management control systems in inter-organisational relationships

learning objectives

• discuss the concept of inter-organisational relationships

• explain the main drivers behind the development and increased importance of inter - organisational relationships

• discuss the interrelation between risk, trust and control at an inter-organisational context

• discuss the implications for management control systems at an inter-organisational context

lecture outline

• the concept of inter-organisational relationships:

  • types

  • importance, popularity

  • notable examples

• inter-organisational relationships are a risky business

  • failure change

  • the concept of risk

  • risk x trust x control

• inter-organisational management control systems

  • are internal MCSs sufficient?

  • IO management control techniques

the concept of inter-organisational relationships

inter-organisational relationships

• various forms of cooperation between independent organisations

• the significance of IORs makes it necessary for managers to extend management control beyond the company’s boarders

• very popular in both manufacturing and service industry

inter-organisational relationships - alliances

the term refers to a wide range of cooperative relationships that represent the middle ground between market and hierarchy forms of governance, the hybrid

environmental conditions

• globalisation

• rapid technological transformation

• increased technical complexity of products and services

trends

• closer business relationships

  • i.e. early supplier engagement; joint designs

  • increased informations sharing

  • CRM very useful

• outsourcing

  • parts/components or other departments

  • cost reduction - focus on core competencies - improve product development - suppliers exercise

rolls royce

• restructuring of supply chain for turbines blades to improve efficiency

• before the restructuring process, the SC compromised approximately 5000 arm’s length relationships and 3JVs

• after restructuring, approximately 40 arms length relationships and much closer collaborations with those remaining in the supply chain

IORs motives

alliances are used to achieve specific outcomes [glaister and brickley, 1996]

setting of relationships

• dyadic relationships

  • relationships can be distinguised taking the industry and the level on the value chain of the partners into consideration

    • vertical

    • horizontal

    • diagonal

• networks

  • simultaneously handling of a set of interconnected relationships

horizontal IORs

• 2012 - qantas and emirates entered an alliance for the next 10 yrs.

  • the deal involves coordinated pricing, sales and scheduling, shared airport lounges and integrated frequent flyer programs

• 2018 - increase bargaining power when dealing with global suppliers and share own brand products - 3 yr alliance

diagonal cooperation

firms of different industries work together

• in 1993, starbucks formed a partnership with barnes and noble, placing is coffee outlets inside the bookstores

• 2014 - apple formed alliances with mastercard and visa to create apple pay

• 2019 - apple card - new alliance between apple, goldman sachs, and mastercard

• 2017 - formed an alliance to build data driven products, initially focused in healthcare, life sciences, retail and transport

any standard factors of success?

• goal compatibility

• synergy - matching culture

• collaborative environment

• a certain amount of equality

IORs are a risky business

issues with IORs

• loss of proprietary information

• management complexities

• financial and organisational risks

• risk of becoming dependent

• loss of decision autonomy

• loss of flexibility

• long term viability

failed friendships - over 60% of IORs fail

• in 2009 - volkswagen acquired 19.9% of suzuki for 1.7 bil and sign an agreement to share technologies and global distribution networks

• 2011 - suzuki claimed VW had breached its contract, in failing to hand over the hybrid technology. VW said suzuki didn’t honour the alliance, complaining that suzuki was buying engines from european rival fiat instead of VW

• clash of personalities - distrust between the companies undermined the entire relationship

inadequate MCS are often blamed for the failure

it is typically linked to the risks associated with collaborative organisational forms: risks associated not only with the lack of cooperation among partner firms, but also with performance failure despite full cooperations [das and teng, 1996, 2000, 2001]

control problems

• control structures and related control practices do not suffice

  • because fundamental uncertainty and bounded rationality it is impossible for individual actors to foresee all potential opportunism and thus to fully align interests in advance

• formal control and contracts are necessarily incomplete - there is a control structure deficit

• the risk of opportunistic behaviour and the related appropriation concerns are particularly high when there is asset specificity

do intra-firm management control frameworks fit inter-organisational relationships?

why might they not fit?

• separate [but overlapping] profit functions of partners

• absence of once central figure who provides conscious governance

• the potential role of courts and third party arbitrators in settling disputes

challenges

MCS, cost accounting systems and performance management systems are adapting to address:

• relationship risk and decision making under uncertainty

• performance of the value chain

• aligned incentives of all partners

risk [das and teng, 2001]

• relational risk

  • the probability and consequences of not having satisfactory cooperation

  • opportunistic behaviour, conflicts

• performance risk

  • the probability and consequences that alliance’s objectives are not achieved

risk is different from a condition of uncertainty as it related to the estimated probabilities

risk and perceived risk

perceived risk and objective risk

• perceived risk is determined by trust and control

• both trust and control reduce the perceived risk and impact of undesirable outcomes

• trust entails a positive expectation - hence unpleasant outcomes are less likely - leads to perception of lowered risk in a relationship

• control does not always reduce objective risk - “illusion of control“

the concept of trust

“the willingness of one party to relate with another in the belief that the others actions will be beneficial rather than detrimental to the first party“ - child and faulkner, 1998

• positive expectation:

  • sako [1992]:

    • contractual trust

    • competence trust

    • goodwill trust

trust and risk [das and teng, 2001]

• a firms goodwill trust in its partner firm will reduce its perceived relational risk in an alliance, but not its perceived performance risk

• a firms competence trust in its partner firm will reduce its perceived performance risk in an alliance, but not its perceived relational risk

trust and control nexus

• trust is seen as a substitute for control

• control and trust should be seen as complements [cite]

• control can damage established trust

the relationship between trust and control can shift over time as the supply chain matures

inter-organisational MCS

dual role of inter-organisational MCS

• types of controls:

  • outcome/results controls

  • behaviour/actions controls

  • social cultural controls

• monitoring [controlling]

  • measurement and performance assessment

  • intended to reduce opportunism and promote goal congruence

• coordination [enabling]

  • of activties across legal boundaries, information sharing

  • intended to assist learning

outcome/results control

• use of integrated information systems

• target costing

• inter-organisational cost management

• rank based rewards

• value chain analysis

• open book accounting

perceived performance risk in an IOR will be reduced more effectively by output control than by behaviour control

open book accounting

• the exchange of internal information and accounting data between the supplier and the buyer in order to achieve benefits for both partners

  • reduces information asymmetry - confidential information is shared both upstream and downstream

  • collaborative efforts create additional opportunities for cost reduction

• it requires high degree of cooperation and trust

  • unfortunately - one-side OBA

behaviour/action controls

• focus on how the parties should act and whether these specifications have
  been followed

• policy documents, procedures, structures for regulating employment and
  training

• frequent meetings to develop and discuss guidelines joint projects

• focus on communication – cross organisational teams; boards

perceived relational risk will be reduced more effectively behaviour control
than by output control (Das and Teng, 2001)

social/cultural controls

• values, norms and culture that influence thevehabiour of the people in the companies

• cross organisational teams are governed by social controls

• selections of partner - “matching culture“

rolls royce developed jointly with its partners

• a supplier strategy

• the relationship profile tool

• trust

social control will reduce both perceived relational and perceived performance risk [das and teng, 2001]

inter organisational management control

changes of a company’s internal management control system

the joint development of inter organisational management control with key customers and/or suppliers

changes of a company’s internal MCS

• overlapping responsibilities

• an inter organisational perspective on target costing

  • functionality price quality trade offs

  • inter organisational cost investigations

  • concurrent cost management

  • rank based rewards

• an inter organisational perspective on working capital management

• internal management control systems that account for network effects

  • value flow charts

  • profitability analysis of customer relationships

the joint development of inter organisational management control

• inter organisational performance measures

  • mix of financial and non financial measures

  • joint reward system

• inter organisational behaviour controls

  • policy documents, procedures

  • joint meetings

  • alliance board

• inter organisational cost management

  • coordination of activties seek to reduce their shared costs

  • open book accounting

  • jointly developed target costing

  • value chain analysis

• social control techniques and establishment and development of trust

summary

• main types of IORs - well known examples

• reasons of popularity

• benefits and issues

• risk and trust and control framework

• implications to MCS