INTERNAL CUSTOMERS AND INTERNAL SUPPLIERS

To push a customer and market orientation deep into the organization, many firms have adopted systems by which internal customers evaluate i nternal suppliers. The internal supplier receives a larger bonus for a higher evaluation, The authors examine two internal customer-internal supplier incentive systems. In one system, the internal customer prov ides the evaluation implicitly by selecting the percentage of its bonu s that is based on market outcomes (e.g., a combination of net sales a nd customer satisfaction if these measures can be tied to incremental profits), The internal supplier's reward is based on the percentage th at the internal customer chooses. In the second system, the internal c ustomer selects target market outcomes, and the internal supplier is r ewarded on the basis of the target. in each incentive system, some ris k is transferred from the firm to the employees, and the firm must pay for this; but in return, the firm need not observe either the interna l supplier's or the internal customer's actions. The incentive systems are robust even if the firm guesses wrongly about what employees perc eive as costly and about how employee actions affect profit. The autho rs discuss how these systems relate to internal customer satisfaction systems and profit centers.