Paper presented at the EMNet 2011 December 1 to 3, 2011, Limassol, Cyprus (http://emnet.univie.ac.at/ ) EVOLVING FUNCTIONS OF INTERORGANIZATIONAL GOVERNANCE MECHANISMS José M. Sánchez * Universidad de Cádiz Dpto. Organización de Empresas Gta. Carlos Cano s/n 11002 Cádiz (Spain) T. +34 956015455 F. +34 956015402 e-mail: [email protected]María L. Vélez Universidad de Cádiz Dpto. Economía financiera Gta. Carlos Cano s/n 11002 Cádiz (Spain) T. +34 956015435 e-mail: [email protected]Concha Álvarez-Dardet Universidad Pablo de Olavide Dpto. Dirección Empresas Ctra. Utrera, km. 1 41013 Sevilla (Spain) T. +34 954349357 e-mail: [email protected]* Corresponding author This research was partly financed by the research project SEJ-5061 from Andalucia government. ABSTRACT Through a longitudinal case study, this article examines the evolution of the twofold function of formal governance mechanisms, for control and coordination, as an interorganizational relationship between supplier and distributors evolves. We ask whether all formal governance tools develop simultaneously, or whether each mechanism is designed and used for only one function; whether different mechanisms’ attributes foster one function rather than the other; and whether different mechanisms are developed over
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Paper presented at the EMNet 2011December 1 to 3, 2011, Limassol, Cyprus
(http://emnet.univie.ac.at/)
EVOLVING FUNCTIONS OF INTERORGANIZATIONAL GOVERNANCE
There is a considerable body of research on the governance of interorganizational
relationships (IORs) among nonintegrated firms (Hendrikse and Windsperger, 2009).
Studies (e.g., Noordewier et al., 1990; Celly and Frazier, 1996; Vlaar et al., 2007;
Mellewigt et al., 2007) argue that there are two main reasons why partners in IORs draw
up interorganizational formal governance (IFG) mechanisms: control and coordination.
Mellewigt and colleagues (2007) propose to analyze through a longitudinal study
whether contracts serve more as safeguards in the initial stages and subsequently evolve
toward a coordinating function as a relationship develops. But contracts are only a part
of IFG mechanisms, and because in real life contracts are incomplete, they need to be
complemented by other control systems (Gulati and Singh, 1998; Baiman and Rajan,
2002). Managers combine different mechanisms to govern IORs (Baiman and Rajan,
2002); thus, studying only a specific mechanism in isolation from other parts of the IFG
system may show only partial results.
In this paper we study how the control and coordination functions of IFG
mechanisms evolve, emphasizing the relationship between these two functions and IOR
evolution. This project contributes to the related literature in several ways. First, we
widen our study to include IFG mechanisms beyond the contract: a commission system,
shared software, shared information, an evaluation system, and an operational manual.
This allows us to analyze whether all IFG mechanisms develop both functions
simultaneously, or whether each mechanism is designed and used for only one function.
Second, we keep in mind that different mechanisms that make up the IFG system can
have different attributes. Adler and Borys (1996) argued that there are two types of
formalization—enabling vs. coercive—and analyzed their characteristics (internal
transparency, global transparency, flexibility, and repair), the design process, and
implementation differences. Applying this framework allows us to study whether
mechanisms’ attributes foster one function rather than the other. Third, through a
longitudinal case study, we analyze whether different mechanisms are developed over
time to complete the contract. In fact, new IFG mechanisms can change the balance
between the two key functions either by being used predominantly for one of them
rather than the other, or by causing a decrease in the use of other mechanisms. Finally,
following the proposal of Mellewigt, Madhok, and Weibel (2007), we explore whether
the evolution of the IOR partly explains the evolution of both functions, or vice versa.
For the most part, research in this area has been conducted at the level of the
dyad; we examine a larger group: a marketing channel. A marketing channel can be
understood as a nonequity and open-ended IOR in which a set of smaller downstream
distributors assumes part of the value chain functions from a bigger upstream
manufacturer (Stern et al., 1996). Marketing channels are vertical and asymmetrical,
with a dominant firm determining the terms of the nonownership contractual
arrangement (Lassar and Kerr, 1996; Frazier, 1999).
IORs are developed and maintained over time, requiring the use of longitudinal
research designs. We study a long period, from 1985 to the present, from both sides of
the relationship. From the supplier side, the controlling firm unilaterally developed a set
of IFG mechanisms in order to increase the likelihood of attaining its objectives. From
the distributors’ side, controlled firms used IFG mechanisms to facilitate better-
informed decision-making.
2. THE STRUCTURE AND NATURE OF INTERORGANIZATIONAL
FORMAL GOVERNANCE FUNCTIONS
One important decision that executives make when forming an IOR is allocating duties,
risks, procedures, and so on through contractual provisions, which determine exchanges
in more precise terms (Ariño and Reuer, 2004; Mellewigt et al., 2007). These
contractual terms try to help firms devise remedies for foreseeable contingencies or
design processes for unforeseeable outcomes, protecting each firm against self-
interested behaviors by the other party. Moreover, contracts clarify mutual expectations,
enable goal congruence, and establish common ground. In order to manage their IORs,
firms have a range of contractual options available (Lassar and Kerr, 1996).
However, even if the partners clearly understand their relationship’s objective
and their mutual interests, it is not feasible to design a contract that anticipates all
possible eventualities, no matter how complex the contract may be (Ariño and Reuer,
2004). In real settings, complex and complete contracts are impossible to define because
of ex ante contingencies and ex post renegotiations (Gietzmann, 1996; Gulati and Singh,
1998). Furthermore, when a contract becomes excessively detailed, it will be inflexible
(Poppo and Zenger, 2002). Thus, researchers often describe interfirm contracts as
incomplete (Baiman and Rajan, 2002), pointing out that it may be impossible to
envisage all future contingencies, or may be costly or impossible to account for them in
the contract, so contracts never fully reflect working relationships (Gietzmann, 1996).
Sometimes contracts are merely legal bases on which long-term relationships can be
built.1 Since self-interest makes partners likely to take advantage of any loopholes
(Geyskens et al., 2006), there are authors who maintain that contracts should be
complemented by other control mechanisms to mitigate the inefficiency of incomplete
contracts (Baiman and Rajan, 2002; Langfield-Smith, 2008). Firms can choose a set of
governance mechanisms shaping their IFG.
IFG mechanisms are generally understood as formal (written and standardized)
procedures and statements used by managers to monitor and influence the behavior and
activities in an IOR. IFG mechanisms include contracts, organizational structures,
performance measures, administrative controls, and operational procedures, among
others. They can play a vital role in creating a range of acceptable behaviors,
performance expectations, and dispute resolution mechanisms, and also in facilitating
knowledge transfer and structuring communication flows. To prevent IORs from
failing, IFGs have to realize a twofold goal: control the risks of opportunistic behaviors,
and coordinate activities and resources across firms (Mitchell et al., 2002; Gulati et al.,
2005; Vlaar et al., 2007; Mellewigt et al., 2007). However, as Hendrikse and
Windsperger (2009) note, the large majority of governance studies focus on mitigating
the risks of opportunistic behavior.
The conventional view held by users of agency theory and transaction cost
economics is that in an exchange relationship, agents tend to behave opportunistically,
prompting the principal to adopt mechanisms for curbing such opportunism.
Opportunistic behavior can arise from several sources, even in the absence of specific
assets. A firm can misrepresent its capabilities or resources during the selection process,
and/or during the relationship it can fail to contribute what it promised or can misapply
the resources it gains from the relationship. IFG mechanisms can assert control, provide
monitoring, and align incentives (Gulati and Singh, 1998), and thus mitigate agency
problems. In this control function, IFG mechanisms try to motivate the partners to
achieve desirable outcomes, inciting the agents to adopt the behavior required, and/or
dissuading them from adopting others.
From the resource-based perspective, an IOR enables firms, in their quest for competitive advantage, to attain, through sharing and combining their resources, some beneficial outcome that they could
1 Vlaar et al (2007) note that contractual agreements in the United Kingdom, for example, are frequently the result of exhaustive negotiations in which each party attempts to impose conditions on the other. In Germany, in contrast, contracts are used to reassure partners of the common or shared legal principles to which they wish to adhere.
not attain on their own (Mellewigt et al., 2006), even without the threat of
partners’ opportunistic behavior. IORs entail mutual dependence, because tasks
decomposed among partners need coordination and therefore communication and joint
decision-making. As the tasks become more interdependent and more uncertain, this
need increases (Gulati and Singh, 1998). Pooling resources, dividing labor across
partners, and subsequently integrating the dispersed activities are critical to the
generation of value in an IOR (Mitchell et al., 2002). Accomplishing this coordination
requires developing complex linkages between different and interdependent task units
(Mayer and Argyres, 2004). From the perspective of the resource-based view, as
coordinating devices (Mellewigt et al., 2006), IFG offer the proper information flow
between each partner firm, enabling goal congruence, and establishing common ground.
Some authors, like Dekker (2004), maintain that each mechanism is used
simultaneously for both functions: “A contract is not only used to reduce a partner’s
incentives to behave opportunistically, but in addition serves as a framework for
coordination in which the cooperation proceeds. And a joint venture’s administrative
hierarchy not only coordinates the joint venture’s day to day functioning and addresses
problems as they arise; simultaneously it is used to detect opportunism when it occurs”
(2004:31). However, other authors, like Hendrikse and Windsperger (2009), seem to
indicate that each function will have specific mechanisms: “Situations with a joint
interest problem require coordination by some mechanism, whereas situations with
conflicting interests require alignment of incentives (by allocating ownership, control,
and income rights) to a certain extent” (2009:3).
We must bear in mind that different tools that make up the IFG can have
different attributes that may determine whether a given mechanism is used for both
functions simultaneously, or whether different mechanisms suit each specific function.
Adler and Borys (1996) argued that there are two types of formalization—enabling vs.
coercive. Table 1 summarizes their framework. Any IFG mechanism can be categorized
on the enabling vs. coercive continuum, because formalization is a continuous variable
with a zone of indifference. Enabling tools provide detailed, objective, accurate
information; build connections among people and business units, giving people a sense
of the whole; and facilitate analysis and what-if thinking. Adler and Borys propose that
enabling formalization provides needed guidance and clarifies responsibilities, helping
individuals be and feel more effective. We may add that these characteristics favor
coordination, and vice versa. Thus it is possible to determine which function each IFG
mechanism serves by analyzing its characteristics as enabling or coercive.
RQ 1. Do mechanisms’ characteristics indicate their main function for control
vs. coordination purposes?
-- Table 1 here --
Negotiating and forming an IOR initiates a dynamic relationship that must
evolve if it is to be successful (Inkpen and Curral, 2004; Doz, 1996; Ariño and de la
Torre, 1998; Ring and Van de Ven, 1994; Inkpen and Curral, 2004). Interorganizational
governance is not static (Vlaar et al., 2007). During the relationship, managers wish to
bring about changes in the coordination and control mechanisms that they adopt
(Bijlsma-Frankema and Costa, 2005). Chenhall (2003) argued that control systems that
are valid today might lose validity as they evolve through time, and recent research calls
for further studies on IFG evolution.
As a logical extension of our first research question, we focus on the dynamics
of the twofold IFG function, and its potential association with IOR evolution over time.
The arguments above suggest that different mechanisms are developed over time,
completing the contract, and that this development can change both functions and
rebalance them. According to Baiman and Rajan (2002), IFGs may facilitate new
interfirm arrangements. Thus it is arguable that the evolution of the IOR is rooted in the
evolution of the two functions. In contrast, Mellewigt et al. (2007) propose that the
twofold function may vary over the life cycle of an IOR, the primary driver being the
level of trust. It could well be that IFGs serve more of a safeguarding function in the
initial stages of a relationship and subsequently evolve toward a coordinating function.
These contrasting arguments open our second research question, about what leads to
what:
RQ 2. Could the evolution of IORs be explained by / explain the evolution of
control and coordination functions?
3. CASE STUDY RESEARCH
In this paper we have adopted an exploratory longitudinal case study approach (Yin,
1984) to grasp the dynamics and complexities of IORs. We examined the distribution
channel of a supplier that has externalized its distribution functions, offering partners a
consignment contract, a geographical area, and a client portfolio. As a part of a bigger
research project, our nonrandom choice of this IOR was influenced by several factors
(Eisenhardt, 1989). First, the IOR is consolidated, longstanding, and stable. In 2010,
over 95 percent of the distributors had been part of the relationship for over two
decades. Second, this IOR is high performing: in 2010, the supplier’s return on
investment ratio from its IOR was 3.8 times higher than from direct sales. Third, this
IOR is long term and open ended. During the period of study (1985-present), the
supplier progressively introduced several IFG mechanisms to manage the relationship,
making observable the differences between IFG functions.
3.1. Research design and data sources
For proper triangulation (Eisenhardt, 1989) we obtained information from published
sources, internal documents, direct observations, and interviews. Archival data dating
back to 1985 included governance and financial documents; partners’ contracts;
journals, norms, and procedures; materials and slides used in meetings; and computer
reports. These data allowed us to identify the progression, objectives, and content of
IFG mechanisms, and to confirm what we learned from interviews.
Our semistructured interviews had a dual purpose: to gain more information on
topics whose clarification would be particularly interesting for the study; and to
complete and contrast information previously gathered, by tapping the wealth of
experience of those people who actually observed the IFG development. We held 35
interviews (from 2002 to the present) with supplier personnel who held or had held
management positions. We also interviewed 13 partners, whom the supplier categorized
into three groups: group A, with sales exceeding 600 thousand Euros per year; group B,
with sales of 360 to 600 thousand Euros per year; and group C, with sales of less than
360 thousand Euros per year. Our interviewees were chosen randomly from these three
groups (three representatives from group A, and five each from groups B and C). On
average, these interviews lasted about 120-150 minutes. All interviews were tape-
recorded and transcribed, and the completed write-ups were sent to the interviewees to
ensure their accuracy.
Also, we carried out direct observations at the supplier’s head office and in work
centers, as well as at several residential training and meeting sessions. Informally, our
presence at breaks during and after our interviews and direct observations meant that we
could listen to participants’ observations about the functions and objectives of IFG
mechanisms. We have been able to triangulate oral histories of the earlier years with the
archival data, because these materials were often presented and discussed during
interviews; we consider these narrations very useful to help us to understand how IFG
mechanisms were used (Chenhall and Langfield-Smith, 2003). We decided to terminate
our fieldwork after we felt that we had developed a clear sense of the IFG mechanisms’
functions within the IOR, as proposed by Miles and Huberman (1994).
Once the data collection ended, we carefully analyzed the interview transcripts
to understand areas of agreements between interviewees (Eisenhardt, 1989). Archival
data were used to confirm findings that arose in interviews and direct observations. We
then designed a table to reorganize the original transcripts around issues of significance
in order to elucidate the functions, characteristics, and objectives of IFG mechanisms.
Also, interview transcripts and archival data were organized chronologically, and the
common issues in the cells were analyzed, focusing on “what led to what and when”
(Miles and Huberman, 1994:110).
4. THE CASE STUDY
4.1. The supplier’s distribution channel
The supplier firm, CMD (a pseudonym), was established in the late nineteenth century.
It is currently one of the leading firms in the Spanish chemical sector and belongs to a
multinational group. This sector is characterized by a relatively stable market, in which
five giant companies share most of the world markets. CMD is organized into regional
districts, and its activity is now basically commercial, although it also packages its
industrial products into special containers. These containers are an important asset,
often outvaluing the cost of their contents. They are also an important source of income,
since daily rent is charged to the client, and they must be collected for reuse. Industrial
products are sold directly to major clients or through the IOR to a large number of small
and medium clients.
The IOR is configured as a nonequity alliance with a set of smaller partners.
Currently, its importance for the supplier can be seen from the fact that, in 2010, the
IOR accounted for 85 percent of CMD’s sales and catered to 95 percent of its clients.
Nowadays, distributors receive the products on consignment and are entrusted with
commercialization, storage, transport, and the management of CMD’s client portfolio in
exchange for a commission on sales. While delivery sales are carried out through the
IOR, CMD bills the client directly. CMD’s industrial products do not differ from those
of its competitors; its main added value is its distribution system, as its partners supply
the clients with a satisfactory standard of service while maintaining premium market
prices.
4.2. The development and functions of IFG mechanisms (1985-2010)
Practically from its foundation, CMD delegated the tasks of warehousing and transport,
for two primary reasons: logistical costs and market positioning. The 1980s were “a
moment when product demand outran our production capacity; therefore we were
oriented towards production, not sales” (District Director). Distributors were selected
mainly from existing transportation and client firms, entrusted with warehouse and
delivery tasks, and remunerated in different ways: by fees per container in storage or
sold, by remittance of a fixed monthly sum for storage or sales, or by reimbursement of
expenses. "It was difficult to maintain a transport network that could get to the furthest
client, so we thought we should have intermediate firms" (former CEO).
After 1980, gradually CMD began to regularize the IOR, focusing on its legal
and labor aspects. From 1985 onwards, only one standard contract was used for these
independent entities, regardless of their varying sizes, legal constitutions, and other
business activities. An analysis of the contract shows that it states only the basic
expectations and does not envisage every possible contingency. "The contract is only
the legal support" (former CEO). It is a starting point, outlining the legal relationship,
what parts of the business are delegated (geographical areas), the assigned client
portfolio, and some general guidelines for action. "The contract is general. Starting from
there, you enter into the business and you go on learning” (Partner B-3).
CMD next took advantage of the contract development to establish a single
system of remuneration: commissions on sales. "It is the system where if you sell more,
you earn more” (CMD manager of partners). “There was great heterogeneity and one of
the steps was to introduce the current commissions system” (District Director). From
the early 1990s onward, partners operated exclusively in a given geographical area and
received commissions on the area’s sales, even though on occasion CMD delivered the
product directly to the client, giving partners higher profitability. Distributors received
the supplier’s products on consignment and carried out their delivery and sales tasks
mainly in a passive way.
At the beginning of the 1990s, CMD’s sales department had new software,
called GESCOM, that provided monitoring information about sales: falls in demand,
registration and sales of new clients, container contracts, sales analyses contrasted with
the previous period (month/year), itemized sales breakdowns, and the total number of
containers per client. This database included sales information about all the firm’s
clients, but reports could be customized to describe concrete products, specific clients,
and/or distributors. However, at that time, this information was used unilaterally, mainly
by the supplier’s sales department, in order to control and monitor distributors.
According to our interviews, CMD employees tried to structure, limit, and regulate
distributors’ behaviors, telling them how to perform their activities. "To daily supervise
absolutely everything that they do, to give them methods, to set performance rules"
(CAC Director). "At all moments we control and investigate their performance" (CAC
manager).
In 1992, CMD incurred losses, for the first and only year in its history. The next
year, as part of a new downsizing strategy, the firm began to outsource more and more
complex functions. Though its relationship with distributors had been successful, it bet
that it could improve and strengthen its distribution channel. "That the partners worked
well did not mean that we could not make them work better, with a greater alignment"
(CEO). “We needed systems that allowed us to give them the same message at the same
time” (CMD manager of partners). Widening its former IFG system, CMD began to
pilot a new set of mechanisms.
In 1997, CMD decided to share its software, obliging distributors to buy a
specific computer on which to install it. In 1998, the supplier reached electronic
integration, supplying its entire channel with computers and delegating yet more
functions (through passwords, partners could now create and maintain client files, get
information on price discounts, monitor clients’ inventory, manage logistic issues,
receive complaints, and control outstanding payments). From this date, distributors had
to use the software to track deliveries and container movements or to open a new client
file. This decreased the mistakes that the previous handling system had generated, and
even allowed CMD to extract truthful private information or market knowledge from
partners. “We were able to free ourselves of a great deal of administrative work” (CAC
Manager). The software permitted it to externalize more product delivery and invoicing,
which from then onwards were solely partners’ responsibility. “They have given us a
very good tool, to see consumptions or levels of inventories. Now we control the
market, and inform the supplier about changes” (Partner B-5, C-2). Thus, CMD was
able to keep track of its containers and gain information on final clients. This shared
system enabled the supplier to monitor distributors’ inventory on line, gaining greater
control of partners and the end market. “We needed tools which would allow us to
retain market control, with the partners carrying out their activities under our
supervision” (CEO). "Integrating our systems, besides making the whole chain more
efficient, allows us to have a greater knowledge of the end market, although the
management is more expensive” (Commercial Director).
Next, CMD designed new reports from the existing GESCOM data base and
began to share them with its partners: falls in demand, registration and sales of new
clients, container contracts, sales analyses contrasted with the previous period
(month/year), itemized sales breakdowns, and the total number of containers per client.
“This step was indispensable; it was a change toward more proactive sales activities”
(Commercial Director). The new scorecard was developed in 1999 and refined in 2000,
by a team formed mainly of the supplier’s sales employees and distributors, that is,
boundary employees. According to the Shared Scorecard Project Report, “this
information would allow the partner to obtain better knowledge of the evolution of its
clients; plan and solve problems more quickly; and coordinate their work with our sales
department.” Monthly comments by the sales staff enabled them to establish shared
sales objectives and get information from partners. "It is very interesting information
that allows us to detect problems, helping in our management, allowing us to make
quicker decisions and to establish plans and targets” (Partner C-5). The supplier
managers felt that “in order to have partners, we needed to improve the systems, and we
started with the idea of giving in order to receive” (Internal Audit Manager). "It is the
second transformation; we have a system that supports operations, now it transforms
them into partners" (CEO). “It allows us to control partners” (CMD manager of
partners).
CMD’s sales department provided training in the use of the new information.
"Thus they are able to detect market opportunities" (Sales Manager). Boundary
employees also analyzed this information monthly, providing an extra management tool
to monitor distributors and enabling both parties to establish and manage sales
objectives. Although partners already had access to the same information (through client
invoice copies), the newly designed format was more organized, useful, and aggregated.
“We devised a tool to let them know that clients must be managed and that they were
responsible” (CAC Director). "It is very useful, to see what happens, to compare…to
negotiate" (Partner A-1). In most cases, this information even improved sales
department activities by providing an extra control tool. “They need more information,
and it allows us to demand more of them” (CEO).
The supplier also drew up a Distributors’ Management Manual to help partners
better perform their daily tasks, with information and forms about client contracts,
products, containers, safety norms, etc. This manual established guidelines for storage,
distribution, administration, and commercialization, as well as templates of documents
and forms both for internal use and for the final client.
In 2001 and 2002 CMD introduced a Distributors Evaluation System (DES)
developed by another team, this one composed of top managers and experts from a
consultant firm. (Although the system was known internally as DES, the supplier
decided to present it initially as the “Distributors Incentives System” to obtain greater
acceptance from partners.) As CMD managers pointed out, this system had two
objectives: “to reward those who obtained the best results and to identify those who
needed more assistance or more support in order to pre-empt possible conflicts” (DES
Project Report). "It is a very important relationship, and the fact that we had so little
control information was not proper. Starting from here you can begin to think about
how we pay and how we establish incentives. The commissions system is very simple,
it is easily calculated and explained, and partners understand it quickly. The
disadvantage is that it does not motivate appropriately. It sets incentives toward serving
the biggest client, more commission with less work [...] if we have the information and
the profile, the following step is to evaluate them" (CMD manager of partners).
Analyzing the IOR value chain, the supplier defined 37 performance measures
(including financial and nonfinancial, and internal and external measures), their relative
weights, and the desired level of development. These performance measures covered all
the channel activities, including warehousing, delivery, administration, and
commercialization. "They know what points we will value, and both parties agree
yearly where they want to arrive in each one of these areas" (District Director). It was a
system for continuous improvement whose principal goal was the enhancement of
partners’ sales activities. “We already have the personnel and systems necessary for
control. What we are after is to clarify, both for us and for them, what we want them to
do, encouraging improvements” (CMD manager of partners). “The supplier now
demands more; they want us to visit and assist clients. Before this was secondary, and
now it is more valued" (Partner C-4). Through this mechanism, CMD obtained a
ranking of its partners every year, so it could reward best performances. The system also
allows the supplier to identify distributors who require more assistance, enhancing
strong points and eliminating weak ones. “It is useful, you can see your defects and you
can try to correct them" (Partner A-2). However, each distributor knows only its own
evaluation, and which distributor is the best in each category (group A > 600,000
Euros/year; group B > 360,000 Euros/year; and group C < 360,000 Euros/year). CMD
can now detect shortfalls item by item and partner by partner, in order to implement
pertinent individual objectives. Each year, the supplier and the partner have meetings in
order to mutually agree exactly what each one is willing to give, establishing joint
improvement projects. "These tools allow us to settle objectives; every year we have a
meeting and we establish them, together with the supplier personnel. The point is that
each one knows what he has to do and where to do it" (Partner B-1).
From 2002 to 2006, CMD designed a distributors’ web page that included all of
the former IFG mechanisms, as well as some new services and information (optional
low-cost responsibility insurance, a safety advisor, ISO-9000 consulting, email, a client
complaint resolution program, processing of client debts, and ISO-14000 consulting).
"To be able to use the web page and the new applications more efficiently, a specific
training program has been elaborated…it is an open environment that will incorporate
all those contents that are considered of interest to the channel. Please, send me any
suggestions" (Agents Manager letter to the channel).
In 2005, the US headquarters decided to change its worldwide enterprise
resource planning (ERP), migrating to SAP. This change over took 4 years, from 2005
to 2009. Initially, because of the need to homogenize all processes, and because the
Spanish business style was different from that of other countries, the parent firm
decided to eliminate the IFG mechanisms described above. Over time group member
companies in other countries had developed different distribution channels focused
mainly on distributors acting as resellers, and they perceived no need to develop any
concrete IFG mechanisms because in their philosophy they saw distributors as end
clients. However, a headquarters team did a deeper analysis and decided to select
CMD’s system as a worldwide best practice, including it in the new SAP, and investing
more time and money in their distribution channels. In a first step, CMD decided to
maintain the distribution channel’s software in a parallel way, while it adapted its own
procedures and software to the new context. In the second step, the supplier developed
new interfaces and software for distributors in order to update former shared software,
making it compatible with the SAP environment. This model of IOR management was
being exported to other European countries with excellent results, as CMD’s CEO
stated. One of the managers underlined the reasons for implementing this system
throughout Europe. First, distribution costs: “At the moment, in France, our trucks are
half loaded. Second, we will offload a heap of administrative work”. Second, inventory
reduction: “Currently we have 325 distributors in France who have at least 15,000
containers. If we improve routes and rotation, we improve asset management and reduce
costs.” Third, improved market presence: “We will improve our proximity to the clients.
Usually, these are two conflicting concepts: if you reduce costs you reduce service. But
in this case, curiously, by reducing costs we improve service.”
Currently, the distribution channel management is based on this set of IFG
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Table 1. Adler and Borys’s (1996) FrameworkCharacteristics Enabling To a great extent To a minimal extent Coercive
Repair
This refers to the breakdown of control processes, providing capabilities for fixing them. The intuition is that not everything can be foreseen, and some intellectual work (and consequent freedom) must be left to users to determine the appropriate course of action in such unforeseen circumstances.
More enabling tools integrate information about process and task to reach targets and to search for solutions to potential problems. They generate information that facilitates responses to real work contingencies. So an IFG tool will be considered more enabling if it 1. is designed and implemented so that it might be reconfigured by users, 2. is designed and implemented so that it might be reconfigured by designers following users’ recommendations,3. acts as a valuable resource informing users about their actions,4. signals problems and opportunities for improvement,5. gives users access to very detailed information in order to investigate problems or deviations,6. is designed so that user-driven changes to the format and make-up in terms of measurements of reports are possible,7. facilitates what-if analysis and investigation about causes of performance rather than simply facilitating the production
of routine reports, focused only on target achievement.Internal transparency
This is about understanding the working of local processes.
More enabling tools explicate the key components of processes, guide understanding of processes, and give users quick feedback on their performance by providing metrics that help them to assess their performance. So an IFG tool will be considered more enabling if 1. It is a working tool instead of a monitoring device. 2. It seeks to give a common data set and clearly mapped business processes. 3. It helps to clarify the activities that make up every business unit.4. It increases the user’s knowledge of the operations of every business unit.5. It provides an excellent platform that can inform its users in detail concerning the inner workings of the processes it acts
upon.6. It gives detailed information on the drivers of results, allowing a better understanding of what drives revenue/cost levels.7. Its integrated measures are objective and accurate. 8. It increases the knowledge of how each business unit works as a whole.
Global transparencyThis refers to understanding where and how the local
processes fit into the organization as a whole. If a system is to facilitate responses to emerging contingencies, then it must be used to provide a sense of where local actions sit
in relation to larger organizational strategies, goals, and agendas. Enabling formalization is not simply an exercise in decentralization and delegation; it is an attempt to harness local creativity and flexibility. So an IFG tool will be considered more enabling if 1. It offers a wide range of contextual information designed to help users interact with the broader organization and
environment. 2. It helps to communicate business unit strategy.3. It is explained in detail to all users. 4. It signals areas in which we may need to change business unit strategy.5. It reflects the users’ contribution to the organization. 6. It shows users where their own tasks fit into the whole, showing a larger representation of organizational activities and
Characteristics Enabling To a great extent To a minimal extent Coercive
business.7. It helps the business unit to understand the overall context in which it is working.8. It encourages interaction between previously distant individuals. 9. It generates regular and frequent flows of strategic information between operational and senior management10. It allows analyzing information in order to come up with ideas for improving operations under control.11. It allows thinking of new ways of doing things.12. It positions individual units within a larger representation of organizational activities.
Flexibility This captures members’ discretion over the use of control
processes (i.e., the extent to which they can turn them off).
Because unconstrained flexibility is unlikely to be beneficial, IFG can offer an effective framework for mapping out individuals’ areas of responsibility and control. Flexible tools encourage users to adapt tools to their specific work demands. So a tool will be considered more enabling if 1. It seeks to facilitate flexible responses to emerging events to the extent that the control systems can be turned off when
not needed.2. It allows customization.3. It allows for the setting of a variety of options ranging from blocking specific actions to automatic reporting options.4. It allows activities that have not been built into the agreements. 5. It assumes that deviations are also learning opportunities, allowing a detailed analysis, and providing a flexible guide
to act. 6. It allows for members’ discretion to use it. It is not compulsory, allowing exceptions.7. It is not focused on ensuring strict adherence to original assumptions and action plans.
Development process (Design and implementation activities)
The manner in which the development process is carried out affects how the tool will be perceived. So a tool will be considered more enabling if 1. It allows users’ involvement.2. Its development process is experience-based.3. It utilizes local knowledge.
Source: Adapted from Adler and Borys (1996), Wouters and Wilderom (2008), and Chapman and Kihn (2009)
Table 2. IFG Usage and Main Characteristics of the Interorganizational Relationship
Unilateral use of IFG1985-1997
Dual use of IFG1998-2010
Supplier orientation Production Market-Clients Main targets Logistics. To create a distribution
channel to cut logistic costs.Client services. Giving to receive. To reduce the supplier’s costs, outsourcing administrative and sales activities. To detect weak points in the relationship and to create a closer IOR with a team feeling
Relationship benefits for the supplier
Cost and investment reductionsClient proximity
Centers, staff, and cost reductionsClient proximity Homogeneous client serviceHigher quality service
Percentage of the supplier total sales (average) 66 % 85 %
% supplier total client accounts (average) 80% 95%
IFG users Supplier employees Supplier employees and distributorsIFG functions Control Control and coordinationIFG mechanisms Contract, commission system and direct
supervisionContract, commission system, software GESCOM, management manual, DES
IFG designers Lawyers and top managers Marketing, logistics, control, and sales managers (middle managers)
IFG effects Sporadic and dispersed information gathered in a nonhomogeneous, sparse way A feeling of poor control
Gathering and sharing information in a homogeneous way
A feeling of proper controlInvolved supplier departments
Sales department Sales, logistics, and control departments and client attention center
Problems Higher LowerControl focus Output Output, activities, and relationshipCommunication flows and links
SporadicSales department
Continuous and formalized IFGAll departments
Relationship type Arm’s length Partnership
Table 3. Main Features and Functions Associated with IFG Tools Control / Coordination Enabling / Coercive characteristics
Con
trac
t
Control
“It is only a legal framework” (Supplier and
distributors). “Mainly, the contract gathers the
legal relations, the geographical area assigned,
general instructions and economic conditions”
(Supplier).
It is the same contract for all distributors, not accepting changes or customizations. It establishes only the main legal provisions, not
generating responses to actual contingencies. It does not provide a guide to understand the processes. It is only a legal framework, but
clarifies the main activities and their geographical scope. It provides task delegation, but not a sense of how local actions fit with
organizational goals. Although it is explained in detail it does not help people communicate or interact. From a variety of optional
clauses, the supplier set a homogeneous contract, not allowing customizations or exceptions. It was designed by lawyers and supplier
managers.
“We established an unique contract for all distributors” (Supplier).
“The main goal was legal” (Supplier and distributors).
“It allowed us to dismiss some distributors, contracting others” (Supplier).
Com
mis
sion
syst
em
Control
“We give a report with sales detail, and the
commissions […] We compensate cash sales
with commissions. The distributor will give us a
promissory note with the difference. When the
distributors have discrepancies, we will negotiate
the following month” (Contract clauses).
It is the same system for all distributors, allowing only a few changes in special cases. It merely establishes the economic amount to
be paid, not allowing any analysis of it. It does not provide a guide to understand how to improve distributors’ commissions, only
showing their commission per product and per client. Although it is explained in detail and can be used to interact, it does not provide
a sense of how local actions fit with organizational goals. It is automatically calculated. It was created by supplier managers, and
established without their partners’ participation.
“It is a system where if you have more sales, you earn more money” (Supplier).
“It is a system which is clear, simple, understandable and reliable” (Supplier and distributors).
Control / Coordination Enabling / Coercive characteristicsSh
ared
soft
war
e
Control & Coordination
“We needed systems allowing us to maintain
control, processing the activities through
distributors, under the supervision of our sales
managers.” “Integrating our systems facilitates a
more efficient chain, increasing your knowledge
about the final market. Although now the
management is more costly, we needed to invest
in it, with more resources and time” (Supplier
managers). “It is a part of a big program. They
bet on us, and now we have the same tools [...]
They incentive us, valuing our work”
(Distributors).
It facilitates routine jobs and reports. The supplier’s top managers decide the list of tasks to be included. It is not open to suggestions
by distributors, because in the end they all use the same supplier’s system. It flatly asserts tasks and activities. It establishes all
distributors’ administrative activities but does not increase distributors’ knowledge of their main operations. It does not provide
distributors with the rationale for their work process. Information is presented in language familiar to the supplier, but not to
distributors. It does not allow a global vision of the contribution from each distributor to the global strategy. The information is
available to distributors on a restrictive need-to-know basis. It is a compulsory tool; they were forced to buy new computers. It was
developed by supplier demand, to satisfy the need for control and to increase outsourcing. It was designed by top managers;
distributors did not participate in any phase of its development.
“We installed specific software to develop our tasks and to control the activities. It allowed us to reduce duplicated activities.
Furthermore, we reduced our structure through distributors” (Supplier).
“Now we develop the work of the supplier” (Distributors).
Scor
ecar
d
Control & Coordination
''It is very useful, to analyze, to compare, to
negotiate" (Supplier). "It allows an ongoing
dialogue, helping in the analysis of contingencies
[…] It allows us to have our independence and
not to depend on the supplier […] It allows us to
have a more direct relationship with the supplier.
This tool allows us to be more integrated”
(Distributors).
Information can be reconfigured by both boundary employees and distributors. One year after implementation, the tool was changed
to include information suggested by users. It provides details in order to investigate causes of deviations. It provides objective,
accurate, monthly feedback on how each distributor works, showing their internal process as a whole. It provides information on the
drivers of sales, distributors’ source of revenues. It provides information designed to help distributors interact creatively with clients,
other distributors, the supplier, and the environment. It shares information that was previously considered private. It allows
distributors to interact with previously distant supplier employees. It is voluntary and can be customized for different purposes by
both sides. It was derived from the distributors’ daily work. It was developed by a team that included distributors. A pilot experience
that also involved some distributors allowed correcting the tool before its definitive development.
“It is a working tool” “It picks up information that some distributors were already demanding” (Supplier).
“It helps in our management, allowing us to take quicker decisions and to establish plans”
“This tool allows us to control our market” (Distributors).
Control / Coordination Enabling / Coercive characteristicsM
anag
emen
t man
ual Control & Coordination
“It allows us to have all the needed information
and forms (contracts, safety norms, etc.) to give
proper information to our clients” (Distributors).
Coercive. It establishes rules and task procedures. It looks for a homogeneous service, and cannot be reconfigured by users, not
allowing customization. It is a working tool that seeks to give a common data set and clearly mapped business processes. It helps to
clarify the activities that make up every business unit, increasing the distributors’ knowledge of the operations of every business unit.
It provides a wide range of information designed to help users interact with the supplier and clients. However, it does not help to
communicate business unit strategy and it does not show users where their own tasks fit into the whole. It seeks to facilitate
homogenous responses to emerging events. It cannot be turned off, and does not allow customization. It was designed by top
managers; distributors did not participate in any phase of its development
“This manual was edited as a support tool for the distributors’ daily work” (Management manual report)
Eva
luat
ion
syst
em
Control & Coordination
“We agree with them, each year, what each one
is willing to give” (Supplier).
“We can see our defects and try to correct them”
(Distributors).
It facilitates routine reports. The supplier’s top managers decide the list of performance measures. It is not open to suggestions by
distributors. It flatly asserts duties. It provides aggregated information on the execution of objectives. It highlights weak points to
improve, but it does not show how to improve them. It provides yearly feedback on 37 performance indicators. Some measures are
seen as subjective and inaccurate. It assesses all activities but does not increase distributors’ knowledge of their operations. It does not
provide distributors with the rationale for their work process. Information is presented in language familiar to the supplier, but not to
distributors. It shows each distributor’s absolute results, but not ranking. It informs distributors about strategic aspects of the channel,
allowing a global vision of the contribution from each distributor to the global strategy. It signals areas in which distributors need to
change. The information is available to distributors on a restrictive need-to-know basis. It is a compulsory tool. All distributors are
measured with the same parameters. It was developed by supplier demand, to satisfy the need for control. It was designed by top
managers, with the help of an external consultant firm; distributors did not participate in any phase of its development and did not
even know that the supplier was working on it. It was completely new for distributors. Its items and measures had never been used
until then.
“We do not want distributors knowing the results of others” (Supplier).
“The supplier gives us a list of targets and objectives to reach”
“It is an evaluating device” “The supplier controls us” “They tell us only how an ideal distributor is” “We miss our participation to
create a mixed system that was good for both parties” (Distributors).
Figure 1. IFG functions on a coercive-enabling continuum from the supplier’s perspective