Master Thesis
Management Control & Trust in Inter-organizational Settings
“The Trust Building Process of Formal Control in an
Inter-organizational Relationship”
by
ANNEMARIE KEIZER
University of Groningen Faculty of Economics and Business
June 2014 Words: 14.411
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ABSTRACT
Confidence is a key factor for a successful inter-organizational cooperation. Trust and control are sources of confidence. Therefore investigates this study the trust building process of formal control in inter-organizational relationships. The study starts with a theoretical analysis of the concepts trust, control and the relationship between these concepts. Based on current literature, trust building elements that foster inter-organizational trust are identified. Literature also indicated that the nature of the trust-control relationship can be substitutive, complementary or interactive. From the theoretical analysis, the main research question and three sub-questions are formulated. Qualitative analysis, based on semi-structured interviews, provides answers to these questions. Results suggest that formal contracts in an inter-organizational relationship provide trust building elements like accountability, clear objectives, commitment and communication. Further results demonstrate that when there is indirect inter-organizational trust, formal control and trust serve as complements. However, when the cooperation continues and indirect inter-organizational trust transfers towards direct trust, formal control and trust serve as substitutes.
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1. INTRODUCTION
Recent literature investigated the role of trust and control in inter-organizational relationships in different ways (Costa & Bijlsma-Frankema, 2007; Velez et al., 2008; Vosselman & van der Meer-Kooistra, 2009). Despite this recent interest, there is still no conclusive evidence on the relationship between control and trust in an inter-organizational setting. There are contradictory interpretations of how trust and control relate to each other (Costa & Bijlsma-Frankema, 2007) and there is disagreement about whether control and trust are substitutes, complements or whether there is an interactive relationship between the two concepts. Some researchers (van der Meer-Kooistra & Vosselman, 2000) argue that trust and control are inversely related, so more control results in less trust and vice versa (substitutive perspective). Others (Tomkins, 2001) suggest that control and trust are mutually reinforcing, so more control leads to more trust (complementary perspective). There is even a third perspective, the interactive perspective where control and trust interact (Vosselman & van der Meer-Kooistra, 2009).
Besides these theories about the nature of the control-trust relationship, other researchers (Aulakh et al., 1996; Dekker, 2004; Vosselman & van der Meer-Kooistra, 2006; Zaheer et al., 1998) extended the literature field by providing classification schemes of trust or control. Dekker (2004) makes a distinction between goodwill trust, capability trust and institution based trust whereas Rousseau et al. (1998) use a different classification scheme. They categorize trust as calculus-based trust, relational trust and institution-based trust. These classification schemes provide a better understanding of the different roles of trust. But these classifications do not contribute to a better understanding of the way in which trust is built (Bachmann, 2001). Because trust and control are not static phenomena, a dynamic analysis is required (Costa & Bijlsma-Frankema, 2007) to get a more comprehensive understanding of the process in which trust is built.
4 Next to trust is formal control the other aspect of this research study. Formal control is frequently used as a safeguard for inter-organizational risks (Krishnan et al., 2011). One of the inter-organizational risks that is safeguard by formal control is relational risk, the probability of non-satisfactory cooperation (Das & Teng, 2001). A non-satisfactory cooperation can result in opportunistic behaviour and that can harm the cooperation (Das & Teng, 2001). Therefore it is important for people in the business field to consider the impact of formal control mechanisms on the level of inter-organizational trust and on the successfulness of the cooperation. This research study contributes to the awareness of this impact by investigating the way in which trust is built within an inter-organizational cooperation. The trust building process is investigated by answering the research question: How is trust built with formal control in an inter-organizational setting?
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2. LITERATURE REVIEW
To get a comprehensive understanding of the trust building process of formal control in an inter-organizational relationship, essential literature about control and trust is explored in this section of the research paper. First, literature about the concepts inter-organizational relationship, trust and control provide a theoretical basis. Second, the relationship between control and trust is examined by describing different theoretical views on this relationship. Based on the theoretical analysis sub-questions are formulated.
2.1 Inter-organizational relationship
An inter-organizational partnership consists of two or more organizations which try to balance individual interests with the objectives of the cooperation (Aulakh et al., 1996). Due to globalization, inter-organizational relations have become looser, more difficult to monitor (Costa & Bijlsma-Frankema, 2007) and competitive pressures will tend to select out inefficient relationships (Zaheer & Venkatraman, 1995). Therefore, choosing the appropriate partner, aligning incentives, using ownership control and establishing trust (Coletti et al., 2005) are critical factors of a successful inter-organizational relationship (Aulakh et al., 1996). In this research study is the organization that cooperate with the interviewed organization cooperate called partner.
Within an organizational relationship it is important to consider inter-organizational risks as these risks are linked with potential losses. This is demonstrated by the high failure rate of alliances relative to single organizations (Das & Teng, 2001). This high failure rate is due to the uncertainty surrounding the cooperative behaviour of the partner. This is defined as relational risk. Relational risk is the probability and consequences of non-satisfactory cooperation (Das & Teng, 2001). It arises because there is a potential that firm’s interests do not align with the interests of the inter-organizational relationship. As a consequence, firms behave opportunistic and this can create problems for a successful inter-organizational relationship (Das & Teng, 2001).
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2.2 Trust
Since trust is a source of confidence and it plays an essential role in an inter-organizational relationship it is important to explore present literature on this topic.
2.2.1 Trust definition. There are many different definitions of trust used in literature. (Aulakh et al., 1996; Coletti et al., 2005; Das & Teng, 1998; Tomkins, 2001; Velez et al., 2008; Vosselman & van der Meer-Kooistra, 2006; Wicks et al., 1999; Woolthuis et al., 2005; Zaheer et al.,1998). This may be due to the multifaceted nature of trust as it is a complex concept with a variety of levels of analysis to which it is applied (Zaheer et al., 1998). Table 1 provides an overview of the different definitions of trust used currently in the literature field.
Table 1. Definitions of trust
“The degree of confidence the individual partners have on the reliability and integrity of each other”
Aulakh et al. (1996) “One’s perception of another’s trustworthiness” Coletti et al. (2005) “Positive expectations about other’s motives with
respect to oneself in situations entailing risk”
Das and Teng (1998) “The adoption of a belief by one party in a
relationship that the other party will not act against his or her interests, where this belief is held without doubt or suspicion and in the absence of detailed information about the actions of that other party”
Tomkins (2001)
“The willingness of a party to be vulnerable to the actions of another party on the expectation that the other party will perform a particular action which is important to the trustor”
Velez et al. (2008)
“Having confidence that one’s expectations will be realised”
Vosselman and van der Meer-Kooistra (2006) “Trust is the expectation by one entity of ethically
justifiable behaviour – that is, morally correct decisions and actions based upon ethical principles of analysis – on the part of the other entity in an economic exchange”
Wicks et al. (1999)
“The expectation that a partner will not engage in opportunistic behaviour, even in the face of opportunities and incentives for opportunism, irrespective of the ability
to monitor or control that party”
Woolthuis et al. (2005)
“The expectation that an actor can be relied on to fulfil obligations, will behave in a predictable manner and will act and negotiate fairly when the possibility for opportunism is present”
Zaheer et al. (1998)
7 Since there are many different definitions of trust, Zaheer et al. (1998) suggest that the components reliability, predictability and fairness capture the complexity and multifaceted nature of the concept trust. Therefore, the definition of trust in this paper is the willingness to be vulnerable to the actions of another party in a risky situation on the positive expectation that the other will perform a particular action which is important to the trustor. This definition contains the component reliability by considering “positive expectation”, suggesting that the other party will perform the action as expected. The definition describes predictability by using “the expectation”, it focuses on the future. Last, it covers fairness by using “perform a particular action which is important to the trustor”, as this is about fair behaviour towards the trustor. A trustor is someone who holds expectations toward another party and may or may not be willing to be vulnerable to the actions of the other party. On the other side there is a trustee, which is the party that is assessed by the trustor (Becerra & Gupta, 2003).
Important for this research study is the distinction between direct- and indirect trust. The previous definition of trust is based on direct trust while indirect trust takes the judgement of an external source into account. Indirect trust is a situation when forming a trust belief, people take into account the judgement of other sources whom they trust (Ferrin et al., 2006) 2.2.2 Inter-organizational trust. As this study is about collaboration between firms, the focus in this study is on trust between firms. Inter-organizational trust is the extent to which organizational members have a collectively-held trust orientation toward the partner firm (Zaheer et al., 1998: 143). It is a key element in inter-organizational relationships (Das & Teng, 2001) as it is the central mechanism in coordinating expectations, interactions and behaviors (Costa & Bijlsma-Frankema, 2007). Furthermore, it decreases relational risk, integrate partners (Das & Teng, 2001) and it reduces inter-organizational conflict (Gulati & Nickerson, 2008).
2.3 Trust Building Process
8 2.3.1 Trust development. Inter-organizational cooperation is a continuing process due to the actions and interactions taking place (Huang & Wilkinson, 2013). This indicates that trust cannot be built in isolation (Huang & Wilkinson, 2013; Vangen & Huxham, 2003). Timing in an inter-organizational relationship is critical since partners should not expect too much from the relationship too soon (Tomkins, 2001). At earlier stages of the inter-organizational relationship the partners’ commitment is less extensive. Because it is impossible to monitor every detail within a cooperation firms must always have a minimum level of trust. Because without this minimum level of trust it is difficult for parties to agree on goals, to impose rules and to conduct teamwork (Das & Teng, 1998). With a lack of this initial trust parties do not cooperate and contract with each other until they have reached a given level of trust where they are prepared to commit themselves to each other (Tomkins, 2001).
2.3.2 Trust building elements. Once the inter-organizational relationship is established, trust building elements will foster the initial inter-organizational trust (Inkpen & Currall, 2004). The trust building process requires investments in key issues as objectives, accountability, commitment, compromise, communication, trust and power (Vangen & Huxham, 2003). In the next table (table 2) trust building elements are derived from current literature and an explanation of the way in which the elements builds trust is provided. All these elements impact the trust building process and are therefore relevant for this research study. Based on this overview the trust building elements of a formal contract are selected later in this research study (see section 4.2).
Table 2. Trust Building Elements
Past behaviour “Trust involves expectations about future behaviour.
Therefore, the trust building process is guided by past behaviour of the partner firm.”
“Partners learn about each other’s behaviour and learn to interpret each other’s actions. Positive repeated interaction between partner firms creates a higher level of trust.”
Costa and Bijlsma-Frankema (2007)
Aulakh et al. (1996) Inkpen and Currall (2004)
Reputation “When firms cannot rely on past behaviour, the trust
building element reputation is important.”
“The initial building of trust can involve a consideration of second-hand information like reputation.”
Tomkins (2001)
Lander et al. (2004)
Clear objectives “Developing an understanding of partner’s expectations is
crucial at the formation stage of a cooperation. Having clarity of purposes and objectives of the cooperation provide opportunities to form expectations about aims and behaviour of partners. This can serve as a basis for the trust building process.”
Vangen and Huxham (2003)
Communication “Communication facilitates the process of collecting
evidence about partner’s trustworthiness.”
“Communication builds trust by providing a basis for continued interaction. From which common norms and values are developed.”
Das and Teng (1998)
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Communication “In building trust it is important for parties to behave
consistently over time and situations, work to meet deadlines and follow promises. This behaviour can be accomplished by explaining expectations, agreeing up-front to the steps necessary to complete tasks, drawing consequences of not meeting expectations and having procedures in place to evaluate performance.” “Communication trust building elements are
encouragement of communication, sharing of knowledge, provision of timely feedback, creation of common
language, creation of a shared vision, offering explanations for decisions, an open communication environment and the presence of receptive actors.”
Lewicki and Wiethoff (2000)
Lander et al. (2004)
Commitment “Commitment is a strong indicator to continue
cooperation.”
“Commitment plays a vital role in assessing the
trustworthiness of another party. A party can demonstrate trust in the other party by committing to actions that makes a party potentially vulnerable to opportunistic actions by another party. In this way commitment can serve as a trust building element.”
“Assigning contracts can act as a form of commitment.” “Partners may use the contract as a tangible expression of their trust in each other and their intention to be loyal partners. In these cases the can be partly interpreted as a symbol or signal for showing commitment
Lander et al. (2004)
Huang and Wilkinson (2013)
Huang and Wilkinson (2013)
Woolthuis et al. (2005)
Accountability “Consistency, holding the other party accountable and the
appropriate use of motivators like rewards and punishments are well documented. These mechanisms mitigate the effects of uncertainty during a cooperation and build trust.”
Lander et al. (2004)
Inter-organizational adaptation
“Inter-organizational adaptation is the adjustment of a partner’s own behavior in order to develop a fit between the partners in the cooperation. Inter-organizational adaptation is an effective trust building element.” “Since trust is not built in isolation, changes in the setting of the inter-organizational cooperation leads to changes in behavior that affects the nature and degree of trust.” “Flexibility and willingness to accept deviations from the contract are key elements of inter-organizational
adaptation.”
Das and Teng (1998)
Huang and Wilkinson (2013)
Das and Teng (1998)
Risk “Risk is the core of trust, while only in risky situations
trust is relevant. Risk is also a trust building element. When a party realizes that another party has taken large risks by trusting the other party, the other party is tended to behave in a trustworthy manner. Moreover, only when some initial risk is taken it is possible for a party to demonstrate his or her trustworthiness.”
Das and Teng (1998)
Trust “Previous trusting acts that benefit the trusting party will
increase the likelihood of reciprocity and develops mutual trust. So trust in itself is also a trust building element.”
Weber et al. (2005)
10 2.3.3 Optimal level of trust. Beyond the initial level of trust and the trust building elements, interactions will play an increasingly important role in continuing the cooperation and in the development of inter-organizational trust (Inkpen & Currall, 2004). However, researchers suggest that it is possible to over- or under invest in trust (Velez et al., 2008; Vosselman & van der Meer-Kooistra, 2009; Wicks et al., 1999). Trust will be damaged when formal control exceeds the level of control necessary to safeguard the transaction (Velez et al., 2008). Until the use of control has reached a threshold, the use of controls is complementary to trust. Over- or underinvestment has consequences for the cooperation. Whereas underinvestment in trust results in missing the opportunity to lower costs of control, overinvestment results in higher costs to sustain trust (Wicks et al., 1999).
2.4 Control
Although control and trust are very different concepts, they are interlinked with each other. Next to trust is also control a source of confidence (Velez et al., 2008). One of the functions of trust is that it reduces complexity and uncertainty, but it also produces risks (Bachmann, 2001). Control mechanisms try to reduce these risks. Control is defined in this paper as “a regulatory process by which the elements of a system are made predictable through the establishment of standards in the pursuit of some desired objective of state” (Leifer & Mills, 1996: 117).
The control literature is split up in two forms of control, formal- and informal control. Formal control is directed toward the establishment of rules and procedures to monitor and reward desirable performance whereas informal control focuses on the regulatory power of organizational norms, values and internalization of goals to encourage desirable outcomes (Costa & Bijlsma-Frankema, 2007).
11 Despite these functions of a contract, bounded rationality precludes the writing of complete contingent contracts (Zaheer & Venkatraman, 1995). Consequently, contracts are more open to interpretation (Woolthuis et al., 2005). But these incomplete contracts do not necessarily result in conflicts as formal control can have a positive effect on the level of trust in an inter-organizational relationship. This occurs when formal control is perceived as enhancing autonomy, competence and relatedness (Costa & Bijlsma-Frankema, 2007). Because an inter-organizational relationship will not develop without the growth of trust and formal control can enhance trust, the sub-question of this study is: which components of a contract build trust?
2.5 Control-Trust nexus
To reach effectiveness in inter-organizational cooperation (Costa & Bijlsma-Frankema, 2007), organizations need to understand the interlinked and complex processes of trust and control (Costa & Bijlsma-Frankema, 2007; Das & Teng, 2001). In this part of the literature review, the different theoretical views on the relationship between control and trust are explored in order to provide a theoretical basis for the control-trust relationship.
2.5.1 Transaction cost theory. Transaction cost theory remarks trust as impossible to assess before a transaction occurs and before a cooperation start. That is why transaction cost theory views trust as irrelevant to business (Bachman & Zaheer, 2006). Instead of trust, the theory focuses on control. Control is seen as a basis for trust as control mechanisms limit the opportunities and incentives for opportunistic behaviour (Woolthuis et al., 2005). The theory received many critiques in recent literature. The main criticism is that transaction cost theory lacks dynamism (Vosselman & van der Meer-Kooistra, 2006). That is why for the understanding of the trust building process this theory is not very useful.
2.5.2 Complementary perspective. This point of view states that trust and control are mutually reinforcing and that both contribute to the level of cooperative behaviour required in a relationship. Control mechanisms increase trust as these control mechanisms make behaviour more predictable (Costa & Bijlsma-Frankema, 2007) and trust complements control by mitigating the limitations of formal control. As a contract cannot include every detail and situation, trust can mitigate this limitation by providing flexible interactions between the firms and secures thereby the details that are not covered by the contract (Yang et al., 2011).
12 2.5.4 Contextual perspective. From this theoretical view the relationship between control and trust can be either complementary or substitutive. It depends on the type of control. Formal control is viewed from a substitutive perspective, because people do not have autonomy to make decisions themselves with formal control and in that way formal control undermines trust. In that sense, trust and control are substitutes. Social control and trust are seen as complementary as social control increases mutual understanding and trust by the creation of shared goals and norms (Costa & Bijlsma-Frankema, 2007).
2.5.5 Interacting perspective. Other researchers (Vosselman & van der Meer-Kooistra, 2009) argue that trust and control are not substitutes or complements, but they argue that the concepts interact. This view acknowledges that both trust and control are not static. Control needs trust and trust needs control and at the same time control produces trust and trust produces control. The result of this interaction between control and trust is a stable and durable inter-organizational relationship (Vosselman & van der Meer-Kooistra, 2009).
2.5.6 Regulatory focus theory. Another perspective on the nature of the control-trust nexus is developed by Weber and Mayer (2011). They state that contract framing influences the way in which the elements of a contract impact the cooperation (Weber & Mayer, 2011). They do not only take the economic impact of formal control into account but also the psychologically influences. One of the theories they use in their paper is the regulatory focus theory (Brockner & Higgins, 2001). In this theory a distinction is made between prevention and a promotion frame. A prevention frame perceives a goal as minimal whereas a promotion frame perceives the same goal as maximal, something that would be ideal if reached (Brockner & Higgins, 2001). This framing is also applicable to formal control. In case of the control trust nexus, the authors Weber and Mayer (2011) propose that a prevention contract acts as a substitute for relational governance. But if a transaction requires flexible, creative or cooperative behaviour, a promotion contract will complement relational governance (Weber & Mayer, 2011).
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3. RESEARCH METHOD
In the literature review were the research questions formulated. In this section of the research paper is the way in which research is conducted explained. First is elaborated why there is chosen for qualitative research. Second is the way in which data is collected explained. The data collection consisted of primary data in the form of semi-structured interviews and secondary data in the form of contracts. Based on this data collection, the data was analysed. Finally is discussed how this research study is made reliable based on research criteria.
3.1 Qualitative research
Within the field of research are two main research paradigms, the explanatory paradigm and the design science paradigm (van Aken et al., 2012). The explanatory paradigm is about describing and exploring knowledge and follows the empirical cycle. The aim of this research paper is to contribute to current literature by solving a pure knowledge problem about the relationship between control and trust. The knowledge problem is that there is no conclusive view on the nature of the control-trust nexus, whether control and trust are substitutes or complements. Because of this research objective, the empirical cycle and the knowledge generating process “theory development” fit best with this purpose (van Aken et al., 2012).
3.2 Data Collection
Like mentioned before data is collected from two different sources, interviews and contracts. In this part of the research method the way in which data is collected is described in detail.
3.2.1 Primary data collection. Since this research study is a qualitative study,
14 3.2.2 Sample selection. The data collection started with approaching companies for an interview. As many different organizations as possible were randomly approached to provide insights for this study. In this way is a comprehensive view created on the concepts trust and control. In total twenty-two organizations were approached for an interview. Ten of them did not response or rejected the request. The other twelve participated. In five weeks the interviews were conducted, varying from thirty minutes till one hour. Five of the interviewees are employees of public institutions whereas the other seven are employees of private institutions. This kind of information is added to this research study in Appendix B.
As the focus of this study is the inter-organizational cooperation, the interview questions were also targeted to this topic. Before the interview started the interviewee was asked to focus on one specific inter-organizational cooperation. Then questions were asked in the same order in which the cooperation developed. First were some questions asked about how the collaboration started and how they got in contact with the partner. Later, the questions were about the function of the contract and the trust developing process. The interview questions that were asked during the interviews are presented in appendix A.
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3.3 Data analysis
The interviews were recorded on audio. From these audio-files, transcripts were made. These transcripts were implemented in the program Kwalitan. In this program, the transcripts were coded to get more insight in the data collection. While using these codes, data is analysed and interpreted. Although the coding provided insights in the interviews and data, it did not contributed directly to the answers on the research questions. In answering the research questions, the transcripts were useful. In this study, the qualitative method summarising data was used (Saunders et al., 2009). Per sub-question was searched for an answer in the transcripts. These answers were collected and summarised in key points. When it was clear what the key points were, overviews were developed and quotes were added to these overviews to underpin the results. These quotes that were collected are presented in the overviews of appendix C, D and E.
The development of the overview in Appendix D followed a few steps. First were the quotes obtained from the interviews which stated something about control and trust and the way in which they relate to each other. Then was indicated with labels what the quotes are about, for example about external control and direct trust. After that, the quotes and situations were interpreted as complements or substitutes while using the labels.
Next to the audio-recordings, notes were made to describe the context of the interview. These contextual data consisted of the location of the interview, date and time, setting of the interview and background information (Saunders et al., 2009). Almost all interviews (except for two) have taken place at the work office of the interviewee. This to ensure the business aspect of the research questions since the research questions were about a business partner in an inter-organizational relationship. All of the interviewees were purchaser at their company or involved in procurement and/or contract management to ensure they are really involved within the cooperation. This kind of information is provided in Appendix B.
3.4 Research Criteria
16 Second, to make this research paper more reliable, results must be independent of the characteristics of the study (Van Aken et al., 2012; Yin, 2003) and potential biases like hot and cold biases have to be controlled. Hot biases are about the influence of interests and emotions of the researcher on the study. Cold biases refer to subjective, cognitive influences of the researcher (van Aken et al., 2012). The potential biases of the researcher in this study are controlled by using the insights of others by coding the interviews, so no codes were overlooked. The potential bias of instruments is controlled by triangulation, using multiple research instruments. The data collection consisted not only of primary data (interviews) but also of secondary data (analysis of contracts). The potential bias of respondents is controlled by interviewing different organizations and people with different positions in the hierarchy. And last, the potential bias of the situation is controlled by researching different forms of inter-organizational relationships.
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4. RESULTS
Now the data is collected and analysed it is possible to show the results of this research study. In this section of the study the results are presented and underpinned with quotes from the interviews. While it is not suitable to incorporate all quotes in this research section, an overview of the data analysis is added to Appendixes C, D and E. In order to provide a comprehensive view on the trust building process of formal control are first the trust building elements of a contract identified. Second, situations are explored when control and trust serve as complements or as substitutes. Based on the results is a conceptual model developed in order to summarize the findings of this research study in one overview.
4.1 Trust building process
The basis assumption of this research study is that trust and control are dynamic concepts. Now are dynamic aspects of trust and the way in which trust is built presented. Although these results are not directly linked to a sub- research question it does contribute to the answer of the main research question by illustrating the process of trust building.
4.1.1 Trust development. Because the interviews were focused on one specific inter-organizational cooperation it was possible to get in-depth knowledge about formal control and inter-organizational trust. To get a comprehensive view of the process in which trust is built, it is good to start describing the situation before a cooperation formally starts. Therefore the interviews started with some exploratory questions about the partner in the inter-organizational cooperation. Some of these exploratory questions were: “how did you get in contact with the partner?” and “what was your expectation of the partner before the cooperation started?” Later in the interview, interviewees were asked how trust in the other party of the cooperation developed. Based on the answers of this kind of questions the results indicate that there must be a minimal level of trust before a party will cooperate or sign a contract.
Interviewee 10 “Trust is there so we cooperate”
Interviewee ten stated that trust is the reason and basis for cooperation. This indicates that there must be trust throughout the duration of the cooperation. But it also argues that there must be trust before a cooperation starts.
The previous quote demonstrated the need for a minimal level of trust in a cooperation. However, this research study investigates the trust building process of formal control. The next quote focuses on formal control.
Interviewee 7 “There is trust, otherwise you do not sign a contract”
18 Interviewee 8 “Trust is the basis for contract management”
The quote of interviewee eight is another piece of evidence for a minimal level of trust. Within this organization trust is part of a philosophy. Trust must be there, otherwise the interviewed organization will not provide a contract to the partner and without a contract the interviewed organization will not cooperate.
4.2 Trust building elements of a formal contract
When there is a minimal level of trust, such as elaborated on in section 4.1.1, and the cooperation starts, trust can further develop within a cooperation. This can be accomplished with trust building elements. Based on the literature review it was taken into account that formal control can have a positive effect on the level of inter-organizational trust. Therefore this research study wanted to identify elements of a contract that builds trust within an inter-organizational cooperation. Table two of the literature review served as a basis for identifying trust building elements of a contract. In the interviews, the interviewees could mention some trust building elements by answering the questions “what is the function of the contract?”, “when did you trust the other party in the cooperation more?” and “what are important elements of the contract?”. Subsequently, the answers on these interviews were compared with the trust building elements of table two in the literature review. Results show that accountability, clear objectives, commitment and communication are trust building elements of contracts.
4.2.1 Accountability. One of the trust building elements that is identified by this research study as a trust building element is accountability. Several interviewees (see Appendix C for an overview) indicated that the function of a contract is establishing agreements, responsibilities and/or liabilities. Some examples are quoted below.
Question “Why is a contract prepared? What is the purpose of the contract?” Interviewee 3 “I think to avoid false expectations and to make clear what the
responsibilities are and of course for them to guarantee the payment. There is written down what I have to pay each month. And of course there is a whole story about mutual rights and obligations”
For interviewee three it was important to formalize responsibilities. In this way a contract served as a guarantee for the payment on the one side and a fulfillment of obligations on the other side. With the formalization parties can be hold responsible for their actions. What the interviewee further said is that a contract facilitates the process of expectations by avoiding false expectations. Uncertainty about the behaviour of the partner is in that way reduced. Interviewee four said about accountability:
Question “What are important elements of a contract?”
Interviewee 4 “The obligation of maintaining the website, the obligation to advertise” Question “To ensure that the partner fulfills these obligations?”
19 In interview four, the interviewee emphasized the inter-organizational obligations. The organizations have to fulfil these obligations otherwise it will have consequences in the form of penalties. A contract provides the opportunity to incorporate these obligations by writing down agreements and penalty clauses.
Question “What are important elements of a contract?
Interviewee 12 “The consideration, why do you make a contract with each other. What do you want to achieve? What do you want to purchase, what is the opposed
compensation? The rates, prices, fees, warranty agreements, responsibilities, liabilities, insurance agreements and the way of ordering. ”
Interviewee 12 …. “Mainly to avoid discussions afterwards.”
The answer of interviewee twelve indicates that there are many important elements of a contract. Interviewee twelve talked about operational agreements like delivery and about more abstract elements like responsibilities and liabilities. However the goal of these elements is the same. These elements are incorporated in a contract to avoid discussions during the cooperation by reducing uncertainty.
In sum, accountability is incorporated in a contract by integrating penalty clauses. With penalty clauses it is clear what the minimal level of expectation is, otherwise the organization have pay money to the partner. This provides clarity and reduces uncertainty. Analysis of secondary data also demonstrates that liabilities and penalty clauses are indeed part of the contracts. From the contracts that were collected (see Appendix E) all incorporated some penalty clauses. So if the contractor do not fulfil the obligations, it can be hold responsible by paying extra money or getting less money for provided goods or services.
4.2.2 Clear objectives. Next to accountability is creating clear objectives also appointed as a trust building element of formal contracts in this research study. Some quotes about clear objectives are presented below.
Question: “What is the function of the contract?”
Interviewee 2 “Registration of agreements”… “If there is uncertainty, and there is often uncertainty, we look at the contract. What is written in the contract? How did we agree on that?”
20 Interviewee 4 … “The main part is about financing. Because you made an investment. For that reason, proper agreements must be made”
Interviewee four answered on that question differently than interviewee two did. This interviewee highlights the importance of clear agreements by thinking about the consequences. The interviewee wanted a successful cooperation, because he made an investment in advance. He wants to receive that investment back within the cooperation and therefore proper agreements must be made. The interviewee further said that the price agreements were fixed for the duration of the contract. So the prices could not change in between. This reduces uncertainty and potential negotiations during the lifetime of the contract. Interviewee eleven answered on the question what is the function of the contract?
Interviewee 11 “To make conclusive agreements with each other”
The interviewee indicated with this quote that conclusive agreements are important. When the organizations agree with the appointments, they do not need to communicate about it anymore. This saves time and effort. According to interviewee twelve is capturing the goals of the cooperation an important element of a contract as he quoted:
Interviewee 12 “What do you want to achieve?” …
So he thinks it is important to know what the objectives of the cooperation are. Then both organizations can work towards it and it is clear what is expected from them.
In sum, the interviewees state the same thing in other words. Clear agreements and clear objectives are important for an inter-organizational cooperation. When there is uncertainty and the agreements are clearly written down in the contract it is not necessary to discuss about it, the clauses can then be interpreted in only one way. So in that sense uncertainty is reduced with a formal contract.
4.2.3 Communication. Communication can act in different ways as a trust building mechanism of formal contracts. A formal contract can in itself function as a communication device by making clear what the agreements are in uncertain situations or on the other side the agreements and clauses in the contract about communication can be perceived as trust enhancing. This will be explained below and in the discussion (section 5.2.4). In case of interviewee four is the initial level of trust based on a dialogue with the partner.
Question: “Where is the initial level of trust based on?”
Interviewee 4 “On the explanation of their side and on the good conversations we had.”
21 Question: “When did you trust your partner more?”
Interviewee 4 “When you notice that what was agreed upon is solid and good executed. So trust is increased when you notice that they are a serious business partner.”
When the cooperation continued, interviewee four told that complying with appointments further increased the level of inter-organizational trust. Behaving consistently and meeting appointments builds trust. As the appointments of a cooperation are written down in a contract it is also interpreted as a trust building element of formal contracting.
Another interview that confirms the results of communication as a trust building element is the quote of interviewee eleven. Interviewee eleven provided an answer on the question “what is the function of the contract?”
Interviewee 11 “Making conclusive agreements with each other and to provide the partner with enough information to be able to make a good price offer.”
In this case the contract served as a communication device. It was developed by the
interviewee and was sent to the partner. This partner could read what was expected from him and react on that by developing a price offer. Partly based on this price offer the interviewee started the cooperation with this specific partner and not with the others. Also during the cooperation the contract served as a communication device. Interviewee eleven described in detail what was expected from the partner in the contract. The amount of materials was for example determined in the contract. If the partner used more than that amount, they had to provide an explanation. In this way the contract ensured continuous interaction.
In total, communication is an important mechanism of a contract. In uncertain situations it provides clarity and during a cooperation it ensures interaction.
4.2.4 Commitment. The last trust building element of formal control identified by this research study is commitment. Two interviewees said that there must be trust before one commits to a cooperation by signing a contract.
Interviewee 10 “Trust is there so we cooperate”
Interviewee 7 “There is trust, otherwise you do not sign a contract”
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4.3 Optimal level of trust
Besides the minimal level of trust and the trust building elements there is another result about the trust building process of formal contracts. Results suggest that it is possible to have too much trust within a cooperation and that this can have negative consequences for the inter-organizational cooperation. Interviewee ten for example emphasized that the duration of the cooperation can negatively impact the performance of the cooperation.
Interviewee 10 “There is a risk if you cooperate for a long time with each other. The motivation to each other decreases. One thinks it will come and then you miss things. The partner thinks we have a collaboration for over twenty years, we do not have to worry. That is a large risk. You see that with innovations”
Whereas interviewee twelve highlights that the level of trust can negatively influences the cooperation.
Interviewee 12 “You must ensure that the cooperation is not becoming too amicable. That can result in price increasing effects and less innovation. It becomes easy and parties recline. That can be a reason to switch from partner.”
Although the different interviewees emphasize trust from different angles, both quotes indicate that there can exist too much trust in the other party of the cooperation. This can have negative consequences for the cooperation as the parties are becoming lazy and less innovative. The parties are used to each other and the cooperation is regarded as a matter of course. As a consequence, parties are less alert, invest less in the cooperation and miss opportunities. This does not benefit the inter-organizational cooperation.
4.4 Nature of control-trust nexus
In addition to the trust building process, situations when trust and formal control act as complements or as substitutes are discovered here to complete the picture of the trust building process of formal control. The results of the interviews are summarized in table four of Appendix D. These results shape the basis for the answers of the second and third sub question: when do inter-organizational trust and formal control substitute? and when do inter-organizational trust and formal control complement each other?
4.4.1 Complementary nature. The results of the interviews indicate that the nature of the control-trust nexus is complementary of nature when there is indirect trust. The following quotes are presented in the same order as the interview to emphasize the process-oriented view and to demonstrate the complementary nature of the control-trust relationship.
Question “Are there situations when you had more trust in the partner?” Interviewee 3 “No, trust is good.”
Question “From the start?” Interviewee 3 “Yes”
23 Interviewee 3 “Well in the start very much. But that slowly drops back. The external party does not interfere anymore.”
Question “Are there situations when the partner did not meet the agreements?”
Interviewee 3 “No I have not discovered. That would influence trust negatively of course. But no, I think the external party will interfere when that happens.”
These quotes are derived from interview three. It demonstrates that there is indirect trust and external control at the same time. In this specific cooperation an external party (a trade organization) controlled the partner in different ways: by checking the legal elements of the cooperation, the external party has the power to interfere within the cooperation and the external party serves as the source of information for the cooperation. These external control elements increase the level of trust in the start of the cooperation as indicated by the quotes presented above. In this way control and trust act as complements as they both contribute to the level of cooperation. The type of trust that is mentioned in the quotes shown above is indicated as indirect trust, since the party of the cooperation trust the external party and thereby the partner. This specific cooperation developed further and the complementary nature of the control-trust relationship changed in a substitutive nature. This will be discussed in section 4.4.2.
The previous quotes indicate the complementary nature of control and trust when there is indirect trust. However these quotes were about external control and not about formal control. The next quotes are focused on formal control and trust.
Question “What are important elements of a contract?”
Interviewee 8 … “What we minimal expect from you is that you can be trusted.” Question “How is trust in the partners developed?
Interviewee 8 “Difficult, because they are in competition they are not fully transparent. When you look at trust you cannot just say I do not trust you. That is not possible. Look, trust is the basis on which we do contract management.”
Question “Where must that trust be based on?”
Interviewee 8 “Trust is based on agreements of the contract and that you do what you agreed upon”
24 These statements direct to the complementary nature of the formal control-trust nexus. Trust and control are mutually reinforcing and contribute both to the cooperation. The interviewee mentioned this by saying that you both need trust and control within a cooperation. Again, in this situation trust is not identified as direct trust. Trust is based on formal control and is not directly based on the partner.
4.4.2 Substitutive nature. When the inter-organizational cooperation is further developed, the control- trust nexus transfers from a complementary nature to a substitutive one. In section 4.4.1 the situation of interviewee three was discussed whereby an external party controlled the cooperation and indirect trust was developed. However, this was in the beginning of the cooperation. The cooperation developed further and external control disappeared, while direct trust was developed. This is indicated by the following quotes:
Interviewee 3 “External party has gradually withdrawn in the process” Interviewee 3 “Trust is good”
So in the situation of interviewee three, external control disappeared and direct trust emerged. In other words, direct trust replaced external control. Other sayings also illustrate the transformation from the complementary nature of control and trust towards a substitutive nature.
Interviewee 8 “What I do in the contract management part is to prevent escalations. If it goes well you do not need a contract. Because when you have a good relationship and good mutual agreements it is not necessary to look at the contract.”
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4.5 Conceptual model
Based on the analysis presented above, the answers on the different sub-questions are combined in a conceptual model.
Figure 1. Conceptual model
This conceptual model represents the trust building process of formal control. It is based on the results of the three different sub-questions. This conceptual model indicates that in the beginning of a cooperation indirect trust is present. At the same time the relationship between formal control and inter-organizational trust is complementary of nature. However, when indirect trust transfers into direct trust the nature of the control-trust nexus changes in a substitutive nature. The horizontal line represents the change from indirect into direct trust. The trust building elements of formal control (accountability, clear objectives, commitment and communication) influences this process.
Formal control and inter-organizational trust serve as complements
Formal control and inter-organizational trust serve as substitutes Trust building elements of
formal control: Accountability Clear objectives; Commitment; Communication; Formal control; Contract Indirect
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5. DISCUSSION
The relationship between formal control and inter-organizational trust is interesting and complex to study. There are many researchers that studied different aspects of the control-trust relationship and all these studies contribute to a more comprehensive view of the relationship between trust and control. However, since there is still no conclusive answer on how the trust building process of formal control progresses, this study is conducted. This study illustrates the trust building process of formal control in an inter-organizational context by describing trust building elements of a formal contract and by investigating situations when trust and control serve as complements or substitutes. In this part of the research study are the results of this study compared with the theory of the literature review. To make this comparison more clearly, the same order as the literature review is maintained.
5.1 Trust building process
In the literature review is argued that trust is a dynamic phenomenon that is accomplished over time (Aulakh et al., 1996; Costa & Bijlsma-Frankema, 2007). The results of this study confirm this statement by demonstrating that inter-organizational trust within several collaborations developed from indirect trust towards direct trust. Further, there are some trust building elements discovered in this study. This suggests that not only the nature of trust can change but also the level of trust can change within a cooperation.
5.2 Trust building elements of a formal contract
Another confirmation of the literature review is that formal control can have a positive effect on the level of trust in an inter-organizational cooperation (Costa & Bijlsma-Frankema, 2007). This is proven by the identification of trust building elements of a contract. However, not all trust building elements are mentioned in section 4.2. The trust building elements that were not applicable to formal contracts are not mentioned in the results section 4.2 because the aim of this research study is not to test previous research studies about trust building elements, but to identify trust building elements of a formal contract. In section 5.3 arguments are provided why these trust building elements are not applicable to a contract. The identified trust building elements that are applicable to a formal contract are accountability, clear objectives, commitment and communication.
27 Third, the assumption made is that contracting parties do expect some positive outcomes of the cooperation, like positive actions from the other party otherwise they will not sign the contract. So there is a willingness to be vulnerable to the party of the cooperation and at the same time there are positive expectations towards the outcomes of the cooperation. In that way accountability serves as a trust building element of a formal contract. This is in line with the research study of Lander et al. (2004). These authors state that reduced uncertainty and becoming vulnerability is a basis for inter-organizational trust.
5.2.2 Clear objectives. The quotes of the results section (section four) indicate that a contract can serve as an instrument that builds trust by creating clear objectives during the lifetime of the cooperation. In case of uncertainty a contract indicates what the agreed agreements were. This provides opportunities to detect possible behavioral deviations of the partner from the agreements. It also makes organizations vulnerable to the partner because the partner can also detect these potential behavioral deviations and this may have negative consequences in the form of penalties. Besides that, with clear objectives the parties know what is expected from them and uncertainty is limited. This provides opportunities to trust the other party of the cooperation. This result is in line with Vangen and Huxham (2003). They argue that clear objectives develop an understanding of the behavior of the partner and this in return provides opportunities to form expectations about the future behavior of the other party. As a result, uncertainty is reduced and trust can be build (Vangen & Huxham, 2003).
5.2.3 Commitment. Just with the other trust building elements, signing a contract makes a party in some way vulnerable to the partner. To become vulnerable consequently creates a risk for the contracting parties. They become dependent on each other. That is why signing a contract can in itself also be seen as a form of commitment and a trust building element. The contracting organization is willing to take a risk. So the organization shows trust in the partner by signing the contract. This in return can increase the level of trust by the partner. Based on that is this result in line with Huang and Wilkinson (2013).
28 Third, clauses about communication and information sharing can be included in a formal contract. Sharing information is a form of knowledge sharing which can be interpreted as an inter-organizational trust building element. When a party shares knowledge with another party in a cooperation it shows that the party is willing to be vulnerable to the actions of the other party in a risky situation while knowledge is valuable in this competitive, global world. When you share information with a partner, the investment in the cooperation and thereby the risk if the cooperation fails increases. Sharing information is a sign of trustworthiness which can increase the level of trust by the partner. That is why communication can be indicated as a trust building element of formal control. This is in line with Lander et al. (2004) who perceive information sharing as one of the communication trust building elements.
5.3 Non-trust building elements of a formal contract
Based on the results of section four it can be concluded that not all trust building elements fit with a formal contract. Past behavior, reputation, inter-organizational adaptation, risk and trust are not identified as trust building elements of a contract. This may be due to the fact that these trust building elements cannot be written down on paper.
5.3.1 Past behavior. Past behavior was mentioned in the interviews as a trust building element, but not one that is applicable to formal control. Past behavior is apparently some feeling, tacit knowledge that is not specified on paper. Therefore it did not function as a trust building element of a formal contract in this study.
5.3.2 Reputation. Next to past behavior is reputation also a trust building element that was not applicable to formal contracts. First, the consideration of reputation built indirect trust but not direct trust. Second, it is not possible or very difficult to capture reputation in a contract. That might be the reason why reputation as trust building element was not applicable to contracts.
5.3.3 Inter-organizational adaptation. Inter-organizational adaptation is about the adjustment of one’s behavior. It is about flexibility instead of strictly holding to the contract. Basically, this trust building element of adaptation oppose to a contract. In a contract is often stated in clear wording what the agreements are in order to avoid discussions. But inter-organizational adaptation and flexibility is about open interpretation and acting outside the agreements in the interest of the cooperation. That is why it is in this study not identified as a trust building element of a formal contract.
5.3.4 Risk. Instead of risk is commitment recognized as a trust building element. It was not so much risk that built trust but it was more about commitment, becoming vulnerable to another party.
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5.4 Control-trust nexus
Next to the dynamic view on trust and the trust building elements is the nature of the control-trust nexus also of great importance in the development of a complete overview of the trust building process.
The results of the data-analysis propose that within the start of the cooperation formal control and inter-organizational trust are complements. It suggests that in the beginning of the cooperation there is more uncertainty about the partner’s behavior and therefore more external control is required before trust can be developed. But the results also indicate that there must be a minimal level of trust, before a contract is signed. This is indirect trust because in this situation trust is based on the judgment of other parties. So both trust and control contribute to the cooperation. However, when the contract is signed and the cooperation continues results show that the complementary nature of the control-trust nexus changes in a substitutive nature. When indirect trust transfers to direct trust, verbal agreements are made instead of written down in the contract.
5.4.1 Transaction cost theory. No evidence is found for the transaction cost theory. This may be due to the dynamic focus of this research study while transaction cost theory lacks this dynamic view (Vosselman & van der Meer-Kooistra, 2006). Transaction theory states that it is impossible to assess someone’s trustworthiness beforehand and that organizations must act on this by establishing control mechanisms (Bachman & Zaheer, 2006). These control mechanisms must limit the opportunity and incentive for opportunism (Woolthuis et al., 2005). The theory even perceives trust as irrelevant to business (Bachman & Zaheer, 2006). However, just like other research studies (Bachman & Zaheer, 2006) this research study indicated that trust is important in business. This research study indicated that it is possible for organizations to assess trust before the start of the cooperation. And this initial level of trust is even of great importance for business, otherwise organizations will not start cooperating. However, the transaction cost theory can based on this study alone not fully neglected. According to the transaction cost theory, the degree of ownership influences the ability to monitor the inter-organizational cooperation (Aulakh et al., 1996). In this study was the degree of ownership the same for the whole sample selection. The inter-organizational relationships in this study were about contracting and collaboration instead of ownership. So this does nothing about the other forms of ownership.
30 5.4.3 Substitutive perspective. Although there is no consistent empirical evidence of the substitutive nature of the control-trust nexus in literature (Costa & Bijlsma-Frankema, 2007), this study found situations where control and trust are substitutes. When indirect trust is transformed in direct trust, formal control and trust substitute each other. What was shown in the interviews was that when the cooperation continued and developed, direct trust was created. At the same time more verbal agreements were made. These agreements were not written down in a formal contract. So in that kind of situations inter-organizational trust substituted for formal control.
5.4.4 Contextual perspective. There is no evidence in this research study for the contextual perspective. In this contextual perspective the type of control determines the nature of the control-trust nexus. Formal control is substitutive to trust, whereas social control complements trust (Costa & Bijlsma-Frankema, 2007). As shown in the data analysis formal control can complement trust. This difference between practice and theory can be explained by the process-oriented focus of this research study. The study of Costa and Bijlsma-Frankema (2007) studied the control-trust nexus from different perspectives and from different levels of analysis. Although they did not study the process of this relationship. This study indicates that the order and process of the inter-organizational control-trust nexus is of importance and that the nature of it can change. However, important to mention is that this research focuses only on formal control. So only that part of the contextual perspective can be criticized for.
5.4.5 Interacting perspective. This research study agrees with the interacting perspective (Vosselman & van der Meer-Kooistra, 2000) in the sense that it is demonstrated that both trust and control are not static phenomena. Both concepts can change during a cooperation in level and in nature. The level of trust can be increased by trust building elements and the nature of trust can change from indirect trust to direct trust. Also the level of formal control can change from signing a detailed contract to making verbal agreements.
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6. CONCLUSION
In summary, the qualitative analysis of this research study indicates that formal control does not only safeguard against opportunism but it also serves as a trust building instrument in an inter-organizational cooperation. It incorporates trust building elements like accountability, clear objectives, commitment and communication. Further is proposed in this study that trust and formal control serve as complements when there is indirect trust in an inter-organizational cooperation. When there is direct trust in an inter-organizational cooperation, the nature of the formal control-trust nexus is substitutive of nature.
6.1 Theoretical implications and managerial implications
This study offers a number of contributions to current literature. First, this study provides an overview of trust building elements of a contract. There are already studies (Aulakh et al., 1996; Costa & Bijlsma-Frankema, 2007; Das & Teng, 1998; Huang & Wilkinson, 2013; Lander et al., 2004; Lewicki & Wiethoff, 2000 Tomkins, 2001; Vangen & Huxham, 2003; Weber et al., 2005) about trust building elements, but no research had indicated what the trust building elements of a contract are. Second, this study provided a more dynamic view of the process of the trust building process of contracts by indicating situations when formal control and trust serve as complements or as substitutes. This study contributes to the debate about the nature of the control-trust nexus and by combining several theories about control and trust, this study provides a comprehensive view of the trust building process of formal control.
People in the business field can use this study when they are preparing and conducting contracts. Business people may consider the impact, influence and importance of these formal control mechanisms on the level of inter-organizational trust and the successfulness of the cooperation.
6.2 Limitations
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6.3 Future research
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