Citation for published version:

Lewis, MA & Roehrich, JK 2009, 'Contracts, relationships and integration: Towards a model of the procurement
of complex performance', International Journal of Procurement Management, vol. 2, no. 2, pp. 125-142.
https://doi.org/10.1504/IJPM.2009.023403

DOI:
10.1504/IJPM.2009.023403

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2009

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 CONTRACTS, RELATIONSHIPS AND INTEGRATION:

TOWARDS A MODEL OF THE PROCUREMENT OF

COMPLEX PERFORMANCE

Michael A Lewis* and Jens K Roehrich

University of Bath School of Management

Bath, BA2 7AY

Version 1.7.
May 19, 2008

* Corresponding Author
Abstract
Although there is a growing body of research exploring
the transition to a more service-based orientation in
complex product markets, the majority of this
literature adopts what mighty be classified as a
‘manufacturer-active’ point of view; that is it
explores the challenges faced by firms (e.g. aircraft
and capital equipment manufacturers, building firms,
etc.) seeking to ‘sell’ their re-conceptualized streams
of revenue. There has been much less research exploring
the challenges associated with the transition from
traditional asset acquisition processes to ‘buying’ or
procuring complex performance (PCP) – here defined as a
combination of transactional and infrastructural
complexity. This paper explores the macro and micro-
economic context to this specific problem space and
develops a preliminary conceptualisation of the process
of PCP. It draws on two principle literatures: one
focused on the boundary conditions firms consider when
choosing to ‘make or buy’ a range of different
activities from the market (e.g. Fine and Whitney,
1999; Gilley and Rasheed, 2000; Williamson, 1985;
Grover and Malhotra, 2003) and, the other on public
procurement (e.g. Thai and Piga, 2006; Knight et al.,
2007) and Public-Private Partnerships in particular
(Broadbent and Laughlin, 2005; Froud, 2003). Three
distinct governance challenges are presented: (1)
contractual, (2) relational and (3) integration. The
paper explores the implications of the conceptual model
by developing a range of research propositions that are
intended to be the foundations for future research.

Acknowledgements
We would like to express our gratitude to the EPSRC KIM
Grand Challenge Programme for funding the research that
forms the background to this paper.
1. Introduction
Buying the performance outcomes of a resource-in-use,
rather than acquiring the resource and using it, is not
a novel phenomenon: from the laundry where a customer
purchases ‘cleaned clothes’ to the vehicle-leasing firm
where a client contracts for ‘miles travelled’. Today
however, this approach is being increasingly applied to
the procurement of complex performance: DuPont for
instance, after years of outsourcing non-core services,
awarded a long-term contract to Convergys to redesign
and deliver the various HRM programs for its 60,000
employees in 70 countries (Engardio et al., 2006).
Likewise, in the computing and telecommunications
sectors for example, the volume of outsourced R&D and
manufacturing services is forecast to grow to almost
$350 billion by 2009 (Carbone, 2005). Similarly firms
like Infosys are developing and maintaining a range of
mission critical IT applications for numerous
international financial institutions. The same trend is
evident in public procurement: UK government for
example has long commissioned specific research
projects from universities and private-sector
institutions but in recent years more and more complex
research performance is being outsourced and contracted
for: for instance, Serco has managed the national
standards laboratory, a large scale, internationally
respected centre of excellence in measurement and
materials science R&D, since 1995.
Interestingly, although there is a growing body of
research exploring different aspects of this transition
to a more complex service-based orientation (Potts,
1988; Armistead and Clark, 1992; Mathe and Shapiro,
1993; Miller et al., 1995; Hobday, 1998; Gadiesh and
Gilbert, 1998; Wise and Baumgartner, 1999; Kumaraswamy
and Zhang, 2001; Mathieu 2001a, 2001b; Brady et al.,
2005; Davies et al., 2007), the majority of this
literature adopts a ‘provider-active’ point of view;
that is it explores the challenges faced by firms (e.g.
aircraft and capital equipment manufacturers, building
firms, etc.) seeking to ‘sell’ their re-conceptualized
streams of revenue. There has been much less research
on the challenges associated with the transition from
traditional asset acquisition processes to ‘buying’
complex performance (e.g. Lindberg and Nordin 2008, van
der Valk 2008). This represents a significant empirical
and theoretical research opportunity because it is a
global phenomenon that necessitates understanding of
the factors that influence both private and public-
sector organisational scale and scope. This exploratory
paper comprises two main sections. The first introduces
the content of, and context to, the research – offering
a model of performance complexity. In the second, the
additive process of procuring complex performance (PCP)
problem space is presented as a series of three
governance challenges: contractual, relational and,
integration. The implications of the conceptualization
are discussed in a range of propositions that can be
viewed as foundations for subsequent research in this
increasingly significant area of public and private
sector procurement.

2. The Content and Context of PCP

Consider the provision of aero-engine ‘power by the
hour’. Although inter- and intra-organisational
boundaries have clearly been changed, the intrinsic
complexities of aero-engine supply and support have not
been removed by this procurement arrangement: these
sophisticated capital assets still need to be paid for
(depreciated) and supported, often globally, by a
Maintenance-Repair-Overhaul (MRO) organisation, with
the support of a range of external contractors.
Moreover, although an apparently simple procurement
arrangement, with airlines specifying x hours of flying
time, closer consideration reveals a whole range of
likely buyer conditions (e.g. short versus long haul,
timing and location of maintenance operations) and
provider caveats (e.g. provider contract assumes the
engine doesn’t exceed certain operating parameters,
etc.) in any contract. In sum, this is a good example
of what the paper means by complex performance outcomes
and the additive challenge of PCP. ‘Power by the hour’
as an outcome actually means on-wing aero-engines
operating within efficient and effective boundaries –
this is complex performance. Buying this kind of
outcome means that airlines have to make significant
judgements about reconfigured sets of specialized and
complex input capabilities – this is PCP.
This archetype provides a useful point of departure for
this conversation but in order to build a conceptually
robust picture of PCP it is necessary to bound the
distinct phenomenon before moving on to explore why and
how organisations embark on the PCP process.

2.1. What is PCP?

Noting that any complexity construct is relative,
subjective and a function of the level of analysis
applied, the relevant literature highlights two
dimensions of performance complexity that have
particular relevance to subsequent procurement
decisions.
The first relates to the performance complexity itself
(Danaher and Mattsson, 1998), a function of
characteristics such as the level of knowledge embedded
in the performance (e.g. the ability to type up doctors
notes compared with the ability to read an X-Ray chart)
and/or the level of customer interaction (e.g. scripted
‘performances’ compared with ‘performances’ that are
“…empathetic and facile with respect to language and
culture”: Youngdahl and Ramaswamy, 2007). Knowledge-
intensive and highly interactive services like
management consultancy have traditionally presented a
significant challenge for procurement processes because
they are difficult to specify ex-ante and,
correspondingly, difficult to measure and monitor.
Unsurprisingly, this has often meant that they are a
controversial area of public and private expenditure.
Second, there is the complexity of the infrastructure
through which performance is enacted. This complexity
can be largely characterized by the extent to which it
is “bespoke or highly customized” (Brady et al., 2005).
Infrastructure procurement is often irregular and, as a
result, buyers often rely heavily on specialist
suppliers, indeed increasingly firms “know less than
they buy” especially in the light of recent outsourcing
trends (Davies, 2003). Figure 1 combines these
dimensions into a matrix of total procurement
complexity.

Infrastructural
Complexity

H III IV

L I II

L H Performance
Complexity

Figure 1. The Procurement Complexity Space

The top-right quadrant of the matrix, labeled category

IV, represents the highest level of aggregate
complexity and provides the preliminary definition of
PCP.

Procuring Complex Performance is defined by inter-

organizational arrangements that are characterized by
significant levels of performance complexity (i.e. must
include numerous knowledge intensive activities) and
infrastructural complexity (i.e. must include
substantial bespoke or highly customized hardware and
software elements).

Although further work will be needed to operationalize

the two framing dimensions (and thereby generate
empirical tests for the typology and its boundaries) in
this preliminary work it is possible to further detail
the other categories in order to reinforce the
differential characteristics of Category IV.

Table 1 below summarizes each category and provides

illustrative examples.

Category Example
I Domestic waste collection service. Here, a public
authority (e.g. Minneapolis, one of the first US cities
to introduce competition in refuse collection) procures a
service with a simple specification and stable demand
patterns (low performance complexity); based on well-
known technologies operating in a fixed area (low
infrastructural complexity)
II Management consultancy services, in particular ‘grey
matter’ assignments such as senior-level policy guidance
(Maister, 1995), are a good example of high performance
complexity (i.e. knowledge intensive and strongly client
relationship/interaction driven) and low infrastructural
complexity.
III An off-shored IT support service with a call centre where
customer interactions are limited in scope and carefully
scripted (i.e. low performance complexity) is delivered
via a relatively sophisticated and complex technological
infrastructure.
IV The UK governments’ (long delayed and expensive)
replacement of its airborne surveillance and counter-
measures aircraft (Nimrod/MRA4) for instance. The prime
contractor, BAe Systems, won the contract to develop and
manufacture a small batch of technologically advanced
aircraft (albeit based on a very old airframe) and
provide their supporting operational and training
infrastructure together with various second line training
and maintenance services (high infrastructural
 complexity); all procured under an availability contract
that provided for different levels of mission hours under
different operating conditions, etc. (high performance
complexity).

Table 1. Different Categories of Performance Complexity

Additionally, it would be interesting to explore how

these types of complexity interact and modify over
time. For instance, international engineering firms
like Arup and Atkins use off-shoring strategies to
manage knowledge and information (transactional
complexity) through the life cycles of their own
complex infrastructure provision, suggesting that
simplification and complexity segmentation strategies
will form an important part of any PCP arrangement.
Equally, competitive, technological, regulatory and
legislative forces will inevitably alter relative
positioning. The type III call centre example for
instance, could become a type I as infrastructure
further standardizes and greater automation of analysis
reduces the performance complexity.

2.2. Why buy complex performance?

Although the strategic logic for the ‘make or buy’
(supply or buy) decision is normally efficiency
maximization, a range of factors, such as global trade
liberalisation, narrower definitions of core
competencies and greater technological complexity
(Oliva and Kallenberg, 2003) seem to be changing the
scale and scope of outsourcing. Customers of firms like
Flextronics (electronics sector) and Li and Fung
(garment sector) for example, are no longer buying sub-
contract manufacturing capacity but rather procuring
‘solutions’ to complex business problems. Although this
suggests that buyers are seeking a broader range of
strategic contributions from their suppliers, this
appears to challenge the dominant theoretical,
Transaction Cost Economics (TCE), logic for
outsourcing. Assuming opportunism and bounded
rationality (Rindfleisch and Heide, 1997) TCE asserts
that firms attempt to minimize transaction costs by
“assigning transactions (which differ in their
attributes) to governance structures (the adaptive
capacities and associated costs of which differ) in a
discriminating way” (Williamson, 1985, p.18). As a
result, firms only internalize activities where adverse
costs might arise from operational difficulties in a
market exchange, primarily uncertainty, frequency, and
asset-specificity1. However where there are high levels
of asset-specificity, TCE suggests that hierarchy
becomes the least-cost governance solution2. In other
words, this logic suggests that organizations
would/should not procure complex performance or that a
purely transaction-based logic is insufficient to
understand the PCP phenomenon. In a related discussion 3
Holcomb and Hitt (2007) balance economizing arguments
with a logic where “the complementarity of
capabilities, strategic relatedness, relational
capability-building mechanisms, and cooperative
experience [are equally] important conditions….for
strategic outsourcing”. Using this balanced definition
it is proposed that:

Proposition 1:
PCP arrangements are considered where organizations can
rely on markets for specialized capabilities, able to

1
An asset is transaction specific if its value in a transaction
with another party is reduced and correspondingly, the larger the
value ‘gap’ between its best and best-alternative use, the greater
the specificity of the asset.
2
Although governance through hierarchy necessitates high fixed set-
up costs, its use of authority rather than court enforced contract
law (for market governance) provides greater control over specific
capability investments (Masten, 1988).
3
See also earlier work by Poppo and Zenger, 1998; Combs and
Ketchen, 1999; Madhok, 2002; Jacobides and Winter, 2005 and Hoetker,
2005.
deliver complex performance, that supplement existing
capabilities deployed along a firms value chain and
create value beyond that achieved through cost
economies.

This notion of looking for strategic value from

procurement is also evident in the public sector. Faced
with increased pressure to be both more effective and
efficient many governments have turned to the
controversial magic formula of private sector
involvement in the financing, development and provision
of public services: effectively creating complex
performance arrangement. Contractual arrangements such
as the UK Government’s Private Finance Initiative (PFI4)
for instance were explicitly conceived as mechanisms
for ‘purchas[ing] quality services on a long-term basis
so as to take advantage of private sector management
skills incentivized by having private finance at risk’
(UK Stationery Office, 2000, p.8). Despite these
similarities, the distinct nature of public sector PCP
activity, introducing divergent values and strategies 5
to both contractual negotiations and subsequent
performance management, necessitates consideration of
several additional factors. For instance, although
private-sector PCP arrangements become increasingly
possible as markets for specialized capabilities emerge
(Jacobides 2005), politically motivated public buyers
can pre-empt established market provision. Some public
sector ‘make-buy’ decisions for instance, might be more
accurately described as choices between in-house

4
Leaving aside specific (sometimes ideological) concerns, such as
whether the policy is legitimate, cost-effective, actually results
in risk transfer or is sufficiently accountable (e.g. Froud, 2003)
this paper argues that PFI is still innovative public procurement
practice.
5
It has been argued that many of the UK Private Finance Initiative
contracts have been influenced more by politics than economic
rationality (Lonsdale, 2005a).
provision6 and processes of encouraging (via development
funding, etc.) one or two specialized private firms to
develop/offer new services that the state can
eventually buy! In the construction sector for example,
it was arguably the emergence of public sector Build-
Operate-Transfer (BOT) infrastructure projects that
created the ex-ante need for firms to develop their
complex performance provision capabilities (Gann and
Salter 2000). Similarly, Boeing, following an order in
2006 from Air India for 68 aircraft (worth over $11
billion - at 2006 list price!), also agreed to create a
Maintenance, Repair and Overhaul (MRO) facility in
Nagpur and further fund a number of existing Indian
flying schools. Therefore it is proposed that:

Proposition 2:
Public-Private PCP arrangements are considered where a
public buyer is seeking (for a variety of policy
motivations) to create/support markets for specialized
capabilities that replace and/or supplement existing
state provision and create value beyond that achieved
through cost economies.

3. The Process of PCP

There will inevitably be multiple distinct governance
challenges associated with the PCP process. For
example, producers or systems integrators often face
monopolistic markets, with highly politicised
purchasing decisions, government regulators,
sophisticated buyer/operators and long lead times in
commissioning, design and production. It is only
through the award of extended revenue generation
opportunities that suppliers are encouraged to commit
but, paradoxically, these multi-decade life cycles

6
Noting that state service provision is often the result of market
failure.
introduce further uncertainty and complexity. This
paper focuses on three areas of specific conceptual and
practical concern:

1. Contractual. How do you write, monitor and enforce

contracts in situations of high asset specificity,
high uncertainty and low exchange frequency,
circumstances that would lead a TCE analysis to
suggest hierarchy as the optimal governance
solution?
2. Relational. Trust, social ties, etc. are essential
complements to contractual mechanisms but in
complex PCP arrangements their development may be
disproportionately time and resource consuming.
3. Integration. Given the PCP intent is to replace,
transfer and/or renew in-house capabilities, ex-
ante diagnosis of systems constraints and
legacies, and ex-post integration activities are
likely to be key ex-ante and ex-post challenges.

As each area is explored in more detail, a number of

further research proposition are identified.

3.1. Contractual Governance

‘Classical’ contract theory argues that parties
safeguard against the hazard of opportunism by applying
legal contracts, specifying what is acceptable and what
is not, with threats of legal enforcement or non-legal
retribution (Williamson, 1975). In theory, ‘complete’
contracts can be drafted (Lyons and Metha, 1997), that
is contracts containing all the necessary safeguards to
mitigate opportunistic behaviour and reduce
transactional ambiguity by clear specification of what
is and what is not allowed within a relationship (Lui
and Ngo, 2004). For instance mitigating the risks
associated with opportunistic behaviour by stipulating
penalties that change the pay-off structure (Parkhe,
1993). Following this logic, an optimal contract is the
one with the lowest transaction costs relative to
outcome. In practice however, drafting costs and
asymmetric information render most contracts
“incomplete”, only defining remedies for foreseeable
contingencies and/or specifying processes for resolving
unforeseeable outcomes (Poppo and Zenger, 2002, p.707).
PCP arrangements introduce a number of additional
conceptual and practical challenges for contractual
governance, beyond those introduced by a very large
number of technological and transactional variables,
all multiplied by the uncertainties introduced by
extended timeframes. Consider for example, the
bilateral interdependence (Carney, 1998; Lonsdale,
2005b; Bennett and Iossa, 2006; Leiringer, 2006) that
is created by very significant levels of exchange-
specific investment (e.g. building a hospital for a
public health authority). Although this mutuality (i.e.
where else will the buyer obtain hospital services;
what else will the supplier do with a hospital) could,
in certain circumstances, reinforce inter-
organizational co-operation, from a contractual
perspective it also clearly exposes both buyer and
supplier to potential opportunism and therefore
increases the likelihood that all parties (but
especially public-sector buyers) will feel obliged to
engage in a complicated and challenging contracting
process. Additionally, as PCP processes are likely to
“be both irregular and infrequent … [organizations] …
may rely more intensely on suppliers and specialist
external advisors.” (Flowers, 2007); this could
potentially contribute to extreme contracting costs
(Baiman and Rajan, 2002). Thus it is proposed that:

Proposition 3:
The greater the complexity of the performance solution
being procured, the greater the time and costs
associated with the contracting process.

In addition to being difficult and expensive, Holcomb

and Hitt (2007) argue that such contracting is “often
counter-productive”. After all, if PCP contracts are
both incomplete (e.g. Lonsdale, 2005b; Bennett and
Iossa, 2006) and excessively detailed, it is likely
they will be inflexible and difficult to monitor ex-
post (Macaulay, 1963; Macneil, 1980). In other words,
and paradoxically, although PCP exchange governance may
be heavily reliant on contractual mechanisms, it may
actually lack enforcement capabilities. As a result, it
seems likely that these arrangements will be regularly
opened up to various forms of external arbitration,
including formal review by the local legal system
(Deakin and Wilkinson, 1998).
Following Agency Theory perspectives on information
asymmetry between principal7 and agent8, effective PCP
contractual governance needs to address both search
costs and contract monitoring/enforcement costs. In
other words, it depends upon accurate ex-ante
specification of service requirements and establishing
meaningful ex-post controls. So, for example,
successful bidding for a typical PFI contract depends
upon accurate operational forecasts (e.g. traffic
volumes, patient numbers, etc.) and effective control
is dependent upon ongoing capture of the same essential
operating standards (Nisar, 2007). Whilst this may be
straightforward for some applications (e.g. a toll
road), research into the most complex PCP arrangements,
like the UK National Air Traffic Service (NATS), has

7
The buyer - responsible for designing and proposing the contract.
8
The supplier – who will perform the task and must decide if
interested in signing or not (Macho-Stadler and Pérez-Castrillo,
2001)
highlighted this as the PCP challenge (Walder and
Amenta, 2004). Others have proffered the complementary
argument that effective governance in long-term supply
relationships is linked to effective knowledge and
information management over the whole lifecycle, based
on reliable and consistent data. (El-Haram et al.,
2002; Brady et al., 2005; Schofield, 2004; Tranfield et
al., 2005). Thus it is proposed that:

Proposition 4:
The greater the complexity of the performance solution
being procured, the more significant the ex-post
contract monitoring costs (design and implementation of
incentive structures, resource intensity, time
commitment, etc.).

Discussion of ex-post contract monitoring also raises

the analogous question of how PCP contractual
governance, normally devised for a single prime
supplier, influences the rest of the supply chain.
Given that many ‘integrated solutions’ are produced in
multi-firm alliances, collaboration between parallel
primes can seemingly be made to work but it is less
clear to what extent other firms, especially small
firms (SMEs), can operate under PCP contracting forms,
given that their typical life-cycle will be shorter
than an average PCP contracting period. Thus it is
proposed that:

Proposition 5:
PCP arrangements will not be replicated by prime
suppliers with their suppliers (in particular with
smaller firms) in subsequent network tiers.

3.2. Relational Governance

Various studies have noted the complementary
characteristics of contractual and relational
mechanisms (Zucker, 1986; Larson, 1992; Poppo and
Zenger, 2002; Klein-Woolthuis et al., 2005; Halldórsson
and Skjøtt-Larsen, 2006; Vandaele et al., 2007).
Tranfield et al. (2005) for example argue for the
significance of relationships in PCP governance,
especially when co-ordinating intra- and inter-
organisational networks with a multiplicity of
stakeholders. More generically, clearly articulated
terms, remedies, and processes of dispute resolution in
combination with relational norms of solidarity,
bilateralism, and continuance may yield greater
confidence to cooperate (Baker et al., 1994; Stephen
and Coote, 2007). Similarly, social processes (e.g.
trust) that promote norms of flexibility, solidarity
and information exchange, can safeguard, albeit
informally, against exchange hazards and facilitate the
enforcement of obligations (Granovetter, 1973, 1985;
Ring and Van de Ven, 1994; Gulati, 1995; Baker et al.,
2002) and unforeseeable contingencies may be
accommodated by a bilateral approach to problem solving
which facilitates adaptations – especially within a
long-term relationship (Zand, 1972). Conversely, there
are significant embedded difficulties associated with
the effective application of relational mechanisms in
PCP, especially public-private, relationships: power
imbalance (Grimshaw et al., 2002); divergent values and
strategies9 in contractual negotiations/performance
management (Teisman and Klijn, 2004); inappropriate
risk and benefit sharing (Dixon et al., 2005; Erridge
and Greer, 2002). Moreover, continuity of staff is
almost impossible in any multi-year contract – and
individual relationships are a core component of inter-
organizational relational governance. Finally, if
relational governance goes beyond calculative self-

9
It has consistently been argued that many of the UK Private
Finance Initiative contracts have been influenced more by politics
interest it can yield blind trust, which can be
(rationally) exploited in competitive environments
(Williamson, 1993). Thus it is proposed:

Proposition 6:
In PCP governance joint use of contractual and
relational mechanisms generates more efficient outcomes
than the use of either in isolation but contractual
governance will tend to dominate.

Some studies have explored the dynamic interaction

between contractual/relational mechanisms (e.g. Poppo
and Zenger, 2002; Olsen et al., 2005). For instance,
given that a contract is often presented as a
manifestation of power that can promote conflict (Gaski
1984) and defensive behaviour (Zand, 1972), Koppenjan
(2005) argued that early ‘interaction’ helps develop
common understanding and mutual trust and thus
positively impacts contract negotiation processes.
Equally, relational governance strongly complements
contractual processes when facilitating continuity in
the face of changes and conflicts (Macneil 1978). Thus
it is proposed that:

Proposition 7:
The greater the complexity of the performance solution
being procured, the greater the benefits to all PCP
exchange parties from investments in relational
governance during the contracting process.

Conversely, Larson (1992) highlights that the

development and maintenance of relational governance,
including a network of social ties, may be time and
resource consuming, especially with PCP arrangements
where the scale and scope of exchange can be extremely

than economic rationality (Lonsdale, 2005a).

significant and repeat business may be less likely
(North, 1990). Thus it is proposed:

Proposition 8:
The risk of potentially significant sunk costs will
prevent PCP exchange parties from investing in the
development of relational governance before a contract
has been signed

3.3. Integration Governance

Consider the transfer of an established infrastructure
asset system, like the Chicago Skyway Toll Bridge, into
a PCP arrangement. Long maintained by the City of
Chicago's Department of Streets and Sanitation; in
October 2004 the Skyway Concession Company (SCC10) was
awarded a 99-year operating lease, making it
responsible for all operating and maintenance costs and
giving it the right to all toll and concession revenue.
In other words, although future upgrades and
maintenance costs were clearly part of the motivation
for the outsourcing decision, the Chicago Skyway was
primarily a ‘substitution-based’ procurement decision
(Gilley and Rasheed, 2000) - one where the buyer sought
to replace or transfer extant capabilities.
Correspondingly SCC had to be cognisant, pre-bidding
and pre-contract, of the “constraints defined by
existing systems and the legacies of the technologies
they embody” (Gann and Salter, 2000). Given that such
system integration capabilities have been identified as
key success factors in the integrated solutions market
place (Brady et al., 2005, Davies et al., 2007), it is
proposed that:

Proposition 9:

10
A joint-venture between the Australian Macquarie Infrastructure
Group and the Spanish Cintra Concesiones de Infraestructuras de
Transporte S.A.
The greater the complexity of the performance solution
being ‘substituted’ through procurement, the more
significant the technical systems integration challenge
(i.e. time for pre-contractual appraisal, pre-transfer
preparation and post-contractual systems migration).

Moreover, integration is not just a question of

appraising and connecting ‘hardware’ but significantly
also requires active management of human resources.
Most of the Skyway employees for example, found
themselves switched from the public to private sector
and, no matter how experienced the incoming service
provider may be in contracting for this process (e.g.
TUPE11 compliance) the ongoing management of employees
requires considerable effort. Moreover, the business
case for many PCP arrangements derives from anticipated
cost-savings and the identification of these
efficiencies is predicated on accessing detailed
operational performance data. Some of this data capture
can be automated (e.g. the Rolls-Royce Naval Total Care
Package – a form of ‘power by the hour’ for Navy buyers
– employs remote Engine Health Monitoring Systems as a
core component of their management systems) but there
will always be significant human input and as such
performance monitoring will be influenced by the
incentive structures that encourage individuals to
complete forms, write reports, make timely calls, etc.
Thus it is proposed that:

Proposition 10:
The greater the transactional complexity of the
performance solution being ‘substituted’ through

11
The Transfer of Undertakings (Protection of Employment)
Regulations 2006 (TUPE) is the main piece of UK legislation
governing the transfer of an undertaking (e.g. contracting out of a
service) or part of one, to another organization. Designed to
protect employees in a transfer situation enabling them to enjoy
procurement, the more significant the employee
integration challenge (i.e. time for pre-contractual
appraisal, pre-transfer preparation and post-
contractual incentivization and management).

In addition to ‘substitution-based’ models, a great

deal of PCP can be classified as ‘abstention-based’
procurement (Gilley and Rasheed, 2000), where
capabilities are bought rather than committing to the
necessary in-house investments. Indeed, the benefits of
long-term PCP are typically presented as those that
derive from the synergy between designing, building and
operating: seeking innovative solutions based on whole
life-cycle costing (Ratcliffe, 2004). For instance,
aligning the design and construction phase of an urban
transport system project with the corresponding long-
term delivery phase may lead to cost-effective and
innovative service improvements (e.g. with respect to
environmental impact). Thus it is proposed that:

Proposition 11:
The greater the infrastructural complexity (i.e. long
duration contract integrating multiple design/operating
phases) of the performance solution being procured,
rather than developed in-house, the more significant
the opportunity for supplier innovation.

Somewhat paradoxically however, this same extended

supplier commitment gives rise to the greater risk of
moral hazard. Although a supplier may have delivered
the additive capability and originally specified
performance improvements, the buyer will remain
concerned that they are not enjoying the most
innovative, cost-effective and appropriate service if

continuity of terms and conditions, with continuity of employment.

TUPE regulations comply with relevant EC Acquired Rights Directives.
the long-term arrangements have – by definition -
created an effective monopoly for the supplier? In many
PFI/PPP markets for example, this concern over a lack
of long-term flexibility (Dixon et al., 2005) and
minimisation of alternative supply options has given
rise to the inclusion of market benchmarking processes
in the original contract; whereby key elements of the
bidding process are re-enacted every few years (e.g. in
the UK, every 5 years is typical) to ensure ‘fair
competition’. Although an interesting mechanism, the
same challenges of asset specificity and uncertainty –
together with a declining long-term incentive - give
rise to the enduring prospect of supplier lock-in.
Moreover, ‘abstention-based’ procurement is likely,
over time, to result in a greater capability gap
between the buying organization and intermediate
markets. Key suppliers of complex performance are able
to combine the learning from previous projects with the
learning from their established base, together with
learning from previous bids and negotiations (Davies,
2003). The experienced supplier therefore develops a
breadth and depth of capabilities that it can apply to
any individual transaction with a potential buyer and
given the financial and organizational significance of
a typical PCP arrangement, bidder reputation (based at
least in part on PCP track record) may have a
disproportionate impact on selection and contribute
directly to supplier rent generation. In contrast, the
buyer of a complex performance package tends only to
maintain internal capabilities that relate to the use
of existing or initially scoped systems, rather than
the acquisition or development of a new system. For
many buyers therefore, it is likely that over time
their capabilities will relate mainly to older
generations of technology rather than the new ones they
may subsequently wish to acquire. Thus it is proposed
that:
Proposition 12:
The greater the complexity of the performance solution
being procured, rather than developed in-house, the
more significant the risk that supplier-led innovation
outside that specified in the contract will diminish
over the lifetime of the contract.

4. Empirical Research
This is not an empirical paper. The concepts and
specific propositions presented are however intended to
provide a clear starting point for further theory-
driven empirical research (Melnyk and Handfield, 1998).
The authors themselves for instance, have conducted a
large-scale (100+ interviews, 6 supply networks) case
based investigation of propositions 6 and 7 (Zheng et
al. 2008 report preliminary findings from this
project). Specifically the work seeks to explore the
changing significance of contractual and relational
governance over time in the long-term relationships
between public buyers and private service providers.
Although a longitudinal approach in its pure form (i.e.
following the contract over 25 or 30 years) was
impractical, retrospective data was collected using the
respondent-driven critical incident technique. Critical
incidents or events that had a positive or negative
impact on the relationship that occurred during the
different project phases (i.e. procurement/bidding,
construction and operation phases) were mapped along a
timeline.
Further investigations should seek to challenge, test
and modify this set of propositions that are inevitably
‘work-in-progress’. The paper makes no specific
recommendations for methodologies other than to
encourage the widest possible range of methods, with
the recognition that some of the propositions will
probably be better suited to different approaches. An
investigation of propositions 1 and 2 for example,
requires researchers to understand the strategic PCP-
related motivations of a range of stakeholders who may
not themselves recognise the phenomenon being
addressed. This is likely to be best suited to
exploratory case study work or possible a range of
Delphi investigations. Conversely, proposition 3 could,
with suitable refinement and operationalisation of the
PCP matrix (probably via discrete Likert scales), be
analysed with quantitative methods using either
questionnaire data or secondary sources as an input.

5. Conclusions
This paper set out to investigate the integrated
solution or complex performance phenomenon and then
provide some initial conceptualization, via a set of
twelve research propositions, of the distinct practical
and conceptual procurement challenges it creates. The
performance/infrastructural dimension of complexity
presented in section 2 offered a simple definitional
schema for clarifying what exactly is meant by PCP –
noting that buying performance outcomes rather than
acquiring resources and using them is not itself a
novel phenomenon (e.g. leasing). The complexity model
allowed us to focus on the distinct notion of PCP. It
is clear from this preliminary exploration that any
complex phenomenon will generate myriad issues of
conceptual and practical interest and as a result the
core of the paper was a more focused discussion of
distinct governance challenges associated with PCP.
Accepting this limitation, conclusions emerged in three
principal areas.
First, it is critical to set the PCP phenomenon in a
broader economic and political context and highlight
the central role of de-regulation/globalization and
evolving public sector procurement in the emergence of
the phenomenon. The work argues that a purely
transaction-based logic is insufficient to understand
why the phenomenon has emerged (e.g. Transaction Cost
Economics would suggest that PCP is an inappropriate
make v buy solution) and that PCP buying organizations
are therefore motivated by a combination of cost
economies and capabilities management. The more
‘strategic’ or ‘(public) policy’ (i.e. long term,
ambiguous, risk bearing) nature of this type of
decision-making renders it more controversial, as
particularly evident in the critiques of PPP/PFI. The
paper also argues that although buyers may have
distinct strategic motivations, public and private PCP
can be, a priori, examined as a common process.
Second, PCP arrangements introduce a number of specific
challenges for contractual and relational governance.
Complexity has the potential to render any contracting
process both more expensive and more ‘incomplete’,
opening up the intriguing possibility that although PCP
exchange may be heavily reliant on contractual
mechanisms, it may actually lack enforcement
capabilities. As a result there will be significant
benefits to all PCP parties from greater interaction
but the potential risk of sunk costs determines the
precise level of investment in the development of
relational governance.
Third, both ‘substitution-based’ but more significantly
‘abstention-based’ PCP are likely, over time, to result
in capability gaps emerging between buying
organizations and their intermediate markets. The
experienced supplier develops a breadth and depth of
capabilities that it can apply to any individual
transaction but the PCP buyer it is likely that, over
time, capabilities will relate to older performance
characteristics.
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