Control at the boundaries

1. EIASM New directions in Management Accounting December 14-16 2006 Control at the boundaries Henri Dekker VU Amsterdam

2. Control choices at the boundaries… and the boundaries of control • Some trends in IOR use • Control choices in IORs • Partner selection • Relational governance & trust • Performance effects • Learning to govern • ‘New’ research directions

3. Interfirm relationships • Alliances, JVs, buyer-supplier rel., networks, licensing, franchising, knowledge sharing, ….. • Broad concept (Gulati, ‘98): • voluntary arrangements… • exchange, sharing or co-development… • products, technologies or services… • wide range of motives & goals… • variety of forms… • across vertical and horizontal boundaries. • Realize goals unattainable alone (in time) • Resource acquisition; scale & scope

4. Trends in IOR use • Anderson & Sedatole (2003): US firms 1985-2000

5. Sector distributions Growth in service; manufacturing declines Anderson & Sedatole (2003)

6. Since 2000…. (Anderson & Sedatole, ‘06) Decline: 9/11; SOX; economic conditions

7. Emerging economies: BRIC 1986-2005 I&C: mainly manufacturing Manufacturing declines; growth in service

8. Governance: Alliances vs. JVs

9. IORs types – Dutch firms ’06 (N=439)

10. Number of different IORS 21% has no IORs 18% is involved in 3 types Automatic fill function?

11. Sequence of events - Gulati (‘98) Alliance decision Partner selection B A Social network influence Governance design C Dynamic evolution Alliance performance D Partner performance

12. Control problems in IORs Drivers of governance choices (Gulati & Singh, ‘98) • Appropriation concerns • Transaction features (TCE) • Coordination requirements • Task interdependencies • Dependence • Beyond the transaction • Relational risk & performance risk (Das & Teng, ‘01)

13. Control mechanisms • Most studies are at the level: Market vs. Hierarchy … vs. Hybrid • Make-or-buy ; Equity vs. non-equity • Equity: incentive alignment • .. and assumed to reflect increased use of (o/b)control mechanisms(e.g. Gulati & Singh, ‘98) • Which controls, how used & why? • More fine-grained understanding of controls & management processes needed • Recent studies in accounting (mostly case evidence)

14. Forms of control examined • Contract clauses& non-contractual controls • Control mechanisms & dimensions • Ex-ante & ex-post controls • Contracts & IOR management • Control purposes • E.g. incentives and decision making & adaptation • (Too) much focus on incentives/safeguarding?

15. E.g. contract functions • Safeguarding & incentives (TCE, AT) • Coordination, adaptation & communication (OT) • Knowledge repositories(Mayer & Argyris, ‘04) • Signaling commitment(Klein-Woolthuis et al., ‘04) • ….? • Under which conditions are different contract functions favored? • How do contract clauses / dimensions relate to different functions?

16. Use of controls - questions ‘We know very little about the policies and procedures that support performance attainment in the day to day life of the alliance’ (Anderson & Sedatole, ‘03) • Functions of control mechanisms in IORs? • Contracts & use of controls during IOR management • Which factors influence these choices? • How do controls help shaping IORs (cf. Mouritsen & Thrane, ‘06)? • How does IOR control evolve & adapt over time? • How related to informal controls? • Partner selection & relational governance

17. Partner selection • Search for complementary resources (Geringer, ‘91) • Selection criteria: Valuable partner resources • But.. also to mitigate appropriation concerns (Gulati & Gargiulo, ’99) • Reduced need for governance • Blumberg (‘01): search effort increases with risk • Selection process as alternative to control?

18. Partner selection • However… learning while searching • Focused search & knowledge acquisition (Huber, ‘91) • Enhanced design of governance structures • In response to anticipated control problems • Appropriation concerns (goodwill) • Coordination needs (capabilities)

19. Partner selection & governance + + / - ? + Dekker (2006 SSRN)

20. Partner selection, knowledge acquisition & governance Contract & controls Potential & chosen supplier(s) WP, with Van den Abbeele

21. Some evidence Dutch (817) & Belgium (287) IT transactions Search effort associated with control problems • Volume(+), asset specificity(+), uncertainty(+), dependence(-) Governance ext. increases with search effort • Selection phase facilitates learning • transaction environment, partner & contingencies • Information availability increases with focused search • More comprehensive ex ante contracts + o/b controls during transaction management

22. Some questions • Effect selection process on governance choices? • Confidence generation vs. information acquisition • How do firms search & select? • Sources of information (networks, referral) • Types of information acquired (e.g. Tomkins, ‘01) • Partner choice (criteria) • Development of contract clauses & controls • How are they developed?

23. Relational governance How are governance and selection choices affected by informal (relational) controls? Trust !

24. Trust Antecedents, forms & effects (Adler ‘01) • Calculative, relational, institutional • Repeated ties & 3rd parties (networks) • 1st hand & 2nd hand information • Trust substituting or complementing control? • Goodwill trust vs. Capability trust (Sako, ‘92) • Differential impact on use of controls? • Differentially impacted by use of controls?

25. Repeated exchanges & trust • Development of ‘relational trust’ • Prior ties, relational embeddedness /governance, shadow of the past, etc. • Promote social norms & values, and routines • ‘Partner experience’: reliability & competence • Effect on selection & governance choices? • Economizing on or improving control? • Information availability (Huber, ’91; Tomkins, ‘01) • Moderating influence on control problems

26. Partner selection, experience& governance design

27. Some evidence (IT transactions…) Selection effort decreases with partner experience • Sticking to “trusted” partners • But: Firms with experience react more strongly to control problems (more efficient search?) • … and have more (1st hand ) supplier information, in turn affecting use of contracts & controls Differential effects of experience on governance • Less governance for appropriation concerns & dependence; more for coordination • Substitutes and complements

28. Torturing ties Is trust always ‘good’? • Misplaced trust (‘trust me, I know what I’m doing’) • Ties can torture! (Krackhart, ‘99) • ‘Simmelian ties’ • Reduced incentives for innovation, adaptation & change; inertia • ‘The strength of weak ties’ (Granovetter, ‘73) • Locating information, dispersion of ideas, information brokerage… • Though less effective for transfer of tacit knowledge & idea development

29. Some questions • How do different forms of trust affect formal control choices and vice versa? • (Under which conditions) are trust & control substitutes or complements? • What are the costs of trust? • Trust or control? • How does trust affect partner selection? • C

30. Performance effects of governance • Meta-analysis TCE studies (Geyskens et al., ‘06) • “Good” governance matters • Governance design fitting multiple dimensions • Transaction, task & relationship characteristics • Anderson & Dekker (’05): Differential responses of high & low performing transactions Cost of contracting Control problems Governance design Misalignment Ex post problems

31. Control benefits & costs • Tradeoff: risk mitigation & cost of control • Without considering governance costs, is ‘misfit’ really misfit… or e.g. a deliberate choice (gamble)? • Do more (fitting) controls improve performance? • How costly is good governance? • Which choices & tradeoffs do firms make in governance design? And how? • E.g. firm differences in contracting efficiency?

32. Learning to govern Mayer & Argyris (‘04): • Prior learning triggers future contract changes Sampson (‘05): returns of alliance experience • Learning curve; diminishing returns to scale & time • Firms with prior ties improve patenting in new alliances • A few help most, marginal incremental benefits of many • Both partner specific and general partner experience • Recent experience matters most; knowledge depreciates • Most valuable under high ambiguity & uncertainty

33. Learning to govern • How does learning to govern take place? • How do firms embed prior experiences & knowledge into new IORs? • Transfer & adaptation of governance structures(?) • Many firms adapt old structures (± 20% of IT cases) • Role of dedicated alliance management functions (Ireland et al. ‘02)?

34. Concluding remarks • Fascinating area! • Diversity of questions • Too many …. • Diversity of theoretical approaches & methods • Integration (e.g. RBV, TCE & social networks) • Case, surveys, experimental, analytical & archival • Challenging (e.g. data collection) Thank you!