“The Impactof Long-TermClient Relationships

on thePerformanceof BusinessServiceFirms.”

by

PiyushKumarRiceUniversity

ISBM Report 12-1999

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U.Ed. BUS99-081

TheImpactofLong-TermClient Relationshipson thePerformanceofBusiness

ServiceFirms

PiyushKumar

tPi~sh Kumar is AssistantProfessorof Management,JesseH. JonesGraduateSchoolof Management,MS-531,

Rice University,Houston,TX 77251-1892. Tel.No. (713) 285-5386(w), (713) 838-9155(h), Fax No. (713) 285-

5251, E-mail: kumarp@rice.edu.This researchwassupported,in part by the Institute for the Studyof Business

Markets,PennsylvaniaStateUniversity.

TheImpactofLong-TermClientRelationshipson thePerformanceofBusiness

ServiceFirms

Abstract

In this paper,weempiricallyexaminetheimpactof long-termclientrelationshipson the

performanceofbusinessservicefirms. Onthebasisofthe informationcontainedin the

CompustatandComnactDisclosuresetsof databases,we find that, overthe longrun,

relationship-orientedbusinessservicefirms achievehigherreturnson theirinvestmentthan

transaction-orientedfirms. Importantly,our findingssuggestthat, unlike for relationship-

orientedsuppliersofbusinessgoods,suchascomponentparts,long-termclientrelationshipsdo

not improvetheproductivityofrelationship-orientedservicefirms. However,suchrelationships

helpbusinessservicefirms resistpricepressuresfrom theircustomersandaddmorevalueto

theirservicesovertime.

2

1. Introduction

Overthelast few years,therehasbeenanemergingtrendtowardlong-termrelationships

amongbusinesscustomersandsuppliersofproductsandservices.A numberof customerfirms

havenow adoptedanapproachoftreatingtheirsuppliersaspartnersratherthanadversaries.In

turn, manysuppliershaveswitchedtheirstrategyfor servicingtheircustomersfrom the

traditionaltransaction-orientedapproachto themorerecentrelationship-orientedapproach.

Althoughthepracticeof long-termbuyer—supplierrelationshipshasgrownin popularity,

severalimportantquestionsregardinghowtheybenefitthepartneringfirms in thelong run

remainto beaddressed.KalwaniandNarayandas(1995),who examinethenatureof

manufacturer-supplierrelationships,suggestthatbothbuyersandsuppliersmightbenefitfrom

engagingeachotherin long-termrelationships.Theyfind thatlong-termrelationshipshelp

streamlinetheoperationsandlower theinventoryholdingcostsofsuppliersofindustrialgoods,

suchascomponentsandparts,theresultingsavingsfrom which areextractedby thebuyersin the

form oflowerpricesovertime. Thebenefitto therelationship-orientedsuppliersof thesegoods

comesin theform oflowerselling andadministrativeexpensesthat offsetthe erosionin gross

marginsandenablethemto achievehigherreturnson theirinvestmentover time thantheir

transaction-orientedcounterparts.Thesefindingssuggestthatwhetherornot long-term

relationshipsbenefitsuppliersin the longrundependson theseverityofpricepressuresexerted

by relationalcustomersandthesavingsin selling expenses.Indeed,in relatedwork,

Balakrishnan,Linsmeier,andVenkatachalam(1996)do find that, from amongsuppliersengaged

in just-in-timerelationshipswith theircustomers,only thosewith abroadcustomerbasearealso

ableto resistpricepressuresandimprovetheirprofitability overtime. Ontheotherhand, iTT

supplierswith anarrowcustomerbasesufferdecliningprofits overthe longrun.

It is importantto notethat theaforementionedstudiesaswell asmuchoftheotherrelated

academicinquiry in theareahaslargely focusedon long-termrelationshipsbetweenbuyersand

suppliersof goods,not services.However,thereis agrowingtrendtowardtheoutsourcingof

businessservices,andlong-termrelationshipsaregaining increasingimportancein themarketing

3

ofservicessuchasresearch,design,andengineering(QuinnandIlilmer 1994);financialservices

(Perrien,Filiatrault, andRicard1993);environmentandwastemanagement(Creele1995);

transportationandlogistics(BeierandCross1993);andconsulting(Frantz1993; Walton1993).

Therefore,thereis presentlyaneedto furtherimproveourunderstandingofthenatureof

client—serviceproviderrelationships,in particular,theimpactofsuchrelationshipson thelong-

termperformanceof servicefirms (ShethandSharma1997).

Basedonwhatweknowregardingthedifferencesbetweenhowbusinesscustomersbuy

servicesandproducts(Jackson,Neidell, andLunsford1995; StockandZinszer1987)it is not

apparentwhetherbusinessclientsandserviceproviderswouldenjoythesamebenefitsfrom

engagingeachotherin long-termrelationshipsthatmanufacturersandsuppliersofgoods,suchas

componentsandparts,would. Forinstance,theproductionofmostbusinessservices,unlike that

of componentandparts,is largelypeople-basedandsuchservicesaretypically notmass

producedorinventoriedatacentralizedlocation. Giventhis difference,it is not clearwhether

andhowlong-termrelationshipswill streamlinetheoperationsofserviceproviders,improve

theirproductivity,andlowertheirservicedeliverycosts.

Further,clientsassociategreatrisk with theselectionandreplacementofservice

providersbecausetheyoftenfind it difficult to setprecisespecificationsfor theservicesthey

wish to purchase(Parasuraman,Zeithaml,andBerry 1985)aswell asto evaluateall the

attributesofa serviceproviderprior to theactualdeliveryoftheservice(Berry 1995;Gronroos

1990;StockandZinszer1987). Theseperceptionsofrisk areknownto reducetheimportanceof

pricein thedecisionprocessfor thepurchaseofservices(Ostromandlacobucci1995). In

addition,businessclientsactivelyparticipatein thedeliveryprocessofmanyservicessuchas

consulting,research,financialservices,andinformationtechnologyservices.Consequently,the

quality ofservicetheyreceivedepends,in part,on theirown effort andinputswell ason the level

of coordinationthat theyareableto achievewith theserviceproviders(Bostrom1995;Beierand

Cross1993). Why, thenwould relationalclientsincreasinglyput greaterpricepressuresover

4

theirserviceprovidersastime goesby? And, moreimportantly,why wouldserviceprovidersbe

vulnerableto suchpressures?

Finally, theconsequentialeffectsofthequalityofmanybusinessservicesare

significantlylargerthanthecostofprocuringthem(DayandBarksdale1994). For example,

poorlyconceiveddesign,consulting,research,orengineeringservicescanhaveaseriousadverse

impacton thebuying firm. On theotherhand,anexceptionalperformanceon thedeliveryof

suchservicescandramaticallyimprovethebuying firm’s performance.However,customers

oftenfacegreatuncertaintywith respectto thequality oftheseservicesbecauseofthepotentially

largevariability in inputsandoutputs(LovelockandWright 1999). Successfullong-term

relationshipsenablecustomersto observetheperformanceoftheserviceproviderovertimeand

reducetheirperceiveduncertaintyassociatedwith thequality ofservicesyetto bereceived.

Undersuchcircumstances,would relationalsuppliersfeel increasedpressureon thepurchase

priceor onservicequality?

In this paper,weaddressthe questionsraisedabove,andusedatacontainedin the

Com~ustatandCompactDisclosuresetsoffinancial databasesto examinetheimpactof long-

termclientrelationshipson thefinancialperformanceofbusinessservicefirms. Our

methodologyfor sampleselectionandhypothesistestingis similar to thatofKalwani and

Narayandas(1995),who investigatedtheimpactof long-termrelationshipson suppliersof

goods,suchascomponentsandparts. We first identify a setofbusinessservicefinns that were

engagedin long-termrelationshipswith theircustomers.Foreachofthesefirms wethenidentify

a matchingcontrolfirm thatusedatransactionalapproachto managingits customers.We finally

comparetheperformanceovertime ofthesematchedpairsof firms. Overall,ourempirical

findingssuggestthatrelationship-orientedbusinessservicefirms do achievesuperiorreturnson

theirinvestmentin thelong runthantheirtransaction-orientedcounterparts.However,thereare

severalkey differencesbetweenhow theserelationshipsaffect thecostsandpricesofbusiness

servicefirms versuswhathasbeenreportedfor componentpartssuppliers. On theonehand,we

find thatlong-termclientrelationshipsdo not increasetheproductivityofbusinessservicefirms

5

anddo not lowertheirservicedeliverycosts. On theotherhand,wealsofind thatthese

relationshipsdo not exposebusinessservicefirms to excessivepricepressuresovertimeand,in

fact,helpthemmaintaintheirgrossmargins. It appearsfrom ourfindings thatbusinessclients

donot engageserviceprovidersin long-termrelationshipswith theobjectiveofdrivingdownthe

costofprocurement.Rather,theyform suchrelationshipsto enableservicefirms to addmore

valueto theirofferingsovertime.

Therestofthepaperis organizedasfollows: In thenextsection,webriefly discussthe

natureoflong-termrelationshipsbetweenbusinessservicefinns andtheirclients. Next, we

presentourhypothesespertainingto theimpactoftheselong-termrelationshipson the

performanceofbusinessservicefirms. Thereafter,wediscussourmethodology,data,andthe

operationalizationofthevariablesofinterest. Finally, wepresentourempiricalfindings,discuss

theirmanagerialimplications,andoffer someconcludingcomments.

2. BusinessServicesandLong-TermRelationships

Thereareseveralpotentialbenefitsthatbothclientsandserviceproviderscanderivefrom

engagingeachotherin long-termrelationships.First, mostbusinessservicerelationships,much

like the servicedeliveryprocessitself, arelargelypeople-based,andthe qualityofthedelivered

servicedependscritically on the interpersonalinteractionsamongtheboundaryspannersofthe

partneringfirms (Berry 1983). As relationshipsstrengthenoveraperiodoftime, theservice

providers’personneloftenassumetheroleofoutsourceddepartmentsandmakecritical decisions

onbehalfoftheirclients.Theinteractionamongboundaryspannersbecomesevenmorecritical

whenserviceproviders,suchasengineeringconsultants,haveto activelyparticipatein anetwork

ofmultifirm relationships,suchasthosewith builders,contractors,inspectors,andsuppliers,on

behalfof theirclients. Theserepeatedinteractionsamongtheclients’ andserviceproviders’

boundaryspannersresultin socialbondsthat increasetrustin therelationshipandconsequently

thevalueof serviceprovidersto theirclients.

6

Further,overtime, theclients’ boundaryspannersbecomefamiliarwith theoperations

andproceduresoftheircounterpartsin thesupplierfirms. In thisregard,long-termrelationships

becomea sourceofreassuranceto theclientsandserveasimplicit performanceguarantees

(Spekman,Strauss,andSmith 1985). Theserelationshipsareespeciallyimportantforbusiness

servicesbecause,unlikewhattheydo for incomingcomponentsandparts,manyclientsdon’t

haveongoinginstitutionalizedprogramsforthemeasurementandcontrolof thequalityof

servicetheyreceive. Servicecontracts,by themselves,areno safeguardbecausetheytypically

specifyonly aseriesof actionsratherthanoutcomes.And often,eventheongoingmonitoringof

serviceprovidersonly ensuresthattheservicefirm adheresto thenecessaryproceduresrather

thaneitherimprovesqualityor lowersservicedelivery costs. As aresult,clientsfeel vulnerable

whentheypurchaseservicesbecausetheyhavelessknowledgethanthe serviceprovider

regardingwhattranspiresin a“black box” serviceperfonnance(van’tHaaff1989). Undersuch

circumstances,successfulongoingrelationshipsreduceclients’ perceptionsofvulnerabilityand

helpthemreducetheirmonitoringcosts.In turn, relationalserviceprovidersareableto gain

scopeadvantagesovertimebecausetheyreducetheclients’ perceptionsoftherisks involvedin

transactingadditionalrelatedbusinesswith them.

Overtime, relationshipsalsohelpservicefirms becomeextensionsof theirclient

organizations.Relationalservicefirms arethereforebetterableto understandtheirclients’

serviceneedsaswell asto collaborateandcoordinatewith theirclients’ personnel.This

resultingmutuallearningprocessenhancestheclient-specific,distinctivecapabilityofrelational

serviceprovidersandenablesthemto addmorevalueto theirofferingsthancouldan outside

competitor. Theaddedvalue,in turn,increasesclients’ switchingcostsandbecomesa critical

sourceofcompetitiveadvantagefor suchserviceproviders(Christopher,Payne,andBallantyne

1991).

Successfulclientrelationshipsalsoenhanceserviceproviders’ reputationsandprovide

themwith a setofestablishedshowcaseaccounts.Theseaccountsareespeciallyimportantfor

businessservicesbecauseword-of-mouthandreferralsplayacritical role in theselectionof

7

serviceproviders(DayandBarksdale1992). Long-termrelationships,therefore,helpservice

providerswin additionalnewbusinessbecausenewclientscannotex-anteverify thequalityof

servicestheyarelikely to receiveandoftenselectserviceproviderson thebasisof

recommendationsfrom otherclients.

Finally, long-termrelationshipsarealso attractivefor businessservicefirms becausethey

typically do not involve largeadditionalinvestmentsin relationship-specifictangibleassetsthat

cannotberecoveredin theeventofaterminationofarelationship(LevinthalandFichman1988).

Consequently,businessservicefirms typically do not faceadditionalfinancialrisksin theform

oflargefixed costsmerelybecauseofengagingtheirclientsin long-termrelationships.Of

course,this maynot be truefor select,capitalintensivebusinessservices,suchas

telecommunicationservices.

3. StatementofHypotheses

We nextstateourspecifichypothesespertainingto theimpactof long-termrelationships

on therevenues,costs,prices,andprofits ofbusinessservicefirms.

ImpactofLong-TermServiceRelationshipson theLevelofSales

Relationship-orientedserviceproviderscanachievesuperiorsalesgrowthfor several

reasons.First, extendedrelationshipsbindclientsandserviceproviderstogetherthrough

noncontractualcommitmentsandenhancethelevel ofmutualtrustbetweenthem(Dion,

Easterling,andMiller 1995; Oster1990). This increasein the levelof trustovertime aswell as

repeatedserviceencountersreducestheuncertaintysurroundingclients’ perceptionsofthe

qualityofthedeliveredservice. Thereduceduncertaintyregardingservicequality helpsclients

reducethecostofmonitoringtheserviceprovideraswell asincreasestheirperceivedrelative

risk ofbuying from potential“out” competitorsofthe incumbent in~~ servicefirm. Further,

long-termclientsdevelopsocialrelationshipswith servicefirms andareconsequentlymore

tolerantofservicefailures(CrosbyandStephens1987). Relationalserviceproviderscan

8

thereforemaintainalargeproportionoftheirsalesbecausetheyarelikely to be insulatedfrom

theadverseeffectsofhighclient turnover.

Second,becauseclientscannotex-anteverify thequalityoftheservicetheywould

receive,word-of-mouthplaysanimportantrolein theselectionof servicefirms (Jackson,

Neidell, andLunsford1995). Therefore,servicefirms whohavesatisfactorylong-term

relationshipswith theirclientsmaybeableto increasetheirsales,both to otherdivisionswithin

anexistingbuyerfirm aswell asto newbuyerfirms.

Finally, overtime, relationalservicefirms cangathercritical informationabouttheneeds

oftheirclientsandcanuseit to gainscopeadvantagesby exploitingcross-sellingopportunities

(Bharadwaj,Vardarajan,andFahy 1993). Theseopportunitiesarisebecauseclientsin long-term

relationshipsaremorelikely to useexistingservicefirms for relatedservicesthanto increase

theirrisksby trying outnewones(Corey1991). Forinstance,clientswho usean information

technologyfirm for softwaresupportareoftenlikely to usethesamefirm for servicesrelatedto

the evaluationandselectionofrelatedhardware.Overall,relationship-orientedservicefirms can

experienceahighlevel ofsalesgrowthbecauseofrestrictedclient switching,enhanced

reputation,andexpansionofscope.

Ofcourse,a long-termfocuson existingclientsoftenrequiresservicefirms to

overspecializeanddedicatetheircritical resourcesonly to theseclients(JacksonandCooper

1988). This specializationmaynot leaveenoughfreeresourcesfor marketdevelopmentandthe

acquisitionofnewclients. Further,relationalclientsoftendissuadetheirserviceprovidersfrom

acquiringnewonesbecauseofconcernsthat it would leadto aredeploymentofcritical

resources,suchasdesignexperts,consultants,orcreativepersonnel.Therefore,servicefirms

that focuson existingclientscanlosesalesbecauseoftheirinability to usesomeoftheir

strengthsto exploit alternativemarketopportunities. Overall,wehypothesizethat:

Ill: Servicefirms in long-termrelationshipswith theirclientsareableto

attainahigherlevel of salesgrowththanservicefirms that do not engage

theirclientsin long-termrelationships

.

9

ImpactofLong-TermServiceRelationshipson SellingPrices

Servicefirms competein themarketplaceon thebasisoftheirdistinctivecapabilities

(DayandWensley1988). Someofthesecapabilities,suchasthesuperiorskills oftheir

personnelortheiroperatingsystems,areintrinsic to thesefirms andarevaluableto potentialas

well ascurrentclients. However,relationship-orientedservicefirms developadditional,client-

specific,capabilitiesovertime thatenablethemto addmorevalueto theirservices.

Consequently,long-termclientsperceivea“capability gap” betweenthe “in” servicefirms and

theirpotential“out” competitors(Coyne1985). This perceivedgap enablesrelationalservice

providersto resistpricepressuresfrom theirclientsandsometimeschargehigherpricesthan

wouldbepossibleby potentialcompetitors.

Further,thereis anecdotalevidencethatclientsthatcontinueto havelong-term

relationshipswith servicefirms tendto purchasefull priceservicesovertime (Reicbheldand

Sasser1990). Therefore,eventhoughservicefirms haveto competeon priceto acquireaclient

andinitiate arelationship,theirability to chargefull pricesfor theirservicesincreasesasthe

scopeoftherelationshipexpands.Finally, overtime, clientsgetusedto theproceduresthat are

put in placeto coordinatewith an existingservicefirm (Malone,Yates,andBenjamin1987).

This proceduralspecificitytendsto lock in clientsandincreasetheirswitching costs(Heidi and

John1990). Relationalservicefirms canextractsomeoftheseswitching costsby charging

higherpricesovertime.

Ontheotherhand,relationalservicefirms oftenhaveto providelargeinitial discountsto

theirclientsat thepre-relationshipstage,thatis, atthetime whentheclient is searchingfor new

serviceproviders(Ford 1990). Clientsoftennegotiatesuchdiscountsat thepre-relationship

stage,becausetheyrealizetheir limitations with regardto driving pricesdownoncethe

relationshipdevelopsandmatures.As aresult, relationalserviceprovidersmight haveto wait

for long periodsoftimebeforetheirrelationshipsbecomesinstitutionalizedandtheyareableto

raisetheirprices. Overall,wehypothesizethat:

10

~j~:Servicefirms in long-termrelationshipswith theirclientsareableto

obtainhiaherpricesover timethanservicefirms that do not engagetheir

clientsin long-termrelationships

.

ImpactofLong-TermServiceRelationshipson ServiceDelivervCosts

Relationship-orientedservicefirms maybeableto decreasetheirservicedeliverycosts

overtime for severalreasons.First, from atransactionscostperspective,relationalservicefirms

candevelopeconomiesofinformationexchangewith theirclientsthroughcommontraining,

experience,andrepeatedinterpersonalinteractions(Williamson 1971, 1975). Second,sustained

relationshipswith selectclientscan alsoleadto anenhancedorganizationallearning,that is, an

improvementin skills andabilities throughlearningwithin theorganization.Relationship-

orientedservicefirms canthereforeincreasetheproductivityandefficiencyof individual groups

ofworkersby exploitingexperiencecurveeffects. Centralizingaccountprocessingfor various

servicescanhelprelationalservicefirms achieveadditionalefficiencies(Bharadwaj,Vardarajan,

andFahy 1993). An enhancementin the level ofefficiencyforthereasonsoutlinedabovecan

reducearelationalfirm’s servicedeliverycostsovertime.

On theotherhand,clientsin long-termrelationshipsarerelativelymoredemanding.

Theyoftenrequirededicatedteamsofpeople,suchasconsultants,designers,inspectors,and

accountmanagers,to servicetheiraccountsfor extendedperiodsoftime. Suchrequirements

tendto reducethemobility andoverlapof critical personnelacrossclientaccountsandtendto

increasethenumberofemployeesofrelationalservicefirms. As aresult,thesefirms oftenhave

to sacrificeproductivityin orderto sustainthesatisfactionlevelsoftheir long-termclients

(Anderson,Fornell,andRust1997). Second,becausetheproductionandconsumptionof

servicesis inseparable,it is oftendifficult for servicefirms to achieveoperationalefficienciesby

massproducingor stockingservicesat acentrallocation(Bharadwaj,Vardarajan,andFahy

1993). Evenif aservicefirm hasselectlargeclient accounts,its servicesareoftendelivered

11

independentlyatmultipleclient sites. Theseservicesaretypically not standardizedandhaveto

becustomized,oftenon aper-joborprojectbasis(JacksonandCooper1988). Furthermore,

thereis oftenalargevariancein thedemandrateforproject-basedservices,suchasconsulting,

engineering,oil-field services,realestateservices,andeventplanning(Bateson1995). Finally,

relationalclientsoftenexpectservicefirms to provideadditionalservicesaboveandbeyond

thosespecifiedin thecontract. Forexample,engineeringfirms oftenassisttheirclientsin the

appraisalofvendorsandconsultantsoftenhelpwith marketresearch.Overall,the limited ability

to standardizeandmassproduce,thedemanduncertainty,andthelackof flexibility with regard

to thedeploymentofcritical resourcesis likely to preventrelationship-orientedservicefirms

from reducingtheirservicedelivery costsovertime.

Overall,theextentto which relationalservicefirms areableto lowertheirservice

deliverycostswill dependon therelativeimpactofthetwo setsofcountervailingforceson the

deploymentoftheircritical resources,in particulartheirhumanresources.Therefore,we

hypothesizethat:

~3: Servicefirms in long-termrelationshipswith selectclientshavethesame

level ofarowthin theirservicedelivervcostsasservicefirms thatdo not

engagetheirclientsin long-termrelationships

.

ImnactofLong-TermServiceRelationshipson SellingExvenses

Selling, general,andadministrativecostsareamajorportionoffirms’ discretionaryfixed

expenses.Becausethesecostsarelikely to bepositivelyrelatedto client turnover,weexpectthat

relationship-orientedservicefirms, by virtue ofhavingarelativelystableclientbase,mayhave

lowersellingcostsovertime thantheirtransaction-orientedcounterparts(Kalwani and

Narayandas1995).

Ontheotherhand,it is knownthat clientsin extendedrelationshipswith theirservice

providersaremoredemandingthanthosewho arenot engagedin suchrelationships.It is

possible,therefore,thatrelationship-orientedserviceprovidersmayhavehigherselling expenses

12

thantheirtransaction-orientedcounterpartsbecauseofthehighcostofmanagingeachindividual

relationship. Overall,wehypothesizethat:

~i4:Servicefirms in long-termrelationshipswith selectclientshavelower

selling, general,andadministrativecostsover timethanservicefirms that

do notengagetheirclientsin long-termrelationships

.

ImoactofLong-TermServiceRelationshipsonOverallProfitability

Overall,relationship-orientedservicefirms canachievesuperiorlong-termprofitability

for severalreasons.First, sustainedrelationshipswith selectclientsallow time for cross-

fertilizationof ideasandreducetherisksassociatedwith thedevelopmentandmarketingofnew

services.Second,relationship-orientedservicefirms canutilize theirdistinctivecompetencies

moreefficiently by takingadvantageoftheknowledgeoftheirclients’ personnel(Freyand

Scholesser1993). Third, relationshipsenableservicefirms to becomefull-serviceprovidersto

theirclients,which, in turn, allows themto marketservicebundlesthatincludehighmargin

services(Slofstra1993). Onthecostfront, relationship-orientedservicefirms areableto

participatein theco-developmentof specificationsandmaybeableto achievecostefficiencies.

Finally, thedevelopmentorsustainedof long-termrelationshipsdoesnotrequireservicefirms to

investheavilyin immovable,relationship-specifictangibleassets.

On theotherhand,developinglong-termrelationshipswith selectclientsmight not leave

enoughfreeresourcesfor serviceprovidersto takeadvantageofnewandpotentiallymore

profitableopportunities. Transaction-orientedserviceprovidersmay,therefore,sometimesbe in

abetterpositionto continuouslyadjusttheirclient baseandpick andchoosemoreprofitable

accountsovertime. Overall,wehypothesizethat:

115: Servicefirms in long-termrelationshipswith selectclientsachievesuperior

profitabiliw over timethanservicefirms thatdo not engagetheirclients

in long-termrelationships

.

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4. Data

WetestedhypothesesH1 through115usingdataextractedfrom theCompustatdatabase.

This databasecontainsfinancial andtextualinformationcontainedin theannualreportsof

publicly tradedfirms. In addition,thebusinesssegmentlevel databasein Compustatalsolists

thenamesofthemajorcustomersof eachfirm andtheannualvolumeofbusinesstransactedwith

them.

Ourmethodologyfor sampleselectionandhypothesistestingis similar to that adoptedby

KalwaniandNarayandas(1995). Theunderlyingassumptionbehindthesampleselection

processwasthat relationship-orientedfirms arelikely to retainthesameset ofcustomersover

time, whereastransaction-orientedfirms arelikely to experiencehigh customerturnoverandnot

retainthe samecustomersovera longperiodoftime. We identifiedtheserelationship-oriented

andtransaction-orientedfirms basedon statutoryinformationon a firm’s principalcustomers

containedin thebusinesssegmentpartoftheCompustatdatabase.

We first selectedasetofbusinessservicefirms thatmaintainedalong-termrelationship

with theirclients duringtheperiodofthestudy. We shallreferto thesefirms astheLTR (long-

termrelationship-oriented)ortreatmentfirms. Foreachfirm in theLTR sample,wethen

selectedamatchingfirm thatwassimilar to theLTR firm in severalrespectsbut did not maintain

a long-termrelationshipwith its clients. We shallreferto this setofmatchingfirms astheTRA

(transactional)orcontrolfirms. We testedourhypothesesby comparingtheperformance,over

time, ofthesepairsofmatchedtreatmentandcontrolfirms. Theprocedurethatwe followed for

selectingthetreatmentandcontrol firms is outlinedbelow.

TheTreatmentSample:Theoverall objectiveof thetreatmentsampleselectionprocesswasto

identify thosefirms that sold a significantportionof theirservicesto thesamesetof customers

overanextendedperiodoftime, whichwassix yearsin ourstudy. We first scannedthe

descriptionsof theSIC codesin theCompustatdatabaseto identify the4-digit SIC codesthat

correspondto businessservices.Within theseSIC codes,weidentifiedfirms that operatedonly

14

within a singlebusinesssegment.Weimposedthis restrictionbecauserelationshipsaretypically

formedat abusinesssegmentlevel, whereassomeoftheperformancemeasuresweareinterested

in arereportedatthefirm level. We thenexaminedthenamesoftheprincipalcustomersofeach

firm to determinewhetherthefirm retainedthesamecustomersoveraperiodoftime. The

Com~ustatdatabasecontainsthenamesofup to fourprincipalcustomerseachofwhich

accountedfor at least10percentofthesalesofthe firm. Basedon this information,we retained

only thosefirms in the treatmentsamplethatsold asubstantialportionoftheirserviceto the

samesetof customer(s)everyyearfor six years.

The ControlSample:Theoverallobjectiveofthecontrolsampleselectionprocesswas to

identify onetransactionalfirm for everyfirm in theLTR samplesuchthatthetwo firms were

similar in manyrespectsexceptthat theLTR firm hadlong-termrelationshipswith its clientsand

thetransactionalfirm did not. Therefore,for eachLTR firm, weconfinedthesearchto the list of

firms thatoperatedwithin thesame4-digit SICcodeasthetargetLTR firm. From this list, we

selectedfirms that operatedin thesamebusinesssegmentasthetarget firm. This list wasfurther

narrowedto only thosefirms that eitherdid not reportanyprincipal customerin anyyearordid

not havethesamecustomerlisted asaprincipal customerin morethanoneyearofthe six years

considered.Finally, from thisrestrictedset,wechosethat firm asthematchingcontrolfirm

whosesalesin theinitial periodofthestudywastheclosestto thesalesofthetargetLTR firm.

Thismulti-stepprocedureensuredthatanLTR firm andits matchedtransactionalfirm wereof

similar size,werefrom thesame4-digit SIC codes,hadsimilarbusinessesdescriptions,but

differedin theirapproachto servicingtheirclients. Whereasthetreatmentfirm engagedits

customersin long-termrelationships,thecontrol firm servicedits clientsonatransactionalbasis.

Weusedastaggeredsamplecorrespondingto theperiod1986 to 1994for ourempirical

analysis.Within thisperiod,we identifiedfirms thatmaintainedlong-termrelationshipswith

theirclientsfor at leastsix years. We shall referto thefirst andsecondyearsofthesix-year

periodfor which weusedatafor aparticularpair offirms astheinitial periodandto thefifth and

15

sixthyearsasthefinal period. In orderto reducetheeffectsof short-termyear-to-yearvariation

in theperformanceofthefirms in oursample,wecomputedtheaveragevaluesofthevariables

ofinterestfor eachfn-m for boththeinitial andthefinal periods. We thentestedourhypotheses

by comparingtheaveragevaluesofthesevariablesfor thetreatmentandcontrolfirms in thetwo

periods. Ourmethodologyyieldeda sampleof72 pairsoffirms from arangeofbusiness

services,includingenvironmentandwastemanagement,researchanddevelopment,designand

engineering,marketingresearch,consulting,oilfield services,informationmanagementservices,

andtransportationservices.In theinitial period,theaverageannualsalesfor theLTR firms in

the samplewere$58 million.

DependentVariables:We usedthenetsalesoftheservicefirms to testthehypothesispertaining

to theeffectof long-termrelationshipson sales. As mentioned,theCom~ustatdatabasedoesnot

provideuswith informationonhowfirms pricetheirservices.Therefore,it is not possibleto use

thedatato directlyparseout the effectsof long-termrelationshipson firms’ costsandprices. We

were ledthereforeto indirectly examinethe directionoftheseeffectsby usingtheavailabledata

on relatedvariablessuchasgrossmarginsandselectedelementsof costs. We first examined

whether,overtime,the grossmarginsofthetreatmentfinns grewat aslowerorfasterratethan

thoseofthe controlfirms. Next, we investigatedthechangesin selectedelementsofthecost

structureofthetreatmentandcontrolfirms over timeto drawinferencesregardingincreasesin

productivityorreductionin servicedeliverycosts. In this pursuit,werelied on theobservation

thattheoperationsofmostbusinessservicesfirms suchasthoseincludedin oursample,tendto

bepeopleintensive(Wilson andSmith 1996). Consequently,an improvementin the efficiency

andan increasein theproductivityof suchfirms typically manifestsitselfassavingsin labor

costs. In fact, themostcommonlyusedmeasurefor assessingtheproductivitychangesamong

suchfirms is theirsalesperemployee(Anderson,Fomell, andRust, 1997;Ip 1997;Rose1995).

Therefore,weexaminedthetrendsin thesalesperemployeeofthetreatmentandcontrolfirms to

drawinferencesregardingchangesin theirservicedeliverycosts. Finally, weusedthefirms’

16

returnson investmentasameasureoftheiroverallprofitability. Returnon investmentis defined

asa finn’s pretaxprofit expressedasapercentageofits total assets.Publiclytradedfirms are

currentlynotrequiredto reportthevalueoftheirassetsatmarketprices. Therefore,in the data

containedin theCompustatdatabase,theseassetsarevaluedattheirhistoricalprices.

Methodology

Thedistributionofthedependentvariablesshowedsignificantdeparturesfrom normality.

Therefore,we testedourhypothesesusingnon-parametricteststhataremorerobustto departures

from normalitythantheconventionalt-tests. Specifically, for eachdependentvariableof

interest,wereportresultsfrom aset offourz-statisticsbasedon Wilcoxon SignedRankTests

(Figure 1).

Initial PeriodBetweenSampleDifferenceTest:We conductedatestto examinewhetherin the

initial periodtherewasasignificantdifferencebetweenthetreatmentandcontrolfirms oneach

dependentvariableof interest. We reportastatistic,z1, basedon this test.

FinalPeriodBetweenSampleDifferenceTest:We conductedasecondtestto examinewhether

in thefinal periodtherewasasignificantdifferencebetweenthetreatmentandcontrol firms on

eachdependentvariableof interest. We reportastatistic,z2, basedon this test.

Within TreatmentSamnleTest: Wetestedwhetherthedependentvariablefor thetreatment

samplechangedsignificantlyfrom theinitial periodto thefinal period. Wereportastatistic,z3,

basedon thistest.

Within ControlSampleTest:Wetestedwhetherthedependentvariablefor thecontrolsample

changedsignificantlyfrom theinitial periodto thefinal period. Wereportastatistic,z4, basedon

this test.

17

A combinationofthefirst andsecondtestsallowedusto examinewhethertherewasa

systematicvariationin thedependentvariablebetweenthetwo samplesfrom theinitial to the

final period. Thethird andthe fourthtestsprovidedadditionaldiagnosticinformationregarding

whetherthetemporaldifferencein thedependentvariableacrossthetwo samples,if any,was

becauseofachangein thedependentvariableforthetreatmentsample,thecontrolsample,or

both.

5. Results

Wereporttheresultsfrom tests1 though4 for eachdependentvariablein Table 1(a)and

in Figures2(a) through2(e). In thesefigures,wereportthemeanandstandarddeviationofthe

dependentvariablesforthetreatmentandcontrolsamplesfor the initial andfinal periodsofthe

studyaswell asthevaluesofthefourz-statisticsfrom theWilcoxonmatchedpair tests.The

samplesizesaresmall andvary for eachtest, largelybecauseofextremevaluesandmissingdata.

We now discusstheresultsofthetestsofhypotheses1 through5.

Net Sales:Figure2(a) displaystheresultsfrom thefourtestsfornetsales. Theresultsshowthat,

in the initial period,thedifferencebetweentheaveragesalesofthetreatmentfirms ($58.43m)

andthe controlfirms ($57.24m)wasnot statisticallysignificant(z1 = 0.52,p > 0.10). This is an

expectedresultbecausewematchedthetwo setsoffirms basedon thelevelsoftheirnetsalesin

the initial period. Similarly, we find that, in thefinal period,thesalesofthetreatmentfirms

($98.65m)wereslightly higherthanthoseofthecontrolfirms ($91.1im), althoughthedifference

betweenthetwo wasnot statisticallysignificant(z2 = 0.99,p > 0.10). Theabsenceof a

significantdifferencebetweentheaveragesalesofthetreatmentandcontrolfirms in thetwo

periodsalsosuggeststhat theobservedpatternofresultsfor theotherdependantvariables,that

mayotherwisebe relatedto the levelof sales,is probablynotdrivenby statisticalregression

effects.

18

Theresultsfrom thewithin treatmentandcontrolsampletests(z3 = 5.85,andz4 = 6.14,p

<0.01forboth) revealthatboththetreatmentandcontrol firms registeredsignificantsales

growthbetweentheinitial andfinal periods. Overall,theresultsfrom the fourtestssuggestthat,

at leastduring thestudyperiod,thetreatmentfirms did not suffera lossofrevenueby following

arelationship-orientedstrategy.On theotherhand,it is alsousefulto notethat thetransaction-

orientedservicefirms werealsoableto keeppace,presumablyby servingnewclientswho

enteredthegrowingmarket.

GrossMargins:Figure2(b)displaystheresultsfrom tests1 through4 for grossmargins. The

resultsofthe initial periodbetweensampledifferencetest(z1 = -1.78,p <0.05) andthefinal

periodbetweensampledifferencetest(z2 = -1.23,p > 0.10)revealthat althoughthecontrol firms

hadhighergrossmarginsin the initial period,thedifferencebetweenthe grossmarginsofthe

treatmentandcontrolfirms narrowedin thefinal period. Theresultsfrom thewithin sample

testsshowthat,whereasthecontrolfirms suffereda significantdeclinein grossmarginsfrom

31.7percentto 28.74percent,(z4 = -1.98,p < 0.05),thedeclinefrom 26.26percentto 25.62

percentfacedby the treatmentfirms wassmallerandstatisticallynot significant(z3 = -1.30,p>

0.10).

It is worthnotingthatourfindings on grossmarginsfor businessservicefirms are

different from thosereportedby Kalwani andNarayandas(1995)for suppliersofproducts.

Specifically,ourdatado not supportthehypothesisthatrelationship-orientedservicefirms face

increasingpricepressuresovertime andsufferagreaterdeclinein theirgrossmarginsthantheir

transaction-orientedcounterparts.Our resultssuggestthat, over time,relationalserviceproviders

might, in fact,bebetteratpreservingtheirgrossmarginsthantheirtransaction-oriented

counterparts.

ServiceDelivery Costs:Theresultsfrom thetestspertainingto thesalesperemployeearegiven

in Figure2(c). Theresultsfrom thewithin treatmentandcontrolsampletests(z3 = 4.02 andz4 =

19

3.62,p <0.01 forboth)revealthatboththetreatmentandcontrolfirms registeredasignificant

growthin theirrespectivesalesperemployeefrom theinitial periodto thefinal period.

However,thedifferencebetweenthesalesperemployeeofthetwo setsoffirms wasstatistically

not significanteitherin the initial period(z1 = -0.15,p > 0.10)or in thefinal period(z2 = -0.37,p

>0.10).

Theseresultsprovideindirectsupportto ourhypothesisthat thereareprobablyfew, if

any, differentialcostadvantagesthataccrueto relationship-orientedbusinessservicefirms asa

directresultoftheirdevelopinglong-termrelationshipswith theirclients. Further,if weview

theseresultsin conjunctionwith thoseon grossmargins,it appearsthatrelationalservicefirms

arebetterableto protecttheirmarginsovertimethantheirtransaction-orientedcounterparts,not

becauseofsavingsin servicedeliverycostsbut probablybecauseoftheability to maintaintheir

prices. Bothofthesefindingsarecontraryto whatKalwani andNarayandas(1995)have

reportedfor relationship-orientedsuppliersofproducts.We do not find evidencethat supports

thehypothesesthat, overtime, relationalservicefirms becomemoreoperationallyefficientthan

theirtransaction-orientedcounterpartsorthattheyfaceincreasingpricepressuresfrom their

customerswhich shrinktheirgrossmargins.

Selling. General,andAdministrativeExpenses:Theresultsfrom thetestspertainingto selling,

general,andadministrativeexpensesaregivenin Figure2(d). Theresultsfrom theinitial period

sampledifferencetest(z1 = -2.47,p <0.01)andthe final periodsampledifferencetest(z2 = -

2.90,p <0.01) revealthat themeanselling, general,andadministrativeexpensesfor the

treatmentfirms weresignificantly lowerthanthosefor thecontrolfirms in both theinitial period

andthefinal period. Further,theresultsfrom thewithin treatmentandcontrolsampletests(z3 =

-0.39andz4 = 0.93,p > 0.10 forboth) revealthat, overtime,themeanselling expensesfor the

treatmentfirms fell somewhatfrom 30.09percentto 25.02percent,whereasthosefor thecontrol

firms increasedfrom 36.6percentto 37.2percent. Thenetresultofthesechangesis thatthegap

in theseexpensesbetweenthetreatmentandcontrolfirms widenedfrom theinitial periodto the

20

final period. Theinferencethatwecandrawfrom theseresultsis thatrelationalservicefirms

hadlower fixedmarketingexpensesthroughoutthe studyperiod,presumablybecauseofhaving

anarrowandstablebaseofclientsandlowerclient turnover.

Returnon Investment:Theresultsfrom thetestsofthehypothesespertaimngto returnson

investmentaregivenin Figure2(e). We find thatovertheperiodofthestudy,whereasthe

averagereturnonassetsofthetreatmentfirms remainedunchangedat around3.16 percent

(z3=0.44,p> 0.10),thereturnonassetsofthecontrol firms sufferedamarginallysignificant

declinefrom 1.48 percentto -0.79percent(z4 = -1.26,p < 0.11). As aresult,thegapbetween

thereturnon assetofthetreatmentfirms andthecontrolfirms becamelargerandstatistically

significantfrom theinitial period(z1 = 1.22,p <0.11)to thefinal period(z2 = 1.90,p <0.05).

Theseoverall trendscanbeattributedto ourearlierfindingson sales,costs,andprices.

Relationalserviceprovidersmaintainedtheirsalesgrowthovertime vis-a-vistransactional

serviceproviders. Further,theywereableto maintaintheirmarginsandincurredlower sales,

general,andadministrativeexpenses.Thenetresultis that theyachievedahigherreturnon

assetsovertimethantheirtransaction-orientedcounterparts.

6. Validationof Results

In this study,wecategorizedabusinessservicefirm asbeingrelationship-orientedor

transaction-orientedbasedonwhat it did andnot what it said. Specifically,everyfirm classified

asanLTR fu-m in oursampleretainedat leastonemajorcustomercontinuouslyfor aperiodof

six years. Conversely,everymatchingcontrol firm eitherdid not haveanymajorcustomerthat

accountedfor asignificantportionof its revenuesor did nothavethe samemajorcustomerin

anytwo ofthesix periodsconsidered.It is quitepossiblethat theLTR firms in oursample

actuallydid nothavealong-termrelationshipbutmerelyhadasequenceoflargetransactions

with thesameset ofclients. Ontheotherhand,it is alsopossiblethat someofthecontrolfirms

hadlong-termrelationshipswith largenumbersof small clients. Therefore,we lookedfor

21

additionalevidenceregardingthecontentofeachrelationshipto increasethelevel ofour

confidencein ourclassificationofthefirms aseitherrelationalortransactional.

Ouroverall objectivewasto furtherconfinethesampleto only thosepairsoffirms where

theLTR firm acknowledgedthattherelationshipswith its client(s)wereindeedlong-termin

natureandthecontrolfirm did not. WethereforescannedtheCompactDisclosuredatabaseto

collectadditionalevidencefor therelationship-orientationofthefirms in oursamplebasedon

thetextualinformationcontainedin theirannualreports. We specificallyexaminedwhethera

targettreatmentfirm hadexplicitly acknowledgedanongoingrelationshipwith oneormoreof

its clients,customizedits services,or investedresearchanddevelopmentresourcesto meetthe

specificneedsofits clients.We foundthat, from amongthe72 treatmentfirms in oursample,35

metthis additionalcriterion. Noneoftheirmatchingcontrolfirms metthecriterion. The

following aresomeofthestatementscontainedin theannualreportsofthetreatmentfirms in the

reducedsampleoffirms:

In bothrelationships,we’re doingmorethansavingourpartnersmoneybyhandlingtheirdatabetterandfaster....We’realsohelpingtheircorebusinessby addingvalueto theirmission-criticaldatathroughourthreecorecompetencies:softwaresystemsdevelopment,datacentermanagement,andinformationmanagementtechnology.

We areconcentratingona strategyof focusedmarketing,management,andtechnicalexcellence...,managersaskfor andreceiveperiodicfeedbackfromeverymajorclient accountin theform ofaQuality ofServiceReport.

We havebuilt equity in theselong-termrelationships,andasourorganizationevolveswith thedemandsofan ever-changingmarket,wealwayskeepin mindtheneedsofthoseclientswhopioneeredtheindustrywith us.

We arealsosuccessfullytransitioningto providingcustomized,valueaddedservicesfor long-termbusinesspartners.

• ..from beingapassivecontributorto ourclients’ objectivesto becominganaccountablepartnerin driving theirbusinessresults.

enjoysexcellentlong-standingrelationshipswith manyofits clients...

We repeatedourearlieranalyses,while confiningourselvesto thedatapertainingonly to this

reducedsampleof35 pairsoffirms. Theresultsfrom theseadditionalanalysesarereportedin

22

Table 1(b) andin Figures3(a)through3(e). Thesamplesizesfor someoftheseanalysesare

relativelysmall, onceagainbecauseofmissingvalues.

Theresultsfornetsales,reportedin Figure3(a), revealtrendsthat aresimilar to those

observedfor thefull sample. We find that, althoughboththetreatmentfirms aswell asthe

controlfinns experiencedsignificantsalesgrowthfrom theinitial periodto thefinal period(z3

=3.78andz4 = 4.04,p <0.01),thedifferencebetweentheaveragesalesofthetwo setsof firms

wasnot statisticallysignificanteitherin the initial period(z1 = -0.29,p > 0.10))orin thefinal

period(z2 = -0.29,p > 0.10).

Theresultsfor grossmargins,reportedin Figure3(b), revealthat, whereasthetreatment

firms experiencedamarginalincreasein theirgrossmarginsfrom theinitial periodto thefinal

period(z3 = 1.30, p <0.10), thecontrolfirms sufferedamarginaldeclineoverthe sameperiod

(z4=-1.50,p <0.10). As aresult,thegapbetweenthegrossmarginsofthetreatmentandcontrol

firms narrowedfrom theinitial periodto thefinal period(z1 = -1.77,p< 0.05,andz2 = -1.34,p <

0.10respectively).

Theresultspertainingto salesperemployeearereportedin Figure3(c). Thetrendsin

theseresultsare,again,consistentwith thosefor the full sample.We find that,whereasboththe

treatmentandthecontrolfirms registeredasignificantimprovementin theirrespectivesalesper

employee(z3 =2.70andz4 = 2.86 respectively,p <0.01for both), thedifferenceacrossthetwo

setsoffirms wasnot statisticallysignificanteitherin the initial period(z1 = - 0.31,p > 0.10)or in

thefinal period(z2 = -0.58,p > 0.10).

Theresultsfor selling,general,andadministrativeexpenses,reportedin Figure3(d),are

somewhatconsistentwith thefindings forthe full sample.We find thatalthough,asexpected,

theseexpensesweremarginallylower for treatmentfirms, both in the initial period(z1 = -0.95,p

> 0.10),aswell asin thefinal period(z2 = -1.21,p < 0.11),thereis probablyno incremental

increasein thesesavingsduringtheperiodofstudy. We find thattheselling, general,and

administrativeexpensesdeclinedfor bothsetsoffirms during theperiodofstudy(z3 =-0.84,p>

0.10, andz4=-l.10,p >0.10respectively).

23

Finally, asreportedin Figure3(e),wefind that, whereas,during theperiodofthestudy,

thetreatmentfirms wereableto maintaintheirreturnon assets(z3 = 0.31,p > 0.10), thecontrol

firms facedadecline(z4 = -1.87,p < 0.05). As aresult,thegapbetweenthereturnonassetsfor

thetwo setsoffirms increasedfrom theinitial period(z1 = 0.80,p > 0.10)to thefinal period(z2 =

2.50,p < 0.01).

Overall,themajortrendsobservedin ourdataforthereducedsamplearevery similar to

thosefoundin the full sample.We find that, overtime,relationship-orientedfirms in the

reducedsamplewereableto achievesimilar levelsofsalesgrowthbut higherreturnson their

investmentthantheir transaction-orientedcounterparts.Again, theimprovementin the

profitability ofrelationship-orientedservicefirms wasnotbecauseofsavingsin servicedelivery

costs,but becauseoftheirability to maintaintheirpricesandhavelowerselling, general,and

administrativecosts.

7. Discussion

Berry (1983)suggestedthattheacquisitionofcustomersshouldbeviewedonly asan

intermediatestepin themarketingprocessandthatservicefirms shouldconstantlystrive to

customizetheirofferingsto theirclientsin orderto encouragecustomerloyalty. Theresultsfrom

ourinitial inquiry into thefinancialconsequencesof sucha relationship-orientedstrategyare

consistentwith hissuggestion. We find that, overtime, therevenuegrowthofrelationship-

orientedbusinessservicefirms matchesthatoftheirtransaction-orientedcounterparts.More

importantly,theserelationalfirms areableto achievehigherreturnson their investmentsoverthe

long runthantransactionalfirms. Theseresultssuggestthat, on average,it is in the interestof

businessserviceprovidersto developandsustainlong-termrelationshipswith theirclientsrather

thanconductbusinessonatransactionalbasis.

Our findingshoweversuggestthatthenatureoflong-termbusinessservicerelationships

maybesomewhatdifferentfrom thatofconventionalbuyer—supplierrelationships. It is

generallybelievedthatbuyer-supplierrelationships,especiallyif theyarealsoassociatedwith a

24

reductionin therosterofsuppliers,resultin lower costsfor thebuyerbecauseofgreater

operatingefficiencies,fewerdefects,andgreaterpricingpower. However,ourdatado not

supportthehypothesesthatbusinessservicerelationshipsalsoimproveserviceproviders’

operationsor increaseclients’ ability to systematicallyextractawaythegrossmarginsofservice

providers.

Why thenwouldbusinessclientsenterinto long-termrelationshipswith theirservice

providers?We did not directlyaddressthis issuein this paperbecauseourfocuswason the

impactof suchrelationshipsontheserviceproviders. However,basedonourdata,wewould

conjecturethat thevalueadditionfor clientsin long-termservicerelationshipsmaynot come

from pricereductionsbut from superiorservicequality. As wementionedearlier,ongoing

relationshipsmayenhanceservicequality asa resultofacombinationof severalforces,

includingsuperiorcoordinationwith theserviceproviderandbettercontrolovertheservice

provider’scritical resources.Ontheotherhand,thelackof directopportunitiesfor costcutting

maybearesultof severalotherfactorssuchasanabsenceofeconomiesofscale,therelative

lackof standardizationof theservicesprocured,andtheinability to correctlyforecastdemand

andenhanceresourceutilization.

Despitethefactthatlong-termclient relationshipsoffer few opportunitiesfor cost

savings,relationalservicefirms still performbetterthantransactionalservicefirms overthe long

run. Theyachievethe samelevel of salesgrowthastheircounterpartsanddo not faceincreased

pricepressuresfrom theirclients. Therelativestabilityoftheiroperatingmarginsandlower

selling andadministrativeexpensesresultin theirsuperiorprofitability overthe long run. Our

resultssuggestthatwhenservicefirms initiate arelationshipwith theirclient, then,unlike

componentpartsuppliers,theyshouldnot expectto seean increasein operatingefficiencyover

time. Rathertheyshouldfocuson enhancingservicequality anddefendingtheirgrossmargins

by trying to increasetheirclients’ switchingcosts.

25

LimitationsandDirectionsforFutureResearch

Ourstudy is aninitial inquiry into the impactof long-termrelationshipson the

performanceofbusinessservicefirms. In this section,wediscussthelimitationsof ourstudy

andoutlinesomeavenuesfor futureresearch.

First, in this study,weclassifiedfirms asbeingrelationalortransactionalbasedon the

stability, or lackthereof,oftheirclient list, aswell asthetextualinformationcontainedin their

annualreports. Thenatureofourdatadid not permitusto explicitly measurethedegreeof a

firm’s relationshiporientation.As aresult,althoughourresultsdo providesomeusefulinsights

into thenatureofbusinessservicerelationships,thereareseverallimitations to ourstudythat

warrantfurtherrefinements.First,wewerenotableto identify thosefirms thatmight havebeen

relationship-orientedbut did not haveanymajorcustomerthat accountedformorethan10

percentoftheirsales. Further,wecategorizedfirms in oursampleinto two distinct classes

dependingonwhethertheymet orfailedto meetcertainrigid criteria. It is conceivablethat

servicefirms canbeplacedon acontinuumfrom beingpurely transaction-orientatedto being

purelyrelationship-orientatedandthatthereis an optimumsomewherein between,wherethese

firms makethegreatestamountofprofit. To addresstheseandotherrelatedissues,futurework

in theareashouldfocusondevelopingscalesto measuretherelationshiporientationofbusiness

servicefirms. Althoughseveralscalesmighthaveto beproposedto measurethevarious

dimensionsofwhatmight constituterelationship-orientation,wesuggestthat astartingpoint

would be to conceptualizeservicerelationshipsassocialrelationshipsembeddedin aneconomic

context. Therefore,it might beusefulto includemeasuresofboth theeconomicdimensionof

long-termorientation(Moorman,Deshpande,andZaltman1993),aswell asthe socialdimension

ofwork groupfunctioning(Friedlander1971)in suchscales. Suchscaleswill providean

alternativemechanismfor classifyingfirms aswell asexaminingtherelationshipbetweenthe

degreeofafirm’s relationshiporientationandits financialperformance.

Second,althoughourfindingssuggestthatbusinessservicerelationshipsmaybedifferent

from theconventionalbuyer—supplierrelationships,wedid not explicitly investigatethe

26

underlyingfactorsthatdrivethesedifferences.Our focuswason outcomesratherthan

processes.Inquiriesinto theprocessoftheformationandmanagementofbusinessservice

relationshipsandinto thedifferencesamongtheincentivesofbuyers,suppliers,andservice

providersto enterinto long-termrelationshipsoffer apotentiallyrichareafor futureresearch.

Finally, it shouldbenotedthat ourfindingspertainto a timeperiodwhentheprimary

demandfor businessserviceswasgrowing. It wouldbeusefulandinterestingto seewhetheror

not thesefindings replicateduringperiodswhenthereis ashrinkagein theprimarydemandfor

theseservices.Basedonourfindings, weconjecturethat, undersuchascenario,therelational

firms might actuallydo evenbetterthantransactionalfirms. Thereasonis that, while relational

servicefirms will beableto retaintheirclients,transactionalfirms will haveto engagein price

competitionto generatesalesvolumes.

27

Table 1(a) SummaryofResultsfor theFull Sample

Initial PeriodTRAfirms

$58.43m

26.26%

$93.48k

$57.24m

3 1.70%

$101.07k

FinalPeriodLTRfirms

$98.65m

25.62%

$117.33k

TRAfirms

$91.llm

28.74%

$119.74k

0.52 0.99 5.85

~l.78**~1.23 -1.30

-0.15 -0.37 4.02***

30.09% 36.6% 25.02% 37.20% 2.47**~ 2.90*** -0.39

3.16% 1.48% 3.18% -0.79% 1.22 1.90** 0.44

Table 1(b) Summarv of Results for the Reduced Sample

Initial PeriodTRAfirms

Final PeriodLTRfirms

$76.88m

33.23%

$101.39k

$113.35m

25.87%

$ 118.38k

$1 19.84m

31.70%

$122.15k

-0.29 -0.29

~l.77**~1.34

-0.31 -0.58

36.16% 40.67% 30.47% 35.81% -0.95 —1.21

3.

1.30

2.70***

4.04***

-1.50

2.86~

-0.84 -1.10

3.88% 2.76% 3.83% -2.40% 0.80 2.50*** -0.31 -l.87~

Assets

p<0.01,** p<O.OS,*p<0.10

LTRfirms

Variable

Net Sales

Margins

Salesper

Employee

SG&A

6.14~

~1.98**

3.62

Expenses

Returnon

Assets

0.93

Variable

-1.26

LTRfirms

TRAfirms

$68.45m

25.76%

$92.88k

Net Sales

Margins

Sales per

Employee

SG&A

Expenses

Return on

28

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AverageValueoftheTarget Variable

Within Treatment SampleDifference Test (z3)

Initial Period BetweenSampleDifferenceTest(z1)

I

4

Final TPeriod

Between SampleDifference Test(z2)

Within ControlSampleDifferenceTest(z4)

Time

Treatment Sample

Firnire 1: Hvnothe~i~T~f~”’~

ControlSample

A (nnnhical Renre~entatiAn

T

Initial Period Final Period

.SOLLii~. ~

Figure2(a):NetSales(Resultsfor theFull Sample

)

Sample Size: 72 firms

NetSales($mm)

$90mm

$50mm ——

98.65(138.72)

58.43(84.93)

Initial Period 57.24(90.31)DifferenceTest(z1=0.52)

Initial PeriodTime

FinalPeriodDifferenceTest(z2=0.99)

91.11(91.10)

Final Period

TreatmentSample ControlSample

Figure 2(b): Gross Margins (Results for the Full Sample

)

SampleSize:63 firms

Gross Margins (%)

30%

25% ——

Within Control SampleDifferenceTest(z4=-l .98**)

31.70(22.48)

28.74(22.13)

Initial PeriodDifferenceTest(z1-1.78**)

26.26(22.39)

Initial Period

FinalPeriodDifferenceTest(z,- 1.23)

Within ControlSampleDifferenceTest(z3- 1.30)

Time

25.62(22.39)

Final Period

Within TreatmentSampleDifferenceTest(z3=5.85***)

Within Control SampleDifferenceTest(z4=6.14***)

TreatmentSample Control Sample

Figure2(c): SalesperEmployee(Resultsfor theFull Samnle

)

SampleSize:45 firms

Annual SalesperEmployee ($000)

120 ——

90

119.74(83.69)

101.07(69.69)

Initial Period...DifferenceTest

(z,=-0.15)

Initial PeriodTime

FinalPeriodDifferenceTest(z2=-0.37)

117.33(74.36)

FinalPeriod

TreatmentSample ControlSample

Figure 2(d):

SellingGeneralandAdministrativeExpenses (%)

40 —

Selling C~nersd 2nd Admini~tr2tive ~ (1~~~111t~ for the Full Samnle’~— ——-———------—.—————. — ±Jfl~J%~flO~O ~tt~OUAI,O

SampleSize: 39 firms

Within Control SampleDifferenceTest(z4”O.93)

37.20(35.32)

36.60(26.83)

Initial PeriodDifferenceTest(z1=~2.47***)

30 ——

Final PeriodDifferenceTest(z2=~2.90***)

30.09(36.27)

Within TreatmentSampleDifferenceTest(z3=-0.39)

Initial PeriodTime

25.02(15.26)

Final Period

Within ControlSampleDifferenceTest(z4=3.62***)

93.48(49.89)

Within TreatmentSampleDifferenceTest(z3=4.02***)

TreatmentSample ControlSample

Figure2(e):Returnon Investment(Resultsfor theFull Sample

)

Sample Size: 63 firms

Returnon Assets(%)

4.00 -

-1.0 —

Within TreatmentSampleDifferenceTest(z4=0.44)

3.18 (6.97)3.16(9.27)

Initial PeriodDifferenceTest(z1=1 .22)

FinalPeriodDifferenceTest(z2=l .90**)

1.48 (11.94)

Within Control SampleDifferenceTest(z3-1.26)

Initial Period Time

-0.79(13.81)

Final Period

TreatmentSample ControlSample

<0.01, ~ < 0.05, ~p<0.10

Figure3(a):Net Sales(Resultsfor theReducedSample

)

Sample Size: 35 firms

Net Sales ($mm)

$100 mm

$50mm ——

76.88 (112.04)

119.84 (173.59)

Initial PeriodDifferenceTest(z1=-0.29)

Initial Period

TreatmentSample

Time Final Period

Control Sample

Figure3(b): GrossMargins(Resultsfor theReducedSample

)

SampleSize: 28 firms

Gross Margins (%)Within Control SampleDifferenceTest(z4=~-1.50)

33.23(19.93)31.70(18.48)

30 ——

Initial PeriodDifferenceTest(z1=-1 .77**)

25.76(18.89)

Initial Period

FinalPeriodDifferenceTest(z2=-l.34)

Within TreatmentSampleDifferenceTest(z3’l .30)

Time

25.87(22.39)

Final Period

FinalPeriodDifference Test(zj”-0.29)

113.35(145.70)Within ControlSampleDifferenceTest(z4=4.04***)

68.45(92.92)

Within TreatmentSampleDifferenceTest(z3=3.78***)

25 ——

TreatmentSample Control Sample

Figure3(c): SalesperEm~lovee(Resultsfor theReducedSample

)

Sample Size: 25 firms

AnnualSalesperEmployee($000)

120 — —

90 —

122.15(83.69)

101.39 (76.95)

Initial Period 92.88(52.74)..DifferenceTest

(z1=-0.31)

Initial Period Time

FinalPeriodDifferenceTest(z2=-O.58)

118.38(85.67)

FinalPeriod

TreatmentSample ControlSample

Figure3(d): SellingGeneralandAdministrativeExpenses(Resultsfor theReducedSamnle

)

SampleSize: 23 firms

SellingGeneralandAdministrativeExpenses (%)

40 —

30 ——

40.67(29.35)

Initial PerioDifferenceTest(z1=-0.95

Within ControlSampleDifferenceTest

1. 10)

36.16(35.98)

Within TreatmentSampleDifferenceTest(z3=-0.84)

Initial Period Time

35.81(24.30)

Final PeriodDifferenceTest(z2=-l.21)

30.47(15.17)

Final Period

Within ControlSampleDifferenceTest(z4=2.86***)

Within TreatmentSampleDifferenceTest(z3=2.70***)

TreatmentSample ControlSample

Figure3(e):Returnon Investment(Resultsfor theFull Sample

)

Sample Size: 26 firms

Returnon Assets(%)

Within TreatmentSampleDifferenceTest(zg’-0.31)

Initial PeriodDifference es(z1=0.80) 2.76(7.24)

FinalPeriodDifferenceTest(z2=2.50***)

Within ControlSampleDifferenceTest(z4=~l.87**)

Initial Period Time

TreatmentSample

FinalPeriod

ControlSample

5.0

3.88 (7.67)3.83 (6.14)

-5.0 ——

-2.40(13.23)

<0.01,~ <0.05,~p<0.10