Contract management : how to control processes and manage risk

Contract Management:

How to control processes and manage risk

Master Thesis

Student:

Kirstin Reimer

Student no.: 10622381

Supervisor: Dr. Rui J.O. Vieira

Program:

MSc Accountancy & Control, variant Control

Amsterdam Business School, University of Amsterdam

Faculty of Economics and Business

Abstract

Purpose: The purpose of this thesis is to study management control systems and risk management in a service organization and to examine which impact the newly introduced contract management has on both of them.

Design/methodology/approach: The research question was approached by conducting a case study in a service organization in Hamburg which is specialized in high value projects. Evidence from 13 interviews were gathered and triangulated with observations, and documents. The data was analyzed by manual coding.

Findings: The results demonstrate that Contract Management indeed influences the management control systems as well as risk management. CM impacts MCS with monitoring and controlling processes and contractual terms and thereby influences administrative-, planning-, and cybernetic controls. RM is affected by CM minimizing the risk included in contracts and monitoring contractual deadlines and options.

Research limitations: The results of this study present the situation two years after the introduction of the contract management team in the studied organization. However, the implementation phase is not over yet and therefore this study might not cover all impacts. Additionally, the interviews were conducted only in the controlling department. However, including different department would have gone beyond the scope of this study.

Practical implications: This paper provides knowledge on how a contract management can be used in the context of management control systems and risk management and points out obstacles which can be avoided in further CM implementations.

Originality/value: To the knowledge of the researcher contract management has never been studied in the context of management control systems together with risk management. It adds to the literature of management control systems as well as to the literature of risk management. Furthermore, it provides an application of the MCS framework introduced by Malmi and Brown (2008) in a service organization.

Key words: contract management, management control systems, risk management, service organization, restructuring, case study

Table of content

Abstract ... 2

Abbreviations/Acronyms ... 4

List of Tables and Figures ... 5

1. Introduction ... 6

2. Literature review and theoretical frameworks ... 8

2.1 Contract Management ... 8

2.2 Risk Management ...10

2.3 MCS (Malmi and Brown framework) ...13

3. Methodology ...18 3.1 Research Method ...18 3.2 Case Setting ...19 3.3 Data Collection ...20 3.4 Data Analysis ...22 4. Research Setting ...23

4.1 About the Company (ECE Projektmanagement G.m.b.H. & Co. KG) ...23

4.2 Internal Structure of the Company ...24

4.3 ECE Contract Management...25

5. Findings ...27

5.1 Contract Management at ECE ...27

5.2 MCS Package ...32

5.3 Risk Management ...46

5.4 Contribution of CM to MCS and RM ...51

6. Discussion and Conclusion ...55

7. Limitations ...57

References ...58

Appendix A – Interview Guideline ...61

Appendix B – Coding Scheme ...64

Abbreviations/Acronyms

BB Beyond Budgeting

BPM Business Performance Management CC Corporate Controlling

CEO Chief Executive Officer CFO Chief Financial Officer

CM Contract Management

COSO The Committee of Sponsoring Organizations of the Treadway Commission ECE ECE Projektmanagement G.m.b.H. & Co. KG

ECM Enterprise Contract Management ERM Enterprise Risk Management FTE Full-time Equivalent

GB GB Immobilien

HRCS Humen Resources and Corporate Services HSV Hamburger Sportverein

IACCM International Association for Contract & Commercial Management

IT Information Technology

KPI Key Performance Indicator

MCS Management Control System

NAO National Audit Office

NCMA National Contract Management Association OGC Office of Government Commerce

OTF Organize the Future

OTIC Office, Traffic, Industry and Corporate Communications

RM Risk Management

List of Tables and Figures

Figure 2: RM framework Figure 3: MCS Framework

Figure 4: Organizational Chart ECE and the integration of Contract Management Table 1: List of interviews

1. Introduction

Contract Management (CM) has always been an issue as long as there have been contracts. Nowadays the increasing amount and more complex regulations of contracts have made it even more important to monitor and control all contracts of an organization and the content of these contracts. However, until now it has more been a legal issue than a management control one. (Kähler, 2013) This study will examine how contract management as a newly introduced team in a service organization impacts the management control system (MCS) package as well as the risk management (RM) in place.

Management control systems has been studied since the term management control has been introduced in 1965 (Carenys, 2010). First the focus was primarily on cybernetic controls which turned later to ―a greater consideration for the organisational and motivational factors that influence behavior, […]‖ (Carenys, 2010, p. 37). However it was only lately that the different systems for management control have not been studied separately but as a package (Malmi and Brown, 2008).

This study provides an insight of a MCS package in practice with a special focus on contract management. In the organization of this case study contract management was newly introduced in 2012 and had various impacts on the MCS package. However, the impacts were not limited to the MCS package but influenced the risk management as well, which is the reason why this has been added to this study.

This study presents a case study with interviews as the main source of information. The information gathered through the interviews are triangulated by documents, observations and field notes in order to get a holistic picture of the studied issue. The evidence from the different data sources showed that contract management has great influence on planning controls, cybernetic controls, and policies and procedures by using the monitoring deadlines, controlling the contractual details, and setting up standard processes associated with contract. Furthermore it impacts risk management in by monitoring the risks included in contracts.

This study is of special interest because the combination of contract management, management control systems and risk management has, to the knowledge of the researcher, never been studied before. A valuable contribution to practice is the insight how contract management can be used to control processes and mange risk, whereas the academic

contribution is that the study adds to the knowledge of three different fields of research, i.e. contract management, management control systems, and risk management.

The paper is structured as follows. First a literature review on the three different fields of research is provided. In chapter three the methodology of this case study is explained, followed by chapter four, which consists of a description of the research setting. Chapter five presents the findings of the case study, which will be summarized in chapter six. Finally, the limitations to the study are outlined in chapter seven.

2. Literature review and theoretical frameworks

The study is based on three different fields of research, namely contract management, management control systems, and risk management. This chapter provides a literature on all of these three topics, starting with contract management, followed by risk management and finally management control systems including the framework of Malmi and Brown (2008), which provides a basis to this study.

2.1 Contract Management

Every company and its operations are built on contracts. However, contracts are becoming constantly longer and more complex (Hill, 2001). Furthermore, many companies struggle to find and analyze their contracts which has negative effects on the internal control of the company. Additionally, flaws in the processes of contract creation and in the contract compliance affect the sales and revenues of an organization as well as they increase the corporate risk (Krappé and Kallayil, 2003). Therefore, it is necessary to manage the contracts and the processes associated with contracts in a structured way. This is done by contract management. According to Keskitalo (2006) ―contract management refers to the processes of managing the entire lifecycle of contracts‖(p. 22). And Loo (2002) lists contract management among the top best practices in project management. And not only private companies apply contract management. It plays also an important role in the public sector. Kralewski et al. (1984) for example examine hospitals which implemented contract management to cope with low occupancy rates.

Contract management as a profession has its roots in the 1950s. It first appeared in the USA where the National Contract Management Association (NCMA) was founded in 19591 Later, in 1999, an international organization for the contract management profession was founded: The International Association for Contract & Commercial Management (IACCM).2 Since then this profession receives also broader attention from outside the USA (Keskitalo, 2006). New management techniques, concepts, and information technology have emerged. According to Kähler (2013) contractual lifecycle, senior responsible owner, and visibility of contract are the most significant among several new concepts. Nevertheless, there is still a great need for improvement in practice. Krappé and Kallayil (2003) found that ―companies continue to rely on cumbersome and time-consuming manual processes to control their contracts‖ (p.3).

Contract management is a voluntary matter. Yet there are several drivers for implementing contract management in an organization. Kähler (2013) lists a large number of

1

http://www.ncmahq.org/About/

clients - and consequently a large number of contracts, increasing length and complexity of contracts, vague contract contents, and globalization as drivers for contract management.

A part of the contract management is the electronic accessibility of the contracts. That makes it on the one hand possible that two people work on the same contract at the same time. Furthermore, it helps to spread information and ensures that everybody is working with the latest version of the contract. On the other hand, there is a risk of misinterpretation of the contract when too many people work on the same contract and the outcome might not be the same as the original author intended it to be (Kähler, 2013). Because of that contract managers with sufficient know-how are needed to summarize the most important information of the contract and provide those information to the rest of the organization. This step is especially important because mostly contracts are difficult to read. This is the case because the person who creates the contract has to write the contract under great uncertainty and in order to cope with this uncertainty ―forms‖, which are former contracts, are used to create a new one. This often results in longer and more complex contracts which are hard to read (Hill, 2001). Using forms to create contracts bears also the risk of copying inefficient parts (Kahan and Klausner, 1997). This risk can be reduced by contract management, because contract managers monitor each contract for its whole lifecycle and are therefore able detect the inefficient parts in the contract. The whole range of tasks associated with contract management can be seen in the good practice contract management framework published by the National Audit Office (NAO) and the Office of Government Commerce (OGC) (NAO, 2008). The framework consists of 4 blocks, namely strategy, development, structure and resources, and delivery, 11 areas and several key activities under each area.

Figure 1: CM framework

Source: NAO (2008), fig. 1, p.6

Keskitalo (2006) points out that contract management usually focuses only on single contracts and not on the entire organization. That means for example that the contract risk is managed rather than the business risk. This fact has led to a further development in contract management which is often referred to as Enterprise Contract Management (ECM). ECM takes contract management to the next level by keeping an eye on the entire contracting activities in an organization (Keskitalo, 2006).

Contract management is closely linked to risk management (Kähler, 2013; Keskitalo, 2006) because contracts can be source of risk as well as a tool to prevent or manage risk. The next section provides therefore a literature overview on risk management.

2.2 Risk Management

Risk management is a topic closely related to contracts in various ways, mainly because contracts are often the source of risks. Contracts bear risks like liability risks, risks regarding the details of contracts (contract risks), and business risks (Keskitalo, 2006). However, Keskitalo points out that contracts are not only a source of risks but can also be used as tools for risk management. Additionally risk management is increasingly connected to management control (Bhimani, 2009; Soin and Collier, 2013). Besides its close connection to

management control and contract management, risk management has the potential to change practices within the organization for example lines of responsibility and accountability (Soin and Collier, 2013; Huber, 2009).

The interest in risk management has grown rapidly since the mid 1990s (Arena et al., 2010; Power, 2004). This rise in interest has moved risk management to a central function of organizations and organizations increasingly report on how risk is been managed in various ways like publications, reports, and websites (Arena, 2010). According to Keskitalo (2006) the traditional risk management approach has the aim ―to ensure that the chosen solutions will fulfill the tasks that are assigned to them strategically in a way that economizes on costs and minimizes risks.‖(p.11) As an explanation for the deep rise in risk management Arena (2010) identifies 4 drivers, namely the change in competitive environment, the emergence of organized stakeholder groups, business scandals in the 1980s and 1990s, and financial scandals at the beginning of the 21st century like the Enron collapse. Those scandals have also led to regulations on risk management like the Sarbanes-Oxley Act (SOX). Soin and Collier (2013) define 3 factors for the rise of risk management, i.e. the increased interest in corporate governance, tighter regulations (with focus on internal control), and media amplification of scandals.

However, there is also criticism on the extensive expansion of risk management. Power (2004) for example points out ―the risk management of everything‖. He sees an alarming shift from primary to secondary risk management. Furthermore, Berry et al. (2005) show that a high level of control leaves less room to act which might lead to a higher risk. They call this the ‗risk of control‘. Likewise, describes Williams (1997) how empowerment of employees and risk management compete with each other.

There are various different risks which have to be managed. Soin and Collier (2013) for example point out the rise in the range of uncertainties and identify operational risks, reputational risks and strategic risks among this range. Furthermore, Arena et al. (2010) list financial exposure, information system interruptions, fraud, client bankruptcies and regulatory changes as possible risks. Barber (2005) explains the concept of internally generated risks which have their origin within the organization and are especially poorly managed in practice. Since the increased interest in risk management the ways of thinking have moved from ―the traditional insurance oriented risk management discipline towards a more holistic and versatile approach to risk management that is often addressed as Enterprise Risk Management (ERM).‖(Keskitalo, 2006, p. 12) The Committee of Sponsoring Organizations of the Treadway Commission (COSO) defines ERM as follows:

“Enterprise risk management is a process, effected by an entity‟s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.” (COSO, 2004)

What constitutes ERM can vary widely throughout organizations in issues like ―calculative practices, cultural significance, and level of embeddedness‖ (Arena et al., 2010, p.660). The most popular framework of ERM is the ERM – Integrated Framework issued by COSO. Mikes (2009) found that innovations in ERM techniques emerge around 4 topics: risk quantification, risk aggregation, risk-based performance measurement, and management of non-quantifiable risks and that ERM has shifted from ‗ERM by numbers‘ with a shareholder value imperative to a ‗holistic ERM‘ with a risk-based control imperative. However, in practice the implementation of ERM is still ―poorly integrated‖ (Arena et al., 2010). Furthermore, Power (2009) criticizes the ERM model as being an ‗intellectual failure‘ which focuses too much on capital and too less on human behavior.

For this thesis the framework of Collier et al. (2013) is used which identifies the drivers of risk management as well as the risk management practices in an organization.

Figure 2: RM framework

2.3 MCS (Malmi and Brown framework)

The main focus of this study is the field of management control systems. Management control systems are a wide field and a range of different approaches exist. Carenys (2010) points out that the focus in the research of management control has shifted from a focus on cybernetic controls to a focus on a broader view of factors that influence behavior since the term management control has first been introduced in 1965. The current trend within the research of management control system is to study the MCSs as a package rather than to examine them separately (Carenys, 2010). Malmi and Brown (2008) present the different types in a framework. Apart from categorizing the management control systems in five groups, i.e. cultural- , planning- , cybernetic- , and administrative controls, and rewards and compensations, Malmi and Brown points out that it is necessary to study the different MCS as a package.

Figure 3: MCS Framework

Source: Malmi and Brown (2008), fig. 1, p. 291

Planning Controls

The first type of control in the framework of Malmi and Brown (2008) are the planning controls. Planning as a type of control has been studied before. Flamholtz (1983) defined planning as the process of setting the organizational goals and how to reach those goals. Flamholtz introduced a framework in which planning is part of the so called core control system. According to Flamholtz the core control system contains four elements, namely planning, operations, measurement, and evaluation-reward.

In the paper of Flamholtz et al. (1985) planning controls are defined as an ex ante form of control. They are used to align the goals of individuals with the organizational goals. This ―goal congruence is essential for both system effectiveness and individual growth and satisfaction‖ (Flamholtz, 1985, p. 40).

Merchant and Van der Stede (2012) present planning as a part of the financial result control system closely linked to the process of budgeting. However, Malmi and Brown (2008) point out that planning does not have to be of financial character. It is about guiding the individuals in order to achieve the organizational goals. The level of which the individuals are involved in the planning process can vary between the different organizations.

Malmi and Brown (2008) distinguish between two different types of planning, action planning and long-range planning. Action planning describes a planning horizon of up to one year with a more tactical focus. Long-range planning emphasizes the strategy. It has a medium to long planning horizon.

Cybernetic controls

The second element in the framework of Malmi and Brown (2008) are the cybernetic controls. Green and Welsh (1988) identified 5 different criteria for the definition of cybernetic controls: Quantification, standard setting, feedback, variance analysis, and modification ability. Malmi and Brown point out that there is an important difference between cybernetic systems which are only information systems and those which are real control systems. The difference is that in a control system the behavior is linked to targets and the people in charge are held accountable for variations. Malmi and Brown recognize four different types of cybernetic controls in their framework: Budgets, financial measures, non-financial measures and hybrids.

The first of the cybernetic controls is budgeting. Hansen et al. (2003) describes budgeting as a comprehensive plan which is used for performance planning and ex post evaluation with normally an annual planning period which can be broken down into shorter periods. Budgeting is one of the most common and most traditional approaches of the cybernetic controls. Traditionally it is ―concerned with top-down planning for financial performance, build on organizational hierarchies, and intended as a control over operational expenditure‖ (Bunce et al., 1995, p.255). However, there has been a lot of criticism on budgeting. Some of the criticism points are that the information used in budgets are not up-to-date anymore when the budgets are actually been used, or that too much focus is on cost reduction when it should rather be on value creation, and that it does not fit into the latest

organizational designs (e.g. flat hierarchy structures). Furthermore, is vulnerable to budget games and can lead to dysfunctional behavior (Hansen et al., 2003). Hansen et al. (2003) indentify two main trends in budgeting. The first one is the U.S.-based Activity-Based-Budgeting (ABB) and the second one is the European-based Beyond Activity-Based-Budgeting (BB). They are both created out of the idea, that the traditional budgeting does not fulfill today‘s needs. However the two trends have different directions. ―[…] the ABB-group has more of a planning focus and the BB-group more of a performance evaluation focus, […]‖ (Hansen et al., 2003, p.98).

The second and third subgroups of cybernetic controls are financial and non-financial measures. Financial measures might use information provided through budgets. However, they are not as complex as budgets. Financial measures can be used for setting simple targets based on financial values (Malmi and Brown, 2008).

Non-financial measures are of increasing importance. They are supposed to be the drivers of financial performance and their use might lead to better prediction of the future (Ittner and Larcker, 1998). For example discovered Ittner and Larcker (1998) that ―[…] customer satisfaction measures are leading indicators of customer purchase behavior […]‖ (p.13). They also emphasize that non-financials are becoming more and more important in organizational disclosure.

The last of the cybernetic subgroups are the hybrids. Hybrids consist of a system of financial as well as non-financial measures. An example of a hybrid performance measurement is the Balanced Scorecard which is a complex system of financial and non-financial indicators. (Malmi and Brown, 2008)

Reward and Compensation

Reward and Compensation, the third group in the Malmi and Brown (2008) framework, are often closely related to the cybernetic controls. However, this is not always the case since the basis for rewards does not have to be cybernetics. Reasons for a company to give out reward or compensations can be of any nature (Malmi and Brown, 2008). Not only can the reasons vary but also the reward and compensation themselves. Bonner and Sprinkle (2002) state, that rewards and compensations have the purpose to align the goals of individuals with those of an organization. This works because in the case of monetary rewards ―individuals have utility for increases in wealth‖ (Bonner and Sprinkle, 2002, p.308), and the organization offers rewards and compensations for behavior which is in favor of the organization. Incentives like rewards and compensations ―lead to greater effort than would

have been the case in their absence‖ (Bonner and Sprinkle, 2002, p.305). Bonner and Sprinkle identify 4 different types of changes in effort, effort direction, effort duration, effort intensity, and strategy development. Effort direction explains where the person spends his effort on. Effort duration represents the length of time a person spends on a specific task. Effort intensity specifies how hard a person works on a specific task for a specific time. And strategy development refers to the learning process which results from receiving rewards and compensations. Rewards can vary between extrinsic and intrinsic rewards. Extrinsic rewards are given after evaluating the performance whereas intrinsic rewards are independent from the evaluation process and refer more to the individual‘s perception (Flamholtz et al., 1985). The evaluation process is the process where the performance is measured in comparison to the preset goals. Rewards and compensation can be a form of an ex ante as well as an ex post control. Ex ante in the case that the goals associated with the rewards and compensations direct the motivation of individuals towards organizational goals. Rewards are ex post controls when the behavior changes as a result of the received rewards (Flamholtz et al., 1985).

Administrative Controls

Administrative controls form the fourth group in the framework. According to Malmi and Brown (2008) stand administrative controls for organizing individuals and groups in order to direct behavior, for defining who is responsible for what, and for the standard setting of processes. Malmi and Brown classify three types of administrative controls, i.e. governance structure, organizational structure, and policies and procedures.

Albernethy and Chua (1996) provide the content of the governance structure classification. First they name the management board as part of the governance structure, i.e. its size, its composition, and its role in the organization. Second, they include the formal lines of accountability. Malmi and Brown (2008) add meetings and meeting schedules to this.

Organizational structure is the second part of the administrative controls in the framework. According to Flamholtz (1983) are ―centralization or decentralization, functional specialization, degree of vertical or horizontal integration and the span of control‖ (p. 158) contents of the organizational structure. The organizational structure controls individuals by either ―reducing the variability of behavior and, in turn, increasing its predictability‖ (Flamholtz, 1983, p. 158) or by directly influencing the decision making process for non-programmable events. Either way it presents a strategic decision by the management of how to respond to the environment the organization is exposed to (Flamholtz, 1983).

Policies and procedures, which form the third part of administrative controls, are administrative management tools to direct behavior by defining processes and setting up rules. Simons (1987) refers to formal procedures which include planning systems, reporting systems, and monitoring procedures. Additionally, the Malmi and Brown framework contains what Macintosh and Daft (1987) call standard operating procedures and policies, i.e. a set of written rules, procedures, policies, and operating manuals which are used to guide individuals.

Cultural Controls

The last group in the Malmi and Brown (2008) framework are the cultural controls. They refer to the organizational culture which influences the behavior of the individuals in this organization. Malmi and Brown define three subgroups namely values, symbols, and clans. Value controls refer to Simons (1995) belief systems. Symbol-based controls are in place when it comes to workplace design or dress-codes which are explicitly used to direct behavior (Malmi and Brown, 2008). Finally, clan controls complete the framework. Clans are subcultures, micro-cultures, or individual groups in an organization. They ―work by establishing values and beliefs through the ceremonies and rituals of the clan‖ (Malmi and Brown, 2008, p.295).

3. Methodology

3.1 Research Method

This research studies a MCS package in an organizational context. Malmi and Brown (2008) points out that it is of valuable interest to study MCSs in practice. They stated that the different Management Control Systems within an organization have been studied extensively in the past but only separately. Malmi and Brown emphasized the importance to study the package of the different systems of an organization to get a deeper understanding of how a company is been controlled. They say that ―we know very little about how these systems are actually configured as a package across organizations‖ (Malmi and Brown, 2008, p. 297). Therefore, this study provides insights on a MCS package in a service organization with special focus on contract management and its contribution to the package. Contract management has never been studied in a similar context which makes is particularly interesting for this purpose. Because contract management not only influences the MCS package but also the risk management of an organization, which is often closely related to MCS, risk management has been added to this research. This leads to the central research question of the thesis: How does Contract Management impact the MCS package and the risk management of an organization?

As Malmi and Brown (2008) suggested a case study has been chosen to conduct the research. With a case study it is possible to study the complex subject of the MCS package in an organizational context. A case study as a kind of qualitative research enables the researcher to get a deep understanding of a subject matter (Ryan et al., 2002). It gives the researcher and further the reader a holistic view which is particularly important in this case because a MCS package consists of different systems which should not be studied separately but rather as a whole to fully understand the package. Furthermore, it is possible for the researcher to study the phenomena within their organizational context which contributes to a better understanding (Ryan at al., 2002). A case study is best suited for ―how‖ and ―why‖ questions like the research question of this paper (Yin, 2008).

Furthermore, the focus of this case study lies on interviews which is also a suggestion of Malmi and Brown (2008). They pointed out that interviews enable the researcher to collect large datasets in order to ensure the data quality.

3.2 Case Setting

The setting of this case is ECE Projektmanagement G.m.b.H. & Co. KG which is a company specialized in the management and development of shopping centers throughout Europe. The company is especially interesting because it offers the possibility to study a MCS package in a service organization; moreover, a service organization with a few big, high value projects, each of the projects is an individual case with individual contracts. The company can contribute to the literature of MCSs in facility or real estate management as well as in project management. Since this kind of companies does not produce any products the contracts are the main source to generate profit. Within ECE the phrase ―ECE is a contract producing machine‖ is often been used. This shows that the contracts have to be controlled which brings us to contract management. ECE introduced a contract management team in 2012 to control the contracts and the processes associated with them. The Contract Management at ECE goes beyond an administrative tool, which simply organizes the contracts, to an advanced management tool, which uses the contracts to control different parts of the organization. With its 3000 employees ECE provides a good setting to study MCSs in a large company. It uses a range of different MCSs which gives me the possibility to study the impact of Contract Management on various MCSs.

The Contract Management at ECE has been introduced in 2012 and thereby provides a good setting for this research. Because the introduction of the CM team was only two years ago the changes are still in mind of the affected employees. However, Contract the period of two years is not long enough to fully implement a new team and that leads to some limitations of the study, which will be amplified in detail at the end of the thesis.

Sufficient knowledge about the company to conduct a case study in such a limited timeframe was already gained before the start of the case study, because the researcher did an internship in the Contract Management team from May till August 2013. Therefore, she knew not only the basic facts of the company but was also familiar with culture at ECE, which was useful when contacting the interview partner or ask for further information and documents. The data collection started then in February 2014 and was conducted by the researcher as an external researcher at ECE. That means she did not work for the company during the time of the case study and was not influenced by coworkers for example, hence she could be more objective. The access was gained without any problems. An own account and email address was provided to the researcher and access to the Contract Management files and the intranet of the company was permitted. Moreover, the coworkers at ECE were extremely helpful during the whole process of the research. During the data collection period the researcher tried to be in the company at least once a week.

3.3 Data Collection

In order to get the best insight and gain the most knowledge for the research question interviews were the best choice and the interviews were triangulated by observations, and documents as data sources. By using three different kinds of data the validity and reliability of the findings were enhanced.

Before the starting the interviews the researcher made sure that she had enough background knowledge in order to ask the right questions during the interviews. Documents were collected and informal interviews with colleagues were taken who could answer some questions beforehand. Interviews are a good method to collect rich data sets and thus to gain a deep understanding of the problem and to capture the whole picture (Yin, 2008). For the interviews semi-structured interviews were chosen, because this method gives the opportunity to react to keywords and topics during interviews which haven not thought of before. This method also provides a basis for analyzing the interview and thereby ensures the completeness of information for the topics of the research. By asking the same questions to different people the validity of the study was increased and the data were triangulated.

The sample for the interviews consists of different employees of ECE‘s controlling department. The majority of the interview partners works in the Contract Management team but it was made sure that at least one person of each team of the controlling department was interviewed, namely the business performance management team, the corporate controlling team, and the cash management team. The controlling department was chosen to be the sample because they have a comprehensive knowledge of the MCSs of the company since their function is to control the company. Furthermore, the majority of the interviewees were picked out of the Contract Management team as they have the most expertise in the field of interest. Additionally, the sample varies in terms of different hierarchical levels in order to get to know different perspectives. At first 12 interviews were scheduled but after conducting around half of the interviews it was noticed that there was still a vast knowledge gap on risk management. Therefore, it was decided to ask the person who was responsible for the risk management at ECE in the last two years if she is willing to answer the open questions. This was only on risk management, because on the one hand already enough information for the other parts were collected and on the other hand her time was limited.

Each of the interviews was held in German and conducted at the ECE headquarter in Hamburg. In that way the participants had a familiar surrounding and felt comfortable. Nevertheless, the researcher made sure that each interview was held in a separate quiet room, so that the interviews were not disturbed. Furthermore, the chairs were placed in a way that there was no desk between them, because a desk might give a feeling of separation

or boundary between the interviewee and the interviewer. Each interview was tape recorded and lasted between 40 to 60 minutes. The interview guideline and a piece of paper for taking notes were helpful aids used during the interviews. Afterwards the interviews were transcribed in order to prepare them for further analysis. During the transcribing process a deeper understanding of the things mentioned by the interviewees was gained and the researcher could start analyzing the data.

The second source of information was observation. The researcher was able to work with the Contract Management team in an open space office and had lunch breaks with them. Thereby it was possible to have informal conversations and to get a deeper understanding of the situation. Unfortunately, only a few meetings could be attended by the researcher, because on Fridays normally no meetings were scheduled. Nevertheless, reports were made by the researcher to capture the day in the company and to record things learned from informal conversations.

Documents were the third source of information. They were collected from the intranet, from the contract management data shares, from the ECE website, and from ECE employees who provided further material. The documents were an excellent way to triangulate the data from the interviews.

Table 1: List of interviews

Interview number Interviewee Duration

1 Business Performance Manager 60 minutes

2 Corporate Contract Manager 54 minutes

3 Business Performance Manager 50 minutes

4 Team Leader 51 minutes

5 Corporate Contract Manager 39 minutes

6 Corporate Contract Manager 51 minutes

7 Corporate Contract Manager 37 minutes

8 Head of Department Controlling 55 minutes

9 Corporate Controlling Manager 46 minutes

10 Team Leader 59 minutes

11 Team Leader 42 minutes

12 Team Leader 60 minutes

13 Director Risk Management 40 minutes

3.4 Data Analysis

After the data collection the researcher had over 140 pages of transcribed interviews, notes, and documents of the company. This material had to be analyzed in order to get to the findings which will be presented in the next section of the thesis. In the analysis the transcribed interviews were used as the main source and the notes and documents were taken to back up and triangulate the findings.

Each interview was transcribed in a different word document and after finishing all of them, they were transferred into a program for qualitative data analysis called ―MAXQDA 11‖. This program enabled the researcher to create open codes and sub-codes in order to manually code each interview. The coding scheme used can be found in the appendix. This coding scheme is based on the theoretical frameworks presented in part two of the thesis. The program allowed the researcher to recall everything under one particular code which made the analysis easier.

4. Research Setting

4.1 About the Company (ECE Projektmanagement G.m.b.H. & Co.

KG)

ECE Projektmanagement G.m.b.H. & Co. KG (ECE), the company of the research, is a family owned business located in Hamburg, Germany. It employs 3000 people of which 2000 work at ECE‘s headquarters in Hamburg. It operates as a service company in the field of shopping center management. The shopping centers are owned by investors who appoint ECE to manage the centers. Furthermore, ECE rents the mall in the middle of the shopping center and the car park to generate additional profit by subletting them short term. Additionally, ECE develops shopping centers, either by building new ones or by restructuring existing ones. Besides the shopping centers ECE manages and develops also other projects like office buildings or train stations.

Werner Otto, who owned a successful mail order company which is also located in Hamburg, founded a real estate company in 1965. At that time the company was called ―Werner Otto Vermögensverwatungs G.m.b.H.‖ and it built and run so called ―Gemeinschaftswarenhäuser‖, those were big simple department stores with large parking areas in the country side. Everything a customer would like to buy should be found in those stores. However, in those stores every retailer sold his goods without any separation to retailers next to him. The customers could not tell the difference between the retailers because everybody was selling under the same name. This concept did not attract the good retailers. Therefore Werner Otto brought the American concept to Germany in which every retailer had his own shop in the shopping center. The concept was then adjusted to the German market. The goal was that each customer should find every article which he buys at least once a year in the shopping center in at least two different shops.3 Furthermore, shopping should not be only about buying things anymore. It should be an entertainment for the customer to come into the shopping center. The first center with this concept opened 1969 in Nürnberg-Langwasser, Germany. The center was called ―Franken-Zentrum‖. In this center each retailer was independent and could have his own shop, his own brand name, his own concept and so on. The ECE as the managing company for the center always tried to have an optimal mix of trades and industry between the shop tenants. After the Franken-Zentrum had opened the ECE developed further shopping centers. Today ECE runs 112 shopping centers Europe-wide and has entered other business areas like the management and development of train stations and office buildings. It is run by Werner Otto‘s son

3

Alexander Otto and its name has been changed over time to ECE Projektmanagement G.m.b.H. & Co KG.

4.2 Internal Structure of the Company

Figure 4: Organizational Chart ECE and the integration of Contract Management

ECE is divided into 8 divisions, namely Development, Architecture, Construction, Leasing, Center Management, Finance, Human Resources and Corporate Services, and Office Traffic Industries and Corporate Communication. For a better understanding of this case study each of these divisions will shortly be described.

The division Development is responsible for new market opportunities. The responsibilities here range between finding new projects, calculating the profitability of new projects, and rate the practicality of new projects. In short their responsibility is the whole planning process of new projects. New projects can be for example building new shopping centers, or enlarge, rebuild or modernize old shopping centers. However, especially in

Board Development Architecture Contstruction Leasing Center-Management Finance Corporate Finance Accounting & Controlling Accounting Controlling Business Performance Management Corporate Controlling Corporate Contract Management Cash Management Processes & Projects Risk Management Asset Management HRCS OTIC

Germany the shopping center market is almost saturated which makes it difficult to find new projects.

The division Architecture is together with the division Construction responsible for the realization of projects. With its own architects ECE is able to build shopping center on its own terms and to realize its own ideas.

The purpose of the Leasing division is to rent out the shops in the shopping centers and to negotiate the contractual conditions with the retailers. Their goal is it to find an optimal and sustainable mix of trades and industries to maximize the long-term rental income.

The Center Management division takes care of the management within the shopping center and is responsible for the day to day business in the center.

Finance is the division to which the controlling department belongs and with it the corporate contract management team. Finance at ECE is concerned with everything around financial matters, accounting and controlling.

The responsibilities of Human Resources and Corporate Services (HRCS) are internal services for other departments. The division is further divided into Compliance and Data Protection, Corporate Insurance Management, Human Resources, General Administration, Legal, Information Technology, and Organizational Development.

The last division is the Office, Traffic, Industry, and Corporate Communication (OTIC) division. ECE has expanded its field of business and is also active in the development and management of office buildings, rail stations, and other industry buildings. Additionally, the Corporate Communication department is located in this division.

4.3 ECE Contract Management

In the past there has not been one central contract management at ECE. All contracts of ECE were spread throughout the whole organization. This circumstance led to non-transparency which resulted in incorrect, or even incomplete, invoicing of fees and recharging of costs. It was the case that amounts running into the millions have not been invoiced. Furthermore, the processes and responsibilities regarding contracts were not clearly defined which made it particularly hard to control them. Another problem was that the accountants had to look for billable amounts in the contracts themselves and since usually the accountants do not have the legal knowledge which is needed to understand a contract properly, the risk of mistakes was particularly high. Additionally, there was no database for

the complete recognition of all contracts and therefore no central access point if somebody wants to look through a contract, needs specific information or wishes to see whether a particular contract already exists.

So it was clear that a central contract management was needed. Therefore ECE started the contract management project in August 2012 and organized a workshop in September 2012 to define the goals, tasks and processes of the new contract management. The new structure with the new contract management team was realized then in November 2012. The new team is now responsible for storing most of ECE‘s contracts and to make them accessible for the rest of the organization through a network platform. Furthermore, the team calculates contracts related to parking and renting out the mall. The mall is the space in shopping centers where the customers walk from shop to shop. These spaces are sometimes rented out on short-term which is done by a subsidiary of ECE called ―GB Immobilien‖ (GB). GB and the ECE subsidiary for the parking business, which is called ―Pollux‖, rent the mall and the car park from the investor/owner of the shopping center on a long-term basis and the rent paid by GB or Pollux to the investor/owner is calculated by the contract management team. The team also set ups the contract afterwards. However, this is the case only for the contracts related to mall and parking. The other contracts are set up by the legal department and come only afterwards to the contract management team to be controlled.

Controlling the contracts is also an important task of the contract management team. Contract controlling comprises monitoring of deadlines, ensuring compliance with the contracts, watching over indexations, guarantee correct invoicing, and having an eye on the profitability of the different contracts. In order to guarantee correct invoicing the contract management team has to work closely together with the accounting department. They work out a summary of the contract with all the necessary information which helps the accountants to do the booking and invoicing in accordance to the contract.

5. Findings

5.1 Contract Management at ECE

In this case study the goal of the first part of the interviews (see Appendix A for the full interview guideline) was to study the contract management at ECE in detail to get a better understanding of the organizational specifics and to link it to the rest of the MCS and the risk management at ECE. Therefore, questions regarding the specifics of the contract management at ECE are included in the interviews. The first part was about the tasks assigned to the Contract Management team. Second, it was tried to gain a deeper understanding of the drivers responsible for the implementation of the Contract Management. Third, it was asked why the Contract Management has been included in the Controlling department and not somewhere else in the organization. Fourth, the interviewees were asked if there were any obstacles in the implementation process. And finally, the researcher was curious about their opinion on Contract Management at ECE.

Before 2012 there was no central contract management at ECE. The contracts were spread throughout the whole company and it was almost impossible to overview the vast amount of contracts or even to find every contract when needed. Especially for a service organization it is important to manage its contract, because it relies almost entirely upon its contracts.

It is interesting to observe that previously we did not have a Contract Management or somebody who is responsible for testing our basis of existence, because as a service provider we exist from these service fees. That is why it is now our role to build a system that really ensures this contractually agreed settlement of the service contracts and also to create the link to the controlling, by supporting liquidity management or corporate management by providing the contract data for the liquidity and budget planning. And then also make sure that these contractual plans are then implemented and complied with accordingly. [#2]

However, the implementation process is still in progress. The team has found its direction and is now on the way to realize it. They started to work out complex contract management tools, one for each type of contract. The tools are set up in Excel, but in the long run it is planned to purchase a special contract management software. Those Excel tools can analyze each contract separately in terms of deadlines, billable amounts, options, contractual specifics, etc. but can also analyze all contracts for one type of contract together. But it takes time to set up those tools and therefore today only three types of contracts can be analyzed by using such a tool.

So far we had nothing and now we have a little something. (Laughs) We have a basis. We are now through with 3 types of contracts which we can perform relatively accurate. And the other 20 30, that are missing, still need to be worked out. [#7]

Standard contracts are in place and those standards are set by workgroups of people from different division. Contract Management is always part of these workgroups and can thereby influence the outcome. Those standard contracts should be applied to make the administration of the large number of contracts easier. However, due to the different demands of each investor, i.e. owner of the shopping center, the standard contract is been modified in most cases.

For each contract a uniform standard exists, which theoretically could be applied, so that afterwards there would be no need to distinguish. This is not been lived, because we have to deal with many external parties who have their own needs and desires, so that each standard contract is eventually an individual one at the completion of the contract, what is also quite good for other reasons, but you see, you have to look at each contract carefully. There are rarely two identical. [#5]

Nevertheless, Contract Management contributes a great deal to the transparency within the organization. With CM the ECE is able to have an overview over its whole range of contracts even though there is no contract like the other.

You want transparency of contracts, which is urgently needed and previously that has been lived rather sporadically, I think, more random finds. And in the future it should be so that each contract is been depict and nothing can be missed. [#5]

[…]if we have according to the plan reviewed the entire contract history by the end of the third quarter of this year, we are for the first time able to guarantee that all service contracts and all of the,- I think it is now, 58 types of contracts, for which we are responsible, are available, are scanned and available to be viewed by everyone and therefore are really usable. [#8]

Transparency was especially important because in the past it was not an isolated case that amounts have just been forgotten to be billed. Those amounts were quite substantial. Today it is the responsibility of the CM team to monitor the invoicing process and to guarantee that the underlying contract is complied with.

And there can Contract Management certainly make its contribution by settling the right contract and charging it to the correct cost units - also important issue - that they state if possible the correct cost unit because they often state the wrong cost unit and then it ends up somewhere else, or it gets lost. As though an invoice has been created, but because of the

wrong cost unit combination it reaches neither [business performance manager] in the project business nor [business performance manager] in the contract business. [#9]

Those incidents are now record in a list called tracking incidents list, which provides an overview of all incidents which have gone wrong in the past because of poor contract management.

In addition to the increased transparency an important task of CM is to monitor the time limits specified in the contracts. This is also done by the contract management tools

Then we have now revived a so-called deadline management, where we want, in close cooperation with Legal, to record which deadlines we actually have. We have deadlines for the contract duration. We have deadlines regarding special termination. We have the issue of when which amounts are to be calculated. So there is a whole variety of periods, which may result from the individual contracts and so far there is no system or no computer-based system, where we can somehow keep track of these deadlines. And now we are deliberating with Legal how we can reasonably implement this cross-departmental. [#6]

Further the CM team ensures that all processes connected with contracts work properly. In the past the responsibilities were not clearly defined and no institution was in place to monitor the processes associated with contracts.

Then of course we also ensure the processes altogether; who supplies what contracts; who completes which contracts, and ensure therefore a general process stability, that the right people, conclude the right contracts and that we receive the contracts in a reasonable form, that means for example that all have a signature, that they are all signed with a date, that these characteristics are met. [#12]

The drivers for implementing Contract Management at ECE came from within the company, especially from within the Controlling department itself. The middle management noticed that there were no clear responsibilities when it comes to contracts.

And if I remember correctly, I can report, for example, from one appointment that we had with all Asset Management directors, the CFO, and the head of Accounting, where it was precisely the question of who makes really sure that we pass on all the charges which we are able to pass on by contract, […] That was a very interesting meeting, simply because the asset managers have said that does the ECE Accounting. And ECE Accounting dismissed that and said it's only if the Asset Manager informs them and otherwise it is luck. [...] And after the meeting we went to the meeting with [head of Controlling] and there we discussed in the team leader meeting that our core competence should actually be managing contracts and nothing else, because that is our backbone, this is our neck and when we are vulnerable

somewhere, then it is there now. There are of course other sites, but the economic damage caused is many times higher than other internal weaknesses. [#10]

A second driver was the increased number of contracts. In the past ECE has grown rapidly nationally as well as internationally. With the increased size of the company the number of contracts rose accordingly, which made it particularly difficult to oversee every detail of every contract.

Well, that was a reason for the introduction, that we realized the number of contracts increases. The ECE consists almost only of contracts. For each service we provide, there is a contract. And I think that was somehow a coincidence perhaps that just at the moment when we said we work on that issue that a few cases bubbled up which confirmed exactly that. But I believe that we have also noticed that we no longer monitored certain deadlines for some years and you can tell solely because of this, that a certain potential for risk is there. [#12]

Within the organizational structure the Contract Management team is incorporated in the Controlling department as it can be seen in the organizational chart. That is because there it can fulfill its responsibility to act in the best interest of ECE. Because the asset managers for example work closely together with the owners of the shopping centers, they sometimes take the point of view of the investor they take care of and forget that they actually work for ECE. The Controlling department on the other hand does not have such a conflict. It ensures the profitability of ECE and its associated companies. Therefore, the Contract Management can control that contracts are concluded in the best interest of the company and invoiced correctly with the support of the other teams in the Controlling department.

Right now I think this makes sense, because we act from the perspective of ECE. I spoke a moment ago of the conflict of interests between the ECE-side and the investment side. We do this to ensure that the ECE Group invoices everything it can bill, passes on everything it can pass on. Anything that can be invoiced and can be charged is defined in the contracts. Since first of all it should ensure the billing, I guess, it is useful to have this team in Controlling. [#12]

As it is often the case with new implementations, the implementation of the Contract Management team was not without obstacles. The team was build with a lack of knowledge in contract management. Therefore the implementation phase took considerably longer than planed according to the documents from 2012. It is not clear if that is due to too optimistic planning or due to inefficient work. Either way the lack of experience played an important role.

Two years ago it was a newly formed team, which was not founded with a lot of experience, but an idea, to re-map the whole thing. This is now growing by doing for 2 years. It restructures itself again and again, and has, I think, still a relatively long way to go in order to have, what is wanted in the end and what is absolutely necessary. A very important team, but there is still a lot to do. [#5]

Another obstacle is the lack of IT system support. Most of the contract management tasks are done in Excel and Excel is generally vulnerable to human mistakes. Furthermore, it is not integrated into the other IT systems the company works with. Therefore, the contract management tools are still prone to errors.

And the systems are not in place, that you can quickly enter something in the system which is then processed accordingly. We are on the system side ... - That's just our very great disappointment - we are not so far that we can handle things simple and quickly. This is all done in Excel. [#9]

Additionally, the team and its tasks were not widely known in the organization and therefore the processes and cooperation with other departments were not assured. In the complicated organizational structure of ECE it is of high importance that everybody knows that a contract management exists and what its tasks are. Therefore, it is necessary to clearly communicate it throughout the whole organization. This was not done properly and thereby some contracts for example are still concluded without the involvement of the Contract Management team contracts.

We must demand the legwork of other departments. Simply because of the subject matter that processes are not fully understood or are still in the clarifying process, responsibilities have to be clarified, and our function and role is not really communicated to the outside, what we intend, what our goals are, that we are still under construction and internal structures (in the controlling department as well as in our team internally) are not stabilized yet. [#2]

Despite the difficulties, the contract management at ECE is seen as a key role in the organization.

It has definitely a very important key role for lots of companies of the ECE group. A former colleague once said that ECE is a contract-manufacturing machinery, which is not completely wrong, because the company just exists from its contracts and not from something that you produce, pack, and sell. In this respect that is one of the key points here. And these contracts include the opportunities, but also the risks. We have, I think, a key position at the moment to make this transparent, and also to feed the controlling instruments with what is actually there. Because nothing is worse than a controlling system, which is based on wrong numbers and you think this is all well and in reality the basis is wrong. So far, I think, it is an important source to supply all the other with information [#5]

To conclude, the contract management at ECE is responsible for setting up standard contracts, ensuring the completeness of contracts and therefore adding to the transparency, initiating the invoicing process to guarantee that ECE receives every revenue its entitled to, monitoring the processes associated with the contracts, and assuring the profitability of the contracts for ECE. Despite the results already accomplished, the implementation of the Contract Management is still in progress. For example not very type of contract can be analyzed by using a tool yet. Furthermore, it had to face various obstacles like an insufficient support of IT systems or the lack of awareness of the Contract Management team in other divisions of the company. However, it is seen as key role at ECE, because as a service organization ECE does not produce anything but it relies heavily on its contracts.

5.2 MCS Package

This section of findings is about the MCSs at ECE. To capture the whole picture of MCSs at ECE the framework by Malmi and Brown (2008) is used as an orientation. The framework divides the MCSs in five groups, i.e. planning controls, cybernetic controls, rewards and compensations, administrative controls, and cultural controls. The findings of the MCSs at ECE were grouped according to this framework.

Planning Controls

First, the long-range planning at ECE will be discussed. Since ECE is owned and managed almost entirely by Alexander Otto there was no pressure to specify a strategic plan. Only in 2010 ECE documented a strategy plan for the first time. The strategy presentation can be found on the intranet of ECE. The results were three rather vague goals, i.e. to become European market leader according to assets under management, to become third on the European market according to center in management, and to become third on the European market according to the development pipeline. Those goals are set for a planning horizon of ten years. However, the first two goals have already been reached and the last goal is been deleted from the list, because apparently it says nothing about the profitability of the development of projects. Since 2010 there has not been another official statement about the long-term strategic goals.

3 years ago ECE has documented itself for the first time, has given itself a strategic goal for the year 2020, where defined is which market position we want to have on the basis of different market key figures. These are two specific indicators. On the one hand “asset value under management”, that is the market value of our portfolio, each center that we manage. And there we want to be market leader in Europe in the year 2020. The second specific indicator is the number of centers that we manage, especially the number of center which have a customer frequency of more than six million per year. Likewise, we want to be