Down the drain: Contractual versus relational responses to performance shortfall in large inter-organizational projects

Purpose: Large inter-organizational projects are important contributors to our society (Bendoly, 2014; Davies et al., 2017; Mishra et al., 2015). Existing literature (e.g. Cao and Lumineau, 2015 and Bercovitz & Tyler, 2014) recognizes two strategies of governing large inter-organizational projects (i.e. contractual and relational governance) and indicates that these two governances have joint impact on project performance. Given the fact that most quantitative studies on the two governances modes are based on cross-sectional survey data rather than longitudinal data, many scholars (Faems et al., 2008; Roehrich & Lewis, 2014; Zheng et al., 2008) have called upon researchers to conduct process research to better understand the dynamic interplay of two governances and their impact on performance over time. In a dynamic perspective, performance has impact on the use of these two governances. Thus, there might exist a feedback loop between governances and performance. This feedback loop gives us a more holistic view on the relationship between governances and performance. To the best of our knowledge, there has been little research into this dynamic process. To fill the gap, this research aims to investigate how different governances and performance affect each other over time in large inter-organizational projects. In other words, the study aims to contribute to the governance literature by researching not only the effectiveness of two governances on project performance, but also the impact of performance on the deployment of two governances. Design/methodology/approach: Following Chandrasekaran et al. (2016), we applied a multi-method research approach (i.e. a combination of a multiple case study and a system dynamics simulation method) to explore such a complex phenomenon in large inter-organizational projects. The multiple case study helps to identify a general mechanism of how contractual and relational governances interact with performance over time. The system dynamics simulation helps to replicate performance outcomes under different strategies in real cases and identify boundary conditions of the effectiveness of two strategies. The research studies four large inter-organizational projects under Public-Private Partnerships between Dutch Water Authorities (DWAs) and their contractors. In all cases two parties (DWAs and contractors) encountered a performance shortfall (i.e. actual project performance being lower than contractually required performance). When a performance shortfall occurs, business relationship is slightly changed, it deteriorates and its outcome is uncertain. Contractual and relational strategies have been used to deal with this situation. Between December 2013 and January 2017 we gathered partly retrospective, but mostly real-time data on how the four DWA-contractor dyads responded to performance shortfalls. We collected 561 pages of transcribed interviews with representatives from both the DWAs and (in three cases) the contractor, 541 pages of project meeting minutes, the four contracts (including supplements, i.e., 162 and 941 pages) and their revisions, performance data, and “unobtrusive” information such as website announcements and newspaper articles. Findings: The results of the multi-case study shows that once a performance shortfall occurs, a relational strategy is likely to help enhance the project performance and this results in a good relational outcome. In turn, enhanced project performance and a better relationship promotes the continuous use of a relational strategy. In contrast, a contractual strategy is likely to have negative impact on project performance, thus leading to a bad relational outcome. As a result, it is likely to trigger the repeated use of the contractual strategy. Furthermore, the simulation results show that in a highly complex project setting, even a relational governance strategy may not be able to solve a performance shortfall, whereas in a project with very low complexity, a contractual governance strategy may actually deliver a good outcome. Relevance/contribution: This study contributes to the governance literature by developing a process theory that explains interactions between two governances and performance over time via a multi-method research design, including a longitudinal qualitative multi-case study and a quantitative simulation model. The study enriches our understanding of the dynamic nature of the interplay between the two governance types, their impact on performance, and the effect of performance on the use of two governances. A general message for managers who involve in large inter-organizational projects is that a performance shortfall is inevitable in such a complex setting. Moreover, a relational strategy focusing on information sharing and relation-specific investment is required to overcome a performance shortfall in a timely manner, thereby achieving success with the project.