Internal Customers and Internal Suppliers

Abstract

To push a customer and market orientation deep into the organization, many firms have adopted systems by which internal customers evaluate internal suppliers. The internal supplier receives a larger bonus for a higher evaluation. The authors examine two internal customer-internal supplier incentive systems. In one system, the internal customer provides the evaluation implicitly by selecting the percentage of its bonus that is based on market outcomes (e.g., a combination of net sales and customer satisfaction if these measures can be tied to incremental profits). The internal supplier's reward is based on the percentage that the internal customer chooses. In the second system, the internal customer selects target market outcomes, and the internal supplier is rewarded on the basis of the target. In each incentive system, some risk is transferred from the firm to the employees, and the firm must pay for this; but in return, the firm need not observe either the internal supplier's or the internal customer's actions. The incentive systems are robust even if the firm guesses wrongly about what employees perceive as costly and about how employee actions affect profit. The authors discuss how these systems relate to internal customer satisfaction systems and profit centers.