How is service procurement different from goods procurement? Exploring ex ante costs and ex post problems in IT procurement

https://doi.org/10.1016/j.pursup.2017.12.001Get rights and content

Highlights

  • One of the first studies to compare the execution of procurement activities for goods versus services.

  • Managing the procurement process for service transactions is more costly and problematic.

  • Classical transaction characteristics explain these transaction cost differences.

Abstract

Several studies suggest that, in practice, service procurement is more challenging than goods procurement. The underlying but largely implicit argument is that the procurement process for services involves higher buyer uncertainty and therefore requires extra efforts to mitigate this uncertainty. Drawing on Transaction Cost Economics, we use a database of information technology transactions to investigate the relationship between transaction characteristics and social embeddedness, and ex ante cost and ex post problems. We explore whether the same relationships hold across transactions that involve only goods versus transactions that also involve services. Our findings support conventional wisdom that managing the procurement process for transactions involving services is more challenging than for transactions involving goods. However, when controlling for typical transaction characteristics, there is no difference between transactions involving goods and transactions that also involve services.

Section snippets

Procurement of services: is it different?

Over the past decades, the importance of the service sector in the global economy has increased substantially, bringing its share in world GDP to 68.3% in 2014 (World Bank, 2017). In parallel, the share of business-to-business services in the total procurement expenditures of individual organisations has grown as well (Axelsson and Wynstra, 2002, Ellram et al., 2007). Many organisations, however, find it challenging to effectively organise their procurement of services (Caldwell and Howard, 2010

Recent research on service procurement

Although the first publications on service procurement date back to the 1960s (Wittreich, 1966), the number of studies only started to grow significantly at the beginning of the 21st century (Nordin and Agndal, 2008). Recent literature distinguishes four major topics: specification setting, segmentation, servitisation and performance-based contracting. This set of topics is not exhaustive, but it does cover a substantial part of recent studies. A review of publications in the Journal of

Data collection

We investigate the differences between transactions involving services and transactions involving goods by using survey data on the purchase of IT services and goods by Dutch small and medium sized enterprises (SMEs) with 5–200 employees. Two samples of IT transactions have been collected in 1995. The aim was to collect a multi-purpose dataset, resulting in a broad range of publications to test hypotheses on how transaction characteristics, embeddedness and other variables affect ex ante and ex

Data analysis and findings

Using the Hardware, Software and Services dummy variables, we first split our sample into two groups: transactions that (among others) involve service components versus transactions that do not involve service components. In a second step, we use the dummy variables and subsequently Proportion of Services as independent variables in regression analyses, in addition to transaction and embeddedness characteristics, to explain ex ante and ex post transaction costs.

For the two groups, Table 5 shows

Discussion

Our first analysis shows that transactions that involve services are indeed different in some respects than transactions that do not involve services. Search costs and contracting costs are higher, and service transactions lead to more problems ex post. While previous studies mainly measured perceptions of buyers and perceived differences between goods and service procurement, our analysis demonstrates that transactions involving services are indeed executed differently. However, our findings

Conclusions and recommendations

The findings from our study of a large set of IT procurement transactions provide a possible explanation of the hitherto mainly anecdotal evidence that managing the procurement process for services is different from managing transactions that do not involve services. Our study largely confirms prior studies suggesting that service procurement is more difficult and more expensive than goods procurement (Ellram et al., 2007, Ellram et al., 2008, Fitzsimmons et al., 1998, Van der Valk and

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