success. An example of this is the case in which a relatively low degree of fit results in a relatively high degree of success. By investigating in more detail what goes on in the ‘similarity, success’ quadrant, it may be possible to uncover for example which of the underlying dimensions of the patterns of interaction drives success most strongly. Two other areas in which the typology may be of use is the area of new (business) service development and supply chain management in business services. The first has received rather little attention in comparison to new product development, despite the fact that the specific characteristics of services warrant specific research in this area. Also the phasing and activities that constitute the service development process and the actors involved in this process have not been investigated in large detail. The importance of buyersupplier interaction in the development of new and/ or improved business services comes from the fact that the service customer acts as a co-producer in the service delivery process. Consequently, the customer can play a valuable role in new service development by contributing to the creation of the right generic prerequisites for the service: the service system, the service process and specifically the service concept (think of the concept of ‘lead user’ involvement in product development). One way in which the typology could be of help is in obtaining a better understanding of which actors (i.e. end customers versus internal users) to involve in the new service development process. A second way could be using the typology as a framework for designing the service process in relation to the service concept, and subsequently putting an appropriate system in place. The second area in which the typology can be used is the area of Supply Chain Management, which is specifically relevant for the two service types that are being passed on to the buying company’s customers. The typology could be used to identify common problems and solutions for services belonging to these two classes of the classification rather than applying concepts of goods supply chains to the area of services.