Marketing

Product (mathematics)

Philosophy

Service (business)

Service-dominant logic

Set (abstract data type)

Computer science

Anthropology

Business

Corporate governance

Physics

Process management

Mathematics

Optics

Exploratory research

Epistemology

Agency cost

Sociology

Artificial intelligence

Geometry

Industrial organization

Programming language

Finance

Knowledge management

Perspective (graphical)

Agency (philosophy)

Shareholder

Adaptation (eye)

Social science

Journal of Business Research

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.

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