The effect of sales performance control on innovation

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THE EFFECT OF

SALES PERFORMANCE CONTROL

ON

INNOVATION

Master Thesis Business Administration

track Entrepreneurship & Innovation

Student:

Eline van der Bij

Studentnumber:

5908426

Supervisor UvA:

Dr. W. van der Aa

Second Supervisor UvA:

Dr. G.T. Vinig

Supervisor company:

W.H.J. van Kouswijk

Date:

08-10-2014

Version :

Final

Publications and/or duplications of information in this thesis are prohibited without prior permission of the author.

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Statement of Originality

This document is written by Student Eline van der Bij who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Confidentiality Clause

This thesis contains confidential information. This work may only be made available to the first and second reviewers and authorized members of the board of examiners. Any publications and/or duplications of information in this thesis are prohibited without prior permission of the author.

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Abstract

The company investigated in this study wants to augment its innovation scores and improve the way sales is being controlled. Because of this and because sales and innovation are neglected topics in today’s literature this study has been executed. The present study aims to investigate the relationship between perceived control on sales performance and innovation and the role interactivity of these control methods plays in this relationship. This qualitative research is performed in the Dutch division of a business unit that belongs to a big technology company. An analysis of nine interviews shows that several factors that are perceived to be part of control on sales performance play a role when it comes to innovation. Motivating factors are the focus on innovation in long-term plans & meetings; the way conversations are held in meetings; the existence of a shared innovation agenda with the client and sharing experiences during meetings. Hindering factors are the push to sell; the fact that trying costs money; the focus on numbers, forecasts and revenues in the first place; the bonus system; no content discussions; innovation agenda is a tick in a box and the fact that sales performance control is time consuming. No clear evidence was found about interactivity playing a moderating role in the relationship, but out of literature and data from the interviews investigated can be concluded that when it comes to control, interactivity is of positive influence to the effectiveness of management control systems in general. The results and implications of this study bring us closer to the answer on the question whether control on sales performance is of influence on innovation. Corresponding with literature, this study does not give an unambiguous answer to this question. However, the factors that are considered to be part of control on sales performance and have influence on the degree of innovation, offer opportunities for future research.

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Acknowledgements

When I started the journey of ‘writing a thesis’, I went through some finished theses of fellow students. What stayed with me, were all these first words about ‘the difficulties they came across’, ‘how hard and challenging it was’, but ‘it is finally over’ et cetera. When people tell me something is challenging and a ‘never ending story’, I always question myself ‘how difficult can it be?’ After finishing my project (which I even do not call a thesis anymore), I come back to this. People were right. Writing a thesis has not proven to be that difficult, the whole project has. For me the most challenging was coming up with an idea. What is it really that I am interested in? A question that will be with me all my life. I had the feeling that when I would find ‘it’, writing my thesis would be the most rewarding and would give me the most satisfaction, but what was ‘it’? That it was the same as IT, is something I did not realize before finishing.

Looking back on my project, all topics I proposed cross my mind. I like everything and nothing, can be the conclusion of this personal journey. One decision I made in the beginning of the journey is that I wanted to do something that matters. I did not only want to write this thesis for myself, I wanted to give other people something they could think about, something interesting. The decision to apply for an internship was one of the best I made last year. Not only because it gave my thesis project visibility, content and meaning, also because this internship taught me more about myself and my future.

I want to thank the IT-company that gaveme the opportunity to do a graduate internship there. Not only did I have access to all information available about this company, I also got access to the people. People who are open to everyone, people who want to help whenever and wherever they can and people who are committed to what they do. Inspiring people. I want to thank everyone who made time available for me, among others all interviewees and my fellow interns who stood beside me. Especially I want to thank the people who were intensively involved in my project and internship, made me feel welcome and have been critical for the better: Henry van Kouswijk, Brunia van Brakel, Mark Kamphuis, Monique van Dalen & Menno van der Horst.

Moreover, I want to thank the people who gave me the feeling I am not stupid and who kept believing in my ideas. Besides that, they always support me to do what I think is best: Gea van der Tuin & Wim van der Bij.

Finally, I want to thank my supervisor of the University of Amsterdam: Wietze van der Aa. A supervisor sounds like someone who stands above you and marks things red whenever possible. However, you stood beside me and supported me to make this project my project and to do what I found interesting. Your positive way of advising and supervising is something I recon special in present world. Our conversations have been interesting and inspiring to me and your triggering questions gave me a feeling I never felt before during my studies: I did something special and I needed to do the best I could.

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Content

1 INTRODUCTION

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2 BACKGROUND

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3 LITERATURE REVIEW

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4 CONCEPTUAL MODEL

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5 METHODOLOGY

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6 FINDINGS

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7 DISCUSSION

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BIBLIOGRAPHY

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APPENDIX I - INTERVIEW PROTOCOL

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APPENDIX II - INTERVIEW ANALYSIS TEMPLATE

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1 Introduction

Sales is at the heart of many organizations, whether on selling cars or selling solutions. In commercial organizations this focus on sales seems obvious. Sales performance leads to profit and is the basis of an organization’s result and success. Rapp, Bachrach, Panagopoulos, & Ogilvie (2014) explain salespeople’s main goal is to discover expressed and unexpressed needs of customers. This fits with modern innovation literature, claiming that innovation usually starts with the customer and discovering their latent needs (Perks, Cooper & Jones, 2004). However, where innovation seems to be a long-term issue, sales cannot come soon enough. This thesis deals with the tension between sales and innovation, with a focus on the way sales performance is being controlled.

Since innovation is regarded a concept, researchers have been looking for ways to deal with it. Where innovation used to be a manner to distinguish oneself, nowadays innovation is a necessity and sometimes even a strategy to survive.

The question is how to enable innovation in a business unit of a big organization that is stock market listed and based in the US? And, more specifically, in a business unit that is responsible for selling and delivering IT-solutions to clients in the Netherlands? In the United States innovations are created and new products come alive, but this does not necessarily mean the Dutch division is ignoring innovations. What stimulates innovation and what restricts it? And does a tension exist between the pressure on sales and the degree of innovation? Do sales targets and compensations plans focus on the short term or do these elements foster to sell something new – innovations – to existing clients?

Literature on management control and innovation often investigates the extent to which a measurement system is diagnostic or interactive. Interactivity in control seems to be an important issue. However, is interactivity important with regard to sales and innovation in the context of this research?

An additional subject of study in this research is perception. If one wants to change something, the only way to do this might be through the perception of the people who are central in this change. How control on sales performance is perceived is also addressed in this study.

The present thesis is focused on the following research question:

What is the relationship between perceived Control on Sales Performance and Innovation and is this relationship influenced by the interactivity of these control methods?

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It seems obvious that there is a tension between sales and innovation. The question is why it is ignored in today’s literature: because sales is a practice and not a science or because sales is perceived to be just a number? This thesis gives answers and fosters to start questioning too.

1.1 Contribution to practice

This research is performed in the Dutch division of a business unit that belongs to a big technology company. Due to confidentiality, the name of this company and business unit is excluded of this report. The business unit of this technology company, a service organization, in the Netherlands is in the middle of a changing process that includes a change in governance structure. Innovation, loyalty & growth are focus points in this program. For this reason an extended sales dashboard is being developed that maps the sales performance in a clearer and more efficient way. This dashboard is focused mainly on sales performance, but loyalty and innovation are seen as important factors needing attention too. Currently, innovation scores (based on customer surveys and reports from external research agencies) are considered too low in comparison to competition. For this reason present research focuses on innovation in combination with sales performance. Whether it motivates or reduces innovation, reality is that sales numbers and control systems are used to indicate our performance and thus it is realistic to investigate the way sales performance is controlled and to link the results of it to innovation. Since one of the goals is to augment their innovation score, it is relevant to link their approach to sales performance control to innovation.

1.2 Contribution to literature

In the current literature the vast majority of research has been done in the area of new product development and management control systems, while only a few deal with innovation. The outcomes of these studies are relevant for this service division of a technological company, where no new products are being developed. Besides this, the added value of present thesis is a result of differences with existing literature. Mouritsen et al. (2009) do not investigate whether the measurements reduce or augment innovative performance. Bisbe & Otley (2004) restrict their study to product innovation. Davila (2000) advises that future research is needed to understand when planning is appropriate and when too much detail can hinder performance.

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De Jong, Verbeke & Nijssen (2014, p. 645) admit the fact that sales have been an ignored issue when it comes to innovation: So far, little is known about how a company’s sales force can leverage

servitization and customization in the context of NPD. Research has ignored what knowledge and skills salespersons require to effectively match a company’s technical capabilities to specific customer needs and, as such, help develop superiorly customized new product and service solutions. This is thus another interesting avenue for future research.’

Targets, compensation and bonuses are inexplicitly linked with sales. Wotruba & Rochford (1996) analyze the impact of compensation in stimulating new product sales. Although this is only about products, they find a significant difference between firms that changed their compensation plans and firms who did not. This is an interesting factor to consider in the current context.

Although this research is an important contribution to literature, the most important contribution is to practice, especially for the company where this research is performed. Because the organization is working on the way it controls its sales performance and another goal is to augment innovation scores, it seems to be valuable to link these variables.

1.3 Outline of Thesis

This thesis starts with describing the background of the research in Chapter 2. After this literature about sales measurement methods and innovation are investigated in chapter 3. Chapter 4 gives an overview of the conceptual model used in current research. The methodology section explains how this research is conducted and data is analyzed (chapter 5). After this the findings section (chapter 6) will indicate the results of the research conducted and finally discussions and conclusions are presented in chapter 7. Managerial Implications, limitations and direction for future research can be found in chapter 7 too.

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2 Background

2.1 Company Information

This research is conducted at one of the biggest IT-company’s in the world, founded in 1939 in the United States of America. This company is stock market listed and has 300.000 employees worldwide and the whole organization made a net revenue of $112.3 billion in fiscal year 2013. Current study is done in a subsidiary based in the Netherlands (circa 2.500 Employees). The organization consists of five business units. The scope of this research is a business unit that is responsible for the sales of end-to-end IT-solutions to its customers. Due to confidential reasons the company’s and the business unit’s name will be excluded. When needed, the company is termed ‘company X’. The business unit will be called ‘the service organization’ (SO) for the purpose of present thesis. The service organization covers around $300M revenue a year. The customer base of SO exists of enterprises in the Netherlands.

2.2 Service Organization’s Structure: Account Divisions

The business unit SO in the Netherlands consists of several accounts. Account Executives (AE’s) are in the lead of these accounts. There are dedicated accounts, where the AE is responsible for one company that is a big client that has been with company X for more than 3 years. Besides the dedicated accounts, there are account grouped in sectors: The Public Sector, The Finance Sector and the Industry Sector. Finally there are some ‘Business Development’ Accounts, these are responsible to generate new business at other than existing clients.

Current study focuses on the existing accounts of the service organization, this means all customers exist for more than 3 years for this company. This decision is made because of the possibility to compare more years than only one and compare more deals to existing clients than only one deal.

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2.3 The sales process

A sales process in company X consists of several stages. All actions with regard to an offering are tracked in a CRM-system. These opportunities go through a couple of stages:

Stage 1: Understand Customer

This phase is at the starting point of an offering. This stage is a general introduction stage, the first contact with a customer. The stage is described as ‘identify and acknowledge a customer’s business need for the purpose of identifying a potential opportunity’.

Stage 2: Validate Opportunity

Stage two includes validating the fit of the potential solution with the customer’s business needs and begin to influence the business initiative to our advantage.

Stage 3: Qualify the Opportunity

After the validation of the opportunity in stage 2, stage 3 is meant to make a pursue decision. In this stage it is decided to pursue or not pursue the offering based on the understanding of all known decision criteria of our customer and ourselves.

Stage 4A & 4B: Develop & Propose Solution

In stage 4A a proposed solution is developed with the customer to address their business need. When an opportunity is in stage 4B, the final solution to the customer is presented. This solution addresses the business needs of the customer.

Stage 5: Negotiate & Close

This stage is gone through to attain final agreement on the acquisition and delivery of the solution Stage 6: Won, Deploy & Expand

When an opportunity is won (so the deal is closed) deployment of multi-date shipments needs to be made. After this customer satisfaction with the delivered solution needs to be ensured. Finally identifying any incremental opportunities can be the finishing task, and with new opportunities the sales cycle starts all over again.

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When an opportunity is lost, this means the proposition is not accepted by the customer. When an opportunity is ‘not Pursued’ this means company X made the choice to not pursue the opportunity in stage 3. The ‘error’ phase is used when an error of the sales system is revealed, for instance when an opportunity has a double entry in the CRM-system.

Opportunity Type in the investigated business unit

 Upsell: new service to existing client. SO also calls this ‘Add on’ and uses this Opportunity type when company X sells new services to an existing client, or sells existing services to an existing client in a new territory.

 Run Rate: augment current contract with addition of new services. SO uses this opportunity type when sales occur as the Client consumes/ uses the product/service on an existing contract.

 New Business: new SO customer with new contract. SO also calls this ‘New Logo’ and uses this Opportunity Type in the case where an existing client has generated less than $1M SO business within the previous fiscal year, or the client has not previously contracted with SO.

 Renewal: renewal of current contract. SO uses this Opportunity Type for non-competitive renewals, extensions and renegotiations, most often within existing scope.

 Defend: A competitive renewal. SO sometimes calls this a “re-compete’ and uses this opportunity type for competitive renewals, under a new agreement and new terms.

2.4 Control on Sales Performance

Company x is a commercial organization that is stock market listed. The focus of the subsidiary in the Netherlands is on sales and delivery of the services, employees are pushed to deliver to the client. A sales process exists of different stages (paragraph 2.3) and all opportunities are labeled by type (run rate, upsell, defend, new business, renewal). There are different ways control on sales performance is being executed.

The fiscal year starts at the first of November and ends at the 31st of October. Control on sales performance consists of several steps and actions from the management team to the accounts of the service organization. These controls are executed on a yearly basis, monthly basis and bi-weekly basis. Besides several meetings, employees have a target and a variable bonus can be part of their salary too.

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The following control mechanisms are included in the governance structure of the Service Organization: 1. ABP: Account Business Planning (yearly, progress regularly reviewed in ABR)

The goal is to create a tactical account plan in order to achieve account and country year objectives on growth, innovation and customer satisfaction. It includes account strategy, customer overview, customer challenges, relationship matrix, Business Value Framework, Multilevel call plan, innovation roadmap. Audience is the core management team and Account team.

2. AFP: Account Financial Plan (yearly, progress regularly reviewed in ABR)

The goal of this meeting is to create a financial year plan in order to determine yearly budget, targets on additional sales. Audience is the country/industry lead, finance, business operations, AE & account finance.

3. ABR: Account Business Review (monthly)

This is a strict review where accounts are challenged on progress of the account against year plan on operational Excellence, the financial plan, operationalisation of ABP, forecasting and sales targets. Audience: country/industry lead, finance, business operations, AE, account finance, delivery.

4. AE Pipeline Development (monthly)

The aim of this meeting is knowledge sharing and demand creation to share best practices, discuss challenges and opportunities to grow the business. This meeting is organized on industry level.

Audience: country/industry lead, business development, Sales operations & AE. 5. Funnel Calls (biweekly)

This is a status meeting on the sales pipeline of the accounts and the progress on a detailed level. What support is needed to convert the account pipeline to achieve targets.

Audience; Sales operations, AE. 6. 1:1 (biweekly)

Direct manager and Account executive discuss progress and challenges on the account towards the goals and targets. Audience: AE-direct manager.

7. Reward System

Account executives receive an AE performance plan in which a matrix is made on targets and potential rewards when targets are met.

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2.5 Innovation – Status Quo

The business unit of this technology company, a service organization, in the Netherlands is in the middle of a changing process that includes a change in governance structure. Innovation, loyalty & growth are focus points in this program. On innovation, the worldwide approach is explained by the following quote:

‘It’s not about what company X has done or developed. It’s about what our innovations can do for you— your ability to win in the marketplace; improve service to your customers, constituents and colleagues; and thrive in the shift to a New Style of IT. In other words, not just technology. And not innovation for innovation’s sake. But rather, innovative ways technology can be delivered and consumed to help you reach your goals and stay a step ahead in this new, business-led, flexible, collaborative IT environment. Just as we’ve done through technology changes in the past, company X will listen to your concerns and collaborate with you on purposeful innovation. And we won’t stop until we’ve achieved the outcomes that matter most to you.’

What is seen at the service organization, is that innovation is scoped to the perspective of the client. This company can develop loads of inventions in the USA, but what matters is how innovations can help a client to reach their goals and improve this process. At this service organization this is what matters the most, since this business unit offers end-to-end services to their clients. For current thesis this is the basis of the definition of innovation: an innovation has to be something new to the client.

2.5.2 Newness of the offering

Since current thesis reviews the case of company X, we focus on innovation as something new to an existing client. So even if the offering to the client includes something this company has done for instance for 20 years, when this is a new feature to the client, it is marked as innovation. To record these ‘innovative sales’ company X marks the offerings with the opportunity type ‘Upsell’ in their sales measurement system. Upsell is only applicable to existing clients. Offerings to new clients are labeled as ‘new business. This category will be investigated ‘manually’ and since new logo is approached as a separate ‘account’ besides the ‘existing client accounts’, with this research we approach them as different categories and focus on the ‘upsell’ opportunity type in existing accounts, so new offerings to existing clients.

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Next to this newness to the client, another thing SO does is executing a survey to their customers: the Voc (Voice of the Customer). In this survey clients can give their opinion about the service and this includes indicating a degree of innovativeness. The following is asked to an existing customer:

‘The extent to which this business unit provides innovation is…. ‘(Choice: Excellent, Good, Average, Fair/Mediocre, Poor, Not Applicable, Not important). After this question the customer can explain the judgment. An important note here is that an ‘average’ score is interpreted as ‘below expectation’ and this has to be made clear to the respondent on forehand. These scores will be explored too.

2.5.4 Relevance

Innovation is perceived as a relevant issue. Selling innovations to the client and how innovative the client perceives the service of SO, is monitored. Innovative products are not the responsibility of this business unit, this takes place in the United States. This business unit’s main ability and opportunity to create innovations seems to be offering new combinations in service innovation. Since SO is responsible to sell and deliver services to other companies, employees in this unit play a key role with regard to innovation. In the definition of innovation the word purposeful is mentioned. To make innovations purposeful, people in the business unit investigated have to know what drives their customer. This is the basis of sales too. This is the main reason why innovation and sales seem to be interlinked in this business unit. However the approach of the company worldwide and this specific business unit does not necessarily seem to fit the connection between innovation and sales. The purpose and relevance of present research is to gain more insight in the relationship between sales and innovation.

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1) Tension between sales control and innovation

2) Literature about management control in general & innovation

•LOC framework (un)revised •MCS literature

•Interactivity

3) Relationship Punishment/Rewards & NPD in innovation literature

4) Control on Sales Performance => Degree of Innovation

•role of interactivity •perception

Figure 1 Order of reviewing of literature streams

3 Literature Review

Less than expected was found in existing literature about the way sales is controlled in an organization with relation to innovation. This is the reason that articles about control in general with a link to innovation are investigated too. The levers of control framework (Simons, 1995) and Management Control Systems (MCS) are well known concepts in accounting literature. So this stream of literature is investigated first. One part of the levers of control framework is rewards/punishments, here the link with sales is clear. However, only literature could be found about this factor in relationship with new product development. Although this is not the way innovation is defined on behalf of present study, the use of both streams of literature (so control measurements in accounting literature and sales management in innovation literature) leads to our conceptual model. This model will be explained in chapter 4. Figure 1 shows the visualization of the order and way of thinking in current literature review.

To make this literature review most clarifying, the first paragraph investigates innovation and the second paragraph elaborates on all literature about performance control measures and innovation, with the link to sales where applicable. Finally this chapter ends with a short summary of the main literature and conclusions drawn from it. To show the articles that laid the foundation for present research, the main articles are presented in a table together in this third paragraph.

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3.1 Innovation

Existing literature about innovation gives a lot of different definitions of this concept. One challenge of doing research in this area is the fact that the use of various definitions leads to comparisons of the same subject in the context of another definition. A lack of common definitions and measures leads to inconsistencies in research (Johannessen, Olsen, & Lumpkin, 2001). This paragraph starts with explaining the views of existing literature at innovation in short. After that, the definition of innovation used in present research is explained.

3.1.1 Innovation in existing literature

Schumpeter (1934) introduced the term innovation as follows: ‘An innovation process is the development and implementation of a new or improved product, service technology, work process or market condition, in the intention to gain competitive advantage’. In business literature Schumpeter is broadly cited and his definition is widely accepted and build upon.

Crossan & Apaydin (2010, p. 1155) offer an overview of a selection of the literature about innovation from 1981 – 2008. They define innovation as: ‘the production or adoption, assimilation and exploitation of a ‘ value-added novelty’ in economic and social spheres, renewal and enlargement of products, services and markets, developments of new methods of production and the establishment of new management systems. It is both a process and an outcome (p. 1155).’

The focus of their literature review of the literature is on organizational innovation, which includes firm, group and individual levels of analysis. Existing research has some different levels of analysis: environment, organization and individual & group level (Crossan & Apaydin, 2010, p.1182). In current research the focus is on the situation in one business unit, so innovation to the client is analyzed here at an organizational (Business Unit) level.

Damanpour & Gopalakrishnan (as cited in Bowen, Rostami, & Steel, 2010) define innovation as the adaptation of an idea or behavior pertaining to a product, service, system, policy or program that is new to the adopting organization. In this research the adopting organization can be seen as the client. 3.1.2 Defining Innovation in the context of present research

Johannessen et al. (2001) mention a dichotomy when it comes to the definition(s) of innovation. They state that when investigating innovation, most distinctions in innovation are unnecessary and lead to fragmentation of the concept innovation. When it comes to research, Johannessen et al. (2001, p.27)

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state that innovation at an organizational level should be defined and measured as a single construct, distinguished only by the newness of the innovation. Within this view, they explain that it is important to mention what is new, how new it is and to whom it is new. Hence, for present research it seems important to ensure that the definition that is used, is not fragmented.

Reviewing all definitions of innovation existing and with regard to the investigated organization’s definition of innovation, current thesis uses the following definition of innovation:

‘Innovation is an offering pertaining to a product, service, system or program that is sold to and new to a client’. The clients investigated have been with the company researched for at least three years.

This definition is chosen because analysis is most valuable when it fits with the way the term innovation is used in the investigated company. To investigate this term the best, not only innovation as perceived by the investigated company, also innovation as perceived by the client is reviewed.

3.2 Control on Sales Performance & Innovation

According to Neely, Gregory & Platts (1995) a performance measurement system can be defined as the set of metrics used to quantify both the efficiency and effectiveness of actions. In context of current research these actions would be with regard to sales performance. Neely et al. (1995) explain that performance measurement systems can support organizations to be more effective and efficient than their competitors and this leads to higher customer satisfaction.

Traditionally performance measures were based on only accounting numbers. Davila (2000) mentions the need of a broader definition of management control systems. It is not only about financial measures, but Davila (2000) states that management control systems should go beyond them and also include non-financial measures. He explains that project managers rely more on non-financial measures than they do on financial ones. Neely et al. (2000) show that more authors argue that performance measurement systems should focus on a set of multiple performance measures, not only financial ones.

Simons (1990) defines management control systems as formalized procedures and systems that use information to maintain or alter patterns in organizational activity. He indicates that management control systems are not only important for strategy implementation, but also for strategy formation (p.

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128). According to Simons (1990) these systems include Strategic Planning Review, Financial Goals, Budget preparation and Reviews, Program reviews and Evaluation and reward.

Mouritsen et al. (2009) state that innovation is not developed merely because of good innovative ideas, innovation has to pass the test of management accounting calculations before it can be heard. In one of the cases empirically investigated, Mouritsen et al. (2009, p. 741) find: ‘When sales variance is unfavorable, attention is directed to finalize orders rather than to produce leads. (…) Sales performance created the tension between customization and closing orders.’ The focus on closing orders is present in a commercial organization, but what does this mean for innovation to the client? In present study, the following definition (based on Simons, 1990) of control on sales performance is used:

‘Sales performance control systems are financial and non-financial procedures and systems that use information to maintain or alter patterns in organizational activity with regard to sales actions.’ One consideration is that Simons’ research (1990) is on management control systems and not only on sales, although control on sales performance is part of management control systems in general. Because his framework is widely accepted and broadly used, and the focus in present thesis is on sales, the decision is made to confine the definition of Simons (1990) with regard to sales.

3.2.2 Dichotomy about the relationship between Performance Control Measures and Innovation A dichotomy exists about the way accounting and control research looks at innovation (Mouritsen, Hansen, & Hansen, 2009). Some literature sees management control measures as obstacles to innovation and factors reducing creativity and thus incapable of supporting innovation.

Researchers who see performance control measures as obstacles to innovation have different reasons for that. Damanpour (1991) explains that in a service context standardization of work processes would have an adverse effect on innovation as it constrains the producer-client relationship. He thinks managerial control should be practiced by direct supervision. Dougherty & Hardy (1996, p. 1124) indicate that large, mature organizations often privilege existing businesses over new products, avoid uncertainty in favor of the tried and true, and emphasize control over flexibility and creativity. Creativity is a term perceived as important when it comes to innovation. Amabile (1998, as cited in Davila, 2000, p. 387) states that management control systems, by imposing rules and constraining behavior, reduce the level of creativity required from product development and, thus, negatively affect performance. Quinn (1985) mentions that reward and control systems in most big companies are designed to minimize

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surprises, while innovation is full of surprises. Verona (1999) admits the different perspectives of new product development and sales. He states that new product development needs deep and broad knowledge of a firm’s capabilities and emphatic design to discover latent needs, while sales need a more routine approach.

However, other research proposes that management control systems can enable innovation, but too much emphasis on formal systems limits it (Davila, 2000). Davila explains the role of management control systems in new product development (NPD) and investigates project managers’ performance in a NPD-process. With his empirical research in the medical devices industry, Davila tries to answer whether these management control systems hinder product development performance. He explains that this relationship depends on the fact whether companies use management control systems in an optimal way or not. He hypothesizes that the relationship between MCS and project performance will be positive if projects benefit from more structured systems. On the other hand, if systems are too structured and stifle the ability of the development team to respond to demands particular to the project, then the relationship will be negative (Davila, 2000, p. 394).

Davila makes a distinction between types of information as well and according to his findings, he argues that cost and design information has a positive effect upon performance. In contrast, time information hinders performance, supporting the argument that too much emphasis on formal systems limits innovation (Davila, 2000, p. 404). One of the limitations of his study is that it has only been tested in one industry. However, the literature reviewed by Davila, gives a valuable foundation for present study, since he among others made clear that within this area of research the context is very important. On the one hand he finds evidence for the fact that management control systems can hinder performance in an NPD process, but he explains that most of the times friction exists between these systems en project performance too. Cooper & Slagmulder (2004) show that the integration of different cost control systems can have a positive impact on innovation. Dunk (2011) show that the more budgets are used as a planning instrument rather than as a control instrument, the greater the positive effect of product innovation performance on organizational performance.

Considering these different research outcomes, necessary to add is that most research about this topic focuses on product innovation or product development, and not (as is the case in present research) on innovation to the client in a service delivery organization, except Damanpour (1991). However, the dichotomy exists and it would be interesting to investigate in this type of organization too.

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About control & innovation Miller & Friesen (1982, as cited by Simons, 1990, p. 131) found that control was positively correlated with innovation for conservative firms and negatively correlated with innovation for entrepreneurial firms. This is explained by the fact that conservative firms use formal control systems to signal new opportunities, but that entrepreneurial firms’ control systems flag innovative excess and result in less innovation. Present study investigates a mature IT-firm that is doing business since 1939. This can be an explanation of a positive relationship between formal control systems and innovation, but it depends on how the control systems are used.

3.2.3 Levers of Control Framework

Simons’ (1995) Levers of Control Framework (LOC) has been widely accepted as a framework for control and is also used frequently in research about management control systems (MCS) and innovation (Davila, 2000; Bisbe & Otley, 2004; Dunk, 2011; Bisbe & Malagueño, 2009). This paragraph explains Simons’ (1990) framework and recent revisions made by Tessier & Otley (2012). These revisions are explained because the role of interactivity is being discussed by Tessier & Otley, a factor broadly mentioned in various articles and investigated in present study too. Simons describes four levers of control: Belief Systems, Boundary Systems, Interactive Control and Diagnostic Control. Belief systems are used to inspire and direct the search for new opportunities. Boundary systems are used to set limits on opportunity-seeking and behavior. Diagnostic control systems are used to motivate, monitor and reward achievement of specified goals. Interactive control systems are used to stimulate organizational learning and the emergence of new ideas and strategies. Simons (1995) see these four levers as creators of opposing forces that lead to business strategy together. LOC theory states that the joint use and integration of four levers of control create a dynamic tension between different styles for use of formal management accounting and control systems (Bisbe & Malagueño, 2009) Figure 2 shows the framework of Simons (1995).

21 Figure 2 Levers of Control Framework

(source: Simons, 1995, p. 7)

Tessier & Otley revised the levers of control framework in 2012, adding items recently discussed in accounting literature. Figure 3 shows their revised framework, described by Tessier & Otley (2012, p. 172) as a framework in which components are better defined and more tightly integrated, and therefore more useful for holistic empirical research on control packages. There are remarkable changes in comparison to Simons’ original levers of control framework that might be interesting for current research. Meaningful for this thesis is that Tessier & Otley (2012) discuss the ambiguity between dual role of controls and perception of controls. They define the two concepts as follows (p. 175): ‘Managerial intentions (e.g.: enabling/ constraining) refers to what managers are trying to achieve by implementing a control and is a design attribute of the MCS. Employee perceptions, however, refers to employees’ interpretation of what the control is for and, therefore, is not a design attribute of the MCS.’ To overcome the addressed issues the revised framework of Tessier & Otley (2012) has three adaptations in this area:

1. The revised framework distinguishes between managerial intentions and employee perceptions. 2. The revised framework accounts for the presentation of controls

3. The revised framework uses the positive and negative labels to describe employee attitudes towards control and acknowledges the fact that these attitudes can be neutral.

Current research does not include an investigation about how the way of control might need adaptations. This thesis investigates the step after this: how the means of control are perceived by the people being controlled. However taking into account that employee attitudes towards control can be

Belief Systems: to inspire & direct the

search for new opportunities

Boundary Systems: used to set limits

on opportunity seeking and behavior

Interactive Control systems: used to

stimulate organizational learning and the emergence of new ideas and strategies

Diagnostic control systems: used to

motivate, monitor and reward achievement of specified goals.

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neutral and admitting the importance of presentation of control, current research focuses with regard to control on one aspect that is highlighted by Tessier & Otley (2012): employee’s perception of control.

Because the situation in one firm is investigated in this research, the way control is presented inside different accounts in one business unit is not expected to be very different. So the focus here is on the managerial intentions of sales performance control and especially how employees perceive this. Of course, because one business unit is investigated, managerial intentions will not differ either, but how this is perceived by employees can be different. This is why this aspect is taken into account too. Next paragraphs will elaborate more on these topics.

3.2.3.1 Managerial Intentions

When using control systems, one needs to manage the tension between performance and compliance (Tessier & Otley, 2012). This tension can be managed in different ways. The layer with ‘managerial intentions’ show the factors that have influence on the way performance is controlled. These managerial intentions will be explained in current paragraph.

23 3.2.3.2 Diagnostic/Interactive intentions

The framework of Tessier & Otley (2012) implies a change of the concepts interactive and diagnostic control systems. While Simons (1995) approached diagnostic control system and interactive control systems as systems in their own right, Tessier & Otley consider diagnostic and interactive controls as a description of how control systems are used.

Based on Bisbe & Otley’s (2004, p. 717) definition, interactivity is defined with regard to present research as the degree to which within the control systems mentioned provide continual exchange between top managers and lower level of management as well as personal attention of managers.

Bisbe & Otley (2004) investigate the role of interactive control systems with regard to innovation. They conclude that the more interactive the use of MCS (management control systems) by top managers, the greater the effect of product innovation on performance. They make the distinction between high innovating and low innovating firms. For low innovating firms an interactive use of control systems may favor innovation, while for high innovating firms an interactive use of control systems appear to reduce innovations through the filtering out of initiatives that results from the sharing and exposure of ideas. As management control systems Bisbe & Otley (2004) selected budget systems, balanced scorecards and project management systems. In current research there seems to be no additional value in deciding whether we are investigating a low innovating firm or a high innovating firm. The reason for this is that most studies considering the role of interactive control systems and the relationship with innovation base innovation on product innovation and mostly on R&D spending and obtained patents. Because a service department of a technology firm is investigated, innovations can be product-based, but also different combinations of products combining in an innovative service (corresponding to the definition used in present research). Nevertheless, interactivity seems an interesting and important factor to investigate, because it says a lot about the way control systems are executed.

Spitzer (2007) explains that the technical aspects of measurement are important, but they are only one part of an effective system of performance measurement. This means that the numbers in performance measurement need to be right, but measurement is nowhere when these numbers are not used in an efficient and interactive way. Interactivity when using measurement systems is a social process. True transformational performance measurement requires extensive social interactivity (Spitzer, 2007, p. 103). Interactive dialogues need to be present in every stop of performance

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measurement. ‘Most communication about measurement, when it happens, occurs within a particular function, like sales or manufacturing. The failure to appropriately socialize measurement across the organizational continues to reinforce the silo mentality. Embracing interactivity outside of our own roles and functions – about anything, but especially about measurement – is an ‘unnatural act’ in most organizations.’

The perspective of Spitzer (2007) corresponds to the adaptations Bisbe & Otley (2012) made in the levers of control framework. Spitzer (2007) argues that there is often a focus on one particular type of tool or technique (like Business Performance Management, Customer Relationship Management, Scorecards, Dashboards) that reflects the biases of those who are leading the effort. And, unfortunately, one of the most difficult things to do in an organization is to challenge long-standing assumptions (Spitzer, 2007, p.119): ‘if people understand what the numbers mean and how they relate to each other,

then measurement is no longer a mystery. It is not a matter of choosing between technology and people; it is a matter of using each appropriately.’

Bisbe & Malagueño (2009) aim to contribute to the emerging LOC and innovation literature by providing insights on the choice made by senior managers in selecting which individual control systems are selected for interactive use, as well as on the impact of this choice on innovation outcomes. They conclude among others that the choice of individual management accounting and control systems selected for interactive use is associated with a firm’s innovation management mode (which could be an intuitive, systematic or strategic mode). While current study does not focus on innovation management mode, Bisbe & Malagueño (2009) show us that interactivity plays a role with regard to management control systems and that interactivity is a mode of using a control system. The operating principles, routines and practices they take into account are: Funding, Resource allocation, Targeting, Priority Setting, Measuring Results and evaluating progress. In present research, the main focus is on sales performance control and targeting and measuring results are taken into account.

Davila (2000) also considers interactivity, since he distinguished between six types of information and especially measures these types of information through three characteristics. The first one is level of detail of information reported. Second is the frequency of information updating, which can be linked to interactivity. The third one was usage pattern of information, which questions whether information was discussed with constant interactions.

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Simons (1990) explains that top managers must decide which aspects of management control systems to use interactively and which aspects to program. Interactivity exists when business managers use planning and control procedures to actively monitor and intervene in ongoing decision activities of subordinates.

Requirements for interactivity in measurement systems are (Spitzer, 2007): frequent interactivity, effective dialogue, measurement frameworks being continually reviewed and improved, collaborative learning and appropriate use of technology. Bisbe & Otley (2004) admit the importance of interactivity when talking about innovation. Simons (1990) and Spitzer (2007) show the value of it in performance measurement systems too. This is why this factor is included in current research.

3.2.3.3 Enabling/Constraining

Tessier & Otley (2012) use the labels enabling and constraining to describe the dual role of control. An enabling way of control has the role to promote creativity, while a constraining role has the function to ensure predictability. According to Tessier & Otley, in some research the dual role of control is confused with the concept of quality of control. They state that is important to make the distinction between the role and the quality concept, and with their framework Tessier & Otley (2012) exclude the quality of control (good or bad). They mention Adler & Borys (as cited in Tessier & Otley, 2012, p. 174) as an example for confusing the role of a control mechanism with quality of the mechanism, where coercive controls are described as ‘bad’ and enabling controls are described as ‘bad’. Tessier & Otley (2012, p. 174) see both roles of enabling and constraining as desirable.

Adler & Borys (1996) focus on the degree and type of formalization in workflow processes. In their research two types of bureaucracy are distinguished: enabling and coercive. Enabling is the positive view of the human outcomes of bureaucracy, it provides the needed guidance and clarifies responsibilities. It makes employees feel and be more effective (Adler & Borys, 1996, p. 61). Coercive is the negative view of human outcomes of bureaucracy, it hinders creativity and innovation, stimulates dissatisfaction and it demotivates employees (Adler & Borys, 1996).

Current research follows the thoughts of Tessier & Otley (2012) in the fact that it is important to take notice of how control mechanisms are used and to what extent they are perceived as either enabling or constraining.

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3.2.3.4 Rewards/Punishments as a consequence of control systems

This factor is about the question what the consequences will be of achievement or non-achievement of performance and compliance requirements (Tessier & Otley, 2012). With regard to sales, this might be found when investigating the target setting and bonus system in an organization.

Wotruba and Rochford (1995, as cited by Beuk, Malter, Spanjol, & Cocco, 2014, p.651) found that 27% of firms make some adjustment in their sales force’s compensation mix to accommodate new product sales. The question remains what the influence is of these adjustments. Rochford & Wotruba (1996) compare firms in how successful they are in achieving their new product objectives and what role specific sales management programs and tactics play. They find that firms that were more successful in achieving their new product objectives accompanied their new product launches with significantly more changes in sales force quotas and compensation than did firms whose achievement of new product objectives was less successful (Rochford & Wotruba, 1996). They describe compensations plans as another direct way of getting sales force attention. Compensation changes, particularly those involving commissions or bonuses, produce signals to salespeople about how to shift their efforts and modify their results to earn their pay in line with the new reward package (Rochford & Wotruba, 1996, p. 268). Rochford & Wotruba implicate that these changes can only be valuable and effective when among others sales managers understand the firm’s objectives for the new product (Rochford & Wotruba, 1996, p. 268).

Beuk et al. (2014) investigate the impact of the financial reward system and salespersons’ initial new product sales expectations and effort on their expectations and effort over time. Their third hypothesis deals with financial incentives to sell a new product. They find evidence that success expectations in the first phase of the NPD process leads to higher perceived attractiveness of financial incentives. They find evidence that more sales effort in this first phase leads to higher perceived attractiveness of financial incentives too.

Bonner, Ruekert & Walker (2002) examine formal and interactive control mechanisms available to upper-managers in controlling new product development (NPD) projects, and the relationship between these mechanisms and NPD project performance. One relation tested in their research is between the degree of reliance on team-based rewards and new project performance. Although they expected a positive relationship, they found that the type of reward system employed no relationship to project performance (Bonner et al., 2002, p.241). This research, contrary to Rochford & Wotruba’s

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research, is not purely about sales management and rewards here are based on project performance. Bonner et al. (2002) measure project performance with a 4-item scale that includes the degree to which the project met its schedule and product performance objectives. The overall level of satisfaction with the team’s performance is also part of their measure. Hence, there is no clear link to sales in their research.

3.2.4 Employee Perception of Control

Although the focus in the research of Beuk et al. (2014) is on new product development and the different phases that belong to that process, what is made clear is the fact that perception of a reward is a considerable factor in this area of research. They state that if there is an effect of financial incentives on behavior, it will have to operate through the salesperson’s perception.

Spitzer (2007) explains that measurement may use numbers, but it is not only about numbers: perception, understanding and insight are key elements when using measurement systems. Perception of controls is different to the quality of controls (Tessier & Otley, 2012, p. 175). The concept of perception means that controls can be perceived differently by different employees (Scott, 2001 as cited by Tessier & Otley, 2012).

3.3 Conclusions from literature

Table 1 (p. 26-29) gives an overview of the main articles that laid the foundation for present research’ conceptual model. In previous sections these articles have been discussed. This paragraph aims to present a short overview of the status with regard to literature about sales and innovation and conclusions that can be drawn from the investigated studies.

Literature reviewed gave no unambiguous answer to the question whether a tension exists between sales and innovation, neither to the main question of present research: What is the relationship between Control on Sales Performance and Innovation and is this relationship influenced by the interactivity of these control methods?

Reviewing literature started with explaining the dichotomy in literature about Management Control Systems and innovation. This order was chosen because of a lack of research about sales control systems in relation with innovation, so exploring research about management control systems in general perceived to be a logical step. Besides that the levers of control framework as revised by Tessier & Otley

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(2012) formed the basis of exploring. Different contexts of research (industry, level of analysis et cetera) makes it difficult to compare the various outcomes of studies. However, what became clear is that management control systems have an influence on innovation. This does not automatically mean that sales performance control has something to do with innovation. The levers of control framework introduced the difference between diagnostic and interactive control systems. The revisions by Tessier & Otley (2012) include, among others, the fact that every control system can be interactive and diagnostic, it is a management decision. Interactivity is coming back in all literature investigated about management control systems and innovation as opposing factor to diagnostic way of control and as a factor of influence. How this factor is included in our conceptual model is shown in the next chapter.

When one looks at the framework of Tessier & Otley and the Levers of Control framework in general, the link with sales is made in the rewards/punishment element. Investigated literature about this specific part in relation with innovation, gives us more foundation for present research.

In one of these articles that dealt with sales management and innovation (Rochford & Wotruba, 1996), became clear that target setting and rewards are of significant influence on NPD success. However, Bonner et al. (2002) did not find a significant relationship between reward systems and NPD success. In the context of their research, rewards were more based on success of the new product development process than rewards as explained in sales management literature. Because of the lack of literature about sales and innovation, current research deals with the way control on sales performance is perceived with an emphasis on target setting and rewards in relation to innovation to the client.

Last important finding that came out of the literature review is the fact that perception plays a role in all these studies and especially employee perceptions with regard to the levers of control framework. For example Beuk et al. (2014) stated that if there is an effect of financial incentives on behavior, it will have to operate through the salesperson’s perception. And the ideas of Spitzer (2007) are all based on changing through perception, if you want to change something in an attitude, you have to understand the way control is perceived.

Concluding, literature gives many examples of research of management control systems and innovation, but neglects to focus on sales with regard to this. When innovation literature deals with sales, new product development is examined. This does not correspond to the way innovation is defined in this case study. Present research focuses on innovation in a service organization and the influence sales performance control has on this. Interactivity of these performance control systems are taken into account too. Next chapter shows how all these investigations from literature led to the conceptual

Confidential - duplication of information in this thesis is prohibited without permission of the author.

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Table 1-1: Main articles from literature review

Study Title Industry & Country

Level of Analysis/ Context

Main Variables Relationship/ research question

Control mechanism

Innovation Concept

Main results Extra

Davila (2000) In Accounti ng, Organiza tions and Society An empirical study on the drivers of manageme nt control systems’ design in new product developmen t Medical devices in Europe and USA Project managers who lead NPD-processes New product development, project uncertainty, product strategy, management control systems, product development performance Between project uncertainty, product strategy and management control systems. Also: whether MCS help or hinder product development performance. MCS concepts: diagnostic and interactive control system, frequency of information updating and level of detail of information used. New product developm ent project performan ce

- support the relevance of the project uncertainty and product strategy to explain the design of MCS;

- show that better cost and design information has a positive association with performance, but that time information has a negative effect; - significant negative direct effect of time information on NPD project performance; - significant positive effect of product design and cost information on NPD project performance;

- Other MCS with non-significant effect.

Cited by 443. Explorative study using case studies N=56 Cooper & Slagmul der (2004) in MIT Sloan Manage ment Review Achieving Full-Cycle Cost Manageme nt Consume r products division of Olympus Optical Co. Ltd. In Tokyo, Japan. General managers, design and manufactu ring engineers and blue-collar workers. Cost-management techniques: Target costing; Product-specific kaizen costing; General kaizen costing; Functional group management; Product costing Are much of a product’s cost truly locked in during design? Managing costs in product design and manufacturi ng NPD process effectiven ess

- Costs can be aggressively managed throughout the product life cycle. - Olympus Optical applies various cost-management techniques in an integrated manner, with the outputs of some techniques acting as inputs to others, thereby increasing the program’s overall effectiveness. Cited by 34. In-depth field observation s of how cost-manageme nt techniques vary across a product’s life cycle.

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Table 1-2: Main articles from literature review

Table 1-2: Main articles from literature review

Study Title Industry & Country

Level of Analysis/ Context

Main Variables Relationship/ research question

Control mechanism

Innovation Concept

Main results Extra

Dunk (2011) in the British Account ing Review Product innovation, budgetary control, and the financial performanc e of firms Manufact uring organizat ions across Australia Managers in industries including pharmaceu ticals, white goods, chemicals, building materials and foodstuffs. Budgetary control; financial performance; innovation

What is the impact of budgets in the relation between product innovation and financial performance? financial performance and role of budget Product Innovation

- The extent to which product innovation has a positive impact on the financial performance of firms is dependent on the manner in which budgets are used (planning or control mechanism) in organizations.

- The more budgets are used as a planning instrument rather than as a control instrument, the greater the positive effect of product innovation performance on organizational performance. Cited by 20 N=77 Bisbe & Otley (2004) in Account ing, Organiz ations and Society The effects of the interactive use of manageme nt control systems on product innovation Spain Individual firm. Survey to CEOs of medium- sized, mature manufactu ring Spanish firms Interactive control systems; performance; product innovation Does an interactive control system make companies more inclined to develop and launch new products or does it contribute to successfully enhance the impact of the introduction of new products on performance? Interactive control system (levers of control) Product innovation performan ce

- Non-significant direct relationship between interactive control and innovation performance; significant negative effect for high innovative firms. The more interactive the control system, the greater the positive effect of product innovation performance on organizational performance. Cited by 476 N=40 Bisbe & Malagu eño (2009) in Europea n Account ing Review The Choice of Interactive Control Systems under Different Innovation Manageme nt Mode Spain Medium-sized Spanish firms Innovation management mode (intuitive, systematic or strategic), interactivity

What is the impact of managers’ choices in selecting which individual control systems are selected for interactive use on innovation outcomes? Levers of control (LOC) framework Innovation manageme nt mode

- the choice of individual management accounting and control systems selected for interactive use is associated with a firm’s innovation management mode.

Cited by 41 N=57