Perceived Expertise, Risk, Reputation and Compensation Fairness as Predictors. of Perceived Service Value

Transcription

1 Page 1 of 18 ANZAM 2010 Perceived Expertise, Risk, Reputation and Compensation Fairness as Predictors of Perceived Service Value Ralitza Bell School of Business, Australian Catholic University, North Sydney, Australia Ralitza.Bell@acu.edu.au

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3 Page 3 of 18 ANZAM 2010 Perceived Expertise, Risk, Reputation and Compensation Fairness as Predictors of Perceived Value in Professional Business Services Ralitza Bell Faculty of Business, Australian Catholic University, North Sydney, Australia Ralitza.Bell@acu.edu.au ABSTRACT The paper examines organisational decision making in conditions of incomplete information. The research is conducted in the context of outsourcing professional business services, which can be qualified as strategic resources. The paper draws on organisational and marketing theories and can be positioned as interdisciplinary in nature. More specifically the role of factors such as corporate reputation, fair compensation, expertise and perceived risk are examined as predictors of professional business services value. A conceptual model is constructed and tested using structural equation modelling. The results provide support for most of the hypothesised relationships between the variables, and highlight the important role of lowering the perceived outsourcing risk in decision making under incomplete information. Implications for theory and management practice are outlined. Keywords: service value, organisational decision making, professional business services THEORETICAL BACKGROUND According to the resource-advantage theory (Hunt & Derozier, 2004) a firm s unique resources, skills and capabilities lead to developing differential advantage over the competition, which then translates into above industry-average performance. Firm s resource base is shaped by two sources: its own proprietary resources, and the outsourced use of external assets, skills and capabilities. Hence, building its internal assets, skill and capabilities and securing access to carefully selected resources from external suppliers, is an important part of every organisation s management. An example of such indispensable external resource is the outsourcing of professional business services (PBS), a distinct group of highly complex, costly and essential to client organisations services. PBS are usually provided by specialised service suppliers, such as management consultants, advertising and marketing 1

4 ANZAM 2010 Page 4 of 18 research agencies, auditing, legal and IT firms, etc. These firms deliver value to their clients by utilising their employees advanced specialised knowledge and professional skills to solving clients unique business problems. The solutions provided by PBS suppliers play a vital role in the performance of modern organisations, and often have significant impact on the strategic future of the organisation (Fitzsimmons, Noh and Thies, 1998, p. 378). If performed well these services can add tremendous value to the client s business (LaBahn and Kohli, 1997), but if low quality service is delivered the organisation may suffer huge losses. That is why delivering quality outcomes is vital with these services. Yet, being intangible, their quality and, and therefore their value, are hard to assess before actually outsourcing them. Furthermore, PBS are also credence services (Darby and Karni, 1973), as they are technically and/or conceptually complex and thus difficult for a client to evaluate often even after purchase (Thakor and Kumar, 2000) and some use. As a consequence clients need to decide from which PBS supplier to outsource the service in conditions of incomplete information on service quality. Additionally, the cost of such services is typically significant. This naturally leads to client uncertainty and related perceived risk when the outsourcing decision has to be made. To minimise this risk, prior to signing the outsourcing contract the client typically searches for information on the service provider s skills, characteristics (Bergen, Dutta and Walker, 1992) and previous performance. Such information on past performance is then used by clients to infer what sort of service quality the supplier is likely to provide in the future, i.e. if hired. It also help the client form a better perception of the future value to be derived from the service. That is, when real quality is unknown, information on supplier s past performance can serve as a signal of future quality and value. Examples of such signals are service supplier s reputation warranties offered by the supplier, and often the price demanded for the service. Alternative way to handle the lack of information is client s screening for essential supplier s characteristics, knowledge, skills (Bergen at al, 1992), i.e. ability to deliver the needed service. Such screening delivers additional insight into the expertise, or competence (Day and Barksdale, 2003) of the service supplier. Screening becomes possible in the process of negotiating the deal with the service provider. Thus the supplier s past performance, captured in supplier s reputation as a signals of quality, and supplier s perceived expertise/ability reduce buyer s outsourcing risk. Using signalling and screening theories (Bergen at al, 1992), this research aims to 2

5 Page 5 of 18 ANZAM 2010 prove organisational buyers dependence on signals of quality and on screening for essential characteristics in forming perceptions of value, when information is incomplete, as discussed next. CONCEPTUAL FRAMEWORK Dependent variable Construct: Perceived Service Value Economic theory defines value as the utility a consumer derives from a product, and products - as bundles of various product attributes, represented at different levels (Lancaster, 1966) in the competing market propositions. Perceived service value has been researched by a number of business scholars, more often in consumer settings, than in Business-to-Business contexts (Day and Barksdale, 2003). However, only a handful of studies examine professional business services (PBS) value. Hence this study aims to contribute to this rather important but under-researched field of business knowledge. Value is a subjective, perceptual construct (Zeithaml, 1988) and can be considered in a pre-purchase or post-purchase setting. Ravald and Gronroos (1996, p. 23) maintain that supplier s proposition has to be able to create net value for buyers, i.e. customer value is created when customer- perceived benefits of obtaining and using the product/service outweigh the perceived cost the buyer needs to incur to obtain it (Slater and Narver, 2000). Conceptualising perceived value as net value derived from a product or service enables buyers to conduct pre-purchase comparisons among alternative market propositions from different suppliers. This enables organisational decision makers to decide which supplier to choose for their outsourcing of strategic resources, such as PBS. Thus, buyer-perceived future value of the PBS (i.e. Perceived Service Value) is defined for this research as the client s prepurchase assessment of the potential net utility that the PBS supplier appears capable to provide. Antecedent Variables Supplier s Perceived Expertise Although perceived value is studied widely in the context of products and consumer services, there is only a small number of studies that have examined perceived value in the field of PBS. These have 3

6 ANZAM 2010 Page 6 of 18 identified different value antecedents. For example, PBS researchers have shown that certain supplier attributes and purchase-related factors can act as positively associated value antecedents. Some of these involve supplier s industry leadership, customer focus and innovativeness, (Kumar and Grisaffe, 2004), service provider s problem recognition, applied methodology, global network [of associations] and relationship [skills] (Patterson and Spreng, 1997; Whittaker, Ledden and Kalafatis, 2007); technical quality (i.e. reliability, technical expertise, specialised expertise, creativity), functional quality (integrity, responsiveness, professionalism) (Lapierre, 2000). It appears that many of these supplier characteristics underpin supplier s expertise or capability to perform the job for which it will be contracted. Thus, it can be concluded that supplier s perceived expertise (Day and Barksdale, 2003) is one of the essential screening criteria, clients use to assess supplier s potential to provide beneficial service. Perceived supplier s expertise is defined here as the client s impression of PBS firm s ability to properly perform the required service tasks, obtained during the pre-purchase interaction/negotiations with the supplier. Perceived Fair Compensation Fairness in inter-organisational exchange and its correlate, price fairness are also shown to affect perceived value (Xia, Monroe and Cox, 2004), satisfaction (Patterson, Johnson and Spreng, 1997) and buying intentions (Campbell, 1999). The value that fair price delivers in an exchange is not necessarily of economic nature only. As Maxwell (2008) note, it is a kind of social value which is different from...the economic utility of a low price....a fair price triggers the reward centre of the mind, stimulating happiness. A fairly treated customer is a happy customer. (Maxwell, 2008, p.501). Another study, i.e. Ruiz and Cataluna (2008, p. 347) argues that service equity, or fairness provides a salient dimension of service value and a path to value creation for the customer. Hence the role of Compensation Fairness in the context of this research, which is defined here as client s perceptions that supplier s price is equitable, relative to supplier s underlying cost, as perceived by the client before the outsourcing transaction. 4

7 Page 7 of 18 ANZAM 2010 Perceived Reputation Weigelt & Camarer (1988, p.443) define reputation as a set of attributes ascribed to a firm, inferred from the firm s past actions, while Herbig, Milewicz and Golden (1994) interpret the meaning of this construct as an aggregate composite of all previous transactions over the life of an entity, a historical notion based upon the sum of the past behaviours of the entity. The current research is related to decision making in conditions of incomplete information, in which quality is not readily available to be examined prior to outsourcing the service, hence, the relevance of reputation as a surrogate of quality in the conceptual framework. For the purposes of this study perceived PBS firm s reputation is defined as the organisational buyer s perception of the estimation in which the PBS firm is held by the respective industry community, based on assessment of the entity s past behaviour and achievement, and reflecting the extent to which it is successful and respected (Weigelt and Camerer, 1988) Lower Perceived Risk Perceived purchase risk is a central construct when decision making under incomplete information is concerned. Likewise, decreasing the perceived purchase (or outsourcing) risk appears to be very important consideration in selecting a PBS. Hill & Johnson, (2006) have provided evidence that, indeed, in professional services the perceived purchase risk is higher compared to other services, due to the credence nature of the services and the significant cost involved in their outsourcing. Hence lowering this perceived risk is if central importance in the purchase of PBS. This provides justification for inclusion of the construct Lower Perceived Risk in the conceptual model. It is defined, for the purposes of this research, as the client s perceptions that as the client learns more about the service supplier s professional skills and characteristics during the interaction with the PBS provider preceding the outsourcing decision, he/she feels less fear that the PBS supplier may not be suited to handle properly the client s job. Hypotheses Development 5

8 ANZAM 2010 Page 8 of 18 Most often Perceived Service Value is modelled as a function of benefits obtained and sacrifices incurred to obtain them (Slater and Narver, 2000), but scholars have provided empirical evidence for a wider range of specific benefits (such as quality, image, etc), as well as various cost factors (price, cost of information search, risk). The PBS s Perceived Value literature provides empirical evidence that certain factors associated with supplier s expertise, act as PBS value antecedents. Thus, supplier s perceived expertise emerges as one of the essential screening criteria against which buyers assess supplier s potential to provide beneficial service (Day and Barksdale, 2003), which in turn creates value for the client. Hence, the first hypothesis: H1: PBS supplier s perceived expertise increases its perceived service value. The role of sacrifice (e.g. price, effort, time) involved in obtaining any product or service is a negatively related value antecedent is well documented. Reducing the sacrifice leads to increase in value and makes the proposition more attractive. The importance of reducing the perceived risk (and thus the entire sacrifice component of value) is more pronounced in outsourcing credence goods, and especially credence services of high importance and high cost to the client, such as PBS. This is because these services are costly and service quality is of special importance for the success of the service. This means that a lot of money one one hand, and company s performance, on the other hand, may depend on the successful performance of the PB service. That is why the perceived risk of outsourcing such services is higher. Thus risk reduction becomes a major consideration in outsourcing PBS (Hill & Johnson, 2006) and reducing such risk becomes instrumental in increasing the perceived value of a PBS supplier' Therefore the next hypothesis is proposed: H2: Lower Perceived Purchase Risk is positively related to Perceived Service Value. Expertise is a set of skills and characteristics relevant to a particular topic (Lagace, Dahlstrom and Gassenheimer (1991). Perceived PBS firm s expertise reassures the client in the service provider s ability to perform properly a particular job (Day and Baksdale, 2003) and is likely to be directly positively related to lower perceived adverse selection risk. This is because suppliers with higher 6

9 Page 9 of 18 ANZAM 2010 perceived expertise are seen as more likely to provide higher quality of service outputs that meet client s needs and expectations. That is, buyer s perceptions that the PBS firm has sufficient relevant expertise lower client s perceived outsourcing risk. On these grounds the next hypothesis is proposed: H3: Perceived PBS provider s Expertise is positively associated with client s Lower Perceived Risk. The role of price as a value antecedent in outsourcing PBS appears less significant, than in other business contexts, such as physical goods. Some studies in PBS have explicitly recognised that price is not so important in the decision to outsource a service provider than other value predictors, such as quality (e.g. Stock and Zinszer, 1987). Other published research has simply disregarded (i.e. excluded) price from their value models. Instead, it appears there is some evidence that Compensation Fairness is more important in forming value perceptions in PBS, as discussed above. That is why this study included Perceived Compensation Fairness as one of the Service Value antecedents. On these grounds and taking into consideration the previous discussion of this construct and its relationship to value, it is proposed that: H4: Perceived PBS provider s Fair Compensation increases Perceived Service Value. As mentioned before, supplier s reputation is a vital signal of quality in conditions of incomplete information. This is because part of the essential purchase information (e.g. on quality) is imperfectly observable before purchase, and therefore the buyer needs to infer product quality from supplier s previous dealings and its track record of performance, i.e. from supplier s reputation. Reputation has been shown to decrease outsourcing risk in PBS (Fitzsimmons, Noh and Thies, 1998, etc). Hence, the next hypotheses are proposed: H5: PBS supplier s Perceived Reputation is positively associated with Lower Perceived Risk. Following Hansen, Samuleson and Silseth, (2008), who presented empirical evidence that reputation increases customer perceived value in B2B service exchanges, this research proposes that PBS supplier s corporate reputation will have also a direct positive effect on Perceived Service Value. Hence the last hypothesis is proposed: 7

10 ANZAM 2010 Page 10 of 18 H6: PBS supplier s Perceived Reputation is positively associated with the Expected Service Value A diagram of the proposed conceptual framework is shown in Fig.1 at the end of this paper. RESEARCH METHODOLOGY AND DATA COLLECTION To test the proposed model of perceived value, advertising services were chosen as an example of PBS (Day & Barksdale, 2003) and data were collected by means of a self-administered, pretested questionnaire, mailed to marketing directors of medium and large Australian companies, the typical continuous users of the services of advertising agencies. This approach produced 111 valid responses and a response rate of 26%, which is in line with other studies examining organisational behaviour. The respondents represented a wide range of industries from all states of the country, selling consumer and business goods and services. Structural equation modelling was employed to test the research model. More specifically, PLS path modelling was utilised, because of its proven advantages in handling smaller samples, such as the one in this case. PLS is also suitable for research aiming to predict the dependent variable. To estimate the model SmartPLS 2.0 (Ringle, Wende and Will, 2005) was chosen. The model consists of reflective constructs only, and these were measured by multi-item scales, used and validated by previous research studies in this management field of enquiry. All of the construct were measured on a Likert scale, anchored at 1= Strongly Disagree, and 7 = Strongly Agree. DATA ANALYSIS Since all data were collected by the same data collection instrument, a test for common method bias, using the Herman s one - factor test (Podsakoff, MacKenzie, Lee and Podsakoff, 2003) was performed. The unrotated solution resulting from a principal component analysis of the data indicated there was no single factor emerging, neither did one general factor account for more than 50% of the variance. This provides assurance that common method bias is not likely. The data analysis was conducted in line with the recommended in the PLS path modelling literature 8

11 Page 11 of 18 ANZAM 2010 (Chin,1998) three-step validation procedure: first, validate the outer model, then the inner model, and finally assess the overall model. e The initial PLS processing of the model indicated that the direct path originating from Perceived Reputation and pointing to Perceived Value (i.e. H6) was week in magnitude (beta coefficient = 0.029) and statistically non-significant (i.e. T-value = 0.609, p > 0.05). That is, Perceived supplier s reputation did not have much of an effect on PSV. Indeed, deleting this path (i.e. H6) barely changed the R² for the DV, i.e. it only marginally dropped from to 0.602, i.e. by 0.001, a nonstatistically significant difference. The same applies to all other beta coefficients in the model. Given this and in order to maintain parsimony, the path from Reputation to Value was eliminated and the model was recalculated using PLS algorithm. Thus the final model contained only five paths (see Fig. 2 at the end of the paper) and is analysed below. First, construct reliability was tested by checking unidimensionality of measures (Gerbing and Anderson, 1988), using Principal Component Analysis. The first eigenvalue for each construct, was greater than one, while the second was smaller than one, thus unidimensionality was supported (Tenenhaus et al, 2005). The high Cronbach s alfa coefficients (all exceeding 0.81) provided additional evidence for unidimensionality (Tenenhaus et al, 2005). Convergent validity was assessed against the three Fornell and Larcker s (1981) criteria. In this study the items factor loadings exceeded 0.7 and were significant (as per the 500-sample bootstrap estimate). Only one loading was slightly lower than 0.7, i.e. item 4 in the Reputation block of measured variables was 0.652, but was statistically significant and thus was retained in the model. The scales composite reliability surpassed 0.88 (see Table 1 for further details). Finally, average variance extracted (AVE) exceeded the required level of 0.5. It was 0.66 for Reputation, the others constructs scored over 0.7. Next, discriminant validity was assessed using the Fornell and Larcker (1981) criterion. The average variance extracted (AVE) of each latent variable (LV) was higher than the squared correlations of this construct with any other construct in the model. Also, the square root of each latent variable s AVE was compared with the correlations of this LV with all the other constructs. All of the former were greater than all of the latter by a sizeable margin, providing further evidence of discriminant validity. Finally, the cross-loadings of the measured variables were examined, which showed that all the 9

12 ANZAM 2010 Page 12 of 18 indicators measuring one LV had by far higher loadings on this LV, than on those they are not supposed to measure (full details are shown in Table 2 at the end of the paper). The above tests provide sufficient evidence for the outer model validity, thus it was accepted. The assessment of the structural model was conducted next. The structural model was assessed by first, examining the coefficients of determination, R² for each endogenous variable. In the model R² for the dependent variable (DV), Perceived Value, is 0.602, i.e. the antecedents explain together more than 60% of the variance in the Dependent Variable. Considering that Chin (1998) qualifies R² of 0.67 as characteristic of significant model fit, this result is assessed as good. Lower Perceived Risk has an R² of 0.237, and according to Chin (1998) is in the range between low and medium. However given that Lower Perceived Risk is predicted by only two antecedents, Expertise and Reputation, which do not exhaust the range of factors that lead to perceptions of risk in the examined research context, and were not expected to account for a dominant proportion in the variance of this construct, it is accepted as adequate. Furthermore Henseler, Ringle and Sinkovicz (2009) argue that if an endogenous variable is predicted by only one or two latent variables, moderate R² are acceptable. In brief, judging by the R², the model appears capable to predict the dependent variables. In addition, applying the SmartPLS blindifolding procedure the predictive relevance Q² was also calculated by means of cross-validated (cv)-communality and cv-redundancy (i.e. Stone-Geisser s Q²) for the dependent variables. Both indexes turned out to be positive (Chin, 1998), thus confirming the model s predictive power. Next, the standardised paths coefficients were examined. All beta coefficients were positive, in line with the respective hypotheses. Further, all path coefficients exceeded (Chin,1998) and were statistically significant (p < 0.01, 2-tailed test), as can be seen in Table 3, at the end of this paper. The highest in magnitude β-coefficient is for Fair Compensation- Expected Value, i.e. 0.5, while β for Expertise is 0.23, and the beta-coefficient for Lower Perceived Risk is These results support hypotheses H1, H2, H3, H4, and H5, hence all of these are accepted. H6 is rejected because the betacoefficient of the path originating from Lower Perceived Risk to Perceived Service Value was very weak and statistically non- significant, as explained before. 10

13 Page 13 of 18 ANZAM 2010 To check if Lower Perceived Risk mediates the effect of Reputation on Perceived Value, a test of mediation was conducted. Using the total and direct effects in the PLS output derived from processing the final model, the indirect effects were calculated. It appears that there is a significant indirect effect of Reputation on Value (i.e. β = 0.067, t-value = 2.688, p < 0.05, two-tailed test). This means that Lower Perceived Risk mediates the effect of Reputation on Value. In other words, there is empirical evidence that Reputation lowers the Perceived adverse selection Risk, thus indirectly increasing Perceived Service Value. The above results indicate that Lower Perceived Risk fully mediates the effect of Reputation on Value. Similarly, a test of mediation of Lower Risk between Expertise and Perceived Service Value was conducted. If mediation exists, it needs to be shown that the indirect effect for this relationship of (calculated from the PLS output) is significant. The Sobel test (Sobel, 1982) was employed for this purpose. The required beta coefficients for the effect of Expertise on Lower Perceived Risk, and of Expertise on Perceived Service Value (when Lower Perceived Risk is included in the model) and their respective standard errors were used to calculate the significance of the mediation. It was found that the mediating effect of Lower Perceived Risk was statistically significant (indirect effect s β = 0.086, Sobel test statistic, z = 2.25, p= 0.024), because it was greater than the required for significant mediation minimum value of This mediation is only partial, because both the mediated effect and the direct effect of Expertise on Perceived Service Value are statistically significant. In summary, the range of tests undertaken and satisfied by the proposed final model provides sound evidence that the latter is a good fit with the data, and as such is accepted. DISCUSSION OF RESULTS, IMPLICATIONS AND LIMITATIONS Consistent with theory and previous research as outlined before, the results provide empirical evidence that Perceived Expertise, Perceived Lower Risk (PLR) and Perceived Compensation Fairness are strong predictors of PBS Value, and together account for a healthy 60% of the variance in this construct. Compensation Fairness has by far the greatest effect in building perceptions of service value, followed by LPR. These results indicate that it is important for PBS suppliers to investigate 11

14 ANZAM 2010 Page 14 of 18 client s thinking about what constitutes a fair compensation. Engaging clients in a constructive dialogue during the negotiation stage aiming to substantiate the demanded remuneration should be a priority for PBS providers bidding for outsourcing projects. Supplier s Expertise should also be showcased in a best possible light during the negotiations. Suppliers should handle the perceived risk in outsourcing their services with utmost attention, as it directly and strongly impacts on the perceptions of value. The model shows that understanding the risk averseness of organisational decision makers in relation to outsourcing credence services may help suppliers work to decrease the perceived risk by investing in building reputation and expertise. This is important because, as the model shows, lowering the perceived risk not only directly increases perceived value, but it also does so indirectly, by translating the beneficial effect of reputation on lowering the risk into increased perceived value (demonstrated by the statistically significant mediation effect of LPR on service value). That is, service suppliers with established good reputation are seen by organisational decision makers as less risky potential partners, which in turn makes their proposition look a better value overall. The strong significant influence of supplier s reputation on Perceived Risk demonstrates the ability of reputation to serve as quality and reliability signal when information is incomplete. As shown in other business contexts perceived purchase risk plays a major role in building perceived value when information is incomplete (eg. Erdem and Swait, 1989). This study is the first one to offer empirical evidence that the same holds in the context of PBS. Likewise, as predicted by screening theory, client s screening for essential PBS supplier s characteristics (such as perceived expertise) can contribute to reducing the perceived purchase risk when information is incomplete, e.g. in credence services. The results are in line with the predictions of signalling and screening theories that highlights the significance of supplier s signals and buyer s screening efforts in reducing the perceived purchase risk, inherent in situations when information on service attributes is incomplete. The research has some limitations, for example it has only examined one particular type of PBS. More research in other services from the same group is needed to support these findings. Further, an investigation of the same nature in international context could increase the reliability of the results. Also, this research is based on a small sample size. While PLS path modelling has been shown to provide very robust estimates with small samples, bigger samples are always preferred. 12

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17 Page 17 of 18 ANZAM 2010 Zeithaml, V. (1988). Consumer Perceptions of Price, Quality, and Value: A Means-End Model and Synthesis of Evidence. Journal of Marketing, 52(3), 2. Perceived Expertise H3 Lower Perceived Risk H2 H1 Perceived Service Value H5 H6 H4 Perceived Reputation Fair Compensation Fig.1 Initial model Perceived Expertise Perceived Reputation H5 H3 Lower Perceived Risk H2 H1 H4 Perceived Service Value Fair Compensation Figure 2: Final Model 15

18 ANZAM 2010 Page 18 of 18 AVE Composite Reliability R Square Cronbach s Alpha EXPERTISE FAIR COMP LOWER RISK REPUTATION VALUE Table 1. Constructs Average Variance Extracted, Composite Reliability, R square and Cronbach s Alfa coefficients EXPERTISE FAIR COMP LOWER RISK REPUTATION VALUE Expert Expert Expert Expert Comp Comp Comp Risk Risk Risk Reput Reput Reput Reput Value Value Table 2: Final model s items loadings and crossloadings No Hypothesis* Beta Coefficient T- Value p- value, Conclusion two-tailed test H1 expertise > perceived service value p < Supported H2 lower perceived risk - > perceived value p < Supported H3 expertise->lower perceived risk p < Supported H4 fair compensation - > perceived value p < Supported H5 reputation-> lower perceived risk p < Supported H6 reputation- perceived value p > 0.05 Rejected Table 3: Results from testing the research hypotheses *Note: These are the results of testing the final model, i.e. the one resulting from processing the model after H6 was rejected 16