GOVERNANCE IN HUMANITARIAN LOGISTICS

Importance and key contribution In this paper we adopt an Agency Theory (AT) perspective to gain a better understanding of how contractual agreements influence the service triad in humanitarian supply chains. In this research... [ view full abstract ]

Importance and key contribution
In this paper we adopt an Agency Theory (AT) perspective to gain a better understanding of how contractual agreements influence the service triad in humanitarian supply chains. In this research the buyer (the principal) is therefore confronted with two agents (the service provider, which is either an UN agency or an IHO, and “end customer”, which in the humanitarian service triad would be the IP) who may each have their own specific and possibly conflicting objectives (Tate et al., 2010; Van der Walk and Van Iwaarden, 2011). In AT the contractual question becomes should the agent be measured by relational (such as salaries, hierarchical governance) or contractual outcomes (commissions, market governance) (Logan, 2000).

This leads to the following research question: how can agency theory be applied in a service triad in humanitarian logistics in order to gain a better understanding of how contractual arrangements influence the buyer-service provider alignment in an organisation-to-organisation service triads? To assist in answering this question we use descriptive exploratory research to obtain primary data directly from humanitarian in-country programs.

The theoretical contribution of this paper is fourfold. First, this research examines governance structures in contractual arrangements in a humanitarian service triad. An increased understanding of managing services and their service providers in the triadic context of outsourced service delivery adds to the body of knowledge in supply management. Secondly, this is the first examination of governance structures in humanitarian logistics. Thirdly, this is the first application of Agency Theory in humanitarian logistics. Finally, the research is field based and is grounded in empirical observations thus adding to the literature and offering insights to practice.

Theoretical base
Agency Theory (AT) is concerned with the study of problems that arise when one party, the principal, delegates work to another party, the agent (Zsidisin and Ellram, 2003). The focus of AT is on deciding on the type of contract between a principal and an agent (Van der Valk and Van Iwaarden, 2011). AT advances two types of contract – contractual and relational. The formal contractual approach (or structural approach) identifies complex contracts that mitigate the perceived risk of opportunistic behavior (Cao and Lumineau, 2015). In contrast, the relational perspective promotes a more relational governance strategy in which partners rely on trust to address issues of safeguarding and coordination (Malhotra and Lumineau, 2011).

In situations where an agent’s action is difficult to observe, such as in humanitarian logistics (largely due to the complex nature of the task), the principal is exposed to a heightened risk of opportunism by its agent. Similarly, where agents know more than the principals the potential for opportunism increases. This according to Hartmann and Herb (2014) provides an opportunity for the agent to both evade control and misrepresent its capabilities. To avoid opportunism governance emerges from the values and agreed-upon processes found in social relationships which may minimize transaction costs (Malhotra and Lumineau, 2011).

Research questions and method
In the humanitarian service triad, as in third party logistics, the actual material, financial, information and title flows determine the triad, regardless of the contractual set-up. In any case, financial flows originate from donors, hence they are the principal in the humanitarian service triad, whereas the UN agency or IHO as service provider, and the IP will conduct agent-like behaviour. The IP is mainly interested in the desired outcome of the service encounter and possibly in the process that brings about that outcome. Eisenhardt (1989) proposes that a contractual contract is more likely to lead any agent to behave in the interests of the principal. Based on this, we propose the following:

Proposition 1: Within the service triad, the contract applying to the donor-IP dyad is contractual based.

Zsidisin and Ellram (2003) point out that the buyer (here donor) will primarily be interested in pricing, compliance and performance information as a means to reduce risk and monitor supplier behavior. Van der Valk and Van Iwaarden, (2011) posit that cost reduction may be an important buyer objective, while quality is likely an end customer objective. Building on Tate et al., (2010) we propose the following:

Proposition 2: Within the service triad, the contract applying to the donor-UN agency / IHO dyad is contractual based.

In summary, AT can be used to help design the most effective types of contracts and relationships to provide fair outcomes to all parties. The contractual question concerns the management of the agent using contractual or relational contracts while balancing the service triad.

Since humanitarian service triads are a contemporary phenomenon that show their potential in real-life contexts and can hardly be replicated in experiments, the case study design is deemed as an appropriate research methodology. Our empirical study used one case study examining the response to the Typhoon Yolanda. The case in focus was the service triad between the Irish Aid, WFP and Concern Worldwide. Primary data were collected through semi-structured interviews.

Findings
For proposition 1, in the contract between IA and Concern Worldwide the contract is based on measureable outcomes, such as cost, timeliness, and issue resolution. IA observed “As we got more experience in the area [humanitarian sector] we required more information regarding what outcomes needed to be included in our contracts. Part of this was to adhere to transparency and accounting procedures”. These findings show that if contracts are not designed carefully, opportunistic behaviour may occur in the unmeasured areas, so that the spirit of the contract may be lost. IA remarked “…there have been situations in the past where agencies have tried to take advantage and act in their self-interest and not in Irish Aids interest, even though we would be purchasing the goods.” To avoid opportunistic behaviour, incentive capability was adopted in the contract design. Contracts were subsequently designed so that the actions with the highest pay-off to the end customer are also the actions that are most appropriate from the donor’s point of view.

For proposition 2 the end-customer’s preference for outcome-based contracts with the buyer is not necessarily reflected in the service provider – buyer contract. IA has a three-year contract with UNWFP which is a hybrid contract consisting of outcome based measurable outcomes, such as cost, timeliness, and issue resolution and behavioural outcomes. Underlying the contract is a service level agreement, which includes arrangements for the service delivery process. It seems that the donor prefers to focus on aspects like measurability of performance in determining their contracts, and to specify a behaviour-based contract rather than to transfer their end-customer’s requirements to UNWFP. While the behaviour monitoring may be perceived by the service provider to be meddlesome, the presence of a behavioural contract looks like an aid in preventing the service provider from displaying opportunism behaviour.

Implications
New insights were obtained regarding the presence of behavioural based outcomes in the buyer – end customer relationship. Our research suggests that a hybrid (mixed) contract exists. The hybrid approach has the benefit of providing detailed performance data regarding behaviour elements, such as processes for accessing funding, as well as outcome based criteria such as cost, timeliness, and issue resolution. While behaviour monitoring may be perceived by the end customer to be obtrusive, the presence of a behavioural contract appears to help prevent the end customer from displaying reactant behaviour. The presence of behavioural contracts reduces the possibility of misalignment of contracts. This finding suggests that in the cases studied, behavioural governance outweighs contractual governance.

For practitioners, our findings suggest that it is highly important that behavioural outcomes are established between buyer - service provider and buyer – end customer, as it appears to guide the service provider and end customer towards desired behaviour. Aligning all three parties in the triad by means of the right type of contract is beneficial not only for the buyer, but certainly also for the end customer and the service provider. This research suggests that cooperation between the principal and two agents can improve performance through sharing of information, knowledge, and improved coordination. However, this alignment seems to be more easily achieved through behavioural contracts rather than legal arrangements.

Selected references
Eisenhardt, K.M., (1989). Agency Theory: an assessment and review. Academy of management. Academy of Management Review 14 (1), 57–74.
Heaslip, G. (2013), “Services operations management and humanitarian logistics”, Journal of Humanitarian Logistics and Supply Chain Management, Vol. 3 No.1, pp. 37-51.
Tate, W., Ellram, L., Bals, L., Hartmann, E., van der Valk, W., (2010). An Agency Theory perspective on the purchase of marketing services. Industrial Marketing Management 39 (5), 806–819.
Van Iwaarden, J. and Van der Valk, W. (2013), Controlling outsourced service delivery: managing service quality in business service triads, Total Quality Management and Business Excellence, 24, 9-10.

Governance, Service, triads, networks, humanitarian logistics, agency theory [ view full abstract ]

Governance, Service, triads, networks, humanitarian logistics, agency theory