Performance of Industrial Services Outsourcing: a Field Study of Services Coordination in a Brazilian Steel Company

André C. B. Aquino (University of Sao Paulo)
Alexsandro B. Lopes (University of Sao Paulo)

Abstract: This research analyzes if the measurement costs of a traded good’s attributes reduce control sharing in contracts for the provision of industrial services, as forecasted by the contract theories of measurement and transaction costs. Theoretically, when an industry outsources an activity it used to perform internally, it yields partial or full control on the execution of the service and maintains service quality monitoring rights. The choice of the control level the contracting industry exerts on the service provider would affect that activity’s economic income. In a field study, 80 non-spot transactions at an iron and steel mill were analyzed, representing 81% of the mill’s annual service budget. In a quantitative approach, the contract documents were subject to content analysis. The evidences observed in the contracts were triangulated with interviews held with supervisors and operators, in addition to critical observation of the services involved in the mill’s production process. Through the contract design, the results confirm that the measurement costs of the contracted services, directly related to the complexity of the activities involved, encourage control maintenance by the contractor, deriving from lower expectations of using legal enforcement of the contracts and additional use of extra-contractual enforcement mechanisms. In addition, the misalignment between the enforcement mix expected by theory and what is found in practice influences service performance.

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