The Influence of relational signaling on trust development within an inter-firm relationship

The Influence of relational signaling on trust development within an

inter-firm relationship

By

Stefan de Jonge University of Groningen Faculty of Economics and Business Master of Science Business Administration Specialization Organizational and Management Control

1

Abstract

This paper focuses on how relational signaling contributes to the development of trust within an inter-firm relationship, with consideration of control mechanisms. This paper contributes to the debate by addressing the trust and control relationship from an interactive perspective. A case study was conducted at a large scale inter-firm relationship to understand this interactive perspective. The inter-firm relationship consists of a large organization which has multiple long-term projects with an outside contractor. The case demonstrated that control mechanisms serve for interest alignment as well as a vehicle for relational signals to develop and to develop thicker trust. Furthermore, the search for enlightened self-interest contributes to provide positive signals to develop thicker trust. These voluntary positive signals from the enlightened self-interest, produce new control mechanisms in time. As a result, enlightened self-interest and contracting between the parties both create a basis for relational signals to develop. It concludes that the interaction between control mechanisms and relational signals has a strong impact on trust building.

1. Introduction

Over the last past decades, collaboration between organizations has increased extensively (Gorden et al. 2000). Inter-firm relationship increases flexibility and synergy gains to increase competitive advantage of the organization (Colleti, Sedatole & Towry, 2000). The last past decades, these opportunities led to an increase of collaboration. Popular forms of collaboration include teams, strategic alliances, joint ventures and industry consortia. Organizations have interrelated activities with the parties in the inter-firm relationship, due to collaborations. The interrelatedness of activities between the parties creates control challenges for organizations. These control challenges will also have an impact on other parties within the collaboration. Therefore, a control mechanism within an inter-firm relation has an impact on the trust worthiness of the parties within the relationship. According to scholars, trust in collaboration can have an essential influence on the degree of success (Coletti, Sedatole & Towry, 2000). As a result, control and trust are interrelated, within the inter-firm relationship.

The relationship between control and trust creates complexity within the inter-firm relationship. Prior studies have debated what influence control has on trust. On one hand, some studies suggest that control systems changes the way parties perceive the situation, causing them to perceive other collaborators as less trustworthy (Tenbrunsel & Messick, 1999). On the other hand, other scholars suggest that control systems have a positive relationship with trust (Coletti, Sedatole & Towry, 2000). Although partners provide benefit to a collaboration, the risk of opportunistic behavior remains. Misuse of trust can damage the mutual interest of partners in a collaboration. Opportunistic behavior and the lack of cooperation of the parties involved, causes a relative high level of collaboration failures (Das & Teng, 1998). The organization wants to control the other party in order to reduce opportunistic behavior. Therefore, organizations in a collaboration also want to create trust in order to increase the degree of success for the long term benefit of the inter-firm relationship. This is the cause for the control and trust problem in any relationship.

According to Vosselman & Meer-Kooistra (2009), a governance structure is meant to be a solution for opportunistic behavior. The governance structure consists of formal control mechanisms. These formal control mechanisms can act as a safeguarding device through which interest between parties are aligned. Control mechanisms create a source for thin trust. However, this governance structure also gives the possibility to hinder or block the development of thick trust. To understand this process, we need to know what develops thick trust.

2 the collaboration, parties need to signal that they are committed to the relationship. Only through this process, ticker trust can be built (Vosselman, 2012; Minnaar, Vosselman & Hassan, n.d.). To create trust and reduce opportunistic behavior, relational signals and control mechanisms are needed within the inter-firm relationship. Hence, control mechanisms are interrelated with relational signaling. According to Woolthuis Hillebrand & Nooteboom (2005) control mechanisms can act as a substitute or complement in relation with trust. From this perspective it can be questioned, if relational signaling contributes towards trust development and how does trust development of relational signaling works within an inter-firm relationship, with consideration of control mechanisms. From this point of view, it is important to understand how relational signals interacts with control mechanism and if relational signaling influence control mechanisms. These questions will be considered within this thesis.

In prior literature, there is an ongoing discussion how control mechanisms are related with trust. Furthermore, scholars agree that more studies are needed to understand how control mechanisms operate within the social setting of the inter-firm relationship. (Woolthuis, Hillebrand & Nooteboom, 2005). The interaction between control mechanisms and relational signaling contributes towards this understanding. Not only how relational signaling contributes to trust building in an inter-firm relationship, but also how relational signaling is related to control mechanisms to build trust. (Vosselman & Meer-Kooistra, 2009; Minnaar, Vosselman & Hassan, n.d; Woolthuis Hillebrand & Nooteboom, 2005). This gap is further researched within this thesis, by studying the influence of trust building on the basis of relational signaling theory.

This research can have strong implications for managers who are interested in creating an inter-firm relationship for the long term. Managers need to know how to build trust, in order to increase the success of the collaboration. However, it can be questioned how relational signaling contributes towards this process and till what extent do control mechanisms influence this process. These questions are addressed within the research and can have implications for managers in order to build a long term inter-firm relationship. Furthermore, control mechanisms can increase cost and bureaucracy within organizations, and relational signaling can provide managers the opportunity to reduce the negative aspects of control mechanisms.

This study is conducted at a large scale inter-firm relationship, which is cooperating with each other for decades. The main shared activities are multiple long-term projects. This makes the case very suitable for investigating trust development. The interviews were conducted at both parties of the inter-firm relationship. Therefore, the impact of the interaction between control and trust is observed on both sides of the inter-firm relationship.

The research question is: What is the influence of relational signaling on trust development within an inter-firm relationship? To understand the influence of relational signals, control mechanisms should be considered within the trust building processes. Hence, the main aim of this study is to understand the impact of relational signaling on the building of trust in an inter-firm relationship, with consideration of control mechanisms. The influence of relational signaling theory contributes to the understanding of trust development. Only a few studies have been conducted about the interaction between control mechanisms and relation signaling within an inter-firm relationship. The framework of Vosselman & Meer-Kooistra (2009) and (Minnaar, Vosselman & Hassan, n.d) are considered to elaborate on the trust building influence of relational signaling and their relationship with control. This framework is considered to understand the effect of relational signaling on trust-building. However, more empirical evidence is needed to understand the influence of relational signaling on trust building within an inter-firm relationship. On the basis of the research question and prior literature this thesis develops a theoretical framework to study the impact of the interaction between relational signals and control mechanisms on the building of trust.

3 research case is explained in the methodology section. This will be followed by the analysis where the research results will be discussed. After that, the research data will be linked to the theoretical framework in the discussion. Finally, the conclusion, will elaborate on the main findings, future research advice and the limitation of this research.

2 Literature

Before the theories of relational signals will be explained, the elements of trust and control are discussed, and why these two elements are important in an inter-firm relationship. Furthermore, the different relations between trust and control will be described, and why the interaction of relational signals and control mechanisms is important to develop trust. At last, the theoretical framework of this study is explained. 2.1 Why control and trust is important in an inter-firm relationship

To control risk of operational activities, organizations develop control mechanisms to act as safeguarding device. However, organizations add new activities, remove old activities and share activities in forms of inter-firm relationships (Van der Meer-Kooistra & Vosselman, 2000). These forms of inter-inter-firm relationship broaden the scope of management control to the shared activities of the collaboration (Otley, 1994). Cooper (1995) describes the importance of the value chain approach, which focuses on control mechanisms involved in the collaboration with suppliers and buyers. Cooper (1995) mentioned that control mechanisms are an important safeguarding device for coordination of the shared activities.

The structure of the control mechanisms differs per inter-firm relationship. According to Van der Meer-Kooistra & Vosselman (2000) there are three different control patterns. These patterns are based on the market, bureaucracy and trust. First, market based pattern, the market influence the appropriate control mechanisms. Second within the bureaucracy based pattern, the control mechanisms are dominant within the hierarchy of the inter-firm relationship. For instance, specific norms, standards and rules, which are controlled by; evaluations, surveillance and a well develop information system. Third, within the trust based pattern, trust is the dominant control mechanism between the parties.

Prior studies in the inter-firm relationship have focused on the influence of Transaction Cost Economics. Transaction Cost Economics consist of three aspects, which determine the appropriate control mechanisms. These three aspects are: the frequency of the transaction, the uncertainty in those transactions, and the asset specificity of the transactions (Langfield-Smith & Smith, 2003). From the Transaction Cost Economics point of view, the inter-firm relationship with specific investments create dependency and vulnerability for the parties involved (Williamson, 1979). Dependency and vulnerability creates transaction uncertainty, which is the cause for opportunistic behavior (Das & Teng, 1998) Furthermore, shared activities may cause changes in the internal labor relationships. The collaboration can reduce jobs, due to the outsourcing relationship and the cancellation of old activities (Van der Meer-Kooistra & Vosselman, 2000).

4 Vosselman, 2000). Trust may grow during the inter-firm relationship, due to the emergence of values and norms as well as, the growth of the friendship between the parties (Gulati, 1995). Arrow (1972) adds to the discussion, that for every transaction in an inter-firm relationship, an element of trust is needed.

To summarize, to control the risks involved in the inter-firm-relationship both control mechanisms as well as trust is needed (Gulati, 1995; Williamson, 1973; Van der Meer-kooistra & Vosselman 2009). The transaction of this relationship creates dependency and vulnerabilities for the parties involved. Due to the dependency and vulnerability, control mechanisms are set up to act as a safe guarding device. However, due to the complexity of the transaction, control mechanisms are not sufficient enough to cover all the risks involved (Van der Meer-kooistra & Vosselman, 2000). At this point, it is trust that reduces the risk of the complexity of the transaction. The next section describes the different kinds of relationship between control and trust and how these perspectives help to develop a sustainable inter-firm relationship.

2.2 The relationship between control and trust

For the success of the inter-firm relationship, both trust and control are required. Control in inter-firm relationship is composed of external measure based controls and internal value based controls (Eisenhardt, 1985). “External measure based controls entail formal rules, procedures and policies to enhance and safeguard desired behavior; these controls particularly aim to incentivize and constrain. Internal value based controls are culturally imposed and internalized goals, values and norms. They can be initiated and maintained through rituals, ceremonies, initiating programs and networks” Minnaar, Vosselman & Hassan, n.d., p. 3).

Trust is more complex to define. However, Luhmann (1979) argues that trust is as simple as having confidence that the other party will fulfill its expectations. Tomkins (2001) define trust as “the adoption of a belief by one party in a relationship that the other party will not act against his or her interest, where this belief is held without undue doubt or suspicion and in the absence of detailed information about the actions of that other party” (Tomkins, 2001, p 165) This study, uses the definition of trust of Nooteboom, (2002). Nooteboom (2002) defines trust with four elements. A (1) trustor has confidence in a (2) trustee, with respect of some behavior (3), depending on circumstances of the relationship (4). In addition, the nature of trust is defined between the interactions between the parties involved in the inter-firm relationship (Six & Nooteboom, 2005). This study uses this definition because it defines the different elements of trust that define the nature of trust in the interaction between the parties.

5 Both these perspectives can be described as a linear relationship. However, both substitute as the complement relationship can occur within the inter-firm relationship (Woolthuis, Hillebrand & Nooteboom, 2005). These scholars argue that it depends on the intention in which control mechanisms are built. Dekker (2004) mentioned that control mechanisms enhance collaboration goals and creating a mutual transparency, which indicates that trust and control are more of an interaction rather than a linear relationship. Furthermore, Dekker (2004) argues that the relationship between control and trust is non-linear because the complement and substitute argument can both work within the inter-firm relationship. Tomkins (2001) suggest that there is an inverse U-shape relationship between control and trust, where in the earlier stage of the relationship control builds trust. However, the development of interaction between the parties develops trust, and the need for control is reduced. Suggesting that both complement and substitute perspectives are possible within the inter-firm relationship

The third perspective is that control and trust interacts with each other; this perspective focuses on the dynamics between control and trust (Minnaar, Vosselman & Hassan, n.d.). According to Vosselman & Van der Meer-Kooistra (2009) the interaction between control and trust in an inter-firm relationship creates positive expectations about future behavior. From this point of view, trust can produce control while control produces trust. Control mechanisms might provide the inter-firm relationship with alignment of interest and create a certain commitment towards the relationship through the building of trust. Hence, control mechanisms help to safeguard or constrain the action of parties involved in the relationship, but may also provide the relationship with positive behavioral expectations. Here is where relational signaling contributes to trust building. When local actors voluntary empower the use of control mechanisms, they signal their commitment towards the relationship. Signaling of commitment is considered to be important for trust building. It creates positive behavioral expectations about the intentions of the parties, to behave in a cooperative manner and act for the long-term benefit of the relationship

2.3 The importance of control mechanisms and relational signaling in the developing of trust

6 mechanisms interact with relational signals to develop trust. Hence, control mechanisms can develop thin trust and at the same time, interacts with relational signals to develop thicker trust.

The negotiation of a contract creates thin trust while building thick trust is developed by interaction of the parties after the control mechanism is in place (Garud & Karnoe, 2000). Control mechanisms are not sufficient enough to reduce all kinds of forms of opportunistic behavior (Van der Meer-Kooistra & Vosselman, 2000). When control mechanisms are not sufficient enough to cover all the risks of opportunistic behavior, the acceptance of a contractual incomplete agreement can signal the commitment of the parties involved in the inter-firm relationship (Chaserant, 2003). According to the interactive relationship of control and trust, control mechanisms may be helpful in creating a positive expectation about each other’s future behavior (Vosselman & Van der Meer-Kooistra, 2009). These scholars also note that in order for thicker trust to develop, local actors need to signal their commitment to each other. These signals build thicker trust, which can be defined as creating positive expectation about each other’s future behavior. When local actors voluntary empower the use of control mechanisms, they signal their commitment towards the relationship. Signaling of commitment is considered to be important for trust building. It creates positive behavioral expectations about the intentions of the parties involved within the relationship, in order to behave in a cooperative manner and act for the long term benefit of the relationship. To understand these signals, this study uses relational signaling theory. According to Connely, Certo, Ireland & Reutzel (2011) relational signals are behavior clues that allow the other parties to identify their interest. In case of positive relational signals, the other party makes inference about the other parties’ interest in maintaining a mutual rewarding relationship. These behavioral clues or signals, give insight into the nature of the relationship. As a result, if commitment within the relationship is voluntary signaled, relational signals of the local actors can create thicker trust. This thesis uses the 21 signals identified by Six & Nooteboom (2005), to understand how relational signals and control mechanisms contribute to trust building. For the 21 signals that contributes to trust building see appendix A.

2.3.1 What motivates relational signals

7 Lindenberg, (2000). These rites, rituals and common purpose mobilize the value of the normative frame and decrease the value of the loss and gain frame. Hence, the dominant frame decides which signal the parties show in the collaboration.

According to Six and Nooteboom (2005) it requires the absence of opportunistic behavior by the other party or the gain frame, so that the organization can make itself vulnerable to the action(s) of the other party. For trust to grow, the organization needs to believe that the other party acts in the benefit of the inter-firm relationship. This requires a solid normative frame. If a party is seeking self-interest, it will behave opportunistically. These parties are more behaving from a gain frame. However, there are conflicting goals in the background in an inter-firm relationship. In this situation, the gain frame is in conflict with the normative frame which enacts enlightened self-interest (Chaserant, 2003). Therefore, the search for self-interest is important for the short term. However, the search for self-interest is also important for the inter-firm relationship but the gain frame is put on the background in order to create stability within the inter-firm relationship. Hence, the gain frame and the normative frame interact with each other. For instance, a party wants to maximize his own wealth; however it requires the inter-firm relationship to achieve their own goals. As a result, enlightened self-interest is the interaction between the normative frame and the gain frame.

The monitoring of performance and contracting is difficult, due to the complexity of opportunistic behavior in an inter-firm relationship (Vosselman & Van der Meer-Kooistra, 2009). Parties’ interest in the long-term of the relationships will act on each other’s normative goals, especially to reduce the possibility of the consequences of the loss frame. By this process, trustworthy behavior becomes enacted by relational signals (Chersant, 2003; Lindenberg, 2000). According to Lindenberg (2000), relational signals can be particularly expected in certain situations. These situations are characterized as “solidarity situations”. Lindenberg (2000) identified five situations; common good, sharing, need, breach and mishap situations. In the common good situations, the signal looks similar to family context. Here, parties signal that they will act for the benefit for the inter-firm relationship and is willing to relax its self-interest. In the sharing situation, parties signal to share unexpected opportunities with each other. In the need situation, parties signal to help the other party that is in need. In the breach situation, parties signal their willingness to sustain the inter-firm relationship. At last the mishap-situations, a party might decide to inform the other party their motivation to compensate for the mistakes.

2.3.2 The interaction between control mechanisms and relational signaling

8 measures are negotiated, it motivates the parties to signal as well. As a result, control mechanisms interact with relational signals.

In contradiction to the framework of Vosselman & Van der Meer-Kooistra (2009), Minnaar, Veen- Dirks, Vosselman & Hassan (n.d.) suggest that control mechanisms are an influential signal in the commitment to the inter-firm relationship. Implying that a contract not only produces thin trust, but even act as a more important control mechanism to produce thicker trust. Woolthuis, Hillebrand & Nooteboom (2005) also suggests that contracts can have different functions. According to Woolthuis, Hillebrand & Nooteboom (2005), a contract has three functions: coordination, ¸safeguard for contingencies and sign of commitment. From this point of view, contracts can be the outcome of cooperation and trust development. According to Minnaar, Veen-Dirks, Vosselman & Hassan (n.d.) control mechanisms are developed in the context of trust building and are not only a safeguarding device for compensating for mistrust.

To sum, according to Vosselman & Van der Meer-Kooistra (2009) control mechanisms are connected to thin trust, and thick trust is developed by self-regulating mechanism which are motivated by the search for enlightened self-interest. However, Minnaar, Veen-Dirks, Vosselman & Hassan (n.d.) indicate that control mechanisms interact with relational signals and are intermingled with trust building. By the negotiation process of the contract and in the evaluation of the contract, parties signal to each other that they stay committed to the inter-firm relationship.

According to Vosselman (2012) relational signaling contributes to trust building and, as a result, a new control mechanism is created. Furthermore, relational signals might create a new control mechanism, to develop thicker trust. Relational signaling can be an essential aspect for trust building if it influences control mechanisms. As Vosselman & Van der Meer-Kooistra (2009) pointed out, trust produces control and control produces trust. According study of Vosselman (2012) relational signals influence control mechanisms. This study also suggests a negative aspect of relational signals. Relational signals can be interpreted as a routine when time passes. Indicating that parties much pay attention to its positive relational signals, as it can become less valuable over time.

2.4 Theoretical framework

9

Figure 1

Figure 1 illustrates the interaction how control mechanisms interact with relational signals. This interaction is needed to develop thicker trust. Control mechanisms reduce the possibility for opportunistic behavior and at the same time provide a basis for a solid normative frame to develop. The normative frame motivates parties to signal their commitment to the inter-firm relationship. However, opportunistic behavior provides parties to enlighten their self-interest. As a result, the gain frame can be in conflict with the normative frame. Nevertheless, due to the negotiation and evaluation of the contract, the goals of the normative frame can be strengthened. The normative frame motivates parties to act appropriate for the long-term benefit of the relationship and hence put the goals of the gain frame in the background. The strengthening of the normative frame produces positive relational signals which reduce uncertainty for the future of the relationship. The normative frame with the presence of positive signals will then produce thicker trust. Trust will then influence the creation of new control mechanisms. This is where the contract is placed within the social context Woolthuis, Hillebrand & Nooteboom (2005) and where control mechanisms are intermingled with trust development. As a result, control and relational signals are interacting with each other. In this situation, control mechanisms produce signals, which in time produce trust. From this perspective, control produces trust and trust produces control.

3 Methodology

This studies aims for a better understanding of the interaction of relation signaling with control mechanisms and how this interacting, support trust building in a specific inter-firm relationship. To investigate the nature of this interaction, the interview questions emphasize on the processes of trust building in an inter-firm relationship. This approach makes field research the most appropriate choice (Silverman, 2005). The focus is on the real-life context of the inter-firm relationship (Yin, 2003). Therefore, this study uses a case study to

10 understand the dynamics of the interaction between relational signaling and control mechanisms (Eisenhart, 1989). Hence, I approach the interaction between relational signaling and control mechanisms as a system and not as isolated variables. The case study will be completely confidential, and the original organizations names were replaced with pseudonyms. Therefore, the case study is conducted at the client and the contractor. This study involves the use of qualitative data for describing and analyzing, theorizing the interaction of relation signaling and control mechanisms. The qualitative data would not only have the function of description, but aims at positioning the data against the theoretical framework in order to contribute to further theory building (Eisenhart, 1989). From the basis of literature on contracting, controlling, relational signaling and trust building in an inter-firm relationship, I try to provide new theoretical insight of how relational signals interacts with control mechanism and how this process influence trust building.

The case study would be conducted at the contractor, who has a long term inter-firm relationship with a client. The client outsources its technical maintenance and other projects to the contractor, and there are long term contract(s) in place to act as a control mechanism. The contractor and the client are benefitted with a long-term relationship. Furthermore, there is the risk of opportunistic behavior of the parties involved. To better understand the relational signaling process within this inter-firm relationship, this study developed semi-structured interviews. These interviews are the main source of data which is based on the theoretical framework, including the 21 signals of Six & Nooteboom (2005) to increase the reliability of this research. The interview guide is added in appendix B. On average, the interviews duration was between 1 and 1 ½ hours. I conducted 8 interviews at the contractor and 3 at the client. The interviews were with operational managers, business consultant, managing director industry and purchasers. For more detailed information about the interviews see table 1.

The analysis focuses on the identifying theoretical interpretations of the qualitative data of the interviews. This is including structuring and coding the interviews. The interviews were recorded on audio and converted in Word documents. These documents where then coded with the use of Microsoft Excel, where the theoretical framework was the basis for the codes. Thereafter, the codes were classified for the relationship between the different variables, for example, the influence of contracting on opportunistic behavior. For more details of the coding see appendix C. Another source of information is the performance contract. This contract includes different kind of KPI’s, which are technical and soft of nature.

Table 1

Date Client/Contractor Position Duration in minutes

May 2013 Contractor Operational contract manager

97 May 2013 Contractor Business consultant - tender 92

May 2013 Contractor Account manager 61

May 2013 Contractor Project manager 105

May 2013 Contractor Business manager equipment construction

80

May 2013 Contractor Business manager Service 68

May 2013 Contractor Service manager 65

June 2013 Contractor Managing director Industry 55

June 2013 Client Senior purchasing manager 38

June 2013 Client Purchaser contracting 47

11 3.1 The case

The case study investigated multiple inter-firm transactional relationships between the contractor and the client. Because of the scale of the inter-firm relationship, multiple technical services where provided from the contractor to the client. Each of which contains a service length from minimal 1 year till a maximum of 5 years. Due to the confidential treatment of data, I will not go into detail of each organization. However, the multiple services are described below. The contractor delivers multiple technical services. Because of the scale of the inter-firm relationship, the contractor is organizational separated into divisions. Unit Utility has the responsibility of all building related installations. Furthermore, Unit Industry has its service focus on the process of the client.

At Unit Utility, the contractor ensures a pleasant environment at work. They aim to maximize comfort and minimize the number of breakdowns in the building installations. This is achieved through regular maintenance. The installations are constantly monitored by an online management system. There are also multiple contracts and addendums in place. These contracts contains detailed information about the technical operations, Key Performance Indicators(KPI’s) and different kind of contractual clauses Mostly, the contracts have a duration of 3 till 5 years.

Unit Industry delivers maintenance crews and operators, plus all other operation related service and maintenance concepts. They execute inspection campaigns, upgrades and modifications, such as compression and power modules and processes. They are mostly executed on project basis, which include time spans of 1 year to 15 years. In most cases, contracts are in place with clauses specific to the client and KPI’s of technical nature. Also, there are projects, in joint ventures, where other contractor(s) are involved.

The client is a large company which provides the transport of natural gas and green gas. Their main activities involve providing gas transport to constructing new infrastructures, from participating in new projects and develop new services. Their operations also contain multiple external administrators which they provide service to. Therefore, the contractor also delivers technical services to these administrators. Furthermore, the strategy of the contractor is focusing on the long-term relationship. Hence, they do not only operate as performing partner but also want to be a strategic partner. Therefore, they want to cooperate with the client on a long term basis and want to get involved with the strategic decisions of the client.

4. Analysis

12 4.1 Interest alignment and reducing opportunistic behavior

To understand how interest alignment occurs and opportunistic behavior is reduced; we seek in this section how control mechanisms and relational signals influence the building of thin trust. This section will demonstrate how the interaction between control mechanisms and relational signals influence interest alignment and opportunistic behavior.

Most of the projects and contracts endure a couple of years, however for every new contract a tender phase by the client will decide if industry projects or technical maintenance will proceed at the current contractor. Because of the duration of a couple of decades of this inter-firm relationship, the exact start of the relationship was hard to observe. However, due to the tender process for every project, it makes it possible to recognize how relational signals and control mechanisms influence interest alignment and opportunistic behavior. Generally at the tender phase, a project is outsourced on the market by the client. For projects this can be new projects or additions on the old projects. However for the technical maintenance, it can still be the same building related installations. The tender phase will select the contractor of a couple of suppliers. The account manager observed:

Ehm, at the client nothing is certain. The client uses their own equipment, and it is important to keep the equipment intact; this is also due to the core-activities of the client. You’re not in a 1 to 1 position for these outsource projects. For every project they outsource, there are also competitors. The client outsources a lot of projects and they pay a lot of attention to price and quality. Due to this, they have made a pre-selection of equal suppliers. You can interpreted this as divide and control strategy. The selection for multiple suppliers is mostly caused by to the shortage of technical personnel, which is a problem for the next 10 or 15 years which is a demographic problem. We do acknowledge that, but also the client is aware of this situation. The clients have to guarantee continuity. That is the reason they do business with multiple parties, because for the long term they need all the parties to solve this demographic problem. Nevertheless, past performance of the supplier is also essential, but it is difficult to predict which choice for a particular supplier they are making.

Nevertheless, due to the quality of the relationship, industry project or technical maintenance is intermingled. From both services, new projects occur due to the quality of the service of the contractor. As the business consultant observed:

We had a contract with the client until 2006, We’ve lost the client and got a new contract with the client in 2010. This was mostly caused due to governmental regulatory which is obliged to outsource the project to multiply parties. Although, they were satisfied about the service in 2006, we were not assigned for the project afterwards, because our price was too high. Both parties felt very disappointed about this situation because the client wanted to retain the contract, In that time they had another contractor than us. They delivered another product/service than us. Therefore, in the tender of 2010, we had a competitive advantage, as a result of our earlier performance.

13 trust starts in the tender phase and proceeds to the execution phase. As the operational contract manager observed:

If we accept a contract of this scale, not every issue can be covered within the contract. For example, when we accept a contract of this scale, you cannot think, I will be paid for the service I deliver. But how can we work together in such way, that we both reach our goals. The contractor wants to make a profit and the client does not want to worry about the outsourced activities and, of course, does not want to pay too much. If you both search for this balance, than trust building occurs. This occurs in the negotiation of the contract, and also in the execution phase. Due to the fact that when a contract enters the market, the client is convinced that the contract covers all the risk. However, when time passes they will recognize this is not the case, due to the complexity of the service. Therefore, we always help the client with this problem during the execution phase.

However, the signals used during the negotiation and after the contract is written down, are also important to reduce the risks. It is about finding a balance between the signals and the formal control mechanisms. As the business manager equipment construction observed:

It first happens on an informal basis. It is a 2 steps rocket between informal and formal alignment. First, you recognize the situation on an informal basis. Then you search for the right person in the organization of the client. Together, you search for the best solution. And at last you find a balance between the informal patterns and what is written down formal.

From this observation, control mechanisms reduce opportunistic behavior and help with interest alignment. The interaction between control mechanisms and relational signaling develops thin trust. Nevertheless, the intention in which the contract is written down and the signals that the parties send, are also essential in recognizing each other’s interest. Therefore, relational signals lead to control mechanisms, and for every deviation on the contract, new signals emerge, which can lead to new control mechanisms. As a result, the interaction between control mechanisms and relational signals also leads to interest alignment and reducing the opportunistic behavior of the parties.

4.2 Enacting the normative frame

Now that I have discussed how opportunistic behavior and interest is aligned. I observe what motivates signals, and how control mechanisms do motivate parties to send positive signals to each other. Parties interest in the long-term of the relationship, will act on each other’s normative frame (Chersant, 2003; Lindenberg, 2000). In this section, I observe how the parties enact on each other’s normative frame, by looking at the 5 solidarity situations of Lindenberg (2000), (1) common good situations, (2) sharing situations, (3) need situation, (4) breach temptations and (5) mishap situations. Due to the tender and the execution phase, each other’s need situations, becomes clear. As the project manager observed:

14 From the perspective of the contractor they also enact on the normative frame. According to the operational contract manager:

We had a contract, which contains prices, that where below our cost price. However, it was signed by coworkers within our organization. I have the possibility to act really difficult and try to find the boundaries of the contract, but that is not what is agreed upon. I will just deliver good work and with these prices we take the loss for granted. Of course if there is the possibility to change the contract, I will try my best to change this. Nevertheless, the client is not obligated to change the contract. Because we have a formal agreement and you should always deliver according to the intentions in which the contract is written.

Furthermore, the project managers observed that the contract is the basis on which they operate. Nevertheless, coworkers can deliver more qualitative work, than is agreed upon. Here both the normative frame as well as the gain frame is enacted. As the project manager discuss:

You always deliver what is agreed upon in the contract. However, I always try to act from the perspective of my organization. We also try to make a profit. Nevertheless, we always try to deliver what is promised. When something goes wrong in this process, you try to negotiate, but the contract is still the basis. As a result, costs can be higher than expected, but the client has is right to receive what is agreed upon. My subordinates are sometimes motivated to deliver more quality than is agreed upon. This is because they know the people on the work floor and they don’t mind delivering more quality. This can benefit us on the long-term. However, it reduces project results. Therefore, I try to motivate my subordinates on what is agreed upon and do nothing more. But in practice this does not always work that way.

From this perspective, the contract is the basis on which the normative frame is written down. For the sharing and need situation to occur, the search for self-interest is enlightened on the short-term. Hereby, they signal commitment, but the gain frame is also present in the background. However, in breach situations or mishap situations the enlightened self-interest is not present in the background, due to fear of the loss frame. Furthermore, for every project there is a mutual dependency. This is also due to fear of the loss frame. As the business consultant observed:

When mistakes happen, the communication is open and direct. You try to think in solutions and never ignore a problem. I believe this is the only way to deal with mistakes. Nevertheless, depending on the degree of the mistake not all mistakes are taken for granted. But this also works the other way around. If we believe the client makes a mistake, we also communicate open and clear. Of course due to control mechanisms we prevent a lot of mistakes, but when mistakes do happen, it is first discussed with the client. The way in which the parties help each other, is much more important than the formal agreements. These way possible mistakes can also help to develop trust.

Looking at small projects, which less duration, the contract is the basis and there is no room for mistakes. This is due to the small time duration of the project. Hence, the price is more important than the relationship for the long term. According to the service leader:

The client only confirms to what is agreed upon in the contract. Until now, we have had no problems delivering according to the contract. But at this very moment, we are not capable of reaching the delivery times. Due to the high material requirements, it is getting harder and harder to reach the delivery time. The client, in most cases does not respond to our problems.

15 bureaucracy based pattern. For the projects with a longer time span, trust and mutual dependency becomes much more important, and possible mistakes can help thicker trust to develop. Also in the long term projects, sharing situations did occur, here the contractor shared unexpected benefits with the client. As the operational contract manager explain:

We are contractual required to share opportunities or new innovations with each other. Imagine, you are a customer with a building, and you expect of the supplier to do preventive technical maintenance. Preventive technical maintenance is that you will clean and control the building related installations. For every error that occurs at the building related installations, they are deductible. Well, if errors are deductible, what do you think the supplier is going to do on preventive technical maintenance? Almost nothing, because the errors are deductible and you can make a lot of profits on the errors. From a strategic perspective, technical maintenance has a lot of contracts, in which these two components are combined. As a supplier you need to take the core of these costs, therefore you need to balance the costs of errors as well as the cost preventive work. We even go a step further. We look at the long term use of the buildings and if the operations of the organizations are going to change, then the building also have to adapt to it. Hence, we think with the client on a strategic level. If we do not communicate this on a daily basis, you are a fool of a supplier and you will lose the contract after 3 years. Therefore, you must act proactive with cost reduction and technological innovation or work methods and you need to communicate this with the client.

From this perspective, control mechanisms influence how to act appropriate for the relationship till some extent. However, the contract also limit the parties to what is agreed upon and by pressure of the market the contractor must make profit to secure the continuity of the organization. Nevertheless, they still make effort to enact on each other’s normative frame. In which the client, will not operate with a supplier, if they do not make a profit and contractor is positioning itself as a strategic partner and is willing to do more. From this point of view, enlightened self-interest happens, but control mechanisms are also intermingled with trust building. The client also enacts the gain frame as well as the normative frame, as the senior purchasing manager observed:

The interest of the contractor is, to provide a service for the right price. Our interest is to outsource our activities for the right price. Nevertheless, if the price is set too low we’re also not benefited. As a result the supplier, have to perform the same activity with less capacity, due to the low price. In time you can notice this in the quality of their performance. They are more likely to operate on budget instead of on quality.

Furthermore, relational signals are also driven, by the values and norms of the contractor. As the account manager observed:

It is important to recognize each other’s interest. It is motivating to work together with the client to solve problems on a personal level. In that sense we both grow of the experience. We want to solve issues with the client and other customers and try to give them all the solutions to the same issues. Hence, problem solving with the customer is very motivating to me. Furthermore, if we not address these issues, I believe it will cause a lot of problems for the continuity of the organization.

4.3 The process of relational signals

16 depending on circumstances. I try to observe in what frequency the signals do occur, but every interviewer did acknowledge that signals were only provided when particular circumstances occur. Furthermore, negative signals have a bigger impact than positive signals; this is mostly caused by the loss frame. As the project manager observed:

The building of trust takes time. However damaging trust happens very quickly. I’ve enough experience with customers that after mistakes occur, they differently perceive good performance.

The contractor also experience that after positive signals voluntary where provided, that they can value the relationship. From this perspective, relational signaling allows thicker trust into the inter-firm relationship. As the operational contract manager observed:

After the provision of multiple positive signals, I even believe if they don’t act in the expectations I expect. I can discuss their actions. For example, when they suddenly change their patterns of action, I will immediately ask: Why?

The role control mechanisms can also be interpreted as a positive signal, but this mostly depends on the way information is shared between the parties. During contract evaluation process the operational contract manager observed:

When we start with a new contract, the numbers of evaluation meetings are more at the start, than at the ending. This is caused by balancing each other’s expectations. On the basis of these signals, we create new systems and procedures. On the basis of each other’s expectation new improvement develop. These are mostly KPI’s, because you want to make your operations measurable. Then you negotiate what the goal of each KPI is. Furthermore, we discuss the proper functioning of each KPI, and if a KPI is not proper designed, we negotiate to change them. Because the value of the KPI’s is, how they are measured and published.

From this point of view, sharing each other’s expectations create new control mechanisms. Not only do control mechanisms are solely built on signals, but the transparency and how they are published, also acts as a signal. The control mechanisms therefore are intermingled with trust building in order to measure each other’s expectations. The business consultant also observed:

If the control mechanisms are too complex, the chance of reaching your goal is very low. You need to understand, what the goal of KPI’s are. From my experience, what the inter-firm relationship wants to achieve is the goal of the KPI’s. Check each other’s goals, on the basis of this and you construct a model in which you make KPI’s measurable. Hereby, signaling of each other’s expectation and the construction of KPI’s contribute on the four elements of trust. The client trust the contractor in their operations, by negotiation each other’s expectations and make it measurable by KPI’s. Hence, not only signaling increase thicker trust, but also control mechanisms are involved. However mistakes and negative signals can change the circumstances of the trust worthiness and the parties has to respond quickly, or else the relationship can be damaged.

17 signals and control mechanisms contributed to the expectation of each other’s future behavior. Business manager equipment construction observed that changing control mechanisms should be updated frequently:

If trust develops, you should keep in mind to change the formal control mechanisms. You should continually find a balance between trust and the formal side. You can not only depend on trust, this can be very risky.

Trust can lead to less control. However, market pressure and the parties involved keeps the interaction going between control mechanisms and signaling. As a result, the development of thicker trust should be intermingled with the development of control mechanisms. For example, the operational contract manager observed:

We have developed a website, in which the daily operations are published. We have adapted the website to the KPI’s of the client, this give the client the possibility to check 24/7 if we achieve our KPI’s. The funny thing is, after using the website for a while, the client does not even check the website anymore. So, at a certain point, the client doesn’t use the control mechanisms anymore, but the control mechanisms are 24/7 active. This creates a lot of trust, and on the basis of this we take a lot more risk, because we made our operations transparent.

Transparency and the frequency of publishing information is an important facet for the interaction of control mechanisms and relational signals. However, exogenous forces also play an important role, as the business consultant observed during the currently economic crisis:

The atmosphere for independent decisions within organizations becomes smaller. I believe people, understand new ideas. However, the resources are not available. What happens is, they ignore our advice, and at a moment in time something goes wrong. However, we did advise them before it occur, but they didn’t listen. Hence, on their turn we do not achieve our KPI’s. This can create friction between the parties of the inter-firm relationship.

Even at the industry unit, where multiple projects with the client were going on. The signals even affect the creation of new control mechanisms. As the project manager observed:

Be open and proactive to the client is an important aspect. This can also create new projects. An open and cooperative atmosphere with the client is therefore very important. If we discuss signals, solutions to problems are made quicker. Furthermore, these signals can also result into new project for our organization. These signals even will be discussed during the tender phase of the new project. I even think that a lot of signals are within the tender phase.

The building of thicker trust is not only supported by relational signals, but also by control mechanisms as the senior purchasing manager observed:

After providing and receiving multiple positive signals in the relationship, you can expect positive future behavior from each other. Nevertheless, control mechanisms manage the monitoring of to the future expected behavior. From this point of view, control mechanisms are needed, but are not necessary.

Relational signals contribute a lot in creating awareness about each other’s future behavior. Control mechanisms monitor this behavior. From this perspective, the interaction between relational signals and control mechanisms can contribute to the development of thicker trust. Nevertheless, trust also plays an important role, as the purchaser contracting explained:

18 supported the relationship. From this intention we shared each other’s expectation about the role of the contract. Therefore, the contract was badly developed, however the cooperation went very well. Of course, there are risks, which the contract did not cover, but you know that this can be discussed with the business partner. And this can lead to the development of the relationship as well as the contract.

5. Discussion

To consider the research question: What is the influence of relational signaling on trust development within an inter-firm relationship? This section will link the data to the theoretical framework. Before, this framework is linked to the data, I first analyze the contingencies of the transactions of this inter-firm relationship, to investigate till what extent trust and control mechanisms are essential for the investigated case study. At last practical implications of this study will be explained.

5.1 The transactional contingencies

On the basis of the analysis, the control mechanisms of the inter-firm relationship of this case, have great similarities with bureaucracy based pattern (Van der Meer-Kooistra & Vosselman, 2000). However, due to the scale of the inter-firm relationship there is a lump sum of contracts and other control mechanisms specific to address each transaction, for instance, industry projects, technical maintenance, equipment manufacturing and service differ from each other. For a specific case, the service projects and small term industry projects were very similar to the market based pattern. For the service projects, there were indeed no detailed contracts, and payments were based on output. Nevertheless, during the industry projects and technical maintenance, detailed and comprehensive contracting were linked to the operating activities. These operating activities were measured by KPI’s, supervision and evaluated at a regular basis. Although, the transactional patterns can be different, the large scope of the inter-firm relationship, made cross-selling possible. Therefore, the signals that were sent to the service projects, can lead to new industry projects and technical maintenance projects. As a result, relational signals provided new projects with new control signals at a market-based pattern.

Due to the day to day activities and the long-term projects of both industry projects as well as technical maintenance, trust grows during the inter-firm relationship (Gulati, 1995; Arrow, 1972). To reduce other transaction uncertainties, trust is an important factor. This is due to the growing of mutual dependency. This implies that the contractor gets more responsibility over the projects or technical maintenance. Hereby, the contractor shifts from operating partner to strategic partner and operates more for the long term benefit of the relationship.

5.2 The theoretical framework

19 The credibility of exit threats, laws and regulation, made the transaction uncertain. Nevertheless, the core operating activities of the client, and the growing demographic problem of a shortage of technical personnel also have led to more mutual dependency. From this perspective, trust also played an important role. In this matter, the client will select the appropriate party, with respect to technical competence, contractual reliability, trust and the attitude for commitment which can be considered as an important aspect of these long-term contracts. For this reason, the inter-firm relationship for new industry projects and technical maintenance projects are sustainable for a longer-period than the contractual agreement.

At technical maintenance projects, the provision of voluntary signals and till some extent control mechanisms motivated parties to act on the normative frame Lindenberg (2000). Moreover, the development of KPI’s and the building of a website in order to make the operation transparent, measurable and 24/7 availability of data, made the control mechanisms act as a relational signals. In this situation, the control mechanisms, does not only operate as a safeguarding device, but it reacted on the four elements of trust Nooteboom, (2002).Tomkins (2001) discusses that the internet will aid the development of the relationship. This study agrees with this statement, in that sense that constant availability of information based on control mechanisms can act as a vehicle for relational signals. From this perspective, the interaction between control mechanisms and relational signals develop thin trust as well as thicker trust. In the case of great trustworthiness of the parties, the control mechanisms were not used by the client. However, when circumstances changes, for instance increase in risks, or internal personnel shift, the number of respondents increased. This demonstrates the interaction of trust and control. Therefore, this study, contributes to the fact that information technology can create a control mechanism that interacts with relational signals, in that sense; that it acts as a vehicle for relation signals to develop. These results are similar to the theoretical implications of the study of Minnaar, Veen-Dirks, Vosselman & Hassan (n.d.).

Furthermore, within the inter-firm relationship, trust also builds on control mechanisms by the search of enlightened self-interest (Chersant, 2003). The signaling of each other’s expectations creates control mechanisms on which interest is aligned. Although, the contractor and the client still make an effort to enact on each other’s normative frame, by sharing cost reductions and act on each other interest. However, the control mechanisms also limit the parties to what is agreed upon and by pressure of the market, the contractor cannot take too much risk, if the possibility of a profitable project is declining. As a result, the search for enlightened self-interest is also present and the gain frame is on the background of the normative frame. Nevertheless, the search for self-interest of the contractor can be managed within the control mechanisms. For instance, the contract limits operational employees on the quality that is agreed upon, to secure the profitability of the projects. In addition, the client is made aware of the limitation of the contractor, which signals its commitment in the relationship.

The theoretical implications of this study are, that contracting mobilizes the development of the relationship, by enacting on each other’s normative frame and to motivate parties to act appropriate for the relationship. Nevertheless, the gain frame is still present on the background, as parties need to survive in the market. In that sense, the discussion if control mechanisms are the basis for thin trust (Vosselman & Van der Meer-Kooistra, 2009) in which thicker trusts is built on self-regulating mechanisms in the search of enlightened self-interest. Or that control mechanisms are intermingled with trust building (Minnaar, Veen Dirks, Vosselman & Hassan, (n.d.). This study suggest that control mechanisms are connected to thin trust and are intermingled with trust building for thicker trust, due to the interaction of control mechanisms and relational signals. Because the enlightened self-interest is the motivation to act appropriate for the relationship and to secure continuity for the organizations involved.

20 that case the future expectations then will be considered as interest alignment on which a new control mechanism is created, which support the results of Vosselman (2012). When time passes, new signals of each other’s future expectation will be built on the new control mechanisms. This interaction between relational signals and control mechanisms is therefore needed for the development of thicker trust. Furthermore, control mechanisms also enact as safeguarding device on trust. Hence, trust can also be interpreted as a risk, when control mechanisms are not balanced correctly with the signals of the inter-firm relationship.

5.3 Practical implications

The practical implications of this study focus on the contract development of cross-selling. Due to the scale of the inter-firm relationship, it is important that the internal communication of the signals, in which cross-selling occurs, is communicated correctly into the contract. Hence, at the department where signals have created a new project, the employers should also be involved with the contract development of the new project. For example, this can be coordinated by the account manager, who is the central communication point to the client. For the helicopter view of the account manager of all these signals, it also advisable, that the account manager is more involved with contract evaluation. Furthermore, the development and evaluation of each control mechanisms should be constructed to the contingencies of the transaction. In case of a market based pattern transaction, the development of evaluation processes or complex contract are not as essential in the case of a bureaucratic based pattern transaction.

6 Conclusion

This study has used relational signaling theory and the framework of Vosselman and Van der Meer-Kooistra (2009) and the field reflection of Minnaar, Veen-Dirks, Vosselman & Hassan (n.d.) to investigate the process of trust building in an inter-firm relationship. Furthermore, the influence of control mechanisms is considered by the use of the interviewees’ observation in the interaction between control mechanisms and relational signals.

The main aim of this study is, to understand the impact relational signaling has on the building of trust in an inter-firm relationship, with consideration of control mechanisms. This paper concludes that the interaction between relational signals and control mechanisms is an important process for trust development. The signals are motivated from the normative frame to act appropriate for the relationship as well as the gain frame on the background for the search of enlightened self-interest. From this point of view, the dynamic aspect of trust cannot be interpreted as a linear relationship, due to the changing circumstances of the inter-firm transaction. The formal control mechanisms provide a basis for thin trust, however the negotiation process of contract, as well as the development of KPI’s and the availability of a particular website based on the contract is also a basis for trust to develop. From this perspective, control mechanisms can interact with relational signals, to develop thin trust as well as thick trust. However, due to the risk component of trust, the speed of this interaction is important. The important informal signals need to be backed-up by new control mechanisms to ensure trust will develop properly. As a result, the search of enlightened self-interest can improve the speed of this interaction, due to the acknowledgment of the risks within the inter-firm relationship. From this perspective, control mechanisms are a vehicle for relational signals to develop. As a result, trust will increase within the relationship.

21 different in comparison with an isolated one long-term project. Furthermore, the interviewees cannot be completely objective, which biased the results. In addition, the case is mostly a bureaucratic based pattern. The outcome can be very different if the study was conducted at a trust based pattern transaction.

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