Control at the boundaries

Henri DekkerVU Amsterdam

EIASMNew directions in Management Accounting

December 14-16 2006

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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

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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

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

0

2,000

4,000

6,000

8,000

10,000

12,000

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Nu

mb

er

of

Co

llab

ora

tio

ns strategic alliances

joint ventures

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Sector distributionsAlliances by Industry Category

0

2000

4000

6000

8000

10000

12000

OtherServiceWholesale/RetailManufacturing

Anderson & Sedatole (2003)

Growth in service;

manufacturing declines

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Since 2000…. (Anderson & Sedatole, ‘06)

0

2,000

4,000

6,000

8,000

10,000

12,000

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

Nu

mb

er

of

Co

llab

ora

tio

ns strategic alliances

joint ventures

Decline: 9/11; SOX; economic conditions

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Emerging economies: BRIC 1986-2005

I&C: mainly manufacturingManufacturing

declines; growth in

service

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Governance: Alliances vs. JVs

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IORs types – Dutch firms ’06 (N=439)

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Number of different IORS21% has no IORs

18% is involved

in 3 types

Automatic fill function?

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Sequence of events - Gulati (‘98)

Alliance decision

Partner selection

Governance design

Dynamic evolution

Alliance performance

Partner performance

Socialnetworkinfluence

A B

C

D

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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)

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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)

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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?

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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?

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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

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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?

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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)

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Partner selection & governance

Dekker (2006 SSRN)

Control problems •Appropriation concerns •Coordination requirements •Dependence

Governance design

Partner selection

+

+

+ / - ?

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Partner selection, knowledge acquisition & governance

WP, with Van den Abbeele

Control problems •Appropriation concerns •Coordination requirements •Dependence

Governance design

Partner selection

Information acquisition

Potential & chosen

supplier(s)

Contract & controls

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Some evidenceDutch (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

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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?

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Relational governance

How are governance and selection choices affected by informal (relational) controls?

Trust !

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TrustAntecedents, 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?

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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

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Partner selection, experience& governance design

Control problems

•Appropriation concerns

•Coordination requirements

•Dependence

Governance

design

Partner

selection

Partner

experience

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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

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Torturing tiesIs 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

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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

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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

Governance design

Misalignment

Cost ofcontracting

Control problems

Ex post problems

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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?

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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

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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)?

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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!