EIASM New directions in Management Accounting December 14

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

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

Interfirm relationships n n 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. Ø Realize goals unattainable alone (in time) Ø Resource acquisition; scale & scope 3

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

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

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

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

Governance: Alliances vs. JVs 8

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

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

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

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

Control mechanisms n 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) ¨. . n Which Ø controls, how used & why? More fine-grained understanding of controls & management processes needed ØRecent studies in accounting (mostly case evidence) 13

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

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

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) n Functions of control mechanisms in IORs? Contracts & use of controls during IOR management ¨ Which factors influence these choices? ¨ n n n 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 16

Partner selection n Search for complementary resources (Geringer, ‘ 91) ¨ Selection n 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? 17

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

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

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

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

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

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

Trust Antecedents, forms & effects (Adler ‘ 01) n n Calculative, relational, institutional Repeated ties & 3 rd parties (networks) ¨ 1 st Ø n hand & 2 nd 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? 24

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

Partner selection, experience & governance design 26

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

Torturing ties Is trust always ‘good’? n n Misplaced trust (‘trust me, I know what I’m doing’) Ties can torture! (Krackhart, ‘ 99) ¨ n n ‘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 28

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

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

Control benefits & costs n Tradeoff: risk mitigation & cost of control ¨ Without considering governance costs, is ‘misfit’ really misfit… or e. g. a deliberate choice (gamble)? n n n 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? 31

Learning to govern Mayer & Argyris (‘ 04): n Prior learning triggers future contract changes Sampson (‘ 05): returns of alliance experience n 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 32

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

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