Int. J. Knowledge Management Studies, Vol. 2, No.

1, 2008 147

Managing supplier relations with balanced scorecard

Staffan Brege,* Per-Olof Brehmer

and Jakob Rehme
School of Management,
Institute of Technology,
Linkping University,
Linkping SE-581 83, Sweden
E-mail: staffan.brege@liu.se
E-mail: per-olof.brehmer@liu.se
E-mail: jakob.rehme@liu.se
*Corresponding author

Abstract: As a consequence of increased outsourcing, companies become

more and more virtual organisations and dependent upon external sources to
reach their strategic objectives. Here, lacking supplier performance or
commitment can result in failure of the outsourcing programme that
significantly risks the financial results of the outsourcing company.
Consequently, when outsourcing it is important to assure that the supplier
performs as expected. This study uses a Balanced Scorecard (BSC) perspective
for investigating performance measurements in outsourcing. The results
illustrate the importance of a process perspective when outsourcing (securing
volume, high quality at the right time). Formulating a BSC for a supplier, an
outsourcing company could better control/steer the supplier on an
output/performance level.

Keywords: balanced scorecard; BSC; outsourcing; risks; suppliers; IT; wood

product manufacturers; relations.

Reference to this paper should be made as follows: Brege, S., Brehmer, P-O.
and Rehme, J. (2008) Managing supplier relations with balanced scorecard,
Int. J. Knowledge Management Studies, Vol. 2, No. 1, pp.147161.

Biographical notes: Staffan Brege is a Professor of Industrial Marketing and

the Head in the Division of Industrial Marketing/Industrial Management.
His research interest are in the areas of industrial marketing, logistics and
business development and includes topics such as market and functional sales,
outsourcing and supplier strategies, information technology and business
development. Industry segments of special interest are the automotive,
aerospace, telecom and wood manufacturing sectors. He also works as a
Consultant and as a Member in company board of directors.

Per-Olof Brehmer is an Assistant Professor in Logistics Management and Head

of the School of Management. His research topics are value creation strategies,
industrial services, ICT effect on competitiveness, strategies for innovations
and product development in aerospace and automotive industry and lean
production. He has been a research leader for research project in collaboration
with industry concerning value creation strategies, industrial services and
industry competitiveness.
Jakob Rehme is an Assistant Professor in Industrial Economics and Marketing.
He received an MSc in Industrial Engineering and Management, a Licentiate of

Copyright 2008 Inderscience Enterprises Ltd.

148 S. Brege, P-O. Brehmer and J. Rehme

Technology in Industrial Marketing and a PhD in Industrial Marketing all from

The Institute of Technology at Linkpings Universitet. His research interest
includes: marketing and distribution channels, sales and purchasing
management and electronic commerce. He has extensive experience from
industry as a consultant in fields such as industrial marketing, distribution,
logistics and electronic commerce. Prior to his dissertation he was in various
positions at ABB working with logistics, distribution strategies,
sales/marketing and project management.

1 Introduction

Outsourcing, that is, the transfer of internal activities to external sourcing and
partnerships, is a well established practice in the IT and Telecom industries. The
outsourcing process is often starting with narrowly defined operations and develops into
outsourcing of entire functions (cf. Lonsdale and Cox, 1997). Companies therefore tend
to become more virtual and as a consequence more and more dependent upon suppliers
and other kinds of partners.
At the same time, many companies are working increasingly harder to control their
businesses. Balanced Scorecard (BSC) is a technique to broaden control from purely
financial measures to include different kinds of strategic objectives (Kaplan and Norton,
1992). The BSC analysis puts focus on the expected future contribution to financial
performance of leading indicators for success, indicators that mostly mirror the strengths
of the companys intangible assets (e.g. a firms knowledge base, the ability to fulfil
customer needs or an excellent control of process quality). The use of BSC type of
planning and control systems are growing in industry.
If we combine the outsourcing and BSC trends, you could say that companies spend
more and more resources on controlling less and less of internal value added. Unless, of
course, you do not start to include suppliers into the BSC process.
The purpose of this paper is to present a BSC model for supplier control and
management when outsourcing. Our empirical data are two outsourcing cases within the
IT sector and as a contrast a case consisting of six outsourcing examples from the Wood
Product Manufacturing (WPM) sector. The IT sector has a functioning market for
outsourcing, while the WPM sector is basically lacking an independent component
industry that could act as competent outsourcing partners. On the contrary there is a
mutual feeling of mistrust between the potential outsourcing partners.

2 Frame of reference

2.1 A BSC perspective

BSC is a management system developed and used as an internal control system. Goold
and Quinn (1990, p.43) defines a control system as the process which allows senior
management to determine whether a business unit is performing satisfactorily, and which
provides motivation for the business unit management to see that it continues to do so.
When designing a control system it cannot be too strict and inflexible to avoid
opposing and counter-productive behaviour, but neither can it be too loose because then
 Managing supplier relations with BSC 149

it will lead to vague linkages to goals and incentives (Goold and Quinn, 1990). Goold
and Quinn emphasise that strategic goals must be more long-term and must incorporate
both financial and non-financial objectives. BSC must have a clear link to the overall
strategy of the firm (Kaplan and Norton, 1996a; Nilsson and Olve, 2001).
BSCs are argued to be a complement to financial measures, not a replacement
(Kaplan and Norton, 1992). According to its advocates, the methodology, in which
business strategy, goals and action plans are linked together through a wide arrangement
of performance measurement, provides a foundation for a new modern leadership. The
economic measures are balanced with non-financial measures, which provide
management with a wider range of information than before. To help the company to
define a strategy designed for competitive excellence only the strategic measurements
should be included in a BSC (Kaplan and Norton, 1996a,b). There are four main
dimensions in a BSC that comprise different performance measurements.
1 financial e.g., Return on Capital Employed (ROCE)
2 customer satisfaction positive customer attitudes that will lead to
increased profitability and customer stability for market share
3 internal business processes what critical processes must excel to
satisfy customer needs and improve lead time, quality, costs and
performance and
4 learning and growth to improve and create value, e.g. in, product development
(Bengtsson and Skrvad, 2001; Kaplan and Norton, 1992, p.72, 1996a,b).
The financial performance objective becomes the final outcome measure
for the BSC (Kaplan and Norton, 1996a).
A risk is that the financial objectives get too much attention when considering strategic
and operational decisions (Mooraj et al., 1999), for example, as a result avoiding
investments to handle operational bottlenecks that can negatively affect Return on
Investments (ROI) or ROCE. However, Kaplan and Norton (1992) state very clearly
that managers must cease to control the company on the basis of purely financial
performance measurements. It is also discussed that BSC is a tool for the management of
intangible assets (e.g. customer satisfaction, process quality, infrastructures, knowledge,
know-how). Intangible assets are vital in order to stay competitive. Therefore, there is a
need for linked measurements of the four perspectives (i.e. customer, financial, learning
and growth, internal business process) to the strategy of the firm (Kaplan and Norton,
1992, 1996a,b). In this sense, the authors argue that a BSC will help to implement,
control and develop the long-term strategy of the firm and not just work as diagnosis
instrument. Nilsson and Olve (2001) argue that BSCs have been developed to improve
the coordination between business units using financial and non-financial performance
measurements. The problem facing many organisations is that the coordination is not
only internal but also external, between different organisations, because of the
outsourcing to different suppliers.

2.2 Outsourcing strategies and accompanied risks

Outsourcing is by a wide range of authors primarily seen as a way to cut costs by
ordering out tasks to a supplier who can produce the product or perform the service at a
lower cost (see e.g. Byrne, 1996; Earl, 1996). But it is also advocated in the literature,
150 S. Brege, P-O. Brehmer and J. Rehme

that the outsourcing decision should be made on the premises of the companys core
competencies (see e.g. Brandes et al., 1997; Quinn and Hilmer, 1994; Venkatesan, 1992).
The underlying assumption is that core competence is in need of internal control, while
complementary competences could be externally coordinated in partnerships and
standard products could be exposed to the coordination of market competition (Quinn
and Hilmer, 1994). Thus, the activities that create a basis for differentiation and
competitiveness must be kept in-house, while other non-core activities should be
considered as potential for outsourcing. Done correctly, according to Quinn and Hilmer,
outsourcing will provide the opportunities for the firm to develop their core
competencies, while at the same time outsource activities to suppliers which can
perform them at a lower cost. Other important driving forces for outsourcing are
according to Lonsdale and Cox (1997): cost reduction, to convert fixed
costs to flexible, to benefit from a suppliers investment and innovation, and and to
improve time to market.
However, previous studies have shown that only a handful of companies achieve the
expected benefits when outsourcing (see e.g. Gilley and Rasheed, 2000; McIvor, 2000).
In a large survey of Swedish companies it was concluded, that most companies
expectations on cost reduction and increased flexibility when outsourcing had not
materialised (see Bengtsson et al., 2005). Especially logistics performance and quality
are areas where the companies have been very dissatisfied (Bengtsson et al., 2005). Thus,
when considering outsourcing it is vital to evaluate suppliers technology and operational
competencies (cf. Abrahamsson et al., 2003; Jennings, 1997; McIvor, 2000; Spekman,
1988). Similar views of an outsourcing agreement is expressed in the McKinsey
Quarterly Journal (2001, p.45):
managers must assess not only the current performance of a process or asset
but also its potential for improvement. In addition, they must retain enough
expertise to judge whether suppliers are, at minimum, meeting standards and
keeping pace with changes in the field.

When considering outsourcing by price and cost comparisons, it is essential to note that
the external source will also demand profit on value-added that would normally be
retained if the activities are performed internally (Abrahamsson et al., 2003). And since
the customer also wants to add a margin to its purchased products and services,
the outsourcing calculus will end up with two profit margins one for the supplier and
one for the customer.
Another risk is supplier appropriation, which is linked to ending up in a dependency
situation where the supplier can raise prices in a lock-in situation (Walker, 1988). One
example would be when the supplier applies loss-leader tactics (Lonsdale and Cox,
1997). This is a situation when a supplier intentionally or unintentionally (e.g. by
inadequate cost-calculations) during a competitive bidding will offer too low price. Later,
this supplier will need to raise prices. Thus, the buyer needs to consider how prices will
be lowered if the supplier intends to perform the same activity in similar ways. For
example, the supplier can offer better economies of scale and a lower cost structure
(Abrahamsson et al., 2003; Greaver, 1999). Outsourcing also exposes the company to
supplier related risks where the notion of confidentiality is at stake (Lonsdale and Cox,
1997) or diffusion risks in having innovative product or process technology imitated
(Walker, 1988). Thus, an intrinsic risk becomes loss of control of the supplier (Gilley
and Rasheed, 2000; Quinn and Hilmer, 1994; Walker, 1988), where the supplier tries to
 Managing supplier relations with BSC 151

bypass their buyer to become closer to the end-customer. What can be seen is that risks
of outsourcing very much relates to risk of dependency (cf. Lonsdale, 1999; Lonsdale
and Cox, 1997).
Outsourcing to a limited supply market will further increase the dependency
(Lonsdale, 1999). In line with this, Lonsdale and Cox (1997, p.34) make the assumption
that managers will think twice before outsourcing into a supply market containing
only one, or very few, feasible suppliers. If there is not a competitive supply market a
company should only outsource if internal governance is impractical (Lonsdale, 1999).
In line with this, Abrahamsson et al. (2003) emphasise that if there is only one available
supplier there would be a small chance that an external supplier would be able to perform
the activity better and in a more efficient way than the outsourcing party. Therefore,
Lonsdale and Cox as well as Abrahamsson et al. advocate that there is a need for a well
developed supplier market when outsourcing. In short, when outsourcing it is
consequently important to assure that the supplier performs as expected and how this can
be done is discussed below.

2.3 Outsourcing and performance measurements

In outsourcing strategies, non-financial performance measurements are, according to
Carlsson and Lind (2005), a very important complement to the traditional financial
performance requirements but are too often overseen. Improved performance of
non-financial aspects as quality and lead time will result in improved financial
performance (Kaplan and Norton, 1996a). Such measurements are also easier to directly
measure (Carlsson and Lind, 2005). Here, Carlsson and Lind argue that non-financial
performance measurements are critical in controlling the daily performance of
external suppliers, for example, supply reliability, quality and number of sent units.
In addition, such factors become central when selecting suitable suppliers, which
is especially important in outsourcing agreements since such relations often are
long-term.
In a similar way Greaver (1999) suggest that it is critical for a company to monitor
the performance of the supplier delivering the outsourced items. The author argues that
the company should monitor any changes in the suppliers output of components or
changes in the production process. Such oversight requires close communication with the
provider and to analyse the performance and measurements can include:
1 number of outputs
2 number of errors
3 number of on-time deliveries
4 number of days cycle time and
5 number of outputs per employee (Greaver, 1999, p.275).
These measurements must, according to Greaver, be both long-term and short-term.
An important factor is thus to recognise when the supplier gives excellent performance to
create incentives for continuous improvements. However, Greaver is not specific of how
such incentives can be developed.
152 S. Brege, P-O. Brehmer and J. Rehme

With an empirical example, Carlsson and Lind (2005) state that outsourcing more
often than not results in complex supplier relationships and suggests three important
dimensions for controlling performance when selecting suppliers and thereafter:
1 technology/quality
2 time logistical performance and
3 costs.
Linked to such measurements is the concept of BSC and control systems. By this the
outsourcing company can be able to assure supplier motivation and to see if a supplier is
performing satisfactory and in line with the overall business strategy.

2.4 BSC for control and management when outsourcing

In outsourcing agreements, supplier performance/competencies are important operational
issues as well as the issue determining how the relationship between the companies can
develop. In addition, more strategic long-term issues seem to be the suppliers ability to
help with product augmentation and/or product innovation and development. Thus, for
companies outsourcing an important question would become how they can consider
long-term strategic issues and consequences without neglecting short-term operational
issues which are critical for the outsourcing decisions, as these may force the companies
to make trade-offs when considering outsourcing strategies.
To cope with this, the above critical issues of outsourcing would be possible to link
to the four different dimensions in BSC. The scorecard can provide answer to some basic
questions that refer to the supplier handling the outsourced manufacturing:

1 Financial perspective: How price competitive is the supplier?

2 (Business) process perspective: How is the supplier performing (e.g. in terms of

costs, lead time reliability and quality) and what must be improved?

3 Customer focus perspective: How is the supplier supporting the image of the
company from the perspective of the end-customer?

4 Innovation and learning perspective: How can the supplier continue to deliver
value (e.g. more participation in product development and product
augmentation)?
The BSC can through its design and implementation link overall strategy with operations
in the customer supplier (outsourcing) relationship.

3 Outsourcing and management of supplier relations

3.1 Method
To explore the challenges associated with and strategies behind the outsourcing
decision, our research builds on a longitudinal study of three cases. The research design
combined participant observation, interview rounds and reference group meetings.
A case study approach was chosen because case studies are particularly useful for
 Managing supplier relations with BSC 153

analysing contemporary events (Yin, 2003). The three cases were selected to give
possibility of a replication logic and theoretical sampling (Eisenhardt, 1989). This
multiple case design allowed us to observe development over time and the actions taken
within each case and hereby to unfold challenges and implications for the studied
outsourcing cases. In this paper, we use our research finings to elaborate on challenges
that other companies in general and their suppliers may face in similar outsourcing
situations.
Two outsourcing case studies from the IT sector are used which have more
extensively been previously presented (Augustson, 1998; Augustsson and Sten, 1999).
The cases have been written as parts of a licentiate thesis and one of the authors has been
the supervisor and has closely monitored the empirical data collection. The case has since
been complemented with additional information comprising the development of the
outsourcing cases. Complementary to the IT cases we present the results from
six outsourcing examples in the WPM sector from a current research project
(Fransson, 2005). Since the examples are rather similar, we have chosen to present them
as more or less one case.

3.2 Scania and WM data: the case of competence driven

IT outsourcing
Scania is a world leading manufacturer of heavy trucks. Their skills in product
development, production and marketing are well known and they have over the years
successfully implemented a modular system for the launching of new truck models. IT is
an important enabler for the development, but also for an efficient production and
marketing and an integrated part of the business system.
In the beginning of the 1990s, the IT department was still organised as an internal
department. In order to develop a more business-like mentality in the internal use of
IT resources the department was changed to a separate company Scania-Data.
However, the business perspective was still lacking, due to the fact that about the same
people was working together in about the same manner. There was a lack of new
management visions and there was also a shortage of competent personnel. During these
days, in the middle of the 1990s, there was a growing boom in the IT business,
the specialised IT companies were expanding heavily and were often considered as a
more attractive employer.
On top of these issues, Scania saw the main long-term problem of how to secure
IT competence when at the same time IT is becoming more and more strategic. Scania
wanted a strategic partnership and started to look for potential IT partners.
WM Data were the chosen partner, mainly because of the cultural fit (both basically
Swedish companies with very cooperative attitudes). The choice was made, even if both
Scania and WM Data were aware of some of WM Datas shortcomings, such as a lack of
international coverage and experience. Scania-Data were transformed into a 5050 joint
venture and a five year contract was signed, a contract that was supposed to be
renegotiated every year.
Scania also kept parts of the IT resources inhouse, for instance IT close to product
development. The main reason was to keep IT resources that were too close and
integrated with core competence. Another reason was to still be in touch with the
IT development in order to act as a competent buyer. Different organisational
coordination mechanisms were created to handle the relationship between Scania and the
154 S. Brege, P-O. Brehmer and J. Rehme

IT joint venture Scania-Data an IT management board and a more operative IT group.

Scania did not really view the partnership with WM Data as an outsourcing, rather the
opposite, Scania was insourcing IT competence.
The joint venture lasted for some years, but eventually Scania brought the IT function
inhouse once again. The reasons were mainly strategic, IT was too important to be
handled by external partners, at least as the cooperation with Scania-Data had developed.
For instance there was a constant struggle of the financing of new strategic
IT investments.

3.3 LFAB and Sema group: the case of a cost-driven outsourcing

The insurance company LFAB implemented a cost-cutting programme in the middle of
the 1990s. One important part of that programme was the outsourcing of the internal
IT operations. LFAB saw a potential for cost-cutting in the area of 25%, due to the fact
that the internal IT staff was too large and there were insufficient scale economy in the
internal operations. The internal IT department handled a multitude of activities from
pure operations to development of systems and people. LFAB wanted the internal
department to act more strategically and to more closely follow the very dynamic
development in the IT field. So, LFAB decided to go for an outsourcing alternative that
placed operations in the hands of an external partner, but still kept the IT department
inhouse.
Sema Group was chosen as the external partner, an internationally well-known
company with a solid base also in the Swedish market. Sema Group had clearly showed
their potential to reduce the number of employed and to extract the expected economies
of scale in operations. A contract of 130 million Swedish Kronor was signed over a
five year period. Sema Group took over operations of the main frames and the mini
computers and the local PC support for about 700 clients. About 20 employees switched
sides from LFAB to Sema Group. The contract was complemented with a Service Level
Agreement (SLA) which specified response time to handle specified problems and
accessibility to technical personnel.
LFAB reach their cost reduction objectives and could also put internal focus on
strategic IT development. So in this respect the outsourcing was considered as
successful. But at the same time, management of LFAB is of the opinion that it takes
time and effort to handle an outsourcing relationship, more demanding than expected in
the initial phases of planning and negotiation.

3.4 Cost-driven component outsourcing in the WPM Industry

Studying companies in the WPM Industry, such as flooring, doors and windows, offer a
different and interesting context. Companies in the WPM sector can be defined as
manufacturers of products adding value to the wooden material (cf. Brege et al., 2003,
2004; Desclos, 2000). The purchasing cost of wooden raw material is more often than
not a substantial part of total manufacturing costs. This makes purchasing an important
issue that will impact the financial results for the firm (cf. Krajlic, 1983).
Regardless, flooring, doors and windows manufacturers have previously not worked
closely together with suppliers from the saw mills and do not have great confidence in
the capabilities of these suppliers who have generally only delivered bulk commodities
or standard products (see also Nord, 2005). This has resulted in a situation of mutual
 Managing supplier relations with BSC 155

mistrust and arms-length customersupplier relationship with standardised interfaces.

Traditionally, the WPM companies have guarded themselves against uncertainty of
supplies and their own deficiencies of planning by buffers, multiple suppliers and
in-house activities. This is now changing. Recently, the WPM companies seem to more
and more considering outsourcing parts of their manufacturing (see Andersson et al.,
2005; Fransson, 2005). The strategies and issues analysed when considering outsourcing
are summarised in Table 1, for a more comprehensive description see Fransson (2005).

Table 1 Strategies and issues in the WPM-case when considering component outsourcing

Component Outsourcing strategies Cost/financial Other issues when considering

outsourcing for components issues outsourcing strategies
examples
Floor More focus on core Lower costs and A strong need for reliability in
manufacturer 1 business. Outsource to achieve supplies and high quality. No
components that create financial suppliers available. Assure supplier
little differentiation flexibility participation in component
development and suitable solutions
(e.g. Vendor Managed Inventories).
Intends to have parallel production
Floor Outsource components Ensure that total Suppliers competence and
manufacturer 2 that create little costs really can be technology to handle the outsourced
differentiation. No lowered manufacturing
longer the same need to
handle all
manufacturing
in-house
Door Outsource Cost-effectiveness Uncertainty of supplier
manufacturer 1 non-complex and lower capital competence. Risk for supplier
components. Intends to tied up appropriation. Handle cost and
focus on components other issues by parallel production
that create and support teams
differentiation for the
customer
Door Outsource components Mobilise capital Dependency (need for reliability in
manufacturer 2 that create little and lower costs supplies). Suppliers competencies.
differentiation. Focus Avoid single sourcing. Demands:
more on activities that high output capacity, short lead
create differentiation time, minimum delivery delays
and value for customers
Window Focus more resources to Lowering cost, Availability of components
manufacturer 1 core activities down- increasing (critical). Difficulty to find suitable
stream in the value capacity without developed suppliers. Lock-in risk
chain. costly investments where supplier controls volumes
delivered.
Risk of losing of competence
Window Simple operations that Potential for Component quality critical.
manufacturer 2 would demand too lowering total Supply reliability and supplier
costly investments and costs (also competence. Risks for supplier
create little long-term) appropriation. Single sourcing
differentiation creates high dependency. Handle
cost and other issues by parallel
production
156 S. Brege, P-O. Brehmer and J. Rehme

All six examples show that the main driver for outsourcing is cost reduction. Especially
the flooring manufacturers are in a very tough competitive situation, with strong
international pressure. In their situation, cost-cutting is essential for survival and for the
successful implementation of turn-around programmes. The doors and windows
producers want cost-reduction and especially they want to avoid new in-house
investments in component production. They are also driven by the urge to be more
market-oriented and to focus on differentiation factors which they define as
core competence. All examples show a lack of suppliers to take over component
manufacturing and there is no well-functioning supplier market for outsourcing. In all
cases the buying side is trying to build up alternatives, either parallel inhouse production
or (the potential for) multiple suppliers. The outsourcing cases show problems for the
suppliers to meet the demands on cost reduction but also on quality and lead times to
customers. Compared to more mature outsourcing sectors, the wooden components that
are being outsourced are of comparatively low technical complexity and with clear-cut
interfaces to other components in product development and production. Despite this
simple start in the outsourcing process, the flooring, doors and windows manufacturers
share the same opinion regarding the lack of communication with their outsourcing
partners in both strategic long-term issues and day-to-day operations.

4 Analysis

The cases show different aspects of importance for outsourcing relationships to develop
in ways that strengthen the competitiveness of both companies. Table 2 summarises
some aspects in the cases discussed below.

Table 2 Aspects developing and restraining the outsourcing relation

Aspects developing the relation Aspects restraining the relation

Scania-WM data Shared management vision
Secure competence profiles
Partner-specific communication on
strategic and operational level
Joint focus on developing
competence and knowledge
to handle the complexity
LFAB-Sema Separating strategic and operational
group IT-issues in order to gain strategic
cost advantages
Formulating goals and not procedures
for the outsourced operations
WPM-component Clear idea on what to outsource
suppliers Supplier competence and knowledge
for handling the present as well as
future customer demands
IT changed from a cost issue to a
strategic area and thus changing the
foundation for the relation
Conflict of interest in investment
issues (standard versus adapted)
Not developing a shared way to
communicate and assist the
operations
Economic focus might lead to less
focus on innovations and development
Customer wants to discuss
technology, standards and processes
as if handled in-house
Risk of relation dependency (both
ways). Losing and transferring
competence and knowledge to
potential competitors
 Managing supplier relations with BSC 157

4.1 A tool to put strategies into action

The three cases emphasise the fact that the BSC perspective could be a tool to put
outsourcing strategies into action, that is, that the visions and strategies of the
outsourcing company and its suppliers are a precondition and have to be defined and laid
down beforehand. In the WPM case, it seems that the lack of joint visions and the
historically grounded mistrust between the two parties makes it difficult to establish
well-functioning outsourcing relationships. There is a lack of interorganisational
platforms for the handling of development issues. Even if the parties can agree on
economic performance objectives in terms of costs and prices, they also need to establish
an openly structured dialogue covering also non-financial aspects. Here, the BSC as a
management instrument could provide a high potential for better managing the
outsourcing relationships in the WPM sector.
The IT cases illustrate the contrary situation, with mutual visions and cultures
between the outsourcing companies and their suppliers in line with a BSC perspective.
This enables the setting of strategic goals for the future (leading indicators) as well as the
monitoring of results (lagging indicators) to depict the effectiveness and efficiency in the
past. The IT cases have much clearer views on how the outsourcing decision should affect
the financial performance in terms of cost-cutting in more efficient business processes,
IT platforms for more effective product development and perhaps also ultimately better
end-customer satisfaction. So, even though the outsourcing implementations in the
IT cases have have not formally been guided by a BSC methodology, there is a high
degree of similarities in the processes.

4.2 Gaining balance between conflicting goals

As discussed in Section 2, the majority of outsourcing decisions are driven by financial
goals. But even if the outsourcing is financially beneficial there are other issues that have
to be in balance. The outsourcing of activities and components with strong relations to
other activities and processes that are handled in-house might raise the complexity of
total operations. The relationship between outsourcing and strategies in general could
look very different. For example, a new way to reach differentiation and specialisation
might lead to strategies where outsourcing is not the option; complementarities among
operational activities might lead to extended outsourcing or taking back everything from
the supplier etc. These strategic concerns in relationship to outsourcing can easily be
linked to the four BSC perspectives and giving a better frame of reference for sound
decision making.
In the Scania-WM Data case, a conflict between the four BSC perspectives made
Scania to once again take in-house control on IT. Scania thought that the fourth
perspective, the innovation and learning focus could be set back by a lack of IT support
in the joint venture with WM Data. In the WPM-component supplier case the financial
perspective is the driving one, whereas supplier ability to sustain their competence,
knowledge and their competitive advantage over time is questioned. The BSC provides a
base for decision making beyond financial calculation by taking mainly learning and
innovation into the decision.
158 S. Brege, P-O. Brehmer and J. Rehme

4.3 Managing intangible assets

A key aspect in all three cases is how to handle the transfer of competence and
knowledge from a situation within an organisation to an interfirm relation. Teece et al.
(1997) and Winter (1987) among others discuss that technology transfer is not
mechanical, but interactive and embedded in existing capabilities on both sides and in the
social relationship between both sides of the transaction. The important issues are not
only linked to the companies involved in the outsourcing decision but related to the
industrial context. We can see a large difference in maturity among IT-outsourcing
versus outsourcing of wood components, which have implications on how the
outsourcing projects are carried out.
If the social relationship is open-minded it opens up for joint decisions regarding the
future development of the relation, joint development of competencies and knowledge
needed for the future and a situation leading to increased competitiveness for both parties
in the relationship. This is, at least initially, the situation in the IT cases but not in the
WPM-case. Linked to the BSC model we can see that the way of working in different
ways supports three of the four BSC perspectives (business processes, customer focus
and innovation and learning) pointing at the need for applying a multiple perspective on
outsourcing decisions and evaluation of current outsourced activities/processes.

4.4 Outsourcing: BSC for controlling and managing the relation

In our case studies, the companies have different experiences of how the outsourcing
relationship is handled. Future competitiveness of the relations is dependent on the
ability of both customers and suppliers to simultaneously work with issues important for
the short term as well as the long-term perspective. The four perspectives of the BSC
provide such a framework. Table 3 summarises the analysis and exemplifies dimensions
of importance.

Table 3 BSC perspectives and example of dimensions crucial for managing and control
of outsourced relations

Perspectives Key dimensions/measurements to Key internal dimensions/

support the outsourced operations measurements to support business
and the relationship strategy (Kaplan and Norton,
1997, 1996)
Finance: How do we look Expectations of cost reduction by Revenue growth and mix
in the eyes of our the supplier Profitability base
shareholders? Formulations that opens for Cost reduction/productivity
development by the supplier improvement
Existence and interest of Asset and investment
open-books utilisation

Customer: How do or Number of available suppliers Product/service attributes

customers see us? Strategic aspects of the Customer relationship
relationship (supplier and Image and reputation
customer view)
 Managing supplier relations with BSC 159

Table 3 BSC perspectives and example of dimensions crucial for managing and control
of outsourced relations (continued)

Perspectives Key dimensions/measurements to Key internal dimensions/

support the outsourced operations measurements to support business
and the relationship strategy (Kaplan and Norton,
1997, 1996)
Internal processes: What Switching costs Processes
must we excel at? How are cost expected to be Decisions
lowered? Communication process Actions
(customersupplier)
Link between processes
(communication, operations,
strategic)

Learning and Innovation: Competence base of supplier Employee satisfaction

How can we continue to Development of supplier market Employee retention
improve and create Based on the outsourcing the Employee productivity
value? supplier develops new knowledge Staff competencies
and hereby technology diffusion Technology infrastructure
Development and innovation Climate for action
approaches by the supplier and the
customer
The way the supplier work with
other customers

The cases show that in a business process perspective, linked to the BSC, short-term
day-to-day operational issues are about handling costs, supply reliability and quality
(i.e. supplier performance/competence risks). In a longer strategic perspective it is more
about controlling the supplier to avoid supplier appropriation (handle long-term
price development). Here, it can be concluded that it may be necessary to make some
trade-offs by paying a higher price to avoid supplier process risks (i.e. risk of choosing a
supplier that delivers lacking quality or with low supply reliability).

5 Conclusions

The cases studied illustrate the importance of the process perspective when outsourcing
(securing volume, high quality at the right time). A supplier failure will likely lead to
additional costs that can affect both the customer and finance perspective. If companies
neglect these issues, there is a risk that the cost advantages of outsourcing are levelled
out by additional costs to correct deficiencies as quality and lacking lead time reliability.
A balanced lead scorecard approach with clear goals and measures can be used to lower
the risk of such additional costs. The balance scorecard can be used to clarify the goals
in the outsourcing relationship and consequently reveal the expectations from the buyer
and the seller in the outsourcing relationship.
Formulating a BSC for a supplier, an outsourcing company gives the possibility to
better control/steer the supplier on an output/performance level. A result is also that the
company has to be prepared to support the supplier on a production process level when
taking over outsourced activities. Furthermore, they can also help the supplier with
160 S. Brege, P-O. Brehmer and J. Rehme

operation related problems such as reaching quality levels, starting up new technology as
well improving cost competitiveness and reliability in supplies.
However, outsourcing is not a project that can be handled mechanically and with a
fixed agenda. It is important to create competitive advantages by creating and sustaining
knowledge-sharing processes within the supplierbuyer relationship. Sharing of ideas
can build a relationship that is crucial for companies that try to stay ahead of its
competitors. BSC can be used to handle dynamics in business relationships. It can also
be used as a tool to take advantage of knowledge from other outsourcing cases in a
structured manner.

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