Service providers and firm performance: investigating the non-linear effect of dependence

Servitized manufacturers can leverage close relationships with external providers of product-related services to mobilize value creation and improve the responsiveness of their offerings to customer needs. The purpose of this paper is to investigate the economic link between the relational embeddedness of external service providers, as arising from the key dimension of dependence, and firm performance.

The study evaluates financial statement data pertaining to 190 dyadic relationships of servitized manufacturers with service providers operating in downstream channels and accounting for more than 10 per cent of their revenue.

The results indicate that service providers’ dependence has an inverted U-shaped relationship with manufacturers’ return-on-assets (ROA), via non-linear effects on return-on-sales and asset turnover. The results therefore suggest that the observed U-shaped relationship for ROA is driven by diminishing returns of dependence in terms of both differentiation ability and operational efficiency.

Future research could examine other dimensions of embeddedness, as well as contingency factors that may influence the embeddedness–performance relationship.

The study conclusions suggest that managers of servitized firms should foster the embeddedness of external service providers, but they should also be careful to maintain an adequate level of dependence to maximize benefits and minimize liabilities.

The study adds to the limited research delving into inter-firm relationships between servitized manufacturers and external service providers. It empirically demonstrates the economic effects of service providers’ dependence-based embeddedness, challenging the general assumption about a monotonic positive effect of relational embeddedness.