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LEVERS OF CONTROL IN INTERORGANISATIONAL RELATIONSHIPS:

EMPIRICAL EVIDENCE

Luis Silva-Domingo, UNIVERSIDAD ORT URUGUAY

Teresa Canet-Giner, UNIVERSITAT DE VALENCIA

Ana Redondo-Cano, UNIVERSITAT DE VALENCIA

Abstract

Management control of dyadic interorganisational relationships along the supply chain is

still an underexplored area of research. Even though the concepts of the well developed

intraorganisational control research and especially the broadly analyzed model of levers of

control (LOC) may be useful for interorganisational relationships, specialized literature has

somewhat neglected it. This is an expected result, since control problem in IOR has been

generally approached - explicitly or implicitly - from a governance perspective.

Recently there have been some efforts to apply partially LOC in an IOR situation, and a

theoretical model has been proposed under the concept of Management Control Paths aiming to

apply the full potential of LOC to the IOR. It presents an innovative way to look at the control

problem in IOR, although it lacks a sound operationalization of the variables and it does not

present empirical evidence.

We aim to make a contribution with empirical evidence of the use of levers of control

through management control paths in interorganisational relationships. The findings from the

case study research of four dyadic relationships are put forward as a refined and improved MCP

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model, identifying some outstanding contingent variables and their impact on the intensity of use of the

levers of control through each management control path.

Keywords

Management control paths, Levers of control, Inter-organisational relationships

Abbreviations

MCP: Management Control Paths

LOC: Levers of Control

IOR: Inter-organisational relationships

TCE: Transaction Costs Economics

RBV: Resource Based View of the firm

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Introduction

The Levers of Control (LOC) model proposed by Robert Simons (1995) suggests a

control system directly and explicitly related to the competitive strategy and its continuous

development (Mintzberg and Lampel, 1999). The model has received an intense attention in

literature, even though it is just descriptive and it does not explain causal relations among

variables. This may be explained by the fact that it shows the need of arriving to a strategic fit in

the design of the management control mechanisms as a way for solving the control problem from

a strategic perspective (Simons, 2000; Widener, 2007; Mundy, 2009).

The concept of levers of control (LOC) has been put forward as a descriptive model

identifying the existence of sets of control mechanisms: belief systems, diagnostic systems, limits

systems and interactive systems (Simons, 1991, 1995). Belief Systems are basically the core

values of an organization, its mission and vision (as defined by Collins and Porras, 1996), used to

inspire and lead the search for new opportunities and each strategic decision making throughout

the organization. Limit systems are used to set clear limits to behaviour and decision making

through the formalization of rules and prohibitions. Diagnostic systems are used to monitor,

evaluate, correct, and make decisions about predefined goals and objectives. Interactive systems

are used to stimulate learning and the upcoming of new ideas through the direct and intense

involvement of top management with their subordinates, discussing the strategic uncertainties

and challenging known truths. These levers are not mutually exclusive; on the contrary, it is

suggested that there are complementarities that help in solving the control problem (Abernethy

and Brownell, 1997), what it is even admitted in prescriptive models (Ouchi, 1980, Merchant,

1982).

Despite all the attention LOC has deserved (Widener, 2007), it seems that there has not

been a consistent and enduring attempt to apply the model to the problem of control in inter-

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organisational relationships (IOR). The potential benefit in doing so resides in the fact that intra-

organisational management control is a more mature and developed area of research (Jensen and

Meckling, 1976, 1994; Merchant, 1985; Otley, Broadbent and Berry, 1995), following that IOR

management control literature should at least discuss whether the intra-organisational concepts

might be useful.

Management practice and research has shown an increasing attention to the IOR

(outsourcing) as a strategic theme (Quinn and Hilmer, 1994; Argyres, 1996; Quinn, 1999). The

management of outsourcing activities has been acknowledged as a key component of the business

strategy and a critical factor for the overall performance of firms (Hambrick and Fredrickson,

2001; Johnson et al, 2008; Osterwalder and Pigneur, 2010). This importance can be sustained

because failure in IOR could be explained, partially, by the lack of cooperation between parties

(Smith et al. 1995). Since then the topic has received a growing interest (Vosselman and van der

Meer Kooistra, 2009). However, IOR research has somewhat neglected the intra-organisational

knowledge on management control (behavioural perspective), generally approaching the problem

from a governance point of view (appropriation problem and top management coordination).

Recently Mahama (2006) made one of the first efforts to apply LOC in an IOR situation,

although the model considers just a portion of Simons’ model. A few years later, a theoretical

model that applies the full potential of LOC to the IOR setting has been proposed under the

concept of Management Control Paths (Silva-Domingo and Canet-Giner, 2010). This

Management Control Paths (MCP) model presents a potentially high explanatory power and an

innovative way to look at the control problem in IOR. Under these circumstances could be

interesting to search for some empirical evidence in order to know the usefulness of this model to

improve the management control in IOR.

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This paper aims to make a contribution to the IOR literature from the management control

theory. We provide empirical evidence from four cases on the use of LOC in these settings,

refining a theoretical model recently put forward (Silva-Domingo y Canet-Giner, 2010) and

conveying insights for a better understanding of the complex phenomenon, including new

outstanding contingent variables. We hope that this will lead, in due turn, to better designs of

management control mechanisms and performance improvements in IOR.

The paper is structured as follows. In the first section we discuss and identify the

management control problem in intra and inter organisational settings. In the next section we

present the model, explaining the concept of management control paths as a general framework

for the design of management control systems in IOR. In the following sections, we describe the

research methodology and findings. In the last section we discuss the managerial implications of

the research, identifying future research lines.

Management control in IOR

In their critical review on management control of interorganisational relationships Caglio

and Ditillo (2008) pointed out the need of defining the control problem that the firm tries to

solve, and suggested the existence of three different problems: appropriation, cooperation and

coordination. Previously Dekker (2004) had pointed out that the control problem is not only

focused on the appropriation problem derived from the opportunistic behaviour of the supplier;

he drew attention to the need of taking into account the coordination problem between

organisations. Appropriation, cooperation and coordination problems, however, form part of the

governance problem of the inter-organisational relationship (Nooteboom, 1999; van der Meer-

Kooistra and Scapens, 2008). In other words, these problems focus on the relationship between

top management teams of client and provider.

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None of these approaches take into consideration that, from an intra-organisational

perspective, management control deals with the behavioural problem of the people that actually

performs the tasks. And this behavioural problem in IOR will impact directly on the performance

of the outsourced activity. We argue that the client must not only deal with the governance

problem of the relationship, but also must take into consideration the performance of the

outsourced activity (Tomkins 2001; Mahama, 2006) performed by operative personnel of the

provider. This is partially supported by different empirical works recommending that workers of

both organisations should collaborate and work together (Van der Meer-Kooistra and Vosselman,

2000: 52) or proposing the use of social control among the operative teams of both organisations

(Donada y Nogatchewsky, 2006; Cäker, 2008), suggesting some parallelism with

intraorganizational management control. Following Merchant (1985), this means that the control

problem in IOR could be equated to solving the following behavioural problems: direction

(knowledge of goals and indicators), motivation (commitment to the goals and targets), and

personal limitation (development of specific abilities) of the individuals performing the

outsourced activities. Few contributions have taken this approach explicitly (Mahama, 2006;

Silva-Domingo and Canet-Giner, 2010).

However, there must also be stated that the phenomena of the IOR differs greatly from

that of the intra-organisational setting. The root of this difference resides in the fact that in the

interorganisational relationships the individual is outside the boundaries of the client

organisation. The dilemma of aligning goals among individuals and organisation in the intra-

organisational relationships acquires here a new perspective and represents a higher challenge for

management control. Firstly, we have two organisations (client and provider) with their internal

problems (vertical misfits). Secondly, we have the possibility of misfit between the objectives of

the client organisation and those of the individuals who perform the activity (central crossed

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misfit) and its mirrored problem between top management of the provider and the operations

level of the client (secondary crossed misfit). And thirdly, there might be differences in the

objectives of both top management levels (horizontal managerial misfit) and also in the

objectives of both operations levels (horizontal operative misfit). These multiple misfits are

graphically represented in Figure 1.

<<Please insert Figure 1 about here>>

The concept of top management and operations levels needs a better definition in order to

build a practical model. Then, in this context, we state that the top management level is confined

to managers and directors that spend most of their time on duties not directly and closely related

to the specific tasks of the outsourced activity. In the operations level, then, we will find

managers that spend most of their time on the day-to-day issues of the outsourced activity and we

will also find blue collar personnel with any degree of responsibility on the outsourced activity.

In this context, the concept of management control paths (MCP) of IOR is defined as

the options the client' top management level has to put in practice LOC in order to influence the

behaviour of the supplier' operations level - the people who actually perform the outsourced

activity (Silva-Domingo and Canet-Giner, 2010). There could be found three complementary

control paths which are represented in Figure 2. One design option for the client company’s

management is to follow the Direct control path. This would imply the management’s direct

action over those individuals performing activities within the supplier organisation. The client

may also adopt an Indirect managerial path, throughout the linkages between top management

teams, or an Indirect operational path, throughout the horizontal operative linkages. All three

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paths represent complementary design options of control mechanisms for the improvement of the

outsourced activities’ performance, as they influence the individuals who perform them.

<<Insert figure 2 about here>>

This model presents a potentially high explanatory power and an innovative way to look

at the control problem in IOR. However, it is a theoretical contribution, with no empirical

evidence, and it lacks a sound operationalization of the variables. Since the intensity of use of

any control mechanism implies managerial time (costs), a rational approach to select a balanced

and efficient combination of mechanisms and paths must be explored. We aim to make a

contribution understanding the reasons and variables that affect the decision to use different

mechanisms and management control paths. We believe that contingent variables based on

transaction costs economics (TCE), resource based view of the firm (RBV) and trust must be

taken into consideration in the research, given their critical relevance in past research on make or

buy decisions.

Contingent variables: Transactional and relational characteristics in inter-organizational

relationships

Taking transaction cost economics (TCE) as a starting point, Williamson (1985) identifies

three basic characteristics of the transaction: uncertainty, asset specificity, and transaction

frequency. Uncertainty refers to the inability to predict what will happen next, or to anticipate

changes in the circumstances surrounding the IOR (Noordewier, John y Nevin, 1990). Asset

specificity is determined by the alternative value that assets may have when considered for a

different use than was contractually established. The lower the value of the alternative, the more

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specific the asset. This implies that, for some goods, the continuity of an established relationship

is of great value for both, customer and supplier (Williamson, 1981). With respect to frequency,

TCE states that the cost of specialized government structures can be easily recovered when we

talk about periodic transactions (Williamson, 1985).

Other variables also influence the inter-organisational relationships, and have been

incorporated to the TCE discussion. The ability to measure performance (Ouchi, 1977; Merchant,

1982) is also important due to its impact on reducing the possibility of opportunistic behaviour.

The similarity of the cultures of the companies is a positive factor in building a certain level of

consistency in their objectives (Leibenstein, 1982). Consequently, when expected cultural

differences are lower, greater congruence of goals are expected and so opportunistic behaviour

can be prevented or eliminated (Ouchi, 1980; Anderson, 1988). Similarly, we propose that if

there are different views on risk aversion, the part that is less prone to take risks will seek

bureaucratic management control mechanisms when dealing with situations of uncertainty

(Chiles and McMackin, 1996: 83-84). Information asymmetries occur when one part has relevant

information for the transaction that the other part does not have (Ventura, 1995: 81). The

existence of these asymmetries has a positive influence towards the emergence of opportunistic

behaviour. In such situations, further development of control mechanisms are required, but this

could produce the bureaucratization of the relationship and the agreement would lose flexibility,

causing adjustment problems through a problematic and uncertain environment (Merchant , 1998;

Kamminga and Van der Meer-Kooistra, 2007). When bargaining power shows a significant

imbalance, there is the possibility that those who have more power act opportunistically (Round,

2001). The reputation of the supplier, in terms of their skills to meet the required standards, is an

important issue. Hill (1990) sees the reputation as a non-economic factor that discourages

opportunistic behaviour. We can say that if the reputation of the parts is excellent, some control

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mechanisms can be relaxed, while the lack of reputation can result in an increase of these

mechanisms by the customer and even by the supplier.

From a complementary perspective, trust between the participants have a deep impact on

IOR. There are three types of trust: contractual trust (the other part will meet the terms of the

contract); competencies trust (the other part has the required level of skills to develop the

outsourced activity); and goodwill trust (the other part will not behave opportunistically in an

unforeseen situation (Sako, 1992). In a situation of lack of confidence, highly specific

transactions will be organized within the company (internalization), whereas if both parties

develop a high level of confidence, the same transaction could be developed through a

cooperative agreement. The contributions of Ring and Van de Ven (1992, 1994) and Das and

Teng (1998, 2001a, 2001b) indicate that trust in situations of uncertainty limits opportunism.

Something similar happens with the previous experience of both parties in IOR. The effect could

be found in the importance assigned to trust. Experience and familiarity within a contractual

relationship favours the adoption of a common language; it produces savings in information

costs, boosts confidence, and limits the possibilities of opportunism (Williamson, 1985) reducing

the costs of coordination of both companies (Gulati and Singh, 1998).

Research design and methodology

Due to the highly innovative nature of the proposal, we have chosen an exploratory case

study research strategy in order to get a refined and simplified model (Eisenhardt, 1989; Yin,

1994). We have conducted four exploratory case studies with the objective of finding out whether

the Management Control Paths model let us understand how the client organisation designs its

management control systems of outsourced activities. We also expected the research to reveal

new issues or perspectives to enrich the proposed model.

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The concept of management control paths, together with the concept of levers of control,

has been derived from practice. It is then necessary to make a special effort in specifying the

concept (Bisbe et al, 2007). Since levers of control are poorly specified (Bisbe et al, 2007) we

take them here as the degree of formalization and the intensity of use of the specific control

mechanisms (Dávila, 1997). Davila (1997) developed a measure of the number of mechanisms

set in play as a proxy for intensity of use. However, formalisation of a mechanism does not mean

that the mechanism is actually used. We evaluated the intensity of use of each set of mechanisms

(levers of control) by the description of how much and how often the client have make use of,

without taking into consideration the number of mechanisms. Table 1 presents a description of

control mechanisms that have been considered as levers of control for each control path.

--------------------------------

Insert Table 1 about here

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As we have previously pointed out, the design of the Management Control Systems for

IOR is based on contingent factors that we have to consider in our model. Consequently, we

include a set of contingent variables that may have an influence in the design of the management

control paths following traditional and recent literature of transaction costs economics, resource

based view, trust, and Management Control Systems. A summary of relevant contributions for

each considered variable is shown in Table 2, providing content validity to the study.

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We selected the case studies with the following principles. Firstly, we wanted to have

access to the perspectives of the client and the provider. Building up conclusions from both

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perspectives offered the possibility of getting better insights, and it also offered the possibility of

validating the information taken from the interviews. Secondly, we wanted to have access to

different sources of information: interviews with different people and also documentation, and

the possibility to directly observe the activities. Thirdly, we wanted cases with different

contingent configurations in order to get a more complete approach to the phenomena. So then,

we have chosen cases from different countries and different sectors.

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As it was already suggested, the main sources of information were the interviews with

those managers involved in the outsourced activities from both parties. In Table 3 and Table 4 we

describe the interviews held and other sources of information. Due to the high degree of

innovation in the model, we selected a semi structured approach for the interviews. We

developed the interview protocol listing a set of questions directly from the variables of the

theoretical model. This was designed bearing in mind that we could get unexpected insights or

even new issues during the interviews. As a result we were able to get direct answers on known

variables and, at the same time, explore and elaborate on new ones. New contingent variables

were actually found during the firsts steps of the research. These new variables were immediately

introduced to the protocol and all interviewees could answer and comment about the new

questions. All interviews were digitally-recorded except those marked with an (*), where notes

were taken. As the interview protocol was elaborated from the theoretical model, it was not hard

to relate the answers and comments to the theoretical concepts and variables of our model. We

also analyzed written documentation. It provided additional information and also made possible

to triangulate the information from interviews. Some documents, such as public contracts or

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websites, were available on the Internet while other documents, such as the organisational

structures, were provided by the organisations.

Our approach to cope with the analysis of the evidence was the following. After all the

information for each case was collected we made an exhaustive analysis and wrote a case report

of twenty pages on average, describing the competitive setting, all variables of the model, and

managerial decisions related to the inter-organisational relationship. The case reports were sent to

the client organisation in order to get feedback, especially regarding mistakes, omissions, or

misinterpretations. After that, we wrote the final case reports including: a table with brief

descriptions of each contingent variable, a table with a brief description of the control path

variables, and an illustration with the relationships found between variables. Finally, we tried to

build up an explanation of the phenomena taking into consideration all the dyadic relationships

from the four cases.

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Description and analysis of case studies

The four case studies and dyadic relationships are briefly introduced in the following

table, along with a short description of their competitive situation. Table 5 summarizes the four

relations and a description of the outsourced activity for each case study analyzed. The four cases

were: Valencian Port Authority and MV (loading and unloading of the containers); Valencian

Port Authority and Infoport (and information technology company); Infocorp (IT solutions) and

InMind (software development); and finally, belonging to the forestry sector, FOSA (that belong

to BOTNIA group) and NAZCA, a provider. The firms participating in the first and second

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relations are located in Spain, and the firms involved in the third and fourth are located in

Uruguay.

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The specific configurations of the contingent variables for each case study are briefly

described through Table 6.

As it was already mentioned as one of the contribution of our work, we have found three

new, very important contingent variables to take into account in our model: operative

interrelation, task uncertainty, and task strategic relevance. These variables were initially

identified during the fieldwork of the first case study, allowing their inclusion in an adjusted

protocol that was used in the rest of the research. Task uncertainty. Task uncertainty can be

defined as the information deficits for performing that task, meaning that greater level of

uncertainty requires more information for a given level of performance (Galbraith, 1973, 1974).

This uncertainty is caused by the complexity and diversity of tasks (Thompson, 1967). Operative

interdependence or interrelation. The operative interdependence can be described following

Thompson (1967) as whether or not the operation of one party can be undertaken without the

dependence of any contingency posed by the other party’s operation. Thompson (1967) identifies

three types of increasing dependency (pooled, sequential and reciprocal). Task strategic

relevance. Revenaugh (1994) establishes that strategic relevance of the task is, together with

culture, a key factor in the implementation of business changes; Gupta, Satwik Seshasai,

Mukherji and Ganguly, (2006) analyzed the degree in which an activity was considered strategic

and its complexity when firms have to decide which activities to outsource.

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Then, on Table 7, we present a short description of the use and formalization of each lever

of control through each management control path. This description is accompanied by an

explanation of their key determinants, partially obtained through straight answers from

interviewees and partially conceptually developed by researchers during the research process.

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Discussion

As we pointed out in the introduction, the goal of this paper is to understand the

phenomenon of using the levers of control in inter-organisational relationships, through the use of

the management control paths.

We found out that managers implicitly consider that the most efficient design to control

an inter-organisational relationship is to use the indirect managerial path, followed by the indirect

operative path, and lastly the direct path. The less the time of high ranked managers needs to be

dedicated to the task, the better. On the other hand, the lower the operative interrelation, the

lower the possibility of use of the indirect operative path. Belief and Interactive levers in inter-

organisational relationships might be seen by managers as usually not fact oriented, too time

consuming, and long term oriented, hence costly and potentially messy. Therefore, managers

might decrease the intensity of use of those levers even when they are needed.

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The use of Belief systems through Management Control Paths

We found out that the more strategically relevant for the client the outsourced activity is,

the higher the need for an intense use of belief systems. This type of control mechanisms (in

combination with others) drives individuals to explore ideas and potential innovations. Even

small improvements in strategically relevant tasks could be rewarding for the strategic

positioning of the client.

We hypothesize that the evidence suggests a non-linear relationship between cultural

similarity and the intensity of use of formal belief systems through the managerial path, as

follows. When the IOR presents low cultural similarity, the effort in formalizing these control

mechanisms will have, possibly, no effect in the provider behaviour. When it presents high

cultural similarity, the client could expect that the provider will behave according to the same

values; hence, there is no need to spend time and effort in the design of formal mechanisms.

When it presents a medium cultural similarity, the client could find that the effort in formalizing

and inducing some aspects of the belief systems on the provider could have an effect on their

behaviour.

As observed in the cases analyzed, high task uncertainty could raise the need of an intense

use of belief systems given that continuous and quick decisions related to the activities and

processes must be taken. The client needs that those decisions are aligned with the overall

strategy and values.

The use of Limits systems through Management Control Paths

When high idiosyncratic assets are involved in the activity, the intensity of use of

contractual agreements through the managerial path is increased in order to protect those assets

from the risk of opportunistic behaviour. As it was already discussed, there are subtleties when

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intangible assets are involved. In general terms the client should use the limits systems through

the managerial path if any efficient safeguard could be included on it (contracts).

If the outsourced processes present high task uncertainty, then the limits systems should

include a lower level of details to boost flexibility, for it is too costly to update the documentation

every time a small adjustment is made to procedures and other limits mechanisms. Changes in

mechanisms through the managerial path seem to cost more than those in the direct path, and

even more than those in the operative path, since more top management time would be spent.

Given that, a high intensity of use of the operative path should be expected if task uncertainty is

high. In a similar way, the impact of a high environment uncertainty could be seen in a lower

level of details in contracts and procedures through the managerial path. However, low operative

interrelation does not allow to considering the possibility of using the operative path.

The use of Diagnostic systems through Management Control Paths

Diagnostic systems in IOR aim to monitor, evaluate, correct and make decisions about

predefined goals and objectives related to the outsourced processes or activities. The use of these

systems could include a combination of the three control paths (refer to Table 1 for more details).

When high environment uncertainty is present, the possibility of including credible and

useful goals is dramatically decreased. This could lead the client to lower his intensity of use of

diagnostic systems. However, monitoring strategic results is critical in order to, eventually, have

fast reactions to environment changes. Hence, environment uncertainty should call for higher

flexibility in the use of diagnostic systems but not necessarily for a lower intensity of use. The

task uncertainty seems to have a similar impact on diagnostic systems, calling for a flexible use

of them.

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The use of Interactive systems through Management Control Paths

These systems aim to focus on the strategic uncertainties of IOR in order to have a

positive impact on process innovation and competitive adaptation.

If high intangible assets specificity, it could be recommended to use interactive

mechanisms through the direct path since managers of the client could be closer to the key

activities and decisions regarding those assets, decreasing the risk of opportunistic behaviour.

Environmental uncertainty might boost the need for interactive systems through the

managerial path in order to react to the new situation and define the new terms of the

relationship.

Task uncertainty is a strong determinant of the interactive systems through the indirect

operative path. When minor but constant operative joint decisions must be made in order to get

the jobs done in an efficient manner, there is a strong need to be in permanent contact between

client and supplier operative teams. Depending on the type of decisions in play, however, the

interactive systems may be developed through all the management control paths.

In situations of high operative interdependence, it seems to be important to have strong

interactive systems in all three management control paths in order to quickly solve operative

problems and differences that the same interdependence will raise, independently of the task

uncertainty.

Conclusions: research and managerial implications

The first contribution of this paper is that this work presents for the first time empirical

evidence that supports the relevance of the concept of management control paths. The model

seems to present high explanatory potential of the complex phenomena analyzed and, at the same

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time, it might become practical tool for the design of management control systems in inter-

organisational relationships.

From a managerial perspective, a model with high explanatory power with key insights

and contingent factors has been put forward. It could lead to better designs of IOR and this, in

turn, to performance improvements.

Important limitations of this work must be stated. The relationship between two

organisations is a dynamic phenomenon that changes over time due to deliberate rational design

and accidental incremental adjustments. We had to simplify this reality taking a static view.

Future research should focus on the relationships between the three steps of the extended make or

buy decision, and the dynamic relationships between variables of the model studying - for

instance - the impact of each management control path on goodwill and competence trust.

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Figure 1 - Misfit of objectives in interorganisational relationships. There are several potential misfits of

objectives in interorganizational relationships. However, management control systems should focus on the central

misfit, that is, the misfit of objectives between client’s top management level and supplier’s operative level – the

individuals who actually perform the activity.

Source: Adapted from Silva-Domingo and Canet-Giner (2010)

Figure 2. Management control paths. The figure shows the three complementary paths top management of the

client has in order to use the levers of control in order to influence the behaviour of the supplier’ operative level.

Source: Silva-Domingo and Canet-Giner (2010)

Vertical misfit Vertical misfit

Horizontal

managerial misfit

Horizontal operative

misfit

Top

management

Level

Operative Level

Top

management

Level

Operative Level

CLIENT PROVIDER

OUTSOURCED ACTIVITY

Secondary crossed

misfit

Central crossed

misfit

Direct

Path

Top management

Level

Top management

Level

Operative

Level

CLIENT PROVIDER

OUTSOURCED ACTIVITY

Indirect managerial

path

Indirect operative

Path

Operative

Level

28

Table 1 – Control mechanisms in each management control path

Paths

Levers

Specific Mechanisms

Indirect managerial path

Beliefs Documents explicitly establishing the elements of Vision and Mission to providers.

Time spent by top management level of the client in promoting Beliefs in the top

management level of the provider. The client can establish that provider must share

part of the client’s vision, or a key value.

Limits Contract between parts and third party contracts (such as quality standards or

accreditations). It can include aspects that are part of other systems. For instance, it

could include processes, prohibitions (geographical boundaries, or exclusive

service), elements of the HHRR policies of the provider, and safeguards conditions.

Diagnosis Goals, indicators and targets established for the inter-organisational relationship. Can

be part of the contract or not, but the goals are communicated between top

management levels.

Interactive Systematic and regular processes for the dialogue between top management levels

(client and provider) to discuss key variables, emergent and/or non-routine elements

of the relationship.

Direct path

Beliefs The top management level of the client encourages certain part of its Mission and

Vision and central values in a direct way, through documents elaborated and

presented by the client. Time spent on communicating directly with the operative

level of the provider.

Limits The client establishes behaviour rules directly directed and enforced to the operative

level of the provider. For instance, when the activity takes place in the client

facilities where security rules and timetables need and could be imposed and/or when

agreed rules need top management intervention or supervision.

Diagnosis The top management of the client directly establishes targets for the outsourced

activity and communicates directly with the operative level of the provider.

Interactive Systematic and regular meetings between top management of the client and

operative level of the provider to jointly evaluate drivers of performance, review

processes and opportunities.

Operational indirect path

Beliefs Operative level of the client intends to influence the operative level of the provider,

communicating explicitly some aspects of the beliefs system (as a value, for

example) through documents and direct effort.

Limits Client operative level directly establishes limits (procedures, behaviour rules) or

enforces their acceptance to the operative level of the provider.

Diagnosis Operative level of the client establishes or communicates goals and performance

targets for the operative level of the provider. They could communicate and discuss

results with the provider.

Interactive Systematic and regular mechanisms for lateral coordination between operative

levels: joint operative planning, problem solving, and/or changing of procedures.

29

Table 2– Summary of the variables from the initial proposed model

Variable References

Contingent Variables

Asset specificity Williamson (1981, 1985), Redondo (2001), Brickley et al (1997)

Frequency / Contract

duration Williamson (1985), Van der Meer-Kooistra y Vosselman (2000)

Measurability Ouchi (1977), Merchant (1982), Simons (1995)

Uncertainty

Williamson (1985), Koopmans (1957), Noordewier, John y Nevin (1990), Kamminga

y Van der Meer-Kooistra (2007)

Market risk Van der Meer-Kooistra y Vosselman (2000)

Institutionalism Van der Meer-Kooistra y Vosselman (2000)

Information asymmetry Ventura (1995)

Bargaining power

asymmetry Redondo (2001), Walker y Weber (1987)

Reputation Hill (1990), Klein, Cradword y Alchian (1978)

Outsourcing experience Williamson (1985), Gulati y Singh (1998)

Risk attitude Chiles y McMackin (1996)

Similarity of cultures

Leibenstein (1982), Ouchi (1980), Anderson (1988), Van der Meer-Kooistra y

Vosselman (2000)

Contractual trust

Sako (1992), Ring y Van de Ven (1992), Williamson (1993), Das y Teng (1998,

2001a, 2001b)

Competence trust


2001a, 2001b)

Goodwill trust


2001a, 2001b)

Control paths (for each control path, degree of formalization and intensity of use:

Mision and Vision Simons (1995), Dávila (1997)

Procedures and rules Simons (1995), Dávila (1997)

Goals and indicators Simons (1995), Dávila (1997)

Lateral coordination Simons (1995), Dávila (1997)

30

Table 3- Interviews held

Case study Organisation Interviewees # interviews /

avg duration (hs)

APV-IP APV Projects Director 2 / 2

Strategy Director 1 / 2

Infoport Valencia Executive Director 1 / 2

APV-MV APV Projects Director 2 / 2

Innovation Director 1 / 1.5

Strategy Director 1 / 1.5

Technology Director 1 / 1.5

Maritima Valenciana External Relations 1 / 2

Customer Service 1 / 2

IC-IM INFOCORP Vice-president - Software

Factory 2 / 1.5

InMind Director 1 / 2

FOSA-NAZCA FOSA Nursery Head 6 / 3

HR Head (*) 2 / 2

NAZCA Director 1 / 1.5

TOT 4 cases

23 interviews /

2.1 hs avg

31

Table 4 - Documentation analyzed

Case study Organisation Document Issues

APV-IP APV Organisational structure Organisational structure

Financial statements (2006, 2007) Hard data

Strategic scenario (ppt) Strategy, Best practices

Strategic Plan 2001 - 2015 Strategy, Beliefs, Diagnostic

Website Beliefs, hard data, regulations

IPV Website Beliefs, products, certifications,

shareholdings

Project planning Diagnostic and Interactive systems

APV-MV APV Organisational structure Organisational structure

Financial statements (2006, 2007) Hard data

Strategic scenario (ppt) Strategy, Best practices

Strategic Plan 2001 - 2015 Strategy, Beliefs, Diagnostic

Website Beliefs, hard data, regulations

MV Website Beliefs, history, certifications, services

IC-IM IC Website Belief systems, technologies and

solutions, clients

Contract (read on site, not handed out) Diagnostic and boundary systems

Evaluation form (PDP) (read on site,

not handed out) Diagnostic and belief systems

Brochures Beliefs, technologies and solutions

Specific Project documentation (ANII) Organisational and project structure.

Interactive systems.

InMind Website Beliefs, technologies (specific

knowledge)

FOSA-

NAZCA FOSA Website Beliefs, outsourcing strategy

Contract Diagnostic and boundary systems

Evaluation system and bonuses Diagnostic

Procedures Boundaries, Processes

Organisational structure Organisational structure

NAZCA Contract Boundary systems

Measures and goals, productivity

bonuses (read on site, not handed out) Diagnostic systems

32

Table 5 – Description of outsourced activities for each case study

Case study Description

APV-MV

Sector: Logistics and transport in Spain

Ports offer the cargo transfer service from a maritime to a ground transport and vice versa. It is

possible to open up this service in seven steps (Compes-López and Poole, 1998): 1. the passage

of the ship along the approach channel onto the docks 2.- unloading the ship onto the docks 3-

Transportation of cargo from docks to the in-transit storage 4-In-transit storage 5- Transportation

from the in-transit storage to the ground cargo terminal 6- Loading cargo onto ground

transportation, and 7- ground transportation departure. The integrated container terminals, such

as the one we are studying, are prepared to perform all the activities from unloading the ship

cargo onto the docks (2) up to loading the cargo onto the ground transportation (6). In order to do

so, MV takes care, in general, of providing dockage with enough draught and the entire

mechanic means for the loading and unloading the containers, as well as their proper handling.

APV-IPV

Sector: Logistics and transport (APV) and Information Technologies (IPV) in Spain

The activity outsourced is the design and operation of the Port Community System (PCS): it

allows an efficient information exchange between the companies of the community because, on

the one hand, the speed of communications is dramatically improved and, on the other hand, the

amount of mistakes is reduced to a minimum. Thus, providing the correct information and with

the sufficient time to plan the different operative activities, it is possible to reduce enormously

the operative cost of the whole system. We should not forget that the profitability of the port

activities, in general terms, is based in mobilizing the biggest quantity of goods for the existing

fixed costs. Today Infoport Valencia (Infoport) is a company in which its clients are companies

of the port community, which are also, in turn their owners.

IC-IM

Sector: Software development in Uruguay

Infocorp (IC) is a Uruguayan company dedicated to IT solutions, focused on customized

software packages. Their most important product lines are: application integration, e-banking,

Microsoft Accelerator for Sarbanes-Oxley, workflow, corporate portals, and business

intelligence. IC outsources part of the programming keeping in-house part of it, the solution

design and architecture, the project management, and the client relationships. Today, IC works

with ten suppliers. InMind (IM) was born in 2007 as an undergraduate final project at

Universidad ORT Uruguay, supported by IC.

FOSA-NAZCA

Sector: Forestry in Uruguay

BOTNIA, considered as a group, is a fully integrated company although they keep large,

specific, complementary outsourced activities all along the paper production value chain. FOSA

performs its activities in the very first steps of the chain. They keep in-house the research and

development activities, and a supervision structure, but outsource the operation in the field with

several suppliers. NAZCA is one of its suppliers inside the "nursery garden". FOSA is the owner

of all assets involved, including any biological asset.

33

Table 6 – Description of contingent variables

Variable Case APV – MV Case APV-IPV Case FOSA-NAZCA Case IC-IM

Asset specificity High in infrastructure (i.e. docks), with

safeguards

High in intangibles developed by the activity

(database, know how). Safeguards through

property rights.

Medium to high (genetic material). Medium (know how on clients and

projects)

Repetition –

Duration

Long term contracts. Different

providers.

Long term contract. Only provider. High

costs of change.

Annual contracts with diverse providers

but low rotations of providers

Generic, long term contracts with specific

short term contract for each project.

Diverse providers.

Measurability

Simple but costly measures (data

owned by provider). Periodic cross-

data possible.

Very high. Medium to high. High.

Uncertainty Medium Medium Low (long-term production plans along the

supply chain)

Low to medium (some internal unknown

bottle-necks)

Market risk Medium to low Medium to low. Low Low to medium

Institutionalism Stable, trustworthy. Stable, trustworthy. Stable, trustworthy. Stable, trustworthy.

Information

asymmetry Medium Low Low

Theoretically high, but the organisational

arrangement delivers low information

asymmetry.

Bargaining power

asymmetry Low Low High, favouring FOSA (client) High, favouring IC (client)

Reputation Both have high reputation. Both have high reputation.

Both have high reputation (FOSA as a part

of the BOTNIA group at a national level,

and NAZCA at a local level)

High for IC, low for IM

Outsourcing

experience Both have extensive experience Both have extensive experience Medium in FOSA, low in NAZCA. High for IC, low for IM

Risk attitude Both show a positive attitude towards

shared risk.

Both show a positive attitude towards shared

risk. Medium in FOSA, low in NAZCA

Both medium to high; entrepreneurial

attitude.

Similarity of

cultures

Similar in top management level but

differs greatly in operative level

Similar – in operative and top management

level.

Different cultures, with some similarities

at top management levels. Similar cultures (it is a selection criteria).

Contractual trust High High High High

Competence trust High High High on operational competencies, but

doubts on supervision competencies

IC has some doubts on IM managerial

competencies.

Goodwill trust High High High High

Operative

interrelation Low Low High High.

Task uncertainty Low high Low, but intermittent uncertainties given

by introduction of new genetic material Medium to high.

Task strategic

relevance High High Medium to high

Medium to low, given that just specific

activities are outsourced.

34

Table 6 - Description of LOC through each management control path

Case: LOC through Indirect Directive MCP

Beliefs Limits Diagnostic Interactive

APV –

MARVALSA Low

Very high. Long term contracts and

Quality certifications.

High. Included in contracts and

certifications.

Medium to high. Open channels, not

abused. Strategic issues and general

operative adjustment.

APV – IPV Low

Very high. Contracts with service level

agreements. Detailed project

management.

Very high. Includes quality and

milestones.

High. Weekly, interactive meetings

between CML and SML. Goals revision.

BOTNIA - NAZCA Low Very high: contracts, procedures, and

HR practices.

Very high: objectives, measures, goals,

pay by results (productivity and quality).

Medium to low development: periodic

meetings for conflict resolution and

general evaluation (eventually

renegotiation).

IC – IM Low

Very high. Long term and short term

contracts and procedures. Detailed

project management.

Very high. Included in contracts: prices,

hours, and milestones. Competence

evaluations (technical and managerial).

High. Interactive use of measures every

three months with CML, SML and COL.

Case: LOC through Direct MCP


APV –

MARVALSA Low Low Low Low

APV – IPV Low Medium to low. Projects as a reference

for diagnostic and interactive.

Medium. Supplier goal setting, influence

directly individual SOL goals.

High. Weekly, interactive meetings

between CML, SML and SOL. Goals

revision.

BOTNIA - NAZCA Low Low Low Low

IC – IM Low Low

Medium development. CML suggest

individual objectives, measures and

goals.

Low

Case: LOC through Indirect Operative MCP


APV –

MARVALSA Low Low Low Low

APV – IPV Low Low Low Low

BOTNIA - NAZCA Low

Medium. Through direct supervision

and attention to procedures by

supervisors.

Medium. In situ checking of

productivity measurement and quality

assessment.

Medium. Minor operative interrelation

and communication. Daily operative

instructions with medium to low

interaction.

IC – IM Low Medium. Contracts and projects used as

a reference.

Very high. Quality assessed every 7 to

10 days. Milestones monitored daily.

High. Adjustments to workloads

permanent to achieve results. Operative

joint decisions daily.