The relationship between supplier control and competition in public sector outsourcing

• Author: Sven Siverbo,Tobias Johansson
• DOI: http://doi.org/10.1111/faam.12153
• Date: 01 August 2018
• Published date: 01 August 2018

Received: 2 December 2016 Revised: 19 September 2017 Accepted: 18 January 2018

DOI: 10.1111/faam.12153

ORIGINAL ARTICLE

The relationship between supplier control

and competition in public sector outsourcing

TobiasJohansson1Sven Siverbo2

1ÖrebroUniversity Business School, Örebro

University,Örebro, Sweden

2Departmentof Economics and IT, University

West,Trollhättan, Sweden

Correspondence

SvenSiverbo, University West, SE 461 86 Troll-

hättan,Sweden.

Email:sven.siverbo@hv.se

TobiasJohansson, Örebro University,SE 701 82

Örebro,Sweden.

Email:tobias.johansson@oru.se

Fundinginformation

TheSwedish Competition Authority

Abstract

The aim of this article is to develop theory and contribute to

empirical studies about how the effectiveness of bureaucratic con-

trols in public sector outsourcing is contingent upon supplier com-

petition, and why and how this interaction plays out differently

for hard and soft types of outsourced services. In previous inter-

organizational management control (IOMC) research there is a con-

tradiction between theory and empirical results concerning how

bureaucratic control and supplier competition interacts in aligning

suppliers. While IOMC theory suggests competition reduces the

need for bureaucratic control, empirical studies clearly indicate the

opposite. We extend previous research and theorizing by differing

between the outsourcing of hard and soft types of services and by

testing the joint effect of bureaucratic control and competition on

supplier alignment. The empirical case for testing theory is outsourc-

ing by competitive tendering in the public sector.We use transaction

level data from 166 local government suppliers in Sweden. In accor-

dance with our prediction, the effect of bureaucratic control in align-

ing suppliers decreases with supplier competition when hard types

of services are outsourced. For soft types of services, our results

indicate that bureaucratic control is not contingent upon supplier

competition. Furthermore, we show that when supplier competition

is low the effect of bureaucratic control on supplier alignment is

stronger for hard than for soft types of services. These results con-

stitute an important contribution to the central notion of the inter-

play between bureaucratic control and competition in the IOMC

literature.

KEYWORDS

alignment, competition, control, outsourcing, performance ambigu-

ity,supplier

268 c

2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/faam FinancialAcc & Man. 2018;34:268–287.

JOHANSSON ANDSIVERBO 269

1INTRODUCTION

Outsourcing through competitive tendering has become increasingly common in the public sector in many countries.

Proponents of outsourcing argue that outsourcing has many advantages, for example, economies of scale, access to

competence, and increased efficiency through competition (e.g., Osborne & Gaebler,1992; Savas, 2000). More critical

commentators argue that using the market mechanism increases transaction costs, that it is costly to implement con-

trol systems for dealing with cooperation hazards related to outsourcing, and that it is hard to establish functioning

markets for many public sector services (e.g.,Burke & Goddard, 1990; Girth, Hefetz, Johnston, & Warner, 2012; John-

ston & Girth, 2012; Van Slyke,2003). Both proponents and critics, thus, consider competition to be the primus motor

in explaining successful or less successful outsourcing (Bel, Fageda, & Warner,2010; Boyne, 1998; Girth et al., 2012;

Hart, Shleifer, & Vishny,1997; Johansson, 2008; Malatesta & Smith, 2011; Van Slyke, 2003; Williamson, 1985). Both

sides would probably also agree that outsourcing must be accompanied by bureaucratic controls to ensure supplier

alignment, that is, to make sure suppliers live up to agreements on responsiveness, timeliness, continuity, and com-

pliance. The aim of this article is to develop theory and contribute to empirical studies about how the effectiveness

of bureaucratic controls in public sector outsourcing is contingent upon supplier competition, and why and how this

interaction plays out differently for hard and soft types of outsourced services.

Our starting point is the lack of clarity in the literature on what role competition plays for the effectiveness

of bureaucratic controls. In transaction cost economics (TCE) and inter-organizational management control (IOMC)

research (Dekker, 2004; Johansson & Siverbo, 2011; Van der Meer-Kooistra & Vosselman, 2000; Williamson, 1985)

on market competition and buyer–supplier relationships, competition on supplier markets plays an important role in

aligning suppliers and is thus important for control design. If competition is fierce (functional markets), the working of

the “invisible hand” imposes self-control on suppliers, which reduces the need for other control measures. If,however,

supplier markets are less competitive (e.g., small number conditions) and cannot be trusted to deal effectively with

transaction risks, more compelling bureaucraticcontrol is needed to assure supplier alignment (Williamson, 1985).1In

this way the degree or quality of competition becomes an ex ante factor important for the expost control design and

use (Anderson & Dekker,2005; Van der Meer-Kooistra & Vosselman, 2000; Williamson, 1985). In other words, based

on theory we can expectbureaucratic control to compensate for the absence of supplier self-control when competition

is low. In that sense transaction(control) costs increase with lack of supplier competition.

Considering this rather straightforward but fundamental TCE theory, it is highly interesting and surprising that

empirical observations on the relationship between bureaucratic control of suppliers and supplier competition uni-

formly contradict this expectation. Research on both public and private sector outsourcing typically reports posi-

tive, not negative, associations between bureaucratic control and competition (Anderson & Dekker, 2005; Dekker,

Sakaguchi, & Kawai, 2013; Dekker & Vanden Abbeele, 2010; Johansson, Siverbo, & Camén, 2016; Malatesta & Smith,

2014). Buyers seem to increase the use of bureaucratic control when competition is high. Consequently,transaction

(control) costs appear to increase as a consequence of competition on supplier markets(Johansson et al., 2016).

Wenote, however, that none of the previous studies has explored, nor reasoned, how bureaucraticcontrol and com-

petition relate to each other for services that are different regarding performance ambiguities. This is surprising since

performance ambiguity changes the internal workings of competition on markets(e.g., Akerlof, 1970; Hart et al., 1997)

and the compensating role of bureaucratic control (Ouchi, 1979, 1980). This opens up for questions about the inter-

play between competition, bureaucratic control, and the type of service outsourced. In public sector organizations,

both low and high performance ambiguity services are contracted. Low performance ambiguity services are typically

called “hard type of services” and comprise water supply, cleaning, winter road maintenance, park maintenance, and

transportation. High performance ambiguity services are often called “soft type of services,” which covers education,

culture, elderly care, social services, addiction treatment, and health care. Due to differences in performance ambigu-

ity,suppliers of hard and soft services may respond differently to both bureaucratic control and competition. We also

note that, except for the exploratoryconfiguration study by Johansson and Siverbo (2011), performance effects (e.g.,

supplier alignment) of control and competition combinations have not been investigated in research. This means that

wedo not know if increasing bureaucratic control under high competition or decreasing bureaucratic control under low