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1
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
2
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
3
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-
4
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.
5
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.
6
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
7
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
8
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
9
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
10
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.
11
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
--------------------------------
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.
--------------------------------
Insert Table 2 about here
--------------------------------
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
12
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.
--------------------------------
Insert Table 3 about here
--------------------------------
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
13
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.
--------------------------------
Insert Table 4 about here
--------------------------------
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
14
relations are located in Spain, and the firms involved in the third and fourth are located in
Uruguay.
--------------------------------
Insert Table 5 about here
--------------------------------
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.
15
--------------------------------
Insert Table 6 about here
--------------------------------
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.
--------------------------------
Insert Table 7 about here
--------------------------------
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.
16
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
17
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.
18
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
19
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
Sako (1992), Ring y Van de Ven (1992), Williamson (1993), Das y Teng (1998,
2001a, 2001b)
Goodwill trust
Sako (1992), Ring y Van de Ven (1992), Williamson (1993), Das y Teng (1998,
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
Beliefs Limits Diagnostic Interactive
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
Beliefs Limits Diagnostic Interactive
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.