Healthcare sector outsourcing: Institutional contradiction and inertia in changing management control.

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Thesis MSc. BA Organization & Management Control Gerard Slot

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Supervisor: M.P. van der Steen Co-Supervisor: P. van Veen - Dirks

University of Groningen Faculty of Economics and Business

Master Business Administration: Organization & Management Control 24 June 2013

Abstract

Purpose – The study aims to explain how inertia manifests itself on an individual level in the process of changing management control, resulting from contradicting institutions within an organisation. Furthermore, it aims to explore how this inertia could be managed more effectively based on insights from practice based literature. We formulated this as a process which is guided by the sense making process resulting from a disruption of existing institutions.

Methodology – A case study was conducted at company X which gained control of two support facilities from healthcare. In one facility the changes where implemented more successful than in the other.

Findings – The paper identifies three sources of inertia: ambiguity, capability and contradiction. Furthermore, we discovered that experiential learning could really contribute to manage inertia resulting from intra – organisational contradiction.

Managerial implications – The analysis and discussion highlight the way in which the sources of inertia were manifested in practice. In the discussion we highlight important factors which have to be taken in to account when using the concept of experiential learning as a tool to manage inertia.

Key words – Institutions, Institutional logics, inertia, management accounting change, experiential learning, healthcare.

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Master Business Administration: Organization & Management Control

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Preface

Changing the healthcare sector has become a highly debated topic these days. Healthcare facilities should be operating more efficient and effective. Therefore, the aim of this effectiveness is to establish business like healthcare with a new focus on management control. However, the latest developments show that outsourcing in the healthcare sector is becoming of increasing importance. To enhance and increase the quality and efficiency of actual care, outsourcing becomes of major importance in comprehensive restructuring of the public sector. Consequently, control of healthcare support facilities is taken over by businesses. However, until now, businesses experience major difficulties in changing control according to this new form of restructuring of the healthcare sector. Therefore, I wrote this thesis to obtain deeper insights in to this phenomenon. With this thesis I finished my master Business Administration: Organization & Management Control at the University of Groningen. After obtaining my Bachelor degree this thesis contributed to finish the final year and obtaining my Masters’ degree. The thesis topic ‘Management Accounting Change: Stability and Change’ supported me to explore the problem

mentioned and helped me to finish my thesis successfully. The thesis contributes to the existing knowledge about this topic in management control and is helpful for managers experiencing these kinds of problems. Furthermore, it contributes to my knowledge about writing a research paper and my knowledge about literature on this topic.

For this reason, I would like to express my appreciation to my supervisor Dr. Martijn van der Steen and thank him for his very clear, well structured feedback and discussions about the paper. Furthermore, he very much motivated me to increase the quality of the paper and finish it successfully. In addition, his organization of the project helped me to write the thesis within the boundaries the university stated. In line with that, I also want to thank the organisation X for the opportunities they provided to explore the field and for gathering the empirical data where this research is built upon. I want to express special thanks to the people who were willing to provide me with an interview. Finally, I also appreciate the time and effort Prof. dr. ir. Paula van Veen – Dirks took to evaluate my thesis as the second supervisor.

In conclusion I could say, completing this thesis gave me a certain sense of fulfilment and I enjoyed working on it. For the future I hope my performance on similar projects will be equally satisfactory.

Gerard Slot

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Introduction

The last twenty years have witnessed a massive transformation in businesses. The intense competition forced them to re – define their strategies, structures and processes (Busco et al., 2006). The complexity of political, regulatory, and technological changes confronting most organizations has made organizational change and adaptation a central research issue of the 1990’s. The ability to cope with often dramatically altering institutional forces has become a key determinant of competitive advantage and organizational survival (Greenwood and Hinnings, 1996). Recently, environmental issues also affected the non – profit sector. This sector is of increasing importance in most modern economies, not only as providers of goods and services, but also as employers (Salamon and Anheier, 1996). Consequently, in literature on management accounting change, this sector is of growing interest. Focus is directed on the transformations which displace the old style public administration by a “new public management” which is directed on results and measurement and in which accounting has a central role (Olson et al., 1998; Jackson 2003, Modell, 2000). These reforms, commonly known as New Public Management reforms (NPM), were implemented in all European countries since ’90. According to Modell (2000), much research neglected the role of institutional change in this ‘New Public Sector (NPS)’. In his research he focused on the external institutional actors in society which influence change in management accounting due to external institutional pressure (DiMaggio and Powell 1983). Furthermore, the last few years much attention is drawn to the healthcare sector. According to Lapsley and Oldfield (2001), one of the key characteristics of NPS includes the attempts to introduce quasi-markets in health and social care or establish network relationships with private sector service providers (see also; Morris, 2007). Consequently, research is directed on the implementation of management control mechanisms from businesses within the institutional environment of healthcare facilities (Aidemark 2001; Covaleski; 1993; Hassan, 2008; Hyvönen and Järvinen, 2006). In this respect, much research is directed towards the differences between institutional worlds and how external pressure explains institutional change (Di Maggio and Powel 1986; Pache, 2010; Seo, 2002; Creed, 2010). Furthermore, other research focussed on the field level and explores the differences in individual level behaviour between these institutions, by describing institutional logics (Thornton and Ocasio, 1999, 2002, 2008). In addition, other research emphasized the existence of competing logics within an organisational field. Attention is drawn to managing the co – existence of logics, identifying contradictions between these logics and how this causes change (Reay and Hinnings, 2009; Suddaby and Greenwood, 2005; Thornton, 2002).

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produce inertia in changing management control. In line with the growing attention on outsourcing in the public sector, it therefore is of major importance to explain these dynamics.

As such the purpose of this paper is to explain how inertia manifests itself on an individual level in the process of changing management control, as a result of contradicting institutions within an organisation. Therefore, the paper will introduce the concept of institutional logics which provides ‘a bridge between the macro and micro process’ of individual level behaviour (Thornton and Ocasio, 2008). Furthermore, recent literature on micro dynamics in intra – organisational research used practice based literature (Lounsbury, 2008). This literature explains practice variations as a result of multiple logics within an organisational field (Lounsbury, 2007). Furthermore, much research is focussed on how accounting mechanisms are shaped in practice and how logics change in practice (Ahrens and Chapman, 2007; Lounsbury, 2002, 2008; Scott, 2000). However, there is a lack of research on how practices could contribute to manage inertia in changing management control when intra organizational institutions contradict. Therefore we also explore how this inertia could be managed more effectively in practice. In line with Busco et al. (2006), the concept of experiential learning helps us to explain the contribution of practices in managing this inertia. Drawing on a case study at company X we address these problems and obtain insight in consequences of these issues in practice.

The paper is structured as follows. The following section presents a theoretical background that will first discuss the notion of institutions and in which way they shape organisational behaviour by their logics. Then, we address how contradictions between two logics cause inertia in changing management control. Finally, the theory section will provide insights in experiential learning from practice theory and how this affects the change process. These concepts will then be used to build an argument on the ways in which conflicting logics can be subject to various forms of inertia and how experiential learning affects this process. After that, the third section presents a short method session following the fourth section which introduces X, where we address the theoretical concepts in an analysis of two cases. These cases are used to obtain insights from practice for the relations we address. The paper concludes with a discussion and a conclusion which highlight the contributions we generate about conflicting logics and inertia in changing management control.

Theory section

To emphasize this research has two central research questions. The first is ‘How does inertia in changing management control manifests itself, on an individual level, resulting from intra – institutional contradiction?’ The second is ‘How could organisations manage this inertia to change control effectively?’ This section presents a background of existing literature to get more insight in institutional theory and into the phenomenon of contradicting institutions within one organization. First, we present insights from literature about dynamics between the healthcare sector and business environment. Second, the historical roots and the development of institutional theory will be addressed. Then we draw attention to the concept of institutional logics to focus on ways in which institutions shape individual behaviour. Furthermore, it provides theoretical background for the way contradictions between logics cause inertia. Finally, attention is drawn upon the process of experiential learning and how this could drive changes in management control.

Business and healthcare

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problems with adaption, due to the contradictions between these different institutions. Therefore we first provide some background information about former research on this topic

According to Lapsley and Oldfield (2001), the New Public Sector (NPS) is characterized by the introduction of quasi-markets in health and social care or by network relationships with private sector service providers (see also; Morris, 2007). This stimulated management accounting to conduct research on management accounting change in healthcare. Many researchers from the accounting change perspective adopted institutional theory in their exploration to discover insights on implementation of control mechanisms within the healthcare sector and discovered the reasons for change accordingly (Hassan, 2008; Hyvönen and Järvinen, 2006; Aidemark, 2001; Pettigrew et al., 1992; Westphal 1997). Especially, attention is drawn on how several control mechanisms were implemented in healthcare operations, such as the DRG framework of Covaleski (1993) and how pressure of the institutions caused institutional change in healthcare.

Existing literature focused on the co-presence of two main logics underpinning organisational behaviour, i.e. managerial and professional logics (Greenwood and Suddaby, 2006; Reay and Hinings, 2005; Thornton, 2002). It focused on the contradictions between institutional logics and their effect as drivers for change. Therefore, this research is also going to use institutional theory as a basis. However, until now, there is a lack of attention for outsourcing projects where different institutions come together in one business oriented organization. Furthermore, there is little attention on how these two produce inertia and how this affects control. Therefore, this research focuses on providing insights to develop knowledge of this subject. We state that institutional pressure not simply cause people adapting to a certain change in management control as economically rational. We acknowledge that their actions are shaped by different social worlds, which obstructs adapting to change. Therefore, the next section looks at neo classical economic theory which forms the basis of this statement.

Management implications of neo – classical economic theory

The conventional wisdom in management control was grounded in neo classical economic theory. This wisdom was largely based on research from the 1960s on neo classical analysis and the neoclassical theory of the firm (Scapens, 1994). Neo classical economic theory assumes that people are economically rational and are able to oversee all information to select the best alternatives in decision making, which maximizes utility (Hollis, 1975). Changing parameters was enough to adjust human behaviour, because humans adjust to changes by selecting the best alternative to adjust and maximize their utility again. Therefore management accounting change could be seen as economically rational process, which always generated the optimal result.

However, around the 80s, different schools of thought evolved within economics, from radical to Post – Keynesian to evolutionary economics. Bell (1981) argued that, at the centre of many of these theories there was concern about the fundamental assumptions of mainstream or neo-classical economic theory. The main concern was the core economic assumption of rationality and market equilibrium. Hodgson and Screpanti (1991) rejected the view of individual economic rationality and the notion that the whole economic system could be built up by modelling individual behaviour. People experience a bounded rationality and behaviour is not simply shaped by always selecting the best alternatives to maximize utility (Arrow, 1987). They understood the explicit social dimensions which are part of economics and organizations and are useful for the interaction with accounting practices. Therefore, management accounting change has to deal with multiple social contexts which influence the behaviour of people within them.

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and 90s this institutional theory appeared in organization theory, sociology and economics to explain that social processes and institutions matter (Scapens 1994, DiMaggio and Powell, 1991). Institutional economics has its origins in the writings of early institutionalists, such as Veblen, Commons, Ayres, who argue that the core assumptions of neo classical economics, rationality and equilibrium, are inadequate for understanding the concept of change. Coupled with the work on evolutionary economics (Nelson and Winter, 1982) and behavioural economics, institutional theory became stronger in accounting practices. According to this, we need to see organizations and management accounting change in a context of social interactions i.e. institutions, which guide behaviour of organizational actors. People will not simply adapt to changes in control simply as a result of external pressures which are not consistent with their own institution, which causes inertia. To emphasise, the purpose of this article is to obtain insights in how institutional contradiction within one organisation causes this inertia. Different institutions i.e. social contexts and behaviour of organizational members play an important role in this process, because behaviour and controls are shaped by different values, beliefs and assumptions in this case. Therefore the next section will explore institutional theory in more detail.

Institutions

Institutional theory addresses the problem of different social dimensions that have an important role in coordinating economic activity of organizations and guiding human behaviour (Langlois, 1986; Scapens, 1994). In current literature on management accounting change, there are two important streams within institutional theory: New Institutional Sociology (NIS) and Old Institutional Economics (OIE). Although they have different origins and intellectual roots they both describe institutional change. The former explains how external institutional forces create pressure for an organisation to change. It explains that organisations have to conform to these forces from environment to gain legitimacy and therefore they change accordingly (DiMaggio and Powell, 1983). This view indicates the external pressures which have impact on the design of organizations, but not all organizations will conform to these pressures. Whereas NIS states that institutions are given, and assumed to apply pressure from outside the organisation, OIE enables us to look more closely at institutions within the organisation. It focuses on the internal pressures and constraints that shape management accounting practices (Burns and Scapens, 2000; Scapens, 1994, 2006). Therefore, we now highlight details of the roots of this theory and its development, because it provides fundamental principles on how institutions shape behaviour and change within an organization.

First, the theory of Burns and Scapens (2000) finds its roots in rejection of the mainstream economics and accepts that there are differences in behaviour instead of the economic rational men. Furthermore, they recognize that knowledge is subjective. The acquisition of knowledge about the world is not simply an individual but a social act, consequently, the content or objectives of individual self interest are themselves socially constructed. Therefore it is institutions which shape the cognitive processes of individual actors (Hodgson 1988; Scapens, 1994). Old institutional economists see the relationship between past action and current rule based behaviour as socially constructed. Furthermore, institutions inform current actions and create concepts and cognitive frames through which certain behaviour becomes taken for granted.

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These fundamental principles of OIE, however, focus on stability and not on change of management control and organizational behaviour. Therefore Nelson and Winter (1982) explained how MCS evolutionary evolve over time through replication, contraction and imitation. In this vein, Burns and Scapens (2000), made a major contribution in conceptualizing how management control and behaviour changed as a process. According to them, intra organizational – institutions shape individual action by encoding and enactment through MCS. Due to reproduction of actions, these actions change and in turn are institutionalized through MCS. This enables institutional change, which creates a cyclical process.

However, revolutionary change involves a disruption of the established institutions as some major crisis disrupts the truce and makes it necessary to establish new meanings through which to make sense of organizational activity. If existing institutions are challenged, purposive action and conscious choice are more likely (Nelson and Winter, 1982). This happens for example in take – over and outsourcing projects. Nevertheless, the change process will be influenced by the existing institution and as such will be path dependent i.e. the responses are likely to be determined by the current context (Burns and Scapens, 2000). Most important is that the whole process will be shaped by the prevailing institutions. Institutions always exist a priori to any attempt by the actors to introduce change and will therefore shape the process (Bhaskar, 1989).

This paper focuses on such an example where a healthcare facility is outsourced and where a business company gains control over this facility. In the initial phase, there are two contradicting institutions within the organization, which cause problems in adapting to the intended changes. According to this, implementation of management control from a business perspective will be shaped by the prevailing healthcare institution. Institutional theory in management accounting change explains this by focussing on the inert nature of institutions itself (Brignall and Modell, 2000; Burns and Scapens, 2000; Soin et al 2002). However, it is unclear how this inertia manifests itself in the interaction between two institutions. Furthermore, Van der Steen (2009) states that it is unclear how inertia manifests itself in local, individual variants of its relevant institution. However, institutions are very abstract and hard to discover in explaining individual action. When we direct attention to what institutions are and how they shape individual action, institutional logics provide the appropriate bridge between the macro and structural perspective and the micro processes approach (Thorton and Ocasio, 2008). Institutional logics focus on the direct local and individual variants of institutions and how they shape cognition and rational mindful behaviour. Therefore, to set up an argument how inertia manifests itself on an individual level in the process of changing management control, resulting from contradicting institutions, institutional logics are an appropriate concept because of the institutional focus and individual behaviour. Therefore the next two sessions will explain the concepts of inertia and institutional logics.

Inertia

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institution from business. The business institution could be seen as an external factor, which implements change. People from healthcare experience difficulties in responding and adapting to these changes. These difficulties cause problems in implementing change in management control effectively. To discover how contradiction between these institutions causes inertia on individual level, we turn our attention to institutional logics in the next section.

Institutional Logics

The institutional logics approach provides important insights by highlighting how the cultural dimensions of institutions both enable and constrain social action. The approach offers precision in understanding how individual organizational behaviour is located in a social context and the social mechanisms that influence that behaviour i.e. institutions (Thornton, 2008). Institutional logics provide a link between institutions and action. Furthermore, it is an important concept for understanding different organizational environments (Friedland and Alford, 1991; Scott, 2000; Thornton and Ocasio, 2008). Therefore, it is a useful concept to add to OIE theory and to use in this paper.

Lounsbury (2008), states that there are several ways of approaching organisational heterogeneity and practice. Speaking about contradictions, one can say that this is in line with the concept of heterogeneity. One way of approaching this is to examine how institutional, collective logic can provide the foundation for understanding the variation in organisational practices. This is supported by research of Fiedland and Alford (1991) who describe that people enact within organizational broader logics which define what actors understand as appropriate goals as well as appropriate means to achieve goals. According to Thornton (2004, p. 69) we can define institutional logic as:

The social constructed, historical pattern of material practices, assumptions, values, beliefs and rules by which individuals produce and reproduce, their material subsistence, organizing time and space, and produce meaning to their social reality.

The concept of institutional logic refers to the broader cultural beliefs and rules that structure cognition. It describes how key members tend to focus or value information on only a few things and a limited number of positive solutions (Hyvonen et al, 2009; Ocasio, 1997, Thornton and Ocasio, 2008). According to this, we could say that institutional logics find its roots in existing institutions. They define what assumptions, information and knowledge people have and what is important in describing what they see as ‘logical’ or how they rationalize reality. In addition to that, cognitions are partly shaped by the institutions of the context in which one lives or works (Hyvonen et al, 2009). Therefore, institutional logics are important in their relation to cognition and the way in which people see and interpret change and how they are processing information if change occurs in their organisation (Thornton, 2002, 2004).

By incorporating logics in the analysis, researchers recognize that organizational environments are comprised of multiple logics and that the existence of these diverse logics enables actors to segregate and distinguish themselves from others (Lounsbury, 2008). Furthermore, research of Cruz (2009) indicates that institutional logics are the cause of practice variations across units. If practice variation could not be possible, as in this paper, these multiple logics could be the reason for conflict in adapting to change of formal control.

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many organizational fields are characterized by ‘two or more strong, competing or conflicting belief systems’ (1994: 211). Furthermore, Thornton (2002) suggests that conflict could be caused by contradicting logics. The findings of the research indicate that once an institutional logic becomes dominant conflict between these logics creates pressure for organizational change1. However, conflict between these logics within an organisation, instead of between organisational fields; rather cause obstruction of intentional change, due to their inert nature. Therefore, we not simply state that contradictions cause conflict and pressure for change. In contrast, we highlight

how the contradiction between institutional logics within an organisation, cause inertia in the responsiveness or

adaption to a change in formal control2. In line with this the next section will elaborate further on this in more detail.

Conflicting institutional logics and inertia

Institutional logics are helpful to explore inertia in an organization where two institutions come together. This research explores how these contradicting logics produce inertia and how this affects control. The business firm will change management control and cause a situation of revolutionary and intentional change. In this relation the business firm represents the dominant logic. This is important to keep in mind here.

Institutional logics shape the cognitions of people and explain the way in which people see and interpret change. Furthermore, they explain how people process information if change occurs (Thornton, 2002, 2004). As we have seen, revolutionary change in control will challenge the existing institutions i.e. rules and routines. These routines help in coping with uncertainty and complexity and provide predictability of human action. Routines grounded in practically tacit knowledge permit actions in complexity and uncertainty as behaviour becomes automatic (Nelson and Winter, 1982). Furthermore, central to coordination of the company is that members, knowing their job, correctly interpret and respond with the appropriate routines to the messages received, either tacit or rational (Scapens, 1994). Disruption of the established routines causes crisis, uncertainty and anxiety stemming from a lack of knowledge and information about the new situation. This makes it necessary to establish new meanings through which people make sense of organizational activity. Sense making is used to give meaning to this uncertainty, consciously and unconsciously, by gathering information from internal and external contexts (Tillman and Goddard, 2008). Sense making is constructing, or producing meaning to reality. Furthermore, sense making can be also formulated as a set of ideas and images that can explain reality. It helps us to understand reality, our part in it and we can rationalize what we are doing. Furthermore, it is not an outcome, but the interplay of action and interpretation (Brown, 2000; Tillman and Goddard, 2008; Weick, 1993, 1995; Weick et. al., 2005). Members with contradicting logics, which shape cognition and thereby shape interpretation and information processing, will interpret certain information differently. Furthermore, this interplay of action, interpretation and rationalizing reality, will be different than was intended, because of a different cognition which shapes this process i.e. path dependency (Burns and Scapens, 2000). When logics differ in a single organisation, this will cause problems in understanding each other. Consequently, this causes various sources of inertia that highlight a discrepancy between prescribed behaviour and actual behaviour, occurring when new formal management accounting controls meet an existing institution. When we now turn attention to individual level

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Literature about institutional logics uses the term ‘conflicting logics’ for these problems. Therefore, this research uses the terms ‘conflicting logics’ and ‘contradicting logics’ interchangeable.

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action and inertia, Van der Steen (2009) offers some interesting insights which are in line with these sources of inertia.

First, in his research about individual scripts, he states that the problem of interpretation occurs due to tacit scripts. Here new rules are interpreted using existing knowledge, which may be inappropriate. This ‘ambiguity’ is one factor which produces inertia. Burns and Scapens (2000) already provided some indications of resistance due to ‘mental allegiance’ here.3 Here we also use ‘ambiguity’ to indicate that people interpret change in management control in the wrong way when producing meaning to reality. Their underlying logics influence the way of reasoning. Therefore, people reason different than was intended when they are making sense of reality and this causes problems in adapting appropriately.

The second instance of inertia we introduce here is ‘capability’. This is in line with the reasons Burns and Scapens (2000) mention to indicate resistance to change due to institutional contradiction. When the logics of people are shaped by a certain institution, people do not have the capability (knowledge and experience) to adjust to changes in management control, which are implemented by a contradicting logic. Therefore people experience difficulties in adapting to change in formal control when they are making sense of these changes.

Finally, we address a conscious factor which produces inertia. In line with Burns and Scapens (2000) and Van der Steen (2009), inertia in logics also could be produced by conscious reasoning. In that case people consciously decide that values, beliefs, norms and assumptions shaping their actions are more important than other logics. As a result people decide to retain their existing behaviours. We refer to this source of inertia as ‘contradiction’, in line with Van der Steen (2009).

Burns and Scapens (2000) and Van der Steen (2009) provide important insights here for exploring inertia. However, where the former does not really provide empirical insights of inertia and can not really describe how contradicting institutions were manifested on individual level action, we provide insights into how inertia is manifested as a result of contradicting logics in one organisation. Furthermore, in contrast with the latter, we highlight how this occurs in the light of a broader institutional dynamics within an organisation. Because we provide insights in how this inertia manifests itself in changing management control, the next section provide a clear view of our understanding of management control.

Management control and conflicting logics

Contradictions between institutions could cause inertia and misunderstanding in adapting to the intended changes in formal control. Because of contradictions between institutional logics there could be a variety of complex and dynamic reactions to change in control. Furthermore, we want to associate the change in control with the subjective reactions and behaviour people have in line with their logics. Therefore, management control in this researched is defined as the process of influencing behaviour. Management control mechanisms provide a means for gaining cooperation among collectives or individuals who may share only partially congruent objectives. Furthermore, it provides a means in channelling effort toward a specified set of organizational goals (Flamholtz, 1983, 1985; Ouchi 1979). In addition, it includes all the devices or systems managers use to ensure that the behaviour and decisions of their employees are consistent with the organization’s objectives and strategies (Merchant and Van der Stede, 2007). This devices and systems are defined by Burns and Scapens (2000) as rules and routines. In this research we view the change in control, which is intended by the business organisation, as a

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change in formal control, by the definition of Anthony (1965). Contradicting logics create inertia in adapting to the new formal controls which are changed. If people do not adapt to the changes in the right way, the organization experience difficulties in managing the behaviour of people towards the strategy and objectives. However, we are also interested in how these difficulties could be managed in a proper way. Insights from practice based literature provide interesting insights for managing these difficulties (Busco et al., 2006; Lounsbury, 2008). The next section will elaborate further on these insights and the implications for managing inertia.

Experiential learning

Lounsbury (2008) states that emphasis on multiple and institutional logics and forms of institutional rationality could enable a connection between micro – dynamics in practice and institutionalists. Furthermore it highlights that the analysis of multiple logics could benefit from the study of practice in how new logics could be derived from practice. In this vein, the research of Busco et al. (2006) combines interesting insights from the sociology of knowledge and the practice based literature on learning and knowing to extend the institutional framework of accounting change form Burns and Scapens (2000). Their research indicates that there is an important relation between learning, knowledge and trust in implementing new management control in a radical change process and crisis situations. Busco et al. (2006) state that the cognitive sense of safety and predictability is created, sustained and reinforced through practice. This theory finds its roots in experiential theory. By emphasising that learning is achieved through reflection upon everyday experience, this theory involves both cognitive and behavioural elements i.e. they require acts of sense-making by the individual that follow and complement engagement in social practices, such as management accounting. This theory defines learning as a process whereby knowledge is created by transformations of experiences. The individual constructs meaning through continuous cycles of experiencing, reflecting abstracting and acting (Kim, 1993; Kolb, 1983; Senge, 1990). As we saw with institutional logics, the way in which a person constructs meaning to reality and rationalizes events is essential. Therefore we highlight the importance for reflection on the experiences.

Kloot (1997) stated that management control practice and learning are interrelated and that using the new routines will affect understanding. This understanding and knowledge could help to solve anxiety and generates trust. In the framework of Busco et al (2006), practice acquires knowledge and experience which generate trust in the new rules and routines. This trust is the basis of using the new routines in situations of radical change and crisis. In crisis situations, feelings of trust are likely to play a pivotal role in the search for solutions. For the individual such situations represent a breaking down of the behavioural and cognitive truce, which is normally sustained by organisational routines (Busco et al., 2006, p.14). In addition to that, trust is an important factor in outsourcing or inter - firm relationships for accepting each other and adapting to each others control (Van der Meer – Kooistra, 2000). This supports the duality of agency and structure in the Burns and Scapens (2000) model. When more information is gathered from the new logics, by engaging in practice and collective action, uncertainty could be reduced because information and knowledge give understanding of new logics (Lounsbury, 2008). Therefore trust in the new logic will evolve and is a basis for accepting the new formal control principles (Busco

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Theoretical framework

The information provided until know, show important insights of the concepts which are relevant when exploring inertia resulting from contradictions between business and healthcare. However, the research questions: ‘How does inertia manifests itself on an individual level in the process of changing management control resulting contradicting institutions, within an organisation?’ and ‘How could this inertia be managed?’ still remain. We now generate a theoretical framework which clarifies how this thesis attempts to formulate answers on these questions. The framework is visually represented in figure 1.

Management control in this researched is defined as the process of influencing behaviour. Management control mechanisms provide a means for gaining cooperation among collectives or individuals who may share only partially congruent objectives and channelling those efforts toward a specified set of organizational goals (Ouchi 1979, Flamholtz, 1983, 1985). The broad definition of management control gives room for encounter the complexity and differences in the reaction of people from different logics to this change. The management control system is represented by the straight outside boundaries of the large rectangle in the figure. The situation is characterized by two different institutional logics which are present in one organization. The figure shows two different logics entering the control system4. We represent them with small rectangles because they are both part of the same control system. The business logic is represented with the straight lines rectangle and arrows which represents that this logic has the intention to change and is the dominant logic. Therefore, the healthcare logic is represented by the rectangle and arrows with dotted lines. These logics are the values and beliefs which structure cognition and which are grounded in institutions (Hyvonen et al, 2009; Ocasio, 1997). Moreover, these logics structure knowledge, how we process and interpret information, the way we see change and memories in a certain way and are shaped by the institutions in the context where you live or work (Cruz et al. 2009). Consequently, the conflicting logics cause a process. We represent this process by the circle because it’s a circular process. As we have seen from Burns and Scapens (2000), the change of formal controls will disrupt the truce and makes it necessary to establish new meanings through which to make sense of organizational activity. Therefore this change is represented with the small rectangle in the circle as the beginning of the process5. Sense making is the rational state where organizational members generate information to give meaning to uncertainty and change and therefore the first step in the circle. According to this, the sense making process will be influenced by the conflicting logics people have.

As a result, three instances of inertia are produced. This is represented by the square in the circle to show that it is a product of the two rectangles which represent the different logics. First, ambiguity causes information provided by management or actions and situations to be interpreted in the wrong way. As a result, people rationalize certain information different than was intended by the management of the business organization. This will obstructs change to be implemented effectively. Furthermore, some people do not have enough experience and knowledge of the business logics to understand the exact meaning of the information or the change of formal rules. They experience difficulties to adapt and response to changes in an appropriate way, because of their capability. Finally, people could intentional and consciously rationalize certain changes as unacceptable compared to their beliefs, values and assumptions which shape contrasting action and behaviour. As a result they will retain

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This is represented by the arrows which begin outside the control system. 5

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to their existing behaviour and show what we call ‘contradiction’, which obstructs the speed of the change process.

When the concept of experiential learning is implemented in to the process, problems of inertia could be managed. When people are engaged in practice to work with the new management control system, they obtain new logics from it. Essential is the way in which experiences from practice alone are not sufficient for learning. To obtain new logics a person continually cycles through a process of having a concrete experience, making observations and reflections on that experience and test them which lead to another experience (Kim, 1993; Kolb, 1983; Senge, 1990). This process of learning will increase knowledge about the other logic and increases trust in the new practices. This learning and trust will then motivates further engagement and learning again which reduces inertia and helps to establish change effectively.

Methodology

This section provides an overview of the methodology used to generate insights from practice, which helped us to answer the research question. We explain methods we used and how we collected the data from practice. After that we elaborate further on the way we analysed the data and there is a brief description of the company where we conducted our research.

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Method

This research aims to gain insights in dynamics between institutions causing inertia. Therefore it develops theory in the situation of institutional contradiction which is grounded in empirical data. Focus on the question how inertia is manifested and how it could be managed leaves room for a case study approach to understand the dynamic process of contradiction and inertia which has many forms and could have different causes (Eisenhardt, 1989; Glaser and Strauss, 1967). Furthermore, an institutional logic is a rather abstract concept. Therefore, we had to carefully read between the lines. With case study research we could go deeper in to these phenomena. For the same reasons we chose to conduct semi – structured interviews. Therefore, we could analyse ad-hoc situations and we can go deeper in to the experience of people. This is interpretative research mentioned by Eisenhardt (1989). To discover the institutional logics we used the ideal type method (Thornton and Ocasio, 2008) 6. This method is used by many researchers exploring institutional logics. It is a method of interpretive analysis for understanding the meaning that actors invest their actions with (p110). The method structures logics in organisation identity, legitimacy, authority structure, mission, focus of attention, strategy and some control aspects. In addition we added concepts in line with them explicit for our case. These are: Operating procedures, (recipe) rules (cooking etc.) and communication of control. These concepts are in line with research of Rao et al (2003), who conducted research in a French kitchen. Furthermore, we explored the way inertia could be managed. Therefore we selected two cases, one in the beginning of the change process and one in which the process is in a later stadium. Therefore, it became clear which things were different and what helped to reduce inertia. The two cases are part of the same firm, but are separate organizations. Therefore it is a multiple case design (Eisenhardt, 1989). This research focuses on the individual level behaviour and therefore individuals are the units of analysis.

Case description

This research is conducted in cooperation with the company X. This company has 500 people in all its subsidiaries around the Netherlands. The company recently is integrating the business chain, by taking over healthcare facilities to control the operational process. The management accounting mechanisms have to change in these facilities. Furthermore, the operations have to work more effective and efficient and the aim is to combine small support facilities to create large ones. For the data collection we selected two of these cases which are involved in such an outsourcing project. In one of the cases this process is rather successful and people support the change rather good. In the second case this process is going less fast and people do not accept and/or adapt to the changes which are implemented.

Data collection

For the data collection we used semi – structured interviews structured by the concepts of interest from the theoretical framework. These concepts were formal mechanism, sense making, institutional logics and inertia and experiential learning. For each concept we questioned the personal view and opinion, what changed, how they reacted and what helped. These interviews were conducted using an interview guide, which can be found in appendix 1. The structure of the guide was not used as fixed, but as a guideline. Questioned were not always asked in the same order. Furthermore, the interview guide used the concepts from the ideal type method as support for structuring the interviewer during the interview. Interviews were conducted with 13 people:

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- 5 people of the healthcare support facility in Case 1

- 6 people of the healthcare support facility in Case 2 - 2 people of management of the acquiring company X

Every interview was taken in Dutch, were recorded and lasted for approximately 45-60 minutes. In this research we applied the concept of triangulation. Besides interviews we also looked at other ways of data collection. We used observation to generate information about the engagement in practice from people and we searched for ways in which we could see if there were differences between the cases in practice situations. Furthermore, we had many informal talks with people in the canteen for example. We collected the relevant data in a daily dairy.

Data analysis

The analysis focused on the theoretical interpretations of the recorded interviews. Analysis of the results was done by coding of the tapes. The interviews were analysed with the program Atlas.ti to give important small audio fragments of the interview certain codes which represent the content of the fragment. The codes were classified according to the theoretical concepts in our framework. Sense making was found by the codes: uncertainty, clarity and panic. To identify institutional logics the ideal type method was used as codes for the fragments. Furthermore, we added the following codes to these fragments: rational reasoning, irrational reasoning, assumptions normative and symbolic dimension7. The last concepts from the model we coded as learning, confrontation and reflection, experience and trust.

Different codes represented different parts of the interviews, which enabled us to understand certain patterns in the data. Each case had its own data set with the same codes. This way cases could be analysed in the same way, because a within case analysis and a cross case analysis were conducted. Another advantage here was the ability to compare the results with each other, mentioned as the cross case analysis. After all interviews were coded, a selection for each concept in the theoretical framework could be made.

By then the coded quotes from the interviews were divided by concept from the theoretical framework in a PowerPoint presentation. Institutional logics were identified by dividing codes by concept from the ideal type method. We combined quotes from different cases and hierarchical positions per concept of the framework. Overview was maintained by colouring the quotes by position (manager - worker) and case (Case 1 – Case 2). After that, the differences in reasoning between them could be seen and these differences were implemented in the analysis. This was structured by indicating the essential values shaping behaviour by the concepts: organization identity, legitimacy and mission. After that, it recognized those differences in the control mechanisms, which changed (strategy, rules, operating procedures, authority and communication). Finally, we linked the concepts to ambiguity, capability or contradiction.

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Analysis

This study of institutional contradiction and inertia in changing management control almost exclusively used individual verbal accounts which resulted from the semi-structured interviews. Reading between the lines of what the interviewees were saying allowed us to recognize norms, values and rules which shaped their behaviour and place it into a broader context. However, interviewees were also rationalizing passed events and actions during the interview. This was useful for recognize if some rational reasoning was shaped by their logics. By asking detailed questions and examples, by observations and by keeping a daily diary we also obtained information which indicates less rational way of behaviour and events. This chapter will describe the results we found in the practice situation about the contradictions in institutional logics and how this causes inertia in changing management control. We address the concepts which were stated in the theoretical framework we conducted before. In the next section we shortly describe the differences in the institutional logics which enter the control system8. We explain the most important differences in core norms, values and assumptions which are the institutional roots of contradiction. This way we place the individual level behaviour, which causes inertia, in a broader context. The following section begins describing the circle in the framework and how we obtained insights of sense making in the case resulting from the logics entering the control system in the beginning of the take over. The subsequent section explains the way in which contradicting logics cause three instances of inertia, building on the important differences stated before9. The last section will describe in which way this inertia could be managed by practice situations, building on a cross case analysis between the support facilities in Case 1 and Case 2.

Institutional logics; healthcare and business

This section describes the most important differences in core norms, values and assumptions which we recognized as institutional forces entering the control system which were contradicting between logics in our case. The purpose is to provide clarity about the broader context which shapes concrete behaviour which causes instances inertia in changing management control. This is noted in the first part of the definition of Thornton (2004) as: ‘The

social constructed, historical pattern of material practices, assumptions, values, beliefs, and rules..’ by which

cognition and individual behaviour is shaped.

When we tried to obtain the common theme running through the factors of mission, legitimacy identity, and focus of attention, we derived three core differences10. The first and most important one was the way the organisations dealt with their financing issues. The essence is that businesses are dependent on their activities and resources to generate profit and to have the right to exist. Healthcare is financed by the government and therefore not dependent on her resources and activities for financial continuity. Everything was subsidized i.e. “It all came

from the big budget”; therefore people did not care about money. Currently, nothing was possible anymore and

many employees had difficulties in accepting that. In addition, employees explained us government budget covered everything and that this is not the case anymore.

8_{These institutional logics are represented by the dotted and straight line rectangles in the framework. These} rectangles represent the business and healthcare institutional logic

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These instances of inertia are represented in the theoretical framework by the square within the circle.

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Chef Case 2: It is not like in the past where the government came with a bag of money. Back then, it was only about providing a good meal for the client. Now we have to earn money to pay the rent, electricity and your salary etc.

Consequently, formal control is of less importance in healthcare. This was an important insight of our analysis. When people do not have financial systems or do not had to incorporate financial arguments in their reasoning, there is less focus on formal control. The operational manager (from business) of both support facilities stated that there was no formal control at all. Compared to the view of people who originally came from healthcare we obtained somewhat nuanced insights here. These indicated that the differences between the formal organisation and the actual organisation were very different in healthcare. There were formal rules, but people interpreted and used them not very strictly, as mentioned by an employee from the kitchen in Case 1:

In the hospital it was easier... ehm.. In the hospital there was a grey area! You had rules, but you could break them. Well, you didn’t break them, but rules were not followed very strictly. There was a grey area of what was allowed and what was not allowed.

The second important difference is directed to the behaviour and actions, which are based on feelings, emotions or ratio. The operational manager in Case 2 expressed that ‘the way things go around here’ had changed from warm water to ice. In the past it was lovely, soft. Currently, everything was harsh, direct and had boundaries and people experienced difficulties to accept that. Many people addressed this during the interviews. Reasoning of a production worker in Case 1 emphasised this statement:

Production worker from healthcare: Do you no what healthcare is? What the roots of healthcare are? It is compassion and compassion is: you want the people to get better, that they get proper care. That’s care, share feelings of people. In business it’s like: “you have a producer, a client and the client has to be satisfied”. It’s a rational relation and argumentation. In healthcare there are emotional connections and arguments for existence.

The last important difference is the focus on stability between the two logics. With stability we mean that many things are more fixed in healthcare. Where businesses try to obtain stability by continuously change, be more efficient to keep up with environment to survive, people in healthcare are used to obtain it by ‘doing always the same’. Some people for example worked in the dishes or in preparation for twenty – five years now. Another example is that people made exactly the same amount of meals with the same people every day. The general manager told us everything was fixed procedure and that orders were known a week in advance, but now they knew it a day in advance. He added to it:

General manager: People are anxious for uncertainty and try to avoid it. They always did the same things, the same routines. They never experienced change and now everything is changing. This is also a source of uncertainty. People do not really know what uncertainty is. A middle manager from healthcare added: People in healthcare are really much more directed towards stability11.

This part described essential contradictions in values, beliefs and institutional factors, which shape the cognition of people and how they produce meaning to their social reality. The following part will indicate how these

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contradictions cause inertia in changing management control. The next section begins with explaining the circle from the framework. We begin with showing how sense making arose from the changes.

Sense making

A couple of years ago, company X started to enter the healthcare environment by taking over different healthcare facilities to integrate the business chain. X is a profit – oriented company and with the start of these projects they entered the non – profit healthcare domain. After two years, changes in operations still were not implemented in the way top management desired. When company X gained control, people were very pleased, because just before the take over, they were confronted with totally unexpected bankruptcy. People were told that the financial results were very positive a few months before bankruptcy was declared. They were confronted with a radical disruption of their knowledge and assumption about the company. Furthermore, people lost stability and did not know what to do to save the company. A chef in Case 2 declared:

The manager in the healthcare situation gave a speech in the canteen to all of us and he told us that we

were operating very well financially. I thought: “This could not be better, large profits etc. We are doing a very good job”. But then company X came in and judged that this was not correct at all. We did not have any idea how to fix it or how to make more profit.

The employees, of the facilities of both cases, did not have enough knowledge and information of the situation and did not have the information to reduce this uncertainty themselves. When company X changed control according to their objectives, uncertainty arose and people experienced difficulties, because they could not lean on their former routines anymore. Several employees explained that people went home crying and many workers could not take it anymore. They went totally crazy and went home for months with a burn out. They only saw the work and did not realize the purpose of doing it, one said. The production manager in Case 2 underlined this chaos and told us employees needed information to help them understand the process and to deal with the changes which were implemented. He gave the following example:

Many people say things like: “what is happening around here?!” We get new employees, green trucks.. There is changing a lot. They think “Wow, this soup has to be delivered! Just put something together! If it’s just red and looks like tomato soup its fine. If it’s also red tomorrow, but really different, that’s not a problem”. At that moment I took some days off and designed new recipes and rules for the chefs to structure it all.

During that period of change, company X decided to increase production and implemented several instruments and working procedures (control mechanisms) to make production more efficient. More flexibility was needed in the production process to deal with the efficiency aspect. Recipes were structured more; task variety increased and rules for production were adjusted. Employees tried to make sense of the situation and produced meaning to their reality. They rationalized reality and tried to learn the new ways of working as an outcome of interplay between action and interpretation, as stated in the theory section. One of the chefs in Case 1 told us:

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The sense making process already highlights something about the path dependency. Individuals try to produce meaning to reality according to their own logics and common sense. They try to use the information they receive, but also use their own information. The following quote highlights a typical example of it.

Production worker in Case 2: When something has to change you always ask yourself: ‘Yeah… but how

do we have to do it?’ Because when we cook different it is half baked or overdone. You have to find your way there. How do you find that ‘way’?12 By doing it. Just common sense, thinking over the best

way of doing it and then you figure it out. Mostly we find it out our self; we do not use information from management or new rules.

This last example indicates the problem of using internal information to produce meaning to reality. This common sense and own observations and information are influenced by the logic engrained in the healthcare sector. When people use their own ideas and thoughts to rationalize events instead of the information from the new management, problems could exist in the congruence between the behaviour wished for by the business logic and the actual behaviour. The next session will further elaborate the difference in these logics and the inertia it causes in management accounting change when people are making sense.

Conflicting logics: ambiguity and inertia

The following three sections describe three instances of inertia13 in changing management control14. This section provides insights from the case situations were ambiguity caused inertia. We highlight that changes in management control, representing the business logic, are misinterpreted by people with a healthcare logic or focus on very different aspects of the change, which causes inertia.

Institutional logics provide insights in how people are reasoning rationally and processing information (Thornton, 2002; 2004). When these logics contradict in a single organisation this way of rational reasoning and information processing differs between the parties and is a source of misinterpretation and inertia. As already addressed, the managers of the healthcare facilities were really focussed on generating profit. Their way of reasoning is that for generating profit the processes had to be more efficient. Therefore, it was very important to optimize the process and to level the amount of resources with the production level as efficient as possible. People in the healthcare institution did not understand him. They had a rather different way of reasoning and a different view on how to generate profit. They directly linked profit to more sales and, more importantly, almost no one directed attention to their own process. To get a better understanding of this we also confronted people from healthcare with how they thought profit had to be generated. Almost everyone reasoned like this:

Production worker Case 2: things have to go better financially. What is essential for it? Well we just need more work here. We have to cook more meals. What is the most important thing to do then? I think salespeople have to do their work better and sell more meals or the ageing level has to increase. Except for some machines and instruments, we, the personnel and the space, are ready to handle the extra sales.

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The questions formulated in bolt style were questions asked by the interviewer to obtain some more information about the subject or specification of the answer.

13_{These instances of inertia are represented in the theoretical framework by the square within the circle.} 14

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This way of rational reasoning obstructed the way management could implement efficiency and optimizing mechanisms effectively, because people did not have the same arguments for generating profit. They experienced difficulties in the reason for adapting to those controls. Furthermore, also in concrete rules for control, people from healthcare reasoned in a different way, which produced inertia in implementing new rules. A major problem in the former healthcare situation was the waste percentage of the cooking process. The management of company X implemented rules to radically reduce this. Consequently, they needed to adjust the bottlenecks by reducing the amount of personnel or/and making them more flexible. However, people from healthcare reasoned in a different way from the same profit objective. They were reasoning that they needed to cook more when certain people in the process were doing nothing at a certain point, because these people cost money. Instead of being strict in optimizing the process they were focussed on stability and keep people on board. Moreover, the core values and norms of financial objectives and formal control highlighted the strictness and rational way of reasoning in businesses that differed from healthcare. Consequently, people from healthcare were not used to be confronted with the way managers communicated and the way in which they used the rules to provide guidance. When people were confronted with deviations of the rules, or mistakes, they reasoned that it was a personal attack, although managers did not mean it like that. Many interviewees mentioned this as really difficult to adapt to. In line with that, also managers experienced difficulties in guiding people to adapt to change in control.

As the last point indicates, not only the way of reasoning in building an argument causes ambiguity. Also as our theory states, cognition is shaped differently. Therefore, people focus on a limited amount of information or value certain information differently, which causes ambiguity (Hyvonen et al, 2009; Ocasio, 1997, Thornton and Ocasio, 2008). This became clear when the manager told us people did not saw that their own actions really had consequences for the financial results in other parts of the company. The general manager and middle manager (from healthcare) agreed with each other on that in one of the interviews:

General Manager: People don’t see the consequences here. The consequences are different. When we forget to deliver something, we need four, five couriers, which have to drive to the other side of the country. If we have to go to the south, it costs 250 euro. These consequences were not as big in healthcare.

As a result it was difficult to change and implement financial control on individual level in this organisation. People from healthcare did not value and interpret it as if it was an important piece of the whole process to make profit. Furthermore, as stated before, insights from our case clearly show that formal control and rules were more valued and interpreted as guidelines and not as strict the business meant it. Referring to the grey area we mentioned15, the actual behaviour was very different from the formal rules which had to guide behaviour. In healthcare this was a normal thing, as stated by an employee in the kitchen:

It is far more pragmatic and rational or concise now. With business guys its: “this, this, this (knocks on the table)”. For example they give very clear instructions, rules and information. “Its this, this, this is how we going to do it!” It is not loosely interpreted here. In the hospital it was more informal and friendly. It was far more easy-going. The rules were not valued that strictly.

The rules were applied less strict in the healthcare situation and this caused problems in the way behaviour was adjusted after the business logic changed controls. Therefore, managers, who originally came from healthcare themselves, did not provided guidance in the strict way business wanted it, according to the general manager. Furthermore, a new manager from the food industry in Case 2 indicated:

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