The Systemic Contract: Measuring How Effective Contract Rules are in

Organising Complex Projects

Maria Kapsali, Jens Roehrich, Nigel Caldwell

Information, Decisions and Operations (IDO) Group

School of Management

University of Bath (UK)

EurOMA2013 – Dublin/Ireland

Setting the scene

• Challenges: Time, cost, quality and contractual governance • Ashby’s (1958) 'law of requisite variety' – more complex org.

settings = more complex contractual governance (e.g. # of contingencies)

• This study’s outcomes: – One of the first comprehensive empirical examinations of the

effectiveness of different contract rules

– Offering a framework for an effective systemic contract – bridging classical, neo-classical and relational contracting theories

RQ: Which are the contract rules that successfully drive desired behavior within complex organisational settings?

Contracts to Manage Organisational Complexity

• Explicit and formal agreements specifying legal obligations and roles of parties (Lyons & Mehta, 1997)

• Intended to: (i) reduce uncertainty; (ii) minimise the risk of opportunism; (iii) provide a safeguard against ex-post performance problems

• Complete & optimal contract: stipulates control rules for every possible type of opportunistic behaviour and future contingency at the lowest transaction cost relative to outcome

• Complex contracts: “structures of rules, which are sets of explicit or understood obligations, incentives, rewards and penalties stipulating conduct, action and behavior within particular activities in different situations” (Barthélemy and Quélin, 2006, p. 1776)

• Relational contracting also stresses the importance of the longevity of the relationship and positions time at the center of the agreement (Eisenberg, 2000).

BUT: Contracts & Complexity

• Drafting complete contracts – contract complexity • Asymmetric information and incompleteness; bounded rationality • Lengthy and continuous re-negotiations • Time- and cost-consuming • Too rigid to deal with change (classical contract)

• Mixture of classical and relational contracting rules? • In practice: Relationships are governed by either a classical or a relational

contract • i.e. equity joint ventures and non-equity partnerships largely follow a relational

contracting perspective whilst licensing contracts seem to use classical contracting (Hagedoorn and Hesen, 2007).

• Which rules are effective in complex organisational settings?

Methods• Qualitative Comparative Analysis (fsQCA) – Combines depths and breath • 23 public-private relationship cases

• N = too large for in-depth case analysis to be able to retain patterns among them, but also too few for conventional statistical techniques to generalise on

• 6 UK construction Public Private Partnership (PPP)

• 3 EU Public Health - European Antimicrobial Resistance Surveillance System (EARSS) – develop national ICT infrastructures to collect and analyse epidemiological data

• 14 ICT EU eHealth projects – develop or deploy R&D for healthcare services

• Similar settings, but a few differences • Similarities: (i) they were large scale projects with multiple diverse actors; (ii) they

delivered public infrastructure and services; (iii) procured and controlled by national and/or supranational public sector clients working with private companies; and (iv) subjected to open tendering and rigorous selection and monitoring procedures.

• Differences: (i) types of contracts – contract complexity; and (ii) their time span, ranging from 2 to 30 years.

• 132 interviews (+ secondary data) • Coding cases for memberships in sets of sub-sets of conditions (3 different contract rules)

and outcomes (non-/compliant behaviour – e.g. renegotiations/changes/problems in interpreting rules)

Classification of conditions (contracting rules) Linkage control rules to prevent opportunism

Practical decision rules for generating all possible control responses

Emancipatory autonomy rules

formalisation of action accountability rewards incentives obligations penalties - punishment exclusionfragmentation in supply chain standardisation of tasks

communication at the interfaces co-decision processes formal meetings, boards, panels, conferences evaluation, feedback loops overlap and sharing complement of skills negotiations regarding the definition of the goal, planning, monitoring and executing participation of users

Rules that empower to self-regulate and self-organise knowledge creation coupling and interdependence adjust processes and habits leverage for change

Projects Performance Bundle Contract length Contract nature and value

EARSS 1 Concurrent national project 1998 – 2006 Minimum specifications EARSS 2 Concurrent national project 1998 – 2006 **EARSS 3 Concurrent national project 1998 – 2006 **IST GALEN Open Source ontology development 1997 - 1999 Classical- performanceIST ODIN European nursing informatics and telematics 1999 - 2001 **

IST TELECARE Patient Telemonitoring Ultra Low Discomfort Vital Signs Sensors over Mobile Networks 2001- 2005 ** € 1.8 m

IST PROMPT Peripheral Regions Oriented Measure 1999 - 2001 ** € 512.419

IST M2DM Multi-Access telematic Management of Diabetes Mellitus 2001 - 2005 ** € 2.100.578

eTEN AIDMAN feasibility study protocol models, effectiveness and performance for deployment 1999 - 2000 ** €0.73m

eTEN EURODONOR definition, specification realisation of European Organ Data Exchange Portal Data Base 2003 - 2004 ** €3.19m

eTEN EVITAL validate the European market for remote monitoring service 2002 - 2004 ** €2.13m

eTEN MEDASHIP Medical consultation Assistance for ships service 2002 - 2003 ** €2.73m

eTEN MEDCONTI-NETanalyse market demand for a Home Care system in cross-national context 2002 - 2003 ** €2.63m

eTEN IREMMA establish a trans-European network, services for environmental diseases, Asthma Allergy 2002 - 2004 ** €1.82m

eTEN TELE-REMEDY feasibility study, commercial validation and large-scale deployment 1998 - 1999 ** €3.2m

eTEN MEDICATE

Medical Diagnosis, Communications and Analysis Throughout Europe for monitor asthma patients in own homes 1999 - 2000 ** €3.67m

eTEN NIVEMES develop an international network of Telemedicine providers and services 1996 - 1998 ** €3m

Hospital A Design, build, finance and operate (DBFO); construction of new hospital; hard and soft service FM

30 years Classical - Output Non-standard £150m

Hospital B 30 years ** Standard (version 3) £150m

Waste Management A DBFO; construction of new waste treatment plants and stations; no waste collection

25 years ** Non-standard £35m

Waste Management B 25 years ** Non-standard £100m

Fire and Rescue Service A DBFO; construction of new training facility; hard (estate) and soft service FM

25 years ** Non-standard £20m

Fire and Rescue Service B 25 years ** Non-standard £10m

Healthcare A Healthcare B

Product-service provision

Design, build, finance and operate (DBFO); construction of new hospital; Hard (estate) and soft (e.g. cleaning, portering, catering) service FM

DBFO; construction of new hospital; Hard (estate) and soft service FM

Contract nature and value

Non-standard contract; approx. £150m

Standard contract (Version 3); approx. £150m

Contract duration 30 years 30 years

Case example – PPP Hospitals

PPP contract Performance-based contract Memorandum of agreement

Nature Highly complex Medium to highly complex Simple

Duration Up to 30 years 18-36 months 6 years

Exemplary Quote

“We went through about 438 contract variations. […] the biggest one was for £24 million, which was the Treatment Centre, but the cheapest one was a socket in the office.” (NHS Trust Director)

“What needs to be done is highly analysed in relevant documents of the contract.” (Project Manager)

“It is not possible to plan or predict, but we had a memorandum of agreement in place.” (Project Manager)

Brief description

• Extensively bespoke and complicated contract

• Constantly changing requirements regarding portering and cleaning services led to recurring contract renegotiations

• Large number of legal safeguards (linkage rules) covering areas such as reporting and information sharing, performance measures, payment mechanisms, dispute resolution and termination procedures.

• ‘Classical’ performance-based contract, stipulating time, cost and scope specifications and specific periodic evaluation procedures

• Top-down, rule-based instruments which embodied the rationale of managing the largest possible number of projects at the lowest possible cost

• Included description of the project outcomes and collaborative activities

• Completion of certain thresholds, the scope such as achieving 25% coverage of total national laboratory population

• 4 aggregate reports a year

• Minimum critical specifications (linkage conditions) in the form of flexible output targets

Types of Contracts

Findings • Observations across successful projects:

• Extensive use of control rules increases complexity of project routines and reinforces inflexible action

• Fewer control rules (~linkage) is both sufficient and necessary for contracts to be effective and more successfully implemented

• Provided a combination of communication and decision-making rules - swift decision making and autonomous action leading to adaptable responses on the project level

• However, the configurations also show that less control rules in contracts should be an inverse proportion of the other two rules.

• Practical and emancipatory rules are significant for communication, but not easily compatible.

• But, transferring more autonomy to projects through emancipatory rules in order to increase flexible local action introduces instability to the entire programme because it decreases control of the local parts within the projects

• Communication-practical rules are then necessary for balance because these prevent the projects becoming increasingly modularised and remote from each other

Conclusions and Implications

• Org. complexity should not necessarily be reflected in complex contracts

• Accept contract incompleteness, but focus on adaptation and

interdependence and use control to a measure

• Consider a combination of minimum critical specifications as control (linkage)

rules and strong combinations of either practical and/or emancipatory rules

(=systemic contract)

• Flexible and enabling, directs evolutionary-emergent action and desirable

behaviour, not just controls to deal with complex contingencies

Ideas for Improvements & Further Suggestions

Dr Maria Kapsali

Browaldh fellow - Assistant Professor in Projects, Innovation and Networks

Umeå School of Business and Economics Umeå Universitet

Biblioteksgränd 6, 901 87 Umeå, Sweden

e: maria.kapsali@usbe.umu.se

w: http://uk.linkedin.com/in/mariakapsali

Dr Jens RoehrichLecturer (Ass. Prof.) in Operations and Supply Management

School of Management

Information, Decision and Operations Group University of Bath e: j.roehrich@bath.ac.ukw: www.bath.ac.uk/management