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MSc Accountancy and Control, variant Control Master thesis
Interplay between Management Control Systems and
Trust in Interorganizational Relations
Student: Tatiana Burlacu Student ID: 10860770
Supervisor: Dr. R.J. Rui Oliveira Vieira Date: 06.08.2015
Word count: 19800
Amsterdam Business School
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Statement of Originality
This document is written by student Tatiana Burlacu 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.
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Abstract
Trust and control are inextricably related within strategic alliances. Whereas there have been numerous studies on whether trust and control are complements or substitutes, these do not provide much information on the dynamic interaction between the two and consequently, how together. Hence, to understand how partner firms can effectively work together to reach the same goal and obtain same outcomes and benefits, while applying both simultaneously, this study examines the interplay between trust and control within interorganizational relations (hereafter ―IOR‖ / ―strategic alliance‖ / ―partnership‖ / ―interfirm relationships‖). After a thorough study of the prior literature, it became clear that trust and control are usually applied separately and the material is limited in this area. Qualitative research is employed to answer to the researched questions. The study concludes that content analysis is applied to reveal the particularities of interaction between control and trust in practice within strategic alliances and most of all, how and where these two components are substituting each other. One of the key contributions of the thesis consists in its contribution to the growing literature in the field on interplay between management controls (formal and informal) in interfirm relationships
3 | P a g e Table of Contents Statement of Originality ... 1 Abstract ... 2 1. Introduction ... 5 2. Literature review ... 7
2.1 Trust and Control in IORs ... 7
2.1.1 Trust in Interorganizational Relations ... 8
2.1.2 Control in Interorganizational Relations ... 12
2.1.3 Interplay between control and trust ... 14
2.2 Theoretical and Conceptual Framework ... 17
3. Theoretical framework. ... 19
3.1 Das and Teng (1998) conceptual model ... 19
3.2 McDonaldization ... 20
4. Research Method: Content Analysis of Case Studies. ... 21
4.1 Applied Research Method. ... 21
4.2 Steps in carrying out secondary analysis... 22
4.2.1 Content analysis: defining the case setting. ... 22
4.2.2 Processing case studies by coding. ... 30
5. Results ... 30
5.1 Case Study Description ... 30
5.2 Analysis of case studies... 33
A. Control in interorganizational relations... 33
B. Trust within IORs ... 47
6. Discussions and key conclusions. ... 57
References ... 62
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Table of Figures
Figure 1. Trust and Control in Strategic Alliances. Source Das and Teng (1998) ... 11
Figure 2. Framework for interplay of trust and control and group effectiveness. ... 21
Figure 3. Totals of control-related constructs ... 34
Figure 4. Total of trust-related constructs ... 47
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1. Introduction
To adapt to the increasingly global competitiveness of the market and shorter product life cycles, companies have to have appropriate management control systems (MCSs) in place and trust attitude towards each other in order to perform, collaborate and have synergy within this inter-organizational relation (IOR), argues Langfield-Smith (2008).
Nowadays, most of the companies create strategic alliances in order to share the joint decision making in areas such as strategic planning new product and services improvement. They may require joint investments in relation-specific assets. This thesis is aiming at m eas uri ng and explaining the meaning of organizations‘ behavior that related within alliances and thus, analyzing the dynamics among these organizations by examining how trust and control is used to carry out partnerships.
Prior studies indicate that control is achieved through outcome controls and social controls developing over time, and through the development of trust ( Dekker, 2004; Costa and Bijlsma-Frankema, 2007; Vélez, Sánchez and Álvarez-Dardet, 2008). This thesis enhances the growing knowledge of the interaction of control and trust in IORs. In this context, the purpose of this research is to improve understanding and knowledge of how management control and trust approaches in IORs work together to create balance and good performance between two or more parties in a strategic alliance. Based on a content analysis of multiple case studies this paper specifically looks at the MCSs implemented and used in IOR in an Interorganizational setting and how this plays out with trust attitude, to shape Interorganizational cooperation and performance.
By conducting a secondary analysis of the data primarily collected by other researcher, this thesis aims to show the trend of the trust and control constructs both apart and in relation within an interorganizational aspect. 13 case studies were selected and processed to carry out content analysis for this study. More information on case selection is below in the research methodology chapter.
The continuous organizational development of the organization seems to benefit the most when the MCS and trust complement each other (Sitkin, 1995; Gallivan and Depledge, 2003; Woolthuis, 2005; Costa and Bijlsma-Frankema, 2007; Mellewigt, Madhok and Weibel, 2007). This study aims to contribute by examining the interaction between control and trust in interorganizational relations. By doing so it responds to the latest calls in the management accounting community to put more emphasis on the dynamics of control and trust within interfirm relationships (Brattstrom and Richtner, 2013; Cäker and Siverbo,
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2011; Vélez, Sánchez and Álvarez-Dardet, 2008). The field study shows how the relationship between control and trust becomes dynamic and interactive.
It is only relatively recently that researchers have begun to study the specific relationships between trust and the MCS, but there are inconsistencies. Some researchers claim that control mechanisms and trust can be pursued simultaneously, or are complementary (Das and Teng, 1998; van der Meer-Kooistra and Vosselman, 2000; Ring and Van de Ven, 1992; Dekker, 2004; Vélez, Sánchez and Álvarez-Dardet, 2008;), while others argue that control mechanisms are detrimental to trust (Lorange and Roos, 1992). However, researchers have not always considered how specific forms of trust and specific types of controls relate or interact when two or more firms are working together as partners within IORs. By identifying this research gap, the author decided it is an interesting topic to study it and contribute to the existent literature.
The role of this study is to shed light on how control and trust evolve over time in Interorganizational settings. The study attempts to contribute to the knowledge base by exploring the interplay between management control systems and trust in partner relations. Knowing what configurations of controls work best in IOR and what trust approach are useful for them has a practical relevance for parties in IOR. This is because it can provide useful guidance regarding the implementation and usage of combinations of control and trust mechanisms that would ultimately help in their development. The thesis provides an in-depth analysis and makes a contribution to knowledge in the field management accounting.
The master thesis is structured as follows. Chapter 2 presents an in-depth literature review, the research question of the study and its motivation. It defines the inter-organizational relationships and highlights the growing importance of these forms of organization, known also under the name of: strategic alliances, joint ventures, partnerships collaborations. It also examines the notions of trust and control and how these operate together in organizational and inter-organizational setting. Following, in the review we look at the role of trust, control and confidence level in different types of IORs. In addition, the study analyses the complexities of the trust-control relationship and discusses the effect of control mechanisms on trust level, as well as the impact of trust in regulating the control mechanisms in determining the control level. Furthermore, Chapter 3 develops the theoretical framework used to conceptualize the research question; this is later corroborated on results. Chapter 4 presents the research methodology of the thesis. First, it
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defines the use and application of the content analysis, providing arguments on why it is the most appropriate research method. It then presents to the reader the actual content analysis on selected case studies in the light of core investigated components, as: control and trust concepts within interorganizational relations. Chapter 5 discusses the results and consequently, Chapter 6 concludes the thesis by also outlining few of the limitations of the study, along with directions for further research.
2. Literature review
The goal of this section is to offer a conceptual overview on the key concepts under examination such as: control, trust, strategic alliances. For this reason it is organized as follows. Firstly, a review of major studies in the field of Interorganizational relations is provided. Once familiar with the prior literature, the theoretical frameworks were examined, that help understand better how trust and control operate at practical level in Interorganizational relations. In this part of the study, the research question is discussed. Lastly, a conceptual framework is aimed at identifying key actors in establishing and developing Interorganizational relations.
2.1 Trust and Control in IORs
The dilemma in coping with various types of cooperation between organization stems to two key factor on which such relations rely on: trust and control. Although there appears to be consensus that trust is critical for virtual organizations and other new forms of Interorganizational exchange, contradictory advice is frequently offered to managers – at times, including conflicting advice within a given study. For example, in offering recommendations to managers, Harrison and St. John (1996, p.58) cautioned them to ―avoid formalization and monitoring of contractual agreements, which [may] lead to conflict and distrust‘, yet they also advised managers to ‗avoid excessive trust, which leads to its violation (e.g. embezzlement, fraud)‖.
Using excessive control in overseeing work performed by outsourcing partners ―may damage the relationship between the controllers and controlees‖ that leads to an ―unintended human and social consequences [which] …include low morale and circumventing the rules‖ (Markus and Tanis, 2000, p. 175). In conclusion, trust is critical to the success of virtual organizations and Interorganizational alliances, but that ensuring trust is difficult and that having either too much trust or too much control can be dysfunctional.
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Further on, in order to assess the interplay between these two dimensions and examine how these apply in the conceptual framework of our study, the concepts are separately defined below. Then the mechanism on how to avoid situations of excessive control and apply trust as a problem coping mechanism is investigated.
2.1.1 Trust in Interorganizational Relations
In a world of multiple partnerships, trust became an indispensable component for a trustworthy alliance. Prior literature offers many different definitions of trust, however most authors seem to agree that the most important elements of trust are positive expectations from the other party and willingness to become vulnerable. Below are some definitions identified in the prior literature:
Table 1. Definition of Trust
Source Trust definitions
Cummings and Bromiley (1996, p.303)
―individual‘s or group‘s belief that another individual or group makes efforts to uphold commitments, is honest, and does not take advantage given the opportunity‖
Mayer, Davis, and
Schoorman (1995, p. 712)
―the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party‖
McKnight et al. (1998, p. 474)
―Trust is that one believes in, and is willing to depend on, another party‖
Nooteboom (1999, p.203) ―it entails that one does not expect to be harmed by a partner even though she has both the opportunity and the incentive to be opportunistic‖
Rousseau et al. (1998, p. 395)
„a psychological state comprising the intention to accept vulnerability based on positive expectations of the intentions or the behavior of another‖
Sako (1992, p. 37) ―trust may increase the predictability of behavior through each party honoring commitments and allowing partners to deal with unforeseen contingencies in mutually acceptable
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ways‖ Sheppard, Blair and
Sherman (1998, p. 442)
―Trust is accepting the risks associated with the type and depth of the interdependence inherent in a given relationship‖
We can find many definitions on trust in prior literature, some concentrating more on the reliability of the other party and others more on the willingness to take risks. Also the definitions of trust can differ from one discipline to another (Sako, 1992). Because of these many different definitions one common way of thinking about trust does not exist, which makes comparison of research on trust not an easy task.
Many definitions contain a reference to the willingness to take risks, to be vulnerable or to the expectations of the other party. Also dependability is a characteristic often observed. Mayer, Davis, and Schoorman (1995) give the most complete definition: ―Trust is the willingness of a party to be vulnerable to the actions of another party based on the expectations that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other part" (p. 712).
It is a matter of common understanding that trust is not static. Once trust is given to others it can increase or decrease, depending on ongoing interactions with these others and on features of the context in which these occur (Bijlsma-Frankema, 2005).
A growing interest in building trust between organizations stems from the belief that trust enhances business performance. For instance, trust has been identified as an important component which makes strategic alliances, partnerships, joint ventures and networks of small firms, successful (Sako and Helper, 1998). Trust is also of great relevance today because the maintenance of consistently high quality, which is an important source of competitiveness, is easier in a high-trust production system than in a low-trust one (Sako, 1992).
Sako (1992) makes a distinction between three types of trust: goodwill trust, contractual trust and competence trust.
―Contractual trust‖ relies mainly on moral standards of honesty and implies that you will honor the agreement, independent of this being written somewhere or not. Put in another way, contractual trust means that you ―will keep your word‖. A total dependence on legal regulations implies zero contractual trust, which would mean that no oral or written contracts would be concluded. Contractual trust is embedded in
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transactions. Moreover, the more contractual trust, the less information the outsourcer wishes to gather for purposes of preventing or reducing opportunistic behavior.
―Competence trust‖ means that there is the expectation that the seller has the specific knowledge, necessary technical and management competences at his disposal.
It may be acquired by purchasing the existing competences or by investing in their development. Competence trust can be found in the institutional environment of a transactional alliance. Their members can improve their market position by certification of their products or services or by educational degrees.
―Goodwill trust‖ is a term coined to express the expectation that parties have an open commitment to each other. Commitment is the inclination to do extra than is expected. Trusting behavior consists of activities increasing the vulnerability of the person involved with respect to another person whose actions he does not necessarily control (Gambetta, 1988). The particular form of the relationship is here characterized by an imbalance between obligations fulfilled and rewards received. So to say, parties should be prepared to be indebted to each other. Goodwill trust can arise and can be developed in an established contractual relationship. It will decrease the perceived need of the outsourcing party for ex post information gathering (van der Meer-Kooistra and Vosselman, 2000).
Dekker (2004) claims that selection of an appropriate partner based on good predictors of desirable cooperative behaviors is a way of generating trust and mitigating control problems before a governance structure is designed and executed. Ireland, Hitt, and Vaidyanath (2002) underline that selecting a good partner is the beginning of an effective partnership. This influences the need of formal control mechanisms implementation by increasing confidence in another‘s goodwill and capabilities.
The concept of trust is widespread in the social sciences and has been examined in the literature of many fields, such as: economics, sociology, psychology and philosophy. Each of these disciplines has viewed trust in from slightly different angles. Recent summaries of the literature have proposed several different taxonomies of trust (Zucker 1986; Kramer and Tyler, 1996; Brockner et al., 1997).
Nearly all definitions of trust share the condition that one party (the truster) must willingly place itself in a position of vulnerability to or risk from another party (the trustee). That is, the truster makes itself potentially vulnerable to opportunistic behavior by the trustee, regardless of the truster‘s ability to monitor the trustee‘s conduct (Brenkert, 1998; Husted, 1998). Karahannas and Jones (1999, p. 347) note that trust is ‗closely related to risk,
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since without vulnerability to the risk of opportunism, there is no need for trust.‘
The suggested conceptual model relies on earlier work by Das and Teng (1998) who renounced the conventional wisdom regarding trust as critical to organizations. In their scheme, shown in Figure 1, trust between agents is one pathway that can lead to confidence that desired outcomes will occur, but it is not the only such pathway.
Figure 1. Trust and Control in Strategic Alliances. Source Das and Teng (1998)
By reviewing the existent literature, the author identified only few accounting studies that have explored the form of management control systems that are suited to partnerships, and there limited knowledge of the role that trust plays in such relationships. For example in the context of international joint-ventures (Groot and Merchant, 2000), outsourcing relationships (Gietzmann, 1996; Anderson, David and Sedatole, 2000; van der Meer-Kooistra and Vosselman, 2000) and integrative buyer–supplier arrangements (Frances and Garnsey, 1996) and study that reflects explicitly on the design of MCS and trust in such situations has begun to appear (Seal and Vincent-Jones, 1997; Das and Teng, 2001; Seal, Berry and Cullen, 2004). The purpose of this paper is to build on this prior research, to add to our understanding of the design of MCS and trust levels in Interorganizational relationships.
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2.1.2 Control in Interorganizational Relations
Look through all papers (main ones) and write all definitions in the table below – also look for the ones from other fields – there are some in one paper
Table 2. Definitions of control / management control systems
Source Control definitions
Langfield-Smith (2008, p. 349)
―activities such as frequent interactions, meetings, negotiation of disputes, codes of conduct, senior management attitudes and style, and rituals‖
Leifer and Mills, (1996, p. 117)
"a regulatory process by which the elements of a system are made more predictable through the establishment of standards in the pursuit of some desired objective or state"
Merchant (1984, p. 10)
"Good control means that an informed person can be reasonably confident that no major, unpleasant surprises will occur"
Nixon and Burns, 2005)
―Management control systems (MCS) influence decision making to attain (strategic) objectives‖
Two major types of control in Interorganizational relations are identified in the literature (Ring and Van de Ven, 1992; Das and Teng, 1998; Gulati and Singh, 1998; Adler, 2001; Dekker, 2004)
a) Formal control is focused on the outcome and behavior control performs monitoring of performance targets achieved and specifies the outcomes to be realized by the IOR and by its partners. Goal setting sets directions for task performance, clarifies mutual expectations and increases goal congruence (Das and Teng, 1998) in particular when rewards are explicitly linked to goal attainment. Behavior control mechanisms specify how IOR partners should act and monitor whether actual behaviors comply with this pre- specified behavior. Typical ex-ante behavior controls used in IORs are planning, programs, rules, standard operating procedures and dispute resolution procedures (Gulati and Singh, 1998). Das and Teng (1998, p. 507) suggest that behavior monitoring consists of elements such as „reporting and checking devices, written notice of any departure from the agreement, accounting examination, cost control, quality control, arbitration clauses, and lawsuit provisions‟. They debate that because IORs are often characterized by goal incongruence and performance ambiguity, behavior control mechanisms can be important to ensure desirable behavior (Dekker, 2004).
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principal approach of social control in IORs (Ring and Van de Ven, 1992; Adler, 2001). Rousseau et al. (1998, p. 394) define trust as „a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behavior of another‟. They argue that „trust is not a behavior (cooperation), or a choice (e.g. taking a risk), but an underlying psychological condition that can cause or result from such actions‟ (p. 395). There are different perspectives of trust, having more origins.
„Organizational theory is used to argue that the coordination of interdependent tasks performed by inter-firm partners in their pursuit of transactional value may strongly influence a relationship‘s governance structure‟ (Dekker, 2004, p. 46).
Table 3 identifies and classifies several behavior, outcome and social control mechanisms in Interorganizational relationships. Ex-ante control mechanisms help alleviate control problems by aligning interests and by reducing coordination needs before implementing the Interorganizational relations. Ex-post control mechanisms achieve control by processing information, evaluating and monitoring performance (Dekker, 2004).
Table 3. Formal and informal control mechanisms in Interorganizational relationships
Source: Dekker (2004)
Das and Teng (1998, p. 508) consider that „trust and control are parallel concepts and that their relationship is o f a supplementary character in generating confidence‟. Control practices moderates trust level and the trust level influences the effect of control mechanisms in determining the control level (Das and Teng, 1998; Vélez, Sánchez and Álvarez-Dardet, 2008). The current research will focus on the assumption, that trust is being influenced by control mechanisms on same intensity as control mechanisms are influenced by trust. Prior research discusses whether trust and control are better conceived as complementary, or as substitute mechanisms of Outcome control Behavior control Social control
Ex-ante mechanisms
Goal setting Structural specifications: Partner selection Incentive systems/reward
structure Interaction Reputation Social
networks
Ex-post mechanisms
Performance monitoring and rewarding
Behavior monitoring and rewarding
Planning Procedures
Rules and regulations
Trust
(goodwill/capability):
Trust building: Risk taking
Joint decision making and problem solving
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governance. Costa and Bijlsma-Frankema (2007) found while studying trust and control, that the matter of how both constructs relate is one of the most controversial.
2.1.3 Interplay between control and trust
The relationship between MCS and trust has been the subject of several case studies that have focused largely on outsourcing and strategic supplier relationships (Seal and Vincent-Jones, 1997; van der Meer-Kooistra and Vosselman, 2000; Das and Teng, 2001; Mouritsen, Hansen and Hansen, 2001; Langfield-Smith and Smith, 2003; Dekker, 2004; Cooper and Slagmulder, 2004; Kamminga and van der Meer-Kooistra, 2006) or on joint ventures (Yan and Gray, 1994; Groot and Merchant, 2000; Chalos and O‘Connor, 2004). There are also theoretical papers that have focused on risk, trust and control in strategic alliances (Das and Teng, 1998; Nooteboom, 2004) that have drawn mainly on transaction cost economics. Langfield-Smith (2008) successfully present various control mechanisms and the development of trust.
Das and Teng (1998) argue that control is an alternative mechanism that may help to ensure confidence in cooperative behavior. They refer to ‗control mechanisms‘ and ‗trust building‘ as generic policies or activities that may engender high levels of control or trust respectively. Consistent with this position, they argue that trust is not a necessary condition for successful cooperation among members of an alliance. Although their framework mentions ‗control mechanisms‘ (rules or norms that ensure control) and ‗trust building‘ (rules or norms that ensure trust), this paper does not examine empirically how these actually operate in practice. Das and Teng (1998) also argue that the level of control has a direct influence on the level of trust within an alliance, whereas trust building does not influence the level of control directly, but rather moderates the relationship between the level of control and confidence in the partner‘s performance.
In this context, current thesis proposal aims to tackle the following research question: How does the interplay between MCSs and trust within IOR influence the development, cooperation and alignment between parties?
With this research question, it was meant to study how control interacts with trust between partners for an effective collaboration.
There have been calls to research the field of MCS to cover inter-firm relationships (Otley, 1994; Speklé, 2001), and research that considers explicitly the design of MCS and trust in such situations has begun to appear (Seal and Vincent-Jones, 1997; Das and Teng, 2001; Seal, Berry and Cullen, 2004). In particular, some research focuses on MCS design and outsourcing relationships (van der Meer-Kooistra and Vosselman, 2000; Mouritsen, Hansen
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and Hansen, 2001). The purpose of this thesis is to build on the existent research, to extend our knowledge of the formal (control) and informal (trust) MCS in interorganizational relationships.
Langfield-smith and Smith (2003) also argue that there are several well-known models for studying the design of MCS (Ouchi, 1979; Flamholtz, 1983; Merchant, 1984) and that are helpful for the thesis research. However, these frameworks typically focus on control systems within an organization. Only a small number of models consider the interplay of control and trust within interorganizational setting done in practice. For instance, Speklé (2001) created a framework of control standards, based on transaction cost economics (TCE), and Das and Teng (2001) modeled the relationships between MCS, trust and risk in various types of inter-firm relationships. Van der Meer-Kooistra and Vosselman (2000) developed a comprehensive model of management control, which was based on principles of TCE, but which integrated the role of trust. These models will be drawn on in this paper.
In the view of Dekker (2004), a few accounting studies have explored accounting and control problems in strategic alliances, for example in the context of international joint-ventures (Groot and Merchant, 2000), outsourcing relations (Gietzmann, 1996; Anderson, David and Sedatole, 2000; van der Meer-Kooistra and Vosselman, 2000) and integrative buyer–supplier arrangements (Frances and Garnsey, 1996).
This paper examines the literature on management control systems and trust in interorganizational alliances to understand how these two interact in order to ensure effective performance of the alliance.
In the view of Woolthuis (2005) there have been studies on whether trust and contract are complements or substitutes, they show little information about the dynamic interaction between the two. Thought they fail to answer, whether control precedes trust or follows it, in other words, what is underlying relationship between the concepts; also they did not find out, how and why trust and contract can substitute or complement each other; lastly, they missed to improve knowledge on how the various combinations of the two concepts affect a relationship‘s development and outcome.
Management control refers to the process by which an organization influences its subunits and members to behave in ways that lead to the attainment of organizational objectives (Ouchi, 1979; Flamholtz, Das and Tsui, 1985). However, defining control in joint ventures is more challenging, because two or more parents may influence a venture's activities. This study concentrated on the structure of management control mechanisms, informal and formal, exercised by the member organizations in strategic alliance. Geringer and
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Hebert (1989) characterized parent control in international joint ventures as composed of three parts: the scope, extent, and mechanisms of control. The scope of control specifies the areas of the joint venture's operation in which control is exercised. The extent of control is the level to which the parents use control. The mechanisms of control speak of the ways by which control is exercised. Prior studies have each concentrated on a different part of control: Lecraw (1984) on extent, Geringer (1986) on scope, and Schaan (1983) on scope and mechanisms. Thus, their results are virtually non-comparable.
In interorganizational setting „control is used to create conditions that motivate the organization to achieve desirable or predetermined outcomes‟ (Fisher, 1995, p. 25). In other words, the main goal of control is to create the conditions that incentify the partners in the alliance to achieve desirable or predetermined outcomes by cooperatively performing value creating activities (Borys and Jemison, 1989; Zajac and Olsen, 1993; Dyer and Singh, 1998). However, in order to create transactional value, coordination of interdependent tasks between parties is required by pooling the resources, determining tasks to be performed and dividing of labor. The resulting interdependence between the subtasks the partners agree to perform subsequently needs to be coordinated across organizational boundaries to ensure a fit between their points of contact (Langfield-Smith and Smith, 2003).
The more interdependencies between parties‘ activities generally ask for fit between wider ranges of partner operations and require more adjustment and adaptation to each other‘s organizational behavior and use of hierarchical control mechanisms to manage increasing information processing requirements (Thompson, 1967; Galbraith, 1977; Borys and Jemison, 1989; Gulati and Singh, 1998).
Previous research identifies five main types of control mechanisms in IORs that include such organizational elements: command structures and authority systems, incentive systems, standard operating procedures, dispute resolution procedures and non- market pricing systems (Gulati and Singh 1998).
In addition, the need for flexibility and adaptation in those partnerships may imply that control systems rely less on formal mechanisms (Gietzmann, 1996; Ittner et al., 1999). Nevertheless, in certain outsourcing cases the establishment of a formal control system may enable greater control and transparency, which may not only impact on the interorganizational relationship, but may have implications for strengthening control and increasing insights within the outsourcing firm (Mouritsen, Hansen and Hansen, 2001).
Control systems have been conceptualized and categorized in various ways: formal versus informal controls, behavior versus outcome controls; mechanistic versus organic
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controls; bureaucratic versus clan controls. However, these types are not distinct and there is some agreement that all organizational control systems consist of formal, explicitly well designed controls, as well as the unwritten informal or social controls that cannot be designed directly. Within formal designed controls, some researchers distinguish between outcome controls and behavior controls (Ouchi, 1979; Eisenhardt, 1985). Outcome controls measure and monitor the outputs of operations or behaviors, using techniques such as performance measurement. Behavior controls, such as rules and standard operating procedures, specify and monitor individuals‘ behaviors.
Clan or social controls are present in all organizations to varying degrees (Ouchi, 1979). Social controls may develop from beliefs, values and shared norms, and may rely on the universal comprehensiveness of goals, which leads to preferred performances. These controls cannot be clearly designed, but can be shaped and influenced by activities such as frequent meetings, senior management commitment codes of conduct and culture. There is some evidence that social controls are also relevant in inter-firm relationships (Gietzmann, 1996; Nooteboom, Berger and Noorderhaven, 1997). Ouchi (1979) highlighted the links between the style of control and the information features of the task: the degree of output measurability and task programmability. Outcome controls were said to be suitable in situations of high output measurability and low task programmability, whereas behavior controls suit situations of low output measurability and high task programmability. Where both output measurability and task programmability are high, either behavior or outcome controls may be used. Social controls emerge when both output measurability and task programmability are low.
2.2 Theoretical and Conceptual Framework
Various types of partnerships exist among organizations and a particular theoretical focus is on strategic alliance and how this relies on trust and control.
While strategic alliances considered an important dimension of competitive advantage there is also a growing body of evidence of high failure rates (de Rond, 2003). One cause is the high level of risk associated with alliances, compared to ―in-house‖ activities (Das and Teng, 2001). This risk is associated with differences in partners‘ objectives and orientations, and the possibility for partners to opportunistically abuse this relationship (Groot and Merchant, 2000; Dekker, 2004). It has been argued that strong governance structures, management control systems (MCS) and trust work together to reduce alliance risk and
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decrease the probability of failure in strategic alliances (Das and Teng, 2001; Dyel, Kale and Singh, 2001; Speklé, 2001; Nooteboom, 2004).
This is why we rely on strategic alliance as a base for our theoretical framework. As it is hard for a single company to develop a new product or provide some services, if not having complete access to information and specific knowledge. This is when organizations need to access information and knowledge from outside their boundaries. According to Conway (1995) this is needed to be able to develop new ways of working which enable adaptation to turbulent and uncertain environments and they address to external and technologies parties to form strategic alliances and develop their products/services.
Das and Teng (1998) identify strategic alliances as dimensions with potential for opportunistic behavior by partners and for this reason they emphasized their study on the two constructs: control and trust that help partners to achieve an adequate level of confidence in their cooperative behavior. Tomkins (2001) defines interaction between companies as ―supply chain partnerships‖ that eventually share information and practices, decision making rights and joint rewards. Furthermore, these partnerships contribute to business involvement network where they create other alliances in order to improve performance and expand their business.
Strategic alliances are inter-firm cooperative arrangements aimed at achieving the strategic objectives of the partners (Das and Teng, 2002). These alliances involve meaningful and durable exchange, sharing, or co-development of new knowledge, products, services or technologies (de Rond, 2003). There are many types of strategic alliances, including ―horizontal alliances between competitors, vertical alliances between buyers and suppliers, and diagonal alliances between firms in different industries‖ (Nooteboom, 1999, p.1). Moreover, various forms of cooperative ventures and strategic alliances provide ways of gaining access to the specialized skills and competencies that are needed to compete effectively in a globalized market place (Nooteboom, Berger and Noorderhaven, 1997; Das and Teng, 2001). Nooteboom, Berger and Noorderhaven (1997) identified more types of strategic alliances such as: joint ventures, franchises, joint research and development, joint marketing ventures, long-term supply arrangements, and outsourcing relationships.
Building and maintaining this Interorganizational alliances, is not easy, because significant problems may occur, as there is no hierarchical relationship and there is need of trust and control in place. Management accounting and control thus seem to be of substantial importance for the management and performance of inter- organizational relations.
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Nowadays, the development of an area involves the inevitable participation of more key stakeholders or entities. At the same time, the relationship among these is fragile to some extent, as there is need for a mutual trust between these and appropriate management control systems in place. The purpose of this study is contribute to the existing literature and to enhance our understanding of how the management control systems and trust approaches work together to influence the development and cooperation within Interorganizational relations.
3. Theoretical framework
The conceptual model used is created by Gallivan (2001) where the author integrated the framework of Das and Teng (1998) and the McDonaldization theory together.
3.1 Das and Teng (1998) conceptual model
Das and Teng (1998) emphasized on the fact that trust is critical next to control in IORs. Trust between agents is one pathway that can lead to confidence that desires outcomes will occur, but it is not only such pathway. They argue that control is an alternative mechanism that may help to ensure confidence in cooperative behavior. They refer to ‗control mechanisms‘ and ‗trust building‘ as generic policies or activities that may engender high levels of control or trust respectively. Consistent with this position, they argue that trust is not a necessary condition for successful cooperation among members of an alliance. Although their framework mention ‗control mechanisms‘ (rules or norms that ensure control) and ‗trust building‘ (rules or norms that ensure trust), their study does not examine empirically how these actually operate in practice. This is why, focusing on analyzing case studies, as prior research on the practical use of trust and control in IORs. Das and Teng (1998) also argue that the level of control has a direct influence on the level of trust within an alliance, whereas trust building does not influence the level of control directly, but rather moderates the relationship between the level of control and confidence in the partner‘s performance. Figure 2 elaborates upon Das and Teng‘s (1998) framework by integrating it with the precepts of McDonaldization. The four principles of McDonaldization (efficiency, predictability, calculability and control) represent a set of techniques that may be used to ensure desirable outcomes, in terms of behavior (the work process) or deliverables (the work product). As shown by the alternative pathways to effective performance in Figure 2, trust among autonomous agents (or between a firm and its outsourcing partners) is not a necessary condition for successful performance; instead, the four dimensions of McDonaldization may
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serve as substitutes to obviate the need for trust. Below, the author examine the control and trust related constructs and their interplay in IORs to evaluate my claim that employing the four attributes of McDonaldization may hinder the need for trust.
3.2 McDonaldization
Theory of McDonaldization (Ritzer, 1996) is used here to identify specific control mechanisms that ensure effective performance of the individuals and members of the alliance.
Sociologist George Ritzer developed a critique of modern society and its emphasis on standardization, productivity and efficiency. Labeling his framework the ‗McDonaldization of society‘, Ritzer (1996) draws from Max Weber‘s views of rationalization, identifying four attributes of modern organizations: efficiency, calculability, predictability and control. As the name implies, he developed his McDonaldization framework by analyzing fast food restaurants (notably McDonalds) and other franchise organizations that ‗commoditize‘ and ‗rationalize‘ their processes and outputs. Below these dimensions are defined and then used in the coding and analysis part of the thesis.
i. Efficiency refers to choose a means to reach a specific end rapidly, with the least amount of cost or effort. Firms frequently equate efficiency with speed of responsiveness to customers.
ii. Calculability refers to emphasizing ‗things that can be calculated, counted, quantified and a tendency to emphasize quantity, rather than quality‘ (Ritzer, 1996, p. 142). The logic is that, if tasks and outcomes can be quantified, measured and increased, they can serve as proxies for high-quality performance. iii. Predictability means striving for consistency of processes and outcomes – or, the attempt to structure our environment so that surprise and ―differentness‖ do not encroach upon our sensibilities.
iv. Lastly, control is similarly concerned with removing uncertainty from processes and outcomes, although it is broader in nature (compared with predictability), as it includes many different ways by which uncertainty may be reduced.
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Figure 2. Framework for interplay of trust and control and group effectiveness.
4. Research Method: Content Analysis of Case Studies.
To evaluate whether the research framework illustrated in Figure 2 adequately corresponds to the interplay of trust and control in IOR, the thesis employs a qualitative research and more exactly secondary analysis of selected case studies that reflect the most trust and control in IOR
This section describes what methodological instruments have been applied to answer to the research question. It largely refers to the methodology applied by Gallivan (2001) that consists in content analysis of open source software case studies.
4.1 Applied Research Method.
Qualitative research is the appropriate type of research to answer the research question above for more reasons. For the qualitative management accounting research, „reality‟ is created by organizational ― actors‖ interaction with each other and their contextual environment (Parker, 2012) and qualitative research is suitable to obtain such deep and rich understanding of interplay between MCS and trust within IORs.
In the view of Yin (2009) this research is mostly explanatory and descriptive as the researcher will seek to first establish the meaning of MCSs and trust within IOR from the views of participants and then apply these meanings in a wider context and related to the literature in the field. This type of analysis places the researcher in a central position as the key participant to interpret the collected data unlike in quantitative studies where the researcher has only to rely on significance levels of statistics results. Thus, the researcher
Calculability
Efficiency
Predictability
Trust-building
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determines where the greatest emphasis lies after the data has been gathered.
There are more functions a content analysis can carry, of which is important to mention that it first serves as a descriptive purpose, namely to document the phenomenon of interest and it has an explanatory purpose because it explains the forces causing the phenomenon in question and identifies plausible causal networks shaping the phenomenon. Some authors argue that probably the greatest strengths of the content analysis method are that it is unobtrusive and nonreactive, meaning that it can be conducted without unsettling the background in any way.
Scapens (2004) offers five classifications of researcher engagement possibilities, such as: outsider, visitor, facilitator, participant and actor, as it implies that the researcher repeatedly visits the field site(s), employing interview, observation and documentary evidence gathering methods. Therefore, the role of the researcher is of special importance when carrying out this type of analysis. In this case, the researcher is an outsider, analyzing already obtained primary data and information.
4.2 Steps in carrying out secondary analysis
4.2.1 Content analysis: defining the case setting.
There are numerous evidences that show strong advantages of content analysis and its relevance in the investigated realm of this case. Marshall and Rossman (1995) consider that content analysis entails a systematic examination of forms of communication to document patterns objectively. That is a more objectivist approach than other qualitative methods. Traditional content analysis allows the researcher to obtain an ―objective and quantitative description‖ (Berelson, 1952, p.18) of the content of various forms of communications.
Content analysis is one of the classical procedure for analyzing textual material, no matter what where this material comes from – ranging from media products to interview data (Flick, 2002). One of its essential features is the use of categories, which are often derived from theoretical models: categories are brought to empirical material and not necessarily developed from it, although they are repeatedly assessed against it and modified if necessary.
As other research methods, content analysis has its own limitations. Marshall and Rossman (1995) shed light over the case setting by saying that identifying salient themes, recurring ideas or language, and patterns of belief that link people and settings together is the most intellectually challenging phase of data analysis and one that can integrate the entire
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endeavor. For example, Morse (1991, p.120) says that: ―Characteristics of a qualitative research problem are:
(a) The concept is ―immature‖ due to a conspicuous lack of theory and previous research; (b) A notion the available theory may be inaccurate, inappropriate, incorrect, or biased; (c) A need exists to explore and describe the phenomena and to develop theory; or
(d) The nature of the phenomenon may not be suited to quantitative measures.‖
In the words of Langfield-Smith and Smith (2003, p. 281): ―There has been limited research that studies the design of management control systems (MCS) and the role of trust in such inter-firm relationships.‖ (This statement defines the main goal of the thesis that is to contribute the current management control research literature).
By examining the extant literature, more than 30 case studies were selected in the starting phase of the research study for the thesis. They were analyzing the control and control-related constructs and / or trust and trust-related constructs within strategic alliances, however not all of them were used in the end for the thesis analysis because they did not emphasize much on the trust and control relation. Yet, applying carefully selected criteria as recommended by content analysis, a large part of the cases were gradually reduced as they would make erroneous results or create some bias.
One of the major reasons for unfit of some of the cases was that were research done that emphasized much more on control, only mentioning a very few time trust and not taking trust into consideration for that specific research. Thus, the author decided that in order to be able to generalize on this topic and provide a balanced answer to the research question it would be advisable to carefully study the case studies that were looking at both control and trust in an equal measure when performing interviews within IORs. The fact that all the case studies were across more industries, countries, cultures, types and sizes of IOR strengthen even more the patterns identified and gives a picture of how it is actually in practice, in the same time confirming and enriching the existing theory.
Why did those case studies were chosen for the thesis research? Because case analyses, can provide data from multiple sources over several time periods in considerable depth. Cases can be used to explore dynamic changes over time, as is often the case in history, journalism, and anthropology. Missing data are a potential source of bias, regardless of method. Many case write-ups are quite comprehensive, but not all are equally detailed.
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The case writer is dependent on others for information and writer may not always honestly portray the real situation for some reason. Almost all authors carried out respondent validations and this is also a criteria for correctness and accuracy. The author has relied on this aspect as well when choosing the investigated case studies.
For some published cases, members of the focal organization may ask to review material before it is published. While this could result in bias in order to portray a favorable image of the focal organization, it may also contribute to accuracy and honesty by correcting misperceptions of the case writer. (It should also be noted that accuracy and honesty are as much a professional norm in journalism as in organizational analysis.)
Finally, published cases are often written for an audience that may be familiar with the actions of a particular firm and, in some instances, cases are also supported by published Data. The case studies selected are presented below.
25 | P a g e 1 Brattstrom, Anna Richtner, Anders
Good Cop-Bad Cop: Trust, Control, and
the Lure of Integration 2013 Journal of Product Innovation Management
The study shows that cross-functional integration of the two departments (in this case: Research and Development Department and Procurement Department) hinders interorganizational goodwill trust at the benefit of formal control. Why? Because when the buyer firm separates the Research and Development (RandD) Department from the Procurement Department, the two departments play a good cop–bad cop strategy toward the supplier. Thereby, they are able to foster a high level of goodwill trust between RandD personnel of the collaborating firms, while procurement personnel maintain a high level of formal control. The findings offer a way forward for managers seeking to reap the benefits of collaboration, while limiting their exposure to the associated risks.
2
Cäker, Mikael Siverbo, Sven
Management control in public sector Joint
Ventures contains 3 Case studies 2011 Management Accounting Research
A Joint Venture (JV) is an organization form that enables to cooperate with each other in order to achieve desired results. JVs contain an interrelated horizontal and vertical control relationship (between the owners and between the owners and the JV Company) that complicates their relation. Based on three case studies this papers concludes that vertical control packages are affected by: goodwill trust and competence trust; parent differences in management style and size in combination with control competence; parent diversification (low relatedness between the JV's activity and the parents' other activities); and the horizontal control package (e.g., rules for parent interaction and distribution of work). Horizontal control packages are affected by: goodwill trust, system trust and calculative trust; parent differences in size; and efforts to achieve equality. Also, the authors observed that trust is potentially unaffected by the introduction of formal controls and found that trust has an inverted "crowding out" effect on control. A high ambition to maintain trust leads to underdeveloped formal controls.
26 | P a g e 3 Dekker, Henri C. Control of Interorganizational relationships: Evidence on appropriation concerns and coordination requirements 2004 Accounting, Organizations and Society
This paper presents a framework of the control of Interorganizational relationships. Building on transaction cost economics and organizational theory; two control problems are identified that arise when firms engage in Interorganizational relationships: the management of appropriation concerns and the coordination of tasks. The control mechanisms used to manage these control problems and their interrelationships with informal (trust-based) mechanisms are discussed. The explanatory power of the framework is assessed by a case study of a strategic alliance between a buyer and a supplier of railway safety equipment.
4 Langfield-Smith, Kim The relations between transactional characteristics, trust and risk in the
start-up phase of a collaborative alliance 2008 Management Accounting Research
This paper explains how managers' perceptions of trust in partners and alliance risk, at the start-up phase of an alliance, may influence the choice of governance structure and control mechanisms. Also, it studies how processes and activities may enhance levels of trust between partners, mitigate risk and complement formal controls to form an effective control package. A case study of a collaborative alliance in the construction industry is drawn on to examine these relationships and processes. Activities that were undertaken in the period leading up the formation of the alliance (the pre-alliance phase) and during the interim alliance, led to an increase in goodwill trust and reduced managers' perceptions of both relational and performance risk. Alliance governance structures, as well as behavior controls, output controls and social controls, and processes that led to the development of trust and mitigation of risk, formed part of the control package.
27 | P a g e 5 Langfield-Smith, Kim Smith, David Management control systems and trust in
outsourcing relationships 2003 Management Accounting Research
Outsourcing is a form of strategic alliance that has increased in popularity over the past decade. However, there has been limited research that studies the design of management control systems (MCS) and the role of trust in such inter-firm relationships. This paper draws on a model by van der Meer-Kooistra and Vosselman (2001) to examine how control mechanisms and trust are used to achieve control in a single case study of an electricity company and its outsourced IT operations. An analysis of the characteristics of the transaction, environment and parties, indicated that the control strategy adopted appeared to be a trust based pattern of control, rather than a market based or bureaucratic based pattern. Control was achieved through outcome controls and social controls developing over time, and through the development of trust, particularly goodwill trust.
6 Marques, L. Ribeiro, J. a. Scapens, R. W. The use of management control mechanisms by public organizations with a network coordination role: A case study in the port
industry
2011
Management Accounting
Research
This paper discusses management control mechanisms in the context of Interorganizational relationships. The case study has the following aims: to identify the management control mechanisms deployed, or relied upon, by the Portuguese Port Authority in the Port of Aveiro in the exercise of its coordinating role; and to discern - on the basis of theoretical reasoning and empirical evidence - the factors explaining the nature and use of these mechanisms. Several conclusions emerged from the study. A general conclusion was that our prior literature-based theorization is generally consistent with the case observations. That is, in mixed-type networks, the nature and use of management control mechanisms by the public organization acting as a network coordinator seems to be shaped by its assessment of motivations to cooperate and of the contribution to network performance of the various organizations involved in the network. Other more specific conclusions are encapsulated in a "coordination framework", which relates those assessments to specific features of the management control mechanisms. Crucially, our results provide insights into the roles of public organizations acting as network coordinators in the context of mixed-type networks, and, in general, on the nature of the numerous such public organizations in today's economy and society.
28 | P a g e 7 Pernot, Eli Roodhooft, Filip The impact of Interorganizational management control systems on performance: A retrospective case study of an automotive supplier relationship 2014 International Journal of Production Economics
This retrospective case study found that a MCS contingency misfit is associated with poor performance. This misfit is only temporal, however, as the manufacturer can adapt the MCS to fit the changed supplier relationship and regain performance. Furthermore, the case demonstrates the importance of informal control on supplier management, as formal controls appeared unable to overcome operational difficulties. In this respect, the case also shows the manufacturer׳s active role in establishing trust building and social pressure by choosing a suitable supplier plant manager. The resulting leap of trust indicates that trust does not always need to be built gradually. Finally, it reveals that relying on informal controls – in particular trust building – requires the manufacturer to be well aware of its use. Otherwise, the importance of increasing informal control will be underestimated when risks increase or trust is damaged, and valuable time will be lost.
8
van der Meer-Kooistra, Jeltje Vosselman, Ed G.J Management control of interfirm transactional relationships: the case of industrial renovation and maintenance contains 2 Case studies 2000 Accounting, Organizations and Society
This paper is focused on the way in which interfirm relations can be drawn up and controlled. Drawing on contracting theories, a model is built of the management control structure of interfirm relationships. The model consists of 3 control patterns and of contingency factors that influence the choices between the patterns. The model is refined by conducting research in the field of industrial renovation and industrial maintenance. Changes were observed in the way outsourcing relationships are controlled. Institutional, strategic, cultural and historical factors were found to be of great importance for the control structures.
29 | P a g e 9 Vélez, Maria L. Sánchez, José M. Álvarez-Dardet, Concha Management control systems as Interorganizational trust builders in evolving relationships: Evidence from a longitudinal case study 2008 Accounting, Organizations and Society
Research on Interorganizational relationships argues that at mature stages, when trust has reached a high level, it will be damaged by new management control systems (MCSs). This longitudinal case study provides evidence to the contrary: in an open-ended and evolving relationship, even when trust is well established, MCSs can build it. High trust provides a platform where success encourages the partners to cooperate further, demanding, in turn, more MCSs and greater levels of trust to support cooperation. By providing evidence with a greater appearance of objectivity than informal controls can yield action and result controls improve partners' perception of each other's trustworthiness, and build competence and goodwill-based trust. MCSs are used not only to supervise but also to coordinate, and this second, more salient function avoids possible suspicions that could damage trust.
10 Zahir ul Hassan, Mk Vosselman, Ed G.J. The dynamics of accounting, control and trust—shaping the governance of an outsourcing relationship 2 010 Nijmegen Center for Economics (NiCE) Institute for Management Research Radboud University Nijmegen
Through a field study of a long-term interfirm relationship between a managing agent and an outsourcer of facilities management services, an interactive relationship between accounting, control and trust is expressed. It is demonstrated how control produces trust, how trust produces implicit control and influences formal control, and how accounting comes to be a safeguarding as well as a trust building device. Moreover, the study shows how contextual factors, particularly the institutional environment and boundary spanners, may influence the interaction between trust and control and, therefore, the development of the governance of the interfirm relationship. Hence, theoretical implications on the accounting-control-trust nexus are enlightened.
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back and forth if necessary and which he or she combines (Flick, 2002). Coding is understood as ―representing the operations by which data are broken down, conceptualized, and put back together in new ways, it is the central process by which theories are built from data‖ (Strauss and Corbin 1990, p.57).
After selecting the case studies the defined codes were looked for in them, related to the conceptual framework discussed in chapter 3. There were some hundreds of codes resulted. After that all codes were categorized by grouping them into control and trust-related construct which are particular to the research question.
5. Results
This section of the thesis is crucial as it shapes the results of proposed analysis. It brings together the theoretical and practical dimensions of content analysis as a part of qualitative research in the area of trust and control in IORs. Furthermore, the results of each step of content analysis are described, of which: the case studies are defined and described; necessary data is gathered and processed by coding technique; and lastly the content analysis itself is carried out.
5.1 Case Study Description
The study captures the analysis of 13 case studies. The range of investigations is mostly relying on studies that simultaneously examine both trust and control. These have been selected on the principle that it explains how trust and control inter-relate.
The 13 studies identified that met the criteria for the thesis research, including case studies from academic journals. The cases were examined and analysis was re-runned a couple of times to ensure the accuracy of the results. The first reading intended to get to know and understand the research done and check if the case is actually appropriate for the research question in mind. In the second reading, using content analysis, the author searched for passages that corresponded to constructs related to trust (need for trust, existence of trust, examples of trusting behavior or behavior reflecting distrust) and constructs related to control (the dimensions of McDonaldization theory). Subsequently, a third in-depth studying of the cases by counting the number of passages attributing to each a construct, using the definitions of constructs in Table 5. The passages were coded accordingly to these constructs.
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Definitions of terms used in content analysis coding Control-related constructs:
Efficiency, achieving more outputs per unit of input.
Calculability, using quantitative metrics to measure and report on a process or output.
Predictability, the ability to ensure that future outcomes are known.
Control, the ability to influence a behavior or process to ensure that events and outcomes are more predictable.
Trust-related constructs:
Need for trust, sentences that describe why trust is necessary or important, without specifying that trust is actually present.
Existence of trust, passages that describe that one partner trusts another partner (the existence of trust) or how much one partner trusts another (level of trust). Synonyms include goodwill, faith, honesty, dependability.
Activities that reflect trust, specific activities include information sharing, co-location of employees, creation of asset-specific investments.
Activities that reflect mistrust, specific activities include frequent monitoring of a partner‘s behavior, enforcing performance penalties, litigation and conflict.
In table 5, the numeric sums and ratios were calculated to represent the relative number of passages pertaining to each construct.
