Repercussions of digital technologies for information asymmetry in performance-based contracting (PBC): An exploration study in digitally-enabled manufacturing environments

Luis Prato*, Finn Wynstra, Wendy van der Valk

*Corresponding author for this work

Research output: Contribution to conferenceAbstractOther research output

Abstract

Purpose
Classical agency theory (Eisenhardt, 1989; Hypko, Tilebein and Gleich, 2010b) applied to study Performance Based Contracting (PBC), focuses on the notions of information asymmetry and outcome-measurability (Eisenhardt, 1989; Hypko, Tilebein and Gleich, 2010b) to address resulting agency problems. Previous research in manufacturing industries indicates that PBC seems to be less effective in situations when information is expensive to generate (Randall, Nowicki and Hawkins, 2011; Selviaridis and Wynstra, 2015), even with the utilization of a variety of supporting Information Systems (IS) (Eisenhardt, 1989). In the majority of cases, agents either cannot deliver the agreed performance-outcomes or do not behave in line with the goals of the principal. Thus, these barriers have both economic and relationship consequences under this contracting approach.
In sum, contemporary advances of supporting IS, commonly referred as Digital Technologies (DTs) (Ardolino et al., 2018) might have an effect on classical agency theory. DTs like sensor-technology, Internet of Things (IoT), cloud computing, and advanced data analytics may play a vital role to minimize agency problems, by reducing information asymmetry and enhancing outcome measurability (Eisenhardt, 1989). PBC research conducted in the defence, aerospace, mining and transportation sectors, showed an increasing employment of DTs by manufacturers for the generation of performance information and measurements (Grubic, 2014; Visnjic et al., 2017; Grubic and Jennions, 2018), although in digitally-enabled manufacturing environments this utilization is still limited (Prato, Wynstra and van der Valk, 2020).
More recent research suggests that vast amount of performance information in manufacturing industries can directly reduce hidden actions and thereof the moral hazard problem(Prato, Wynstra and van der Valk, 2020). However, insights from principals suggest mistrust of DTs (i.e. accuracy, objectivity, reliability, validity and consistency of measurements and information) as a source of information asymmetry (Prato, Wynstra and van der Valk, 2020). Also; it seems that principals displayed certain inability to interpret available information, which ultimately also became a source for information asymmetry. The main research question is as follows: In PBC, What may be the effect of mistrust of digital technologies (DTs) and inability for interpretation information on information asymmetry?
Methodology
We conducted two exploratory studies (Yin, 2017) given the a lack of detailed prior empirical research. Each case study pertains to a contract between one supplier (ProPSS) and two producers (A and B) of non-durables goods (i.e. packaged foods and beverages). Data was collected through nineteen semi-structured interviews with both the supplier and their customers, while triangulation taking place through the review of multiple documents (e.g. historical archives such as contracts, documentation and performance evaluation records) and field observations.

Preliminary Findings
We will expand possible causes affecting information asymmetry to meet the aim of this study (see Table 1).

Table 1 – Overview of cross-analysis
Root-cause Important quotes
Mistrust of DTs

“….managers trusted only our manufacturing execution systems (MES), the DTs used by ProPSS did not align with the measurements obtained with our legacy systems” Plant Manager at producer B
“We never defined and unified an objective calculation of Original Equipment effectiveness (OEE) with ProPSS. There were many factors involved for the final calculation of this indicator, such as uptime, stops for cleaning, maintenance stops, effective production time and quality of the end-products” Plant Manager at producer B
“… connectivity and production monitoring systems installed by ProPSS were not reliable enough.” Maintenance Manager at producer A
“ we refused to pay the contract’s bonus, because all these inconsistencies. ProPSS could not deny these points” Maintenance Manager at producer A
Ability to interpret information “… OEE as indicator was controversial for all of us…..there were various manners to measure and interpret it.” Maintenance Manager at producer A

Contribution
These findings suggest that the use of DTs can only thrive in an environment of trust and transparency to reduce asymmetric principal-agent relations. Also, development of digital skills for the measurement and interpretation of information seems to the great importance. In conclusion, this study forms a first step in understanding additional effects of DTs in asymmetry of information, for the effective design and management of PBC in such digitally-enabled manufacturing environments.
Original languageEnglish
Publication statusSubmitted - 16 Jan 2021

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