December 2017 Paper by Ornella Benedettini and Andy Neely on 'Does buyers’ dependence translate into financial performance? An empirical analysis of manufacturer-service provider relationships'
It may be beyond the capabilities of individual firms, or not be economically viable, to provide directly all the services related to a core product. For example, manufacturers of capital equipment often decide to supply services to certain customers/markets themselves, while also enabling distributors or other intermediaries to plan, install, integrate, support, optimise the product for the customer and provide product-related training. In such instances, the question arises of how should the manufacturer structure the ensuing supplier-buyer relationship with third-party providers of product-related services.
Drawing upon supply chain management (SCM) research and the theoretical lens of relational embeddedness, this study investigates the effects of a service provider’s “dependency” on a manufacturer’s financial performance in supplier-buyer relationships involving a servitized manufacturer and a third-party provider of product-related services. Using financial-statement-based data from 190 servitized manufacturer-service provider relationships, we find that a service provider’s dependency increases the manufacturer’s performance in terms of return-on-assets (ROA), return-on-sales (ROS) and asset turnover (ATO). However, as service provider dependency increases, the manufacturer experiences diminishing returns; as dependency increases beyond a certain, the negative outcomes offset benefits. Thus, overall, the study finds evidence of an inverted U-shaped relationship between a service provider’s dependency and a manufacturer’s financial performance.