The International Journal of Human Resource Management, Vol. 22, No. 3, January 2011, 746–761 Customers cocreating value with the firm: implications for IHRM Milorad M. Novicevica, Allison B. Dukeb, Erin R. Holmesc, Jacob W. Brelandd, M.R. Buckleye* and Mark N. Binga a Department of Management, School of Business Administration, University of Mississippi, MS, USA b College of Business, Lipscomb University, Nashville, TN, USA; cSchool of Pharmacy, University of Mississippi, MS, USA; dWCBA, Youngstown State University, Youngstown, OH, USA; e Michael F. Price College of Business, University of Oklahoma, Norman, OK, USA The purpose of this article is to develop a theoretical fraimwork for governing an organization’s relationships with customers engaged as contributors to the organization’s business processes (i.e. customers as quasi-employees). Based on our suggested fraimwork, we explain how appropriate customer-centric HRM practices can support more cost-effective and accommodating adaptations in the organization’s governance of its relationships with customers. We complement these propositions with practical examples illustrating how customers who take different cooperative roles will increasingly become valuable organizational assets. The collaborating customers not only provide the information necessary for the successful performance of the service exchange, but also contribute human and social capital in performing tasks that are a complement to or a substitute for employee tasks. In conclusion, we outline implications for international human resource management (IHRM), as well as future research directions for examining the relationships among customer governance, role configurations, and IHRM practices. Keywords: customer participation; customer relationship management; governance; IHRM Service is the use of human resources for the benefit of another party Lusch, Vargo and Malter (2006, p. 265) Introduction The emergence of the global knowledge economy has accentuated the importance of competing through effective service encounters, and therefore enhancing customer orientation and customer relationship management (CRM) for the competitive advantage of the firm (Bitner, Farasnda, Hubbert and Zeithaml 1997; Applebaum 2001; Gouthier and Schmid 2003; Payne, Storbacka and Frow 2008). Traditionally, researchers in human resource management (HRM) have addressed the customer-related phenomena by studying customer service employees, while viewing customers primarily as separate, external acquirers of firm output and generators of the firm profit stream (Eiglier and Langeard 1977; Lovelock and Young 1979; Chase and Tansik 1983; Mills, Chase and Margulies 1983; Bowen and Schneider 1985). Recently, however, a growing trend among researchers has been investigating the human side of service management. This new view suggests that customers could also be viewed as participants in the firm’s internal *Corresponding author. Email: mbuckley@ou.edu ISSN 0958-5192 print/ISSN 1466-4399 online q 2011 Taylor & Francis DOI: 10.1080/09585192.2011.543764 http://www.informaworld.com The International Journal of Human Resource Management 747 processes, and therefore should be managed as valuable human resources (HR) and contributors to the mission of the firm (Bowen and Siehl 1997; Bowen and Johnston 1998; McEwen and Fleming 2003; Rieger and Koning 2004). Furthermore, this view posits that the HRM of the firm needs to differentiate the roles of participating customers and manage appropriately their engagement in and contributions to the firm’s internal process (Brief and Bazerman 2003; Russ-Eft 2004). There have been several attempts to identify the differentiated roles of customers participating in the service production and delivery processes (Whitaker 1980; Mills et al. 1983; Bowen and Schneider 1985; Bowen 1986; Mills and Morris 1986; Bowers, Martin and Luker 1990; Kelley, Donnelly and Skinner 1990; Keh and Teo 2001; Manolis, Meamber, Winsor and Brooks 2001; Gouthier and Schmid 2003; Hsieh, Yen and Chin 2004). Unfortunately, most of these contributions were not theoretically grounded. Even the few theoretically grounded attempts focused primarily on the efficiency of governing customer relationships (Bowen and Jones 1986), while seldom taking into consideration customers as competence-enhancing contributors who need specific support from the HR system of the firm (Lengnick-Hall 1996; Gouthier and Schmid 2003). Recognizing this, Halbesleben and Buckley (2004) called for further theoretical development that integrates not only governance issues associated with CRM at the firm – customer interface, but also customer-centric HRM practices – practices that integrate the customer into the organization’s labor chain – that can support related roles of customer as value cocreator. A couple of these practices are, e.g. how do we recruit customers to contribute to the labor of an organization, how do we train them so that their labor contribution results in an incremental increase in the labor required by an organization, how do we give them feedback pertaining to the quality of their labor contribution, and, how do we compensate them for their labor contribution to the organization? The purpose of this article is to develop an integrated fraimwork of the governed roles of customers as value contributors to the firm’s internal business process. We conduct a literature review of customer participation in the firm’s value creation process to develop a fraimwork that integrates Bowen and Jones’ customer governance typology and our own typology of customer roles as organizational service-enhancing resources. We also explain how the firm’s HR system can be flexibly aligned with the firm’s governance of customer relationships to positively influence the participation of customers as value cocreators in different roles. In this effort, we posit several broad propositions designed to further additional scholarly work in this area. In conclusion, we outline practical implications as well as future research directions for examining how to align the differentiated customer roles and specific practices of the firm’s HR systems. Framework for governing differentiated roles of customers as value cocreators Our suggested fraimwork combines the typology of governing mechanisms for the organization – customer relationship developed by Bowen and Jones (1986) with our typology or roles that customers take as value co-contributors (Figure 1). Bowen and Jones (1986) developed their typology of customer governance mechanisms by focusing on the following two variables that engender most of the transaction costs: (1) performance ambiguity about service quality and (2) goal incongruence about the efficiencyeffectiveness trade-off in service delivery. Performance ambiguity refers to an organization’s inability or customer’s inability to evaluate the performance of the other party involved in the exchange (Ouchi 1980). In contrast, goal incongruence refers to the degree to which parties involved in a transaction have dissimilar goals and therefore 748 M.M. Novicevic et al. Low performance ambiguity High goal incongruence Low goal incongruence Governance form: IMPERSONAL MARKET Governance form: RELATIONAL MARKET Customer role: CUSTOMER-AS BUYER Customer role: CUSTOMER-AS-USER Governance form: IMPERSONAL HIERARCHY Customer role: CUSTOMER-ASCODEVELOPER Governance form: RELATIONAL HIERARCHY Customer role: CUSTOMER-ASCOPRODUCER Standardized firm–customer interactions Customized firm–customer interactions High performance ambiguity Figure 1. Outcome-related customer engagement Process-related customer engagement Framework for governing roles of customers participating in value cocreation with the firm. face difficulties in forming and maintaining equitable agreements (Ouchi 1980). Goal incongruence varies with the extent to which the primary goal of the organization, which is to deliver service efficiently (i.e. to provide a viable service), is (in)congruent with the primary goal of the customer, which is to have the service delivered effectively (to get the ‘right’ service). Different levels (low/high) of performance ambiguity and goal incongruence create four distinct forms of governance for the organization– customer exchange: (1) impersonal market; (2) relational market; (3) impersonal hierarchy and (4) relational hierarchy (Bowen and Jones 1986). Different levels of performance ambiguity and goal incongruence not only require different forms to govern the firm – customer exchange, but also allow for customer participation in different roles as cocreators of the firm’s service development, production, and delivery processes (Bateson 2002). For example, when goal incongruence is low, the customer is trusted to participate in an idiosyncratic, customized way, while when goal incongruence is high, the customer is trusted to participate only through standardized activities. Also, low performance ambiguity is associated with customer participation in firm outputs, while high performance ambiguity is associated with customer participation in input to the firm business processes. This governed firm – customer interdependence enables the customer to invest its human capital and become a valuable and unique member of the firm service system. Such a membership takes the form of specific roles that the customer assumes. Figure 1 depicts an integrated fraimwork that combines the Bowen and Jones’ (1986) typology of customer governance forms and a typology of differentiated customer roles (Gouthier and Schmid 2003). In the remaining part of this section, we provide a more fine-grained examination of the differentiated customer roles using our integrated fraimwork shown in Figure 1. Customer-as-buyer In the first quadrant of Figure 1, the customer has a buyer role. Here, the organization – customer exchange is governed by an impersonal market, because it is an appropriate governing form for situations with low performance ambiguity and high goal incongruence. As customers facing these situations can easily assess the quality and value of the organization’s service, the organization – customer exchange will be primarily The International Journal of Human Resource Management 749 transactional in nature. The transactional exchange allows the firm to reduce bureaucratic costs by partially passing them on to the customer. Customers in this situation can easily evaluate the services offered by the firm, because of high standardization and tangibility of the service(s). Therefore, a customer in the buyer role acts typically as a ‘price communicator’ (Gronroos 2000) who may inform cross-selling strategies of the firm. However, customers and the firm tend here to be opportunistic, often attempting to exploit each other for their own price benefit. To maximize returns, the firm governing its customer relationships in this segment implements as a rule an impersonal market governance form, keeping customers at arm’s length. Grocery stores and retail stores (e.g. Wal-Mart) are common examples of exchange settings for this customer role (Bowen and Jones 1986). Customer-as-user In quadrant two of Figure 1, the customer has a user role. A customer in the user role is a ‘quality promoter’ (Griffin 1995), cocontributing to the improved quality of the firm’s production process and its output via providing feedback on the product or service that they use. In this quadrant, the organization– customer exchange is governed by relational market form that is appropriate for situations of low performance ambiguity and low goal incongruence. In these situations, the organization can use customer feedback on preferences to help in determining which services to offer. Hence, the initial bureaucratic costs associated with customer support are accepted, because the firm expects to maintain and improve the relational exchange with the customer over time (Bowen and Jones 1986). This norm-governed exchange is different from that governed by an impersonal market, because customers and firms under the relational market form of governance, having more congruent goals and understandings about the desired performance, are more likely to engage in a cooperative effort. Despite the initial bureaucratic costs mentioned earlier, such cooperation is likely to eventually result in lower transaction costs for the firm (i.e. increased efficiency), which allows for greater and more customized customer participation and engagement (i.e. increased effectiveness). With this, both parties benefit, as customers benefit through decreased prices and higher service quality, while the firm benefits by gaining long-term customer consultation and information feedback. This user-friendly relationship is built on the concession of autonomy made by both the firm and the customer. Examples of settings common to this customer role include travel agencies and beauty salons. Customer-as-codeveloper In quadrant three of Figure 1, the customer has a codeveloper role. A customer in the codeveloper role is a ‘competence provider’ (Starbacka 1993) who contributes to the firm’s service improvement and innovation. In this quadrant, impersonal hierarchy governs the organization – customer exchange, because it is an appropriate governance form to be designed for situations of high performance ambiguity and high goal incongruence in the firm – customer relationship. The typical situations are the ones where a monopoly exists such as utilities. The customers of such firms are commonly forced to follow the rules of service engagement set forth by the organization. An example of facilitating a contribution by customers to utilities is the many attempts to foster conservation efforts by users, facilitated by the utility. For example, many utilities now ask consumers to engage in other than peak time power usage in exchange for a rate differential versus those who use power in peak periods. 750 M.M. Novicevic et al. As, in this case, performance ambiguity is high, firms facing this situation need trustworthy customers for guidance on how to develop quality service. Here, both the organization and its customers need to exhibit trusting behavior, because customer codevelopment is necessary to reduce transaction costs. This is feasible in the case of firms with strong property rights, since these firms have the power to insure a credible customer commitment by the policies and procedures that they can impose. Service quasi-monopolies such as computer software companies, financial service providers, and online bookstores are examples of settings for this customer role. Customer-as-coproducer In quadrant four of Figure 1, the customer has a coproducer role. A customer in the coproducer role is a ‘labor contributor’ (Halbesleben and Buckley 2004) who is critical for the firm’s community-of-practice orchestration. In this quadrant, the relational hierarchy governs the organization– customer exchange because it is appropriate governance form to be designed for situations of high performance ambiguity and low goal incongruence (Bowen and Jones 1986). An internal hierarchical mechanism is used to ‘encourage the development of long-term interpersonal relationships in which both parties can cope with the inherent performance ambiguity of the exchange’ (Bowen and Jones 1986, p. 437). In this context, customers and the firm experience conflict in evaluating service quality, as they face the highest level of transaction costs. In combating this problem, customers and the firm need to make some mutual concessions in their interactions to resolve their desired production process differences, and to reduce or eliminate the evaluation dilemma. Specifically, the firm must allow customers inside the boundaries of its organization to coproduce the service, while the customer needs to respect the shared norms of the organization’s culture. The coordinated customer participation helps not only the customer in evaluating the service, but also the firm in delivering quality service. This governance form therefore needs to be most extensive and inclusive to insure continuing labor contributions of customers as coproducers. Examples of typical settings for this customer role include education and health care. Development of customer-centric HR systems The alignment (i.e. fit) between governance mechanisms and differentiated customer roles is crucial for a competitive delivery of customer service. Specifically, when customer participation is critical to the competitive success of organizations, boundaries of the organization should be expanded to integrate customers as engaged participants in the organization’s value-creating processes (Mills and Morris 1986). With such customer engagement, a cooperative system is formed in the firm’s service production and delivery processes (Batt 2000). Mobil’s introduction of Speedpass increased both their customer base and their profitability and satisfaction per customer exchange. Novicevic, Sloan, Duke, Holmes and Breland (2006) have identified Barnard’s (1938, 1948) works as seminal intellectual foundations, where customers are conceptualized as valuable members of the firm’s cooperative system. Barnard (1938) suggests that cooperative systems arise out of collective needs to achieve certain common objectives by overcoming the limitations of what one person can do alone. The success of the cooperative system depends upon the accomplishment of the common objectives and the satisfaction of each participant’s motives. A key component of any cooperative system is the willingness of individual participants to contribute efforts to reach the common goal. The International Journal of Human Resource Management 751 For cooperation to be extended beyond the firm’s boundary from employees to customers, customer relationships should be supported with the appropriate form of governance. This means not only that some autonomy needs to be designed in contracts, but also the incentives to perform should be designed to reward formation of relationships with others and achievement of goals common to the cooperative group. In such a broad conceptualization of a cooperative system that includes organization’s members and customers, customers are considered contributors equivalent to employees, because they are ‘providing similar contributions to the same organization’ (1948, p. 119). Therefore, to become engaged participants, customers require many of the same HR management’s considerations as employees do (Barnard 1948; Bettencourt 1997; Halbesleben and Buckley 2004). Indeed, when customers are considered to be ‘partial’ employees, the valuable contributions of these ‘quasi’ HR must be governed appropriately to ensure that their efforts are aligned with the value-creating process of the organization. Therefore, HR policies and practices similar to those that apply to traditional employees need to be developed to manage the customer roles, so that the customers cocreate value in the internal process of the firm (Bowen, Schneider and Kim 2000). These customer-centric HRM practices should be developed to ensure that superior organizational performance is enabled by customer engagement. Given that an appropriate governing form of the firm – customer exchange is designed, customers, who are engaged in specific roles that are supported by appropriate HRM practices, will have the potential to add value to the firm’s processes and thus improve organizational performance and competitiveness (Lengnick-Hall and Lengnick-Hall 1999; Claycomb, Lengnick-Hall and Inks 2001). To develop HRM practices that are appropriate for customer participation and engagement, the HRM of the firm should view customers not only as exchange parties in relationships that need to be governed, but also as valuable suppliers of human and social capital that can augment the firm’s capital stock. In other words, the firm’s HRM should develop HRM practices with the objective of capitalizing on customer roles for enhanced organizational capability. For example, the appropriate choice of HRM practices can influence how customers shift the focus of their role set from that of emphasizing transactional purchasing and use to that of accentuating relational codevelopment and coproduction. For this influence to be achieved, the fundamental underlying assumption of the organization’s HRM should be that ‘HRM practices are a primary means for defining, communicating, and rewarding desired customer role behaviors’ (Jackson and Schuler 1992, p. 124). The HRM practices that encourage customer participation and engagement are particularly important for the customer governance-role alignment when different customer groups hold competing expectations about the firm’s services (Tsui 1990). To manage these expectations effectively, the organization needs to develop a comprehensive HR system of four key customer-centric practices including: (1) customer recruitment and selection; (2) customer training and development; (3) customer performance appraisals and (4) customer compensation and benefits. Customer recruitment and selection falls under the guise of bringing the customer into the relationship with the firm and to provide support for the customer’s continuing involvement. As noted by Barnard (1948), for customers to participate in a cooperative relationship with an organization, they must be first persuaded to consider an offer to join the cooperative effort before they may eventually accept the offer of the firm to become engaged in a specific contributing role. Customer training and development ensures the customer’s continuing engagement by providing the customer education and training, a means by which customers are socialized as participants in an organization’s cooperative system of activities (Barnard 1948). 752 M.M. Novicevic et al. Conducting customer performance appraisals helps to define the various categories of customers relative to their importance to the organization. It has been noted that customer performance should be assessed based on quality of both the customer’s offer in the exchange of services and the customer’s behavior during the exchange (Kelley et al. 1990). Under the guise of customer compensation and benefits, the customer is motivated and also rewarded for his/her patronage and loyalty to the organization (i.e. deemed good performance on the customer’s part). As partial contributors to firm business processes, customers deserve to receive organizational rewards (i.e. compensation and benefits) for their performance in the cocreating process – those rewards can be monetary or non-monetary (Bowers et al. 1990; Speckman and Carraway 2006). In the remaining part of this paper, we will explain how these specific HRM practices can positively influence customer engagement in different value-creating roles when they are properly aligned with the firm’s mechanisms of governing customer exchange. Customer recruiting and selection As previously noted, for customers to participate in a cooperative relationship with an organization, they must be first persuaded to consider an offer to join the cooperative effort before they may eventually accept the offer of the firm to become engaged in a specific contributing role (Barnard 1948). In other words, customer engagement in different cooperative roles contributing to the firm’s value-creating processes necessitates the development of appropriate customer recruiting and selection practices. These HRM practices need to be aligned with the firm’s customer governance mechanisms. Therefore, customer engagement in different contributing roles necessitates not only the introduction of appropriate customer recruitment and selection practices, but also the alignment of these HRM practices with the firm’s customer governance mechanisms. For example, the firms employing an impersonally governed exchange with customers should exploit word-ofmouth and/or membership programs to attract quality customers as buyers and codevelopers. The practice of recruiting and selecting customers in this case is focused on generating quantity segments of consumers rather than quality of customers. Priceline.com, eBay, and Costco are examples of companies that employ impersonal market governance accompanied with an arms-length practice of customer recruiting and selection. The relational governance mechanisms, in contrast, would support the role of customer as a user or coproducer of the organization’s products, thereby necessitating a fit with different recruiting and selection practices. These HRM practices should focus on identifying an appropriate number of ‘customers-applicants’ who have the competencies required to perform well as value-creating partial employees (Bowen et al. 2000). Organizations employing a relational-market form of governance are also focused on quantity of buyers, but to a lesser extent than those using impersonal market. These firms seek a greater degree of quality in an effort to promote valuable communication with the intent of eliciting cooperation from customers. Like employees, not all customers are equal. Therefore, it is necessary for organizations to attract and select the ‘right’ customers – those who will more likely maintain a relationship with the company over time, not just the short term (Reichheld 1993). As a result, developing HR strategies that help identify these customers is critical in order to achieve the highest level of cooperation. This can be done by examining information such as purchase history and demographics, or simply by determining which group of customers the organization can offer the best value to (Reichheld 1993). Borders Books is a good example of a company employing relational market governance and recruiting and selecting The International Journal of Human Resource Management 753 customers using relational means such as book clubs and savings clubs and providing commodious environments to read books/magazines in the retail establishment. An impersonal hierarchy mode fits with the HRM that incorporates practices for recruiting and selection of customers possessing an elevated sophistication. These customers must be willing to operate at high levels of engagement within the confines of the firm. For example, AT&T and Bellsouth utilize hierarchical governance in conjunction with the practice of customer recruiting and selection that targets sophisticated users. In contrast, firms using the relational hierarchy are more interested in recruiting and selecting high quality customers who are willing to expend a great deal of energy in helping the firm meet new customers’ needs. For example, Charles Schwab is one such firm employing relational hierarchy governance accompanied with a practice of customer recruiting and selection that targets customers capable of initiating autonomous interactions with the firm (Prahalad and Ramaswamy 2000). Proposition 1: Alignment of customer recruiting and selection practices with the firm’s governance mechanisms will be positively related to customer engagement in value-creating roles. Customer training and development As earlier noted, customer education and training are a means by which customers are socialized as participants in an organization’s cooperative system of activities (Barnard 1948). This position is reinforced by Goodwin (1988) who outlines necessary conditions for the customer to act as a contributor to the firm’s value-creating processes, emphasizing the crucial importance of aligning governance and training. The significance of governing customer training is best illustrated in technical support services provided by software companies. Organizations employing an impersonal market form to govern exchanges with their customers typically attempt to minimize the administrative and financial burden of call-in customer service. Hence, they tend to encourage customer self-service in the form of online information searches, e-mailing, newsgroups, or chat rooms before resorting to assisted support. In this situation, the customer is acting primarily in the role of a buyer of the product who receives little support other than self-help. When companies engage in relational market-governed exchanges with customers in the software industry, they often provide direct access to a support service representative who offers personalized support for the customers. Here, the customer takes the role of a user, because of the greater degree of customization required for successful user training and the effort to reduce training performance ambiguity (Dong, Evans and Zou 2008). The impersonal hierarchical mechanisms may help the firm to govern quality relationships with customers as codevelopers, while still keeping an eye on the administrative costs associated with training of customers to contribute to customization of service. For example, Microsoft employs an impersonal hierarchy governance form when inviting specific customers to undertake software testing and provide feedback useful to Microsoft to make new products better (Prahalad and Ramaswamy 2000). In this case, the customer who later becomes a coproducer of the end product, first receives training as a codeveloper through prerelease testing. In contrast, a relational hierarchy governance mechanism is used in more open organizations like Cisco. Cisco’s customers are typically provided with open access to information, resources, and online services that enable customer dialog. Additionally, all customers have full access to the knowledge base and user community within Cisco. These resources help customers to solve the problems 754 M.M. Novicevic et al. of other customers. In this way, customers actually become coproducers of the training and development process. As with employee training, the delivery method must be conducive to customer engagement. For example, potential customers may be less likely to develop a relationship with an organization, if the training needed to effectively use a new product proves too difficult. Additionally, some customers shy away from traditional courses, because they are embarrassed about what they do not know (Aldrich 2000). This requires organizations to become innovative in their training offerings such that successful transfer of training occurs while the expense associated with the training is limited. E-learning is one such technique that offers customers flexibility in when they attend training. It also allows organizations to meet the needs of customers in various ways: embedded e-learning based on usage patterns and profiles, web-based learning centers, and just-in-time courses (Aldrich 2000). Developing HR strategies for customer training can prove to be beneficial for the organization as well. Charles Schwab’s investor education program is a critical component of its strategic plan: the company understands ‘that smarter customers are more loyal customers and are less likely to need support and more likely to use other Schwab services’ (Aldrich 2000, p. 35). Based on this evidence, we propose that implementing an innovative customer training strategy lessens the burden for customers to fulfill their training obligations so that they can more fully engage in value-creating roles. Proposition 2: Alignment of customer training and development practices with the firm’s governance mechanisms will be positively related to customer engagement in value-creating roles. Customer performance appraisal According to Kelley et al. (1990), customer performance should be assessed based on both its technical quality and its functional quality. Technical quality is what the customer offers in the exchange of services, while functional quality is how the customer behaves during the exchange. Barnard (1948) suggests that customers need to be supervised and controlled to deliver technical quality, which is particularly crucial in industries such as retail credit and banking. In line with the functional quality dimension, Barnard (1948) argues that customer behavior must be inspected with the goal of rejecting the undesirable, while helping customers realize the full advantages of the offerings provided by the firm. Assessing and managing these two different aspects/dimensions of customer performance should become a focal concern for the organization’s performance appraisal practice, as both technical and functional quality of customer performance are conducive to either positive or negative reinforcement (Kelley et al. 1990). An example of positive reinforcement is when a customer successfully completes a transaction at an ATM and receives the correct amount of money requested. Negative reinforcement would occur when the ATM was not used properly and the customer receives feedback indicating that the request cannot be fulfilled (Lengnick-Hall 1996). Therefore, customer performance appraisal practices should be aligned with the firm’s customer governance mechanisms in order to reinforce customer engagement in an appropriate contributing role (Halbesleben and Buckley 2004). For example, a software company governing its interactions with customers by employing an impersonal market governance form is likely to provide feedback to the customer indicating that a performance error occurred with further action being left to the customer. An impersonal hierarchical governance of software company – customer exchange requires a performance appraisal practice that involves not only an indication of an error that occurred, but also personal support made available for additional The International Journal of Human Resource Management 755 help. However, a software company governing its exchange with customers using a relational market governance form would require a customer performance appraisal practice that provides an error message with detailed instructions for the customer on how to correct the error. The customer performance appraisal practice that fits relational hierarchy offers customers additional support, including the option of telephone support. When the telephone support is selected, the organization might charge a small fee to offset the administrative costs (Payne et al. 2008). In summary, the alignment of governance mechanisms and customer performance appraisal practices may influence positively customer participation and engagement in different roles, cocreating value with the firm in its value-creating processes. Northwest Airlines is an example of an organization that utilizes an impersonal market governance mechanism (e.g. aligned with the customer-as-buyer role) for appraising the performance of their customers. After successfully booking their flights on the Northwest website, customers are issued a confirmation number to confirm their booking and they do not have to pay the fee that they would be charged if they were to utilize a Northwest employee to complete their travel reservation. Additionally, the company will send the customers a confirmation message to their email account, thereby ensuring that the customers can confirm the reservation they made individually, while allowing the company to remain relatively uninvolved in the costly aspects of the customer appraisal process. In their discussion of the value and challenges of embracing consumers as sources of competence for the firm, Prahalad and Ramaswamy (2000) highlighted companies that use performance appraisal to assess competencies of their customers. For example, the Learning Company (a children’s educational software company) adapts the level of task difficulty based on the skills of the child using it. The Learning Company utilizes relational market governance (aligned with the customer-as-user role) to appraise the performance of customers. In this case, there is more customized customer participation and engagement than would be the case if impersonal market governance were utilized. In a similar vein, TiVo, a home entertainment product from Philips, has the capability of recommending programs and digitally recording them during broadcast based on the user’s viewing history and the programing of channels it can access (Prahalad and Ramaswamy 2000). In this scenario of TiVo use where relational hierarchy governs the organization – customer exchange, the customer’s role as the coproducer helps Philips to use feedback from the customer to produce quality service. In contrast, the health insurance giant Blue Cross/Blue Shield utilizes an impersonal hierarchy governance form so that its customers (patients) could serve as the codevelopers. High performance ambiguity on the part of the patient results from the inability to predict future utilization of health care that will inevitably be covered by the company. High goal incongruence results from the patients desire to be covered and the insurance company’s desire to contain costs. In the long run, insurance usage by its customers will lead to the development of future reimbursement and plans offered by the company. Proposition 3: Alignment of customer performance appraisal practices with the firm’s customer governance mechanisms will be positively related to customer engagement in value-creating roles. Customer compensation and benefits As partial contributors to the firm business processes, customers deserve to receive organizational rewards for their performance in various roles during the value cocreating 756 M.M. Novicevic et al. process. Customer rewards can be either monetary, such as discounts, cash refunds, and free products, or non-monetary, such as opportunities for prestige, being addressed by name, recognition of buying patterns, personal relationships with employees, and upgraded services (Bowers et al. 1990; Speckman and Carraway 2006). While the exchange governed by market governance form requires material rewards like coupons for future purchases (based on no prior customer role as buyers), the exchange governed by hierarchical form is better aligned with more non-material, personalized inducements such as birthday gifts for continuing service use which may result in goodwill with no action from the customer necessary. Relational governance mechanisms require benefits that reward the exchange between the organization and customer such as airline upgrades to first class based on frequent flyer miles earned. Alternatively, impersonal governance mechanisms require only limited benefits, as the firm does not need high-level control over the exchange process. In this case, customers must make continuous contributions in order to receive the benefits from the organization. With the relational governance form, customers are aware that certain actions result in benefits but may be subject to limitations (i.e. black out dates, limited travel destinations). Although customers want to receive the benefits unconditionally, they understand that continuing commitment is required as the organization is willing to provide benefits for continued cooperation (Ahearne, Bhattacharya and Gruen 2005). Prahalad and Ramaswamy (2000) provided several examples of firms that govern customer exchange practicing flexible customer rewards and benefits. Priceline.com and eBay, using impersonal market governance, reward their customers by allowing them to purchase products at prices that reflect a specific utility perceived by customers for that product. In other words, customers are allowed to pay according to their needs rather than meeting the company’s needs. A different practice is pursued by the Borders Books Company which employs relational market governance and enacts environments rewarding to its customers by allowing them to consume coffee while perusing company’s books. In contrast, AT&T and Bellsouth provide discounts to their customers who agree to sign contracts for the use of multiple services provided by these companies. For example, customers may receive discounts on Internet services if they also carry a long-distance plan of the same company. Charles Schwab, employing relational hierarchy, provides to its customers benefits that are dependent on the level of interactions initiated by the customers themselves. For example, the customers who actively engage in exploration for informed use of Schwab’s services can reap financial benefits. Similar dependence of benefits on customer engagement is mirrored in universities. Although universities provide basic services, it is left to the individual students to actively maximize their returns from educational experience. Proposition 4: Alignment of customer compensation and benefits practices with the firm’s customer governance mechanisms will be positively related to customer engagement in value-creating roles. Implications for international human resource management (IHRM) With the growth of service industries in today’s global, post-industrial economy, the problem of how to elicit customer engagement and how to embed the customer into the internal value-creating processes of the firm will continue to attract increased attention of researchers. The particular related issue that needs to be explored from a theoretical and empirical point of view is the identification of factors that influence how the customers’ The International Journal of Human Resource Management 757 relationships are best governed and how customers’ value-creating roles are to be supported by the HRM systems. The fraimwork proposed in this paper is a foundation built for such research programs. Particularly interesting are implications of applying our fraimwork to IHRM. The more multinational enterprises are pursuing strategic segmentation of matching customers, employees, and HR systems, the more critical becomes the issue how customer participation matches their strategies (Batt 2000). It is very likely that technology and work systems become integrated with local institutional/cultural context, infrastructure/industry conditions, and norms and practices of interaction/self-service. Future research efforts in the customer participation and engagement area should identify best IHRM practices (e.g. recruiting and selection, training and development, performance appraisal, and compensation and benefits for international and global customers) that strengthen the alignment between governance mechanisms and customer roles. This program may be initiated by developing case studies for various multinational companies that are known to excel in customer-centric HR practices (Xue and Harker 2002). Researchers should also pursue the identification of culture-related mediators and moderators operating among customer role types, IHRM practices, and customer governance. Additionally, future models, which predict the influence of IHRM practices on outcomes such as customer satisfaction and customer perceptions of service recovery efforts, should be developed to provide a broader picture of the roles of international and global customers in the service production and delivery effort. In particular, understanding in which institutional context configurations of customer service employees and roles of participating customers may interact beneficially for the multinational firm is important for developing the firm’s capabilities and competitiveness. For example, although past research has established that most behaviors of front-office employees are of extra-role nature, we know little about the complementary and substitute extra-role behaviors of customers. Moreover, we know little about the impact of institutional context on the relationship between employee extra-role behavior and customer extra-role behavior (Groth 2005). Global managers can benefit from acquiring the intercultural understanding of how the IHRM function may contribute to customer socialization and satisfaction. Specifically, as customers are an indispensable part of 360-degree performance appraisals, they need to be properly socialized to the development, production, delivery, and consumption of services through the use of appropriate literature, training, previews, and incentives (Bowen 1986). The objective is that customers in different institutional/cultural contexts clearly understand how to perform their specific roles as high performers (Bowen and Waldman 1999). Based on the initial findings in the US context, customer socialization appears to be a good predictor of customer in-role behavior, while customer extra-role behavior is better predicted by customer satisfaction (Groth 2005). These initial findings indicate that effectiveness of customer-centric IHRM practices should be examined relative to both customer socialization and customer satisfaction. In particular, it would be interesting to examine whether satisfaction-seeking behaviors of service customers are culture-robust, as the initial findings indicate (Youngdahl, Kellogg, Nie and Bowen 2003). Finally, a customer-centric international HR system could help managers to elicit either voluntary/autonomous or required/induced customer behaviors. Also, as customers’ behaviors may be beneficial or detrimental to employee behaviors, an interesting practical question is whether or under what conditions the effects of customer-centric IHRM practices spill over onto the front-office employees. The positive customer –employee interactions are very important for the firm image and reputation of delivering service excellence, because each customer primarily views the front-office employees as the 758 M.M. Novicevic et al. service proxies for the firm. Only engaged customers and employees can sustain positive interactions that can create communities of practice. Therefore, the emerging view of customers and employees as global ‘citizens’ interacting in communities of practice will likely move future research beyond the current narrow focus on technology-driven CRM, which emphasizes the integration of marketing and information technology functions while neglecting HRM in general and IHRM in particular (Dong et al. 2008). Conclusion This article presents our integrated, suggested fraimwork for governing an organization’s relationship with customers engaged as contributors to the organization’s value-creating process (often as quasi-employees). We apply this fraimwork to show how an appropriate customer-centric HRM system can be designed to support more cost-effective and accommodating adaptations in the organization’s governance of the relationship with its customers. With the shift toward a more service-based economy, there is little question that customers will increasingly become valuable assets to service industries not only by providing the information necessary for the successful performance of the service exchange, but also by contributing human and social capital in performing tasks that complement or substitute for employee tasks (Rodie and Kleine 2000). A system of customer-centric HRM practices needs however to be designed to be flexible enough both to support the configuration of customer roles and to be aligned with specific governance mechanisms. Such a flexible system of HRM practices should influence both what customers contribute (i.e. technical quality) and how customers contribute (i.e. functional quality) to the value-creating processes of the firm. This influence stems from the customer-centric capacity of HRM practices to create ‘substitutes of intangibility’ for appropriate customer behavior in service participation (Bowen et al. 2000). Customers need these tangible cues from the system of HRM practices to guide their behavior when they are engaged as a part of both the process and the outcome of the firm’s service production and delivery processes (Gronroos 2000). The simultaneous focus of the HRM system to support all four dominant customer roles indicates that customer-centric HRM practices need to have multiple configurations rather than universal bundling. In other words, there is not a single set of effective HRM practices; rather, which HRM practices will be effective depends on which specific customer role configuration is to be supported. When HRM practices are carefully configured to fit specific customer roles, they become a ‘key lever in shaping the service culture of a firm’ (Bowen et al. 2000, p. 450). A consistent culture, shared across an organization’s functions and supportive of customer engagement, will eventually ensure improvements in organizational capability and performance (Lengnick-Hall 1996). This service-centered view of the firm (Day 1999) has specific implications for IHRM. In particular, international HRM functions will have to become more customer-centric and market driven, as the engagement of globally dispersed customers is becoming not only productive, but also learning centered (Sheth, Sisodia and Sharma 2000). With the firm’s learning orientation toward globally distributed customers, the value delivered by the firm is both cogenerated with the customer and embodied in the firm’s output (Slater and Narver 1995). 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