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Interaction between control and trust
J.A.M. van der Linden 6029493
Final draft: 18 July 2013 BSc Accountancy & Control Faculty of Economics and Business Universiteit van Amsterdam
2 Abstract
Alliances are characterized by high failure rates. Risk in strategic alliances is the perception that partners don’t cooperate and behave opportunistic. Controls and trust can be used to absorb this risk. The necessary extent of trust and control depends on the level risk. Controls are mechanisms to achieve desired behaviour and trust is the perception that the partner behaves desirable. This thesis covers the relationship between control and trust. Formal controls can both have a negative and a positive effect on trust. They hinder the creation of trust by limiting the actions of partners and preventing them from demonstrating their capacity to work in the best interest of the relationship. On the other hand information asymmetry between partners is reduced by formal controls. This transparency has a positive effect on trust. Social controls build trust by creating shared values, norms and beliefs. Trust creates a platform that is needed for controls to work effectively. Also the need for controls is reduced by high levels of trust.
3 Samenvatting
Technologische ontwikkelingen, globalisering en toegenomen concurrentie verhogen de druk op organisaties tot het aangaan van samenwerkingsverbanden. Wanneer een onderneming niet over de nodige vaardigheden of middelen beschikt om een project op hun eigen kunnen te volbrengen, kan een partner worden gezocht die wel over deze vereiste capaciteiten beschikt. Een strategische alliantie is een manier om de samenwerking te bereiken.
Het percentage van allianties dat daadwerkelijk succesvol is ligt laag. Dit komt doordat samenwerking met een partner verschillende risico’s met zich meebrengt. Deze risico’s zijn dat de partner niet de vereiste vaardigheden heeft of dat de partner niet meewerkt om de alliantie te laten slagen.
Door controle mechanismes en vertrouwen te creëren kunnen deze risico’s worden verlaagd. Controle mechanismes zorgen ervoor dat partners hun gedrag af stellen zodat het belang van de alliantie wordt gediend. Vertrouwen is de perceptie dat de partner geen
oppertunistisch gedrag gaat vertonen. Gesteld kan worden dat zowel controles als vertrouwen nodig zijn om de investering in een alliantie te beschermen.
Controles en vertrouwen hebben een dynamische relatie. Zo heeft de mate van vertouwen invloed op controles. En beïvloeden controles op hun beurt vertrouwen.
Traditioneel gaat de literatuur ervan uit dat alleen sociale controles de eigenschap hebben om vertrouwen te creeren. Formele controles zouden zelfs een negatief effect op vertrouwen hebben. De resultaten uit case studies geven echter een ander beeld.
Formele controles beperken de vrijheid van handelen. Het doel van de controle kan zijn het voorschrijven van specifieke prestatie-doelen (output controle) of specifieke processen (gedragscontrole), de implicatie is dat individuen of bedrijven niet zelf kunnen beslissen wat het beste voor de alliantie is. Dit voorbehoud suggereert vaak een gebrek aan geloof in goodwill, betrouwbaarheid of deskundigheid. Deze thesis laat zien dat formele controles ook een positief effect op vertrouwen kunnen hebben. Dit doordat formele controles de informatie asymetrie weg neemt tussen partners.
Sociale controles bouwen vertrouwen door het vormen van gedeelde waarden, normen en doelen. Dit wordt bereikt door persoonlijke ontmoetingen en interacties. Tot slot kan worden gesteld dat vertrouwen nodig is om control mechanismes effectief te laten werken. Tevens heeft vertrouwen een matigende werking op formele controles. Wanneer er een hoge mate van vertrouwen is, zijn er minder controle mechanismes nodig.
4 Table of contents Abstract 2 Samenvatting 3 Table of contents 4 1. Introduction 5 2. Risk 6 3. Control 6 4. Trust 8
5. Relation between risk, control and trust 9
6. Case studies 11
7. Analyse 15
8. Conclusion 18
5 1 Introduction
Developments in technology, globalization and increased competitiveness have increased the pressure on organizations to enter into collaborations (Langfield-Smith, 2008). When a firm doesn’t have the necessary skills or resources to achieve a project on their own they can find a partner who does have these required capacities. A strategic alliance is a way to achieve collaboration.
Strategic alliances are arrangements between firms aimed at achieving the objectives of the partners (Das and Teng, 2001). Although strategic alliance can be beneficial to
collaborating firms, the failure rates of strategic alliances are high. Risk in strategic alliances is higher than a project done in-house because partners can have different objectives and can behave opportunistic (Langfield-Smith and Smith, 2003). Examples of opportunistic
behaviour are cheating, shirking, and distorting information, misleading partners, providing substandard products or services, and appropriating partners' critical resources (Das and Teng, 2001).
One way of dealing with risk is to form a contract. A contract is made to narrow the domain and severity of risk (Poppo and Zenger, 2002). Because not all contingencies can be covered in a contract, firms must protect their investment from actions from their partners by using other mechanisms.
Risk can be reduced by control systems and trust (Das and Teng, 2001). Control systems are mechanisms used to achieve desired behaviour from the partner. Trust is
important because it reduces opportunistic behaviour and is especially important in scenarios with high uncertainty and interdependency (Van der Meer-Kooistra and Vosselman, 2000).
The optimal way for a firm to protect their investment in an inter-firm relationship is to use both trust and control mechanisms. The relationship between trust and control is commonly believed to be dynamic (Vosselman & van der Meer-Kooistra, 2009). Trust influences control, and control influences trust. The research question of this thesis is: what are the interacting effects between trust and control?
This thesis starts with explaining the concepts relevant to this study. Consecutively risk, management control systems and trust will be described in the second, third and fourth paragraph. The fifth paragraph handles the mutual connected relationship between risk, trust and control. Subsequently paragraph six covers four cases regarding the relation between control systems and trust. These cases enlarge the understanding of how trust and control systems are being used. After that an analyses is given in paragraph seven. This analyse deals
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with the different interacting effects between control and trust. And lastly a conclusion is given in paragraph eight.
2 Risk
The biggest difference between an alliance and a single firm strategy is that the risk of undesirable actions of the counterparty must be kept in mind. There are two types of risks in strategic alliances: performance risk and relational risk (Das and Teng, 2001). It must be noted that this risk isn’t the ‘real’ risk of undesirable behavior but the risk that partners perceive.
Relational risk is the chance of undesirable behaviour of the partner. Behaviour is seen as undesirable when the partner doesn’t cooperate in the best interest of the alliance. Das and Teng (2001) state in the beginning of an alliance, arrangements are made in such a way that the interests of both partners are served. However when a relationship matures interests can change (Vosselman and van der Meer-Kooistra, 2009). Opportunistic behaviour arises because interest of the alliance does not match the interest of the partner. Further firms might have hidden agendas when they enter an alliance. Firms might use the alliance to acquire valuable knowledge of the partner, which can impair cooperation (Das and Teng, 2001).
Performance risk is the risk that goals aren’t achieved even though cooperation isn’t impaired. Lack of competence, changing government policies or simply bad luck are reasons why pre-set goals aren’t accomplished (Das and Teng, 2001).
3 Controls
Controls in alliances are needed to ensure that the partner acts in the benefit of the
relationship and for coordination of interdependent tasks between partners (Dekker, 2004). Firms in alliances must protect their investment from potential opportunistic behaviour of the partner by using control mechanisms (Dekker, 2004). Controls can be described as the regulation and monitoring of activities to achieve goals (Das and Teng, 2001).
Controls make it more predictable if goals are going to be achieved. By making outcomes more certain, controls create a sense of confidence (Das and Teng, 1998). Dekker (2004) distinguishes two main control functions: monitoring and coordination. Monitoring is
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used for measuring and rewarding performance. Coordination is needed because firms in inter-organizational relations have different knowledge and capabilities. Controls can reduce uncertainty by planning and information sharing.
Outcome, behavior and clan
Ouchi (1979) describes three forms of control: outcome, behaviour and clan. The type of control to use depends on the knowledge of the transformation process and on the ability to measure outputs (Ouchi, 1979).
Outcome controls involve measuring outcomes and evaluating these outcomes compared with pre-set goals. Outcome control is preferred when knowledge of the transformation process is low but the ability to measure outputs is high (Ouchi, 1979).
Behaviour control should be used when knowledge of the transformation process is high and the ability to measure outputs is low (Ouchi, 1979). It involves rules and standards, which limit individual’s actions and provide means to evaluate behaviour.
Lastly when knowledge of the transformation process is low and the outcomes are not measurable, clan control is required (Ouchi, 1979). Clan control is a social control which involves shared norms, values and beliefs. Through ceremonies and rituals the firms norms, values and beliefs become internalized (Ouchi, 1979).
Model of Ouchi (1979)
Ouchi (1979) argues that the form of control depends on the clarity which performance can be assessed and the degree of goal incongruence. He states that in situations which require cooperation people must either trust each other or closely monitor each other.
Formal and social
Controls can be formal and social. Formal and social controls are both used to encourage desirable behaviour. Formal controls achieve this by using codified rules and standards to
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measure outcome and behaviour. Social controls use organizational norms, values and cultures to achieve desirable behaviour (Das and Teng, 1998).
The difference is that formal control uses a strict evaluation of performance while social control deals with people. Formal control reduces opportunistic behaviour by setting out strict boundaries. While informal controls influences people through shared goals, values and norms.
4 Trust
Trust is operationalized in different ways. Vosselman and van der Meer-Kooistra (2009) describe trust as the willingness to accept vulnerability, even when it is known that the partner can show opportunistic behaviour. Veléz et al (2008) describe trust as an expectancy that the other party’s word can be relied on and a belief in the motives of the other party. Langfield-Smith and Smith (2003) argue that trust is a mechanism to absorb uncertainty. Das and Teng (1998) treat trust as the positive expectation of future behaviour. Tomkins (2001) describes trust as adopting a belief, without having full information to confirm that belief. Trust is described by Sako and Helper (1998) as the expectation that a trading partner will behave in a manner that is mutually beneficial way.
Trust is important in relationships characterized by uncertainty and strong interdependencies (Vosselman en Van der Meer - Kooistra 2000). In alliances there always must be a minimum level of trust because contracts cannot cover all contingencies. Trust is especially important in alliances because partners are dependent on each other’s performance and are thus vulnerable for the partners’ actions (Das and Teng, 1998).
Sako and Helper (1998) similarly say that trust becomes more important in uncertain situation because it facilitates decision making in contingency situations. Trust is believed to lessen concerns about opportunistic behaviour, better integrating the partners and reducing the need for formal contracts (Das and Teng, 2001).
Tomkins (2001) emphasizes the importance of information in alliances. Tomkins (2001) states that trust reduces the perception of uncertainty although uncertainty in reality isn’t reduced at all. He argues that trust can never remove all uncertainty about future behaviour and because trust also encompasses the freedom to break this trust.
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Competence and goodwill trust
Trust can be distinguished in competence trust and goodwill trust. Competence trust is the expectation that the other party has enough technical and management competence to achieve the objectives specified in the contract (Sako, 1992). Competence trust involves the various resources and capabilities of a firm. Examples of resources are capital, technology and market power.
Goodwill trust is the perception on the effort to make the alliance work. It is about good faith, good intentions and integrity (Sako, 1992). Positive past experience can give firms a reliable reputation which helps to build goodwill trust (Das and Teng, 2001). Goodwill trust ensures that the one party has positive expectation regarding the future
behaviour of the counterparty. Confidence is build when parties know of each other that they are trying to do the correct thing, which shows that they care about the relation (Vosselman and Van der Meer-Kooistra, 2009).
5 Relation between trust, control and risk
The necessary extent of trust and control depends on the level of risk. If there is no risk, controls and trust are obsolete. However risk always arises in alliances because firms are dependent on the actions of the partner. Trust and control are ways to absorb this behavior uncertainty (Vosselman and van der Meer-Kooistra, 2009).
Risk is positively associated with uncertainty and interdependence in inter-organizational relations. If uncertainty and interdependence are high, the level risk is also high. If risk rises, the optimal level of control and trust also rises. If risk stays the same but trust declines, control has to rise in order to absorb all the transactional hazards (Das and Teng, 2001).
Performance risk can be lowered by competence trust. If partners have trust in the ability to achieve a project this will reduce the perceived performance risk. Controls also have the ability to lower risk. Outcome controls can reduces performance risk by planning and budgeting. These controls help to reduce unplanned outcomes and provide that enough resources are available to achieve objectives. Social controls reduce performance risk through joint decision making. This way firms can show their competence, which may lead to less fear of not achieving goals (Das and Teng, 2001).
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Goodwill trust is the intention to make the relationship work and reduces relational risk. Controls which restrict the boundaries of behavior lessen the chance of opportunistic
behavior and reduce relational risk. Also establishing shared norms and values through rituals and ceremonies decrease the level of relational risk (Das and Teng, 2001).
The relational between control and trust is perceived as dynamic (Tomkins, 2001; Vosselman & Van der Meer-Kooistra, 2009). The level of trust depends on the level of control and the level of control depends on the level of trust.
Tomkins (2001) states that the relationship between trust and the information needed for control is inverse u-shaped. He argues that at the beginning of a relationship less
information for control is necessary because the level of commitment between the partners and the costs of opportunistic behaviour are lower. When the relationship matures the level of risk rises so in consequence for a successful strategic alliance both trust and information also need to rise. Once trust is build less control is needed to maintain this trust.
Inverse U-shape (Tomkins, 2001)
Tomkins (2001) states the importance of getting the optimal level of trust. Having too much trust in your partner leaves the opportunity for the partner to take advantage. If there is little trust too much money is spent on control mechanism to prevent opportunistic behaviour. He states that control is only necessary in that areas were trust is missing. He also argues that formal controls can have a negative effect on trust when high trust levels are already established.
11 6 Cases
Veléz, Sanchez and Árdavez (2008)
Veléz et al investigate the relation between controls and already established trust in a mature but evolving inter-organizational relationship. They research the relationship between manufacturer CMD and its distribution channel. The distribution channel consists of 176 small agents, who are divided by geographical territories. Although the distribution channel consists of different agents, CMD views the channel as one entity and uses one MCS over the entire channel.
CMD has used the channel successfully for 19 years and has built the MCS by
gradually introducing new elements throughout the years. Data was collected by interviewing key employees of CMD as well as 8 different agents from the distribution channel.
In 1985 CMD introduced a contract for the entire distribution channel. The contract functioned both as remuneration and a control system. CMD also established a commercial department. The role of the department was to monitor the actions of the individual agents in the distribution channel. Agents were given new contracts on their reputation and on their previous performance. Trust was created through social relations and personal interactions between the commercial department and the agents. CMD had trust in the distribution channel en the agents had trust in CMD.
In 1998 a computer system was distributed among all agents which allowed CMD to control activities of the agents and make the distribution channel more efficient. In 1999 a database was created which allowed CMD to compare individual agents and to show the results of the channel as a whole. Regular meetings were organised were CMD staff met with agents to communicate results and budgets, commercial and price policies, marketing
campaigns, and technical, legal, and logistic issues, as well as administrative matters. CMD began holding surveys to evaluate the satisfaction level among agents and it gave agents the chance to point out areas of improvement in the distribution channel. An agent evaluation system was set up to reward successful agents and to assist agents who were struggling.
Both parties perceived the development of MCSs to increase trust and the sense of partnership. CMD was able to communicate their needs to the agents and evaluate the
performance of agents. Agents perceived the MCS as a way of CMD to show commitment to the distribution channel.
12 Dekker (2004)
Dekker investigates the relation between NMA Railway Signalling (NMA), a supplier of railway safety systems, and Railinfrabeheer (RIB), a task organization of the Dutch
government responsible for the Dutch rail infrastructure. He started his research two weeks before an alliance contract was signed by both parties. Data was collected by interviews and informal discussions.
Both firms were eager to enter the alliance. RIB expected cost savings by reorganizing the supply chain. They also saw the alliance as a way to build a positive reputation which it could use in the future when entering larger scaled alliances.
The main reason for NMA was the possibility to integrate forward into the supply chain. The alliance took over task which originally were performed individually. An alliance board was created with two members of each partner to control the alliance. Informal
meetings and social interactions took place whenever contingencies arose that required coordination.
NMA had a high level of goodwill trust in RIB. NMA kept the level of formal controls to minimum because they perceived the risk of opportunistic behavior, such as information spill over (the conscious leaking of information to other suppliers), insignificant.
There was a high level of mutual dependency because of the specialized products. NMA was dependent on RIB to buy the products and RIB was dependent on NMA for its products. Although this dependency aligned the interest of the partners it wasn’t enough to cover all transactional hazards. For this purpose a financial incentive system was developed to align the part to align the partners’ interests.
Also monitoring was used to cover the concerns. Monitoring was perceived to reduce information asymmetry between the partners by overseeing the functioning and performance of the alliance. The monitoring function included regular information sharing, pre-action reviews, joint decision making and problem solving (social control) and prevented the use of resources for personal benefits.
More complex formal control mechanisms were needed when interdependence and uncertainty increased. These mechanisms consist of task planning and specification,
budgeting, progress evaluation and performance measurement. They improved coordination between the partners and aligned the objectives.
13 Langfield - Smith (2008)
Langfield – Smith investigates the interaction between trust, control and risk by researching Watersafe, a commercial arm of a local government council located in Australia, and their search for an alliance partner. Data was gathered by interviewing managers who were involved in the formation of the alliance. Managers were questioned about their initial perceptions of risk and trust and on the development of these aspects over time. After years of doing all the projects in house, Watersafe decided out a cost point of view, to outsource the upgrading of a waterwasteplant.
The alliance was established in different phases first a possible partner was selected. Then in the interim phase risk was reduced and trust established before the signing of the contract in the final phase.
Goodwill trust was an important criterion in the selection of a partner. Through interviews and workshops goodwill trust was build. Performance risk was reduced through prior work experience competence trust. An interim phase was used to further develop the initial goodwill trust reached in the formation process before entrering the formal alliance phase.
When the partner was chosen and the alliances formed, different controls were formed. Performance was measured through monitoring. Performance targets were established to evaluate performance. These can be seen as both outcome and behavior controls. Ongoing meetings and workshops gave oppertunitities for interaciton in which the risks of the project were identiefied, total cost, and it helped to solve technical challenges. Joint problem solving and activities created mutual interests and trust. Through the solving of technical design and construction challenges competence trust was established.
An alliance board was established to govern and control the alliance. Each alliance member was given a specific role, such as safety, environment, community, people and lifestyle. The alliance board and the interaction between board members reduced performance and relational risk between the partners and increased trust.
After the interim phase the detailed design phase began. All three of control were introduced in this phase. Outcome, behavior and social controls. Monthly reports of cost and non-financal key performance indicators were made to the alliance board. The board member consequently compared these data with targets, risks and opportunities. A large part of the partners’compensation depended on achieving the targets, when a target wasn’t achieved penaltys were given.
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To promote commitment to the alliance goals meetings and workshops were held. The detailed planning established accurate total cost numbers and solved technical difficulties. The cost and nonfinancial targets were established, details of the project were clear and it provided assurance that the alliance members and the Alliance Board could work together as a team through the development of goodwill trust. These processes helped to reduce
managers’ perceptions of both performance and relational risk.
Free (2008)
Free investigates a buyer-supplier relationship between a large retail chain (ConCo) and its relation with a large paper manufacturer (PulpCo). Because of complaints by two retailers about ConCo’s efficiency and service quality a Trading Director was hired. His aim was to modernize and make ConCo’s operations more effective. He did this by dividing ConCo main products in different categories and put a manager on each category. One of this category’s was paper. Because PulpCo was by far the largest paper provider for ConCo, it was a logical choice to hire PulpCo as its category supplier.
An important point was promotional allowances. These are fees paid to the retailer by the supplier to promote certain products. Meetings were organized to discuss the promotional allowance. ConCo thought the meetings were useless because they couldn’t agree on the total allowance amount. PulpCo saw the meetings as detrimental to a deep-thrust relationship. They got the feeling that the only objective for the relation from ConCo’s side was to get money from the promotions.
In the beginning of the relationship trust played an important role in the
communication between the two. During the relationship accounting methods as market controls and open communication of data among competing suppliers were introduced. These allowed the retailer to compare the financial performance of each supplier. Performance measures and controls were introduced to determine efficiency and to create more control over processes and partners. These control mechanisms were used for monitoring and as a disciplinary device instead of instead of using the tools for coordination and learning.
The control mechanisms had a negative effect on trust and even let to distrust. This distrust between the retailer and the supplier created an atmosphere were both parties were vigilant to detect untrustworthiness and opportunistic behaviour. ConCo thought that PulpCo was abusing the relation to push their dead brands on them. PulpCo thought that ConCo’s main interest was getting the lowest prices without caring about the future of the relationship.
15 7 Analyse
In this paragraph the relation between trust and control will be described. The findings in the four cases will be compared with the literature. Traditionally it is argued that only social controls can have a positive effect on building trust (Das and Teng, 1998). It is also believed that controls have a negative effect on trust when high levels of trust are already established (Tomkins, 2001). The findings of the cases are largely inconsistent with these statements.
Formal controls and trust
Das and Teng (1998) argue that behaviour and outcome controls have a detrimental effect on trust. Goodwill trust relies on the perception on the effort to make the relation work. Strict rules and objectives undermine the independence of employees. Goodwill trust is impaired because formal controls implicate that the own judgement of the partner cannot be relied on. Vosselman and Van der Meer-Kooistra (2009) argue that formal controls have the tendency to stimulate opportunistic behaviour. A negative image of the inter-organizational relation can occur when formal controls are constructed or conducted in the wrong way. Similar to Vosselman and Van der Meer-Kooistra, Free (2008) finds that when formal controls are being used in the wrong way they can harm trust. Control mechanisms were used for monitoring and as a disciplinary device instead of using the tools for coordination and learning.
Veléz et al (2009) find contradictory results in their study. They find that formal control have a positive effect on goodwill trust by objectively evaluating performance. Result controls ensured that the evaluation criteria were clear. Further the controls enabled that the evaluation system was perceived as objective and honest. Objective evaluation builds goodwill trust by creating goal congruence.
Tomkins (2001) argues that only during the early stages MCS have a positive association with trust. In the later stages, when trust has reached a higher level, the
introduction of new formal controls can cause harm to trust. Vosselman and van der Meer-Kooistra (2009) support this notion of Tomkins. They argue that formal controls have particular a negative effect when they are implemented in a situation with high established trust.
Veléz et al (2008) find that as the inter-firm relationship matures interdependency and uncertainty rise. So the increased risk needs to be absorbed. This can be done by
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implementing more complex formal controls. Veléz et al (2008) find that these controls don’t have a negative effect on trust because they are necessary for the continuation of the alliance.
Checking and monitoring of performance might lead to the perception that the firms’ competence isn’t sufficient for the job (Das and Teng, 1998). Because of the heavy monitoring of outcome a firm isn’t capable of giving up short-term targets and going for more profitable long term objects. So the firm hasn’t got the chance to show its competence because the strict rules limit his actions (Das and Teng, 1998).
Veléz et al (2009) find that formal controls have a positive effect on competence based trust. Behavior controls allow firms to gather information about the actions of the partner. This information allows firms to objectively evaluate the performance of the partner. Competence trust increases because through monitoring partners have a direct insight in each other’s capabilities. Dekker (2004) finds that formal controls, in particular goal setting, performance measurement and information sharing increased transparency between the partners. This transparency was by the partners seen as an important basis of the trust between them. Langfield - Smith (2008) also find that outcome and behavior controls improved shareability of information and helped to build goodwill and competence trust.
Social control and trust
Social control is characterized by high levels of autonomy. Freedom gives firms the
opportunity to show their capabilities. Social control has thus a positive effect on competence trust (Das and Teng, 1998). Social control has also a positive effect on the building of
goodwill trust. Because social control relies on the building of shared values and norms many interactions are needed. It is believed that these interactions give firms the opportunity to show their commitment to the alliance (Das and Teng, 1998).
Veléz et al (2008) argue that social controls (channel satisfaction surveys and meetings) improved the transferring of information between partners which improved the knowledge of each other. They find that these social controls improved goodwill trust and competence trust by communicating the objectives of the company and increased confidence in goal congruence. Langfield – Smith (2008) find similar results. Through joint decision making competence trust was established. Meetings and workshops helped to create shared norms and values which helped to establish goodwill trust.
Dekker (2004) finds that social controls have a positive effect on goodwill trust. Social control established a strong base of goodwill trust through frequent interaction during
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de start-up phase. Joint decision making and problem solving reduced opportunistic behavior and kept the objectives of the partnership aligned.
Free (2008) didn’t find that social controls such as meetings had a positive effect on trust. In his study meetings were perceived to be useless and even created a sense of distrust.
Trust and control
Vosselkamp and van der Meer – Kooistra (2009) argue that the required level of control with little trust is high and that the required level of control with high trust is low. Dekker (2004) finds that when there are high levels of goodwill trust partners are willing to act vulnerable by limiting the use of formal controls. Thus goodwill trust had a moderating effect on the extent of formal controls.
Das and Teng (2001) argue that the implementation and efficient control mechanisms rely on a certain level of trust. Social controls tend to work best with already high level of trust. Outcome and behavior are more effective with a level of trust. Without trust the motives of the controller will be questioned and it will be harder to implement them. And without trust the competence of the partner can also be questioned and hence the outcomes of the controls. This is supported by Langfield-Smith (2008) who argues that goodwill trust and competence trust enhance formal control mechanisms in strategic alliances.
Das and Teng (1998) argue that trust plays a moderating role between control mechanisms and control level. They propose that control mechanisms work more effective when there is a high level of trust. Vosselkamp and Van der Meer- Kooistra (2009) come to the same conclusion and argue that formal controls work better when there is a level of trust.
18 8 Conclusion
In this thesis the relationship between control and trust in inter-organizational relations is described. When firms enter into an alliance they make up a contract containing arrangements and objectives. Risk arises because not all contingencies can be included in the contract. This leaves firms vulnerable to the actions of the partner. Firms rely on trust and control to absorb this risk.
Controls are needed to influence behavior in such a way that it is congruent with the goals of the partners. Trust is the perception in the partner’s reliability. It is argued that the optimal way to absorb risk is to use control mechanisms and trust. The interacting effects of trust and control were found by looking into theory in the literature and by studying four case studies.
The literature is unambiguous about the effects of trust on control. It is believed that trust has a moderating effect on control. Less control is required when levels of trust are high. Trust also increases the effectiveness of controls.
Social controls create shared norms, values and beliefs through interactions and meetings. These shared norms, values and beliefs ensure that partners have the same goals. Social control has a positive effect on goodwill trust.
The findings on the effect of formal controls on trust are mixed. Formal controls tend to restrict the independence of firms. They reduce competence and goodwill trust because the restrictions can be perceived as a lack of confidence on the own judgement of the partner.
On the other hand it is believed that formal controls improve goodwill and competence trust. They increase transparency and make it clear to partners what the objectives and performance measures are. Goodwill trust is build through goal allignment. Competence trust increases because partners have a direct insight in each other’s capabilities.
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