Measurement costs and control in outsourcing relationships

Abstract

Past research suggests that when an organisation outsources an activity, its control over the execution of the service is reduced whilst service quality monitoring increases. Little accounting research has been documented on the links between measurement costs and control sharing in contracts entailing the provision of industrial services. We analyse 35 contracts involving 80 non-spot transactions and 749 contract terms at an iron and steel mill in Brazil. The study complements this data with information from 32 interviews. We find that the measurement costs of the contracted services are associated with the complexity of activities and the tightness of control maintenance by the contractor, where such costs are high, legal contract enforcement and use of extra-contractual coordination mechanisms is low. Additionally, variances between the conceptually expected enforcement mix and that operating in practice is associated with service performance level.