Paper presented at the EMNet 2011December 1 to 3, 2011, Limassol, Cyprus

(http://emnet.univie.ac.at/)

EVOLVING FUNCTIONS OF INTERORGANIZATIONAL GOVERNANCE

MECHANISMS

José M. Sánchez *

Universidad de Cádiz

Dpto. Organización de Empresas

Gta. Carlos Cano s/n

11002 Cádiz (Spain)

T. +34 956015455

F. +34 956015402

e-mail: josem.sanchez@uca.es

María L. Vélez

Universidad de Cádiz

Dpto. Economía financiera

Gta. Carlos Cano s/n

11002 Cádiz (Spain)

T. +34 956015435

e-mail: maria.velez@uca.es

Concha Álvarez-Dardet

Universidad Pablo de Olavide

Dpto. Dirección Empresas

Ctra. Utrera, km. 1

41013 Sevilla (Spain)

T. +34 954349357

e-mail: mcalvesp@upo.es

* Corresponding author

This research was partly financed by the research project SEJ-5061 from Andalucia government.

ABSTRACT

Through a longitudinal case study, this article examines the evolution of the

twofold function of formal governance mechanisms, for control and coordination, as an

interorganizational relationship between supplier and distributors evolves. We ask

whether all formal governance tools develop simultaneously, or whether each

mechanism is designed and used for only one function; whether different mechanisms’

attributes foster one function rather than the other; and whether different mechanisms

are developed over time in order to provoke both functions’ evolution. Finally, we

explore whether the IOR evolution in part explains the evolution of the two functions,

or vice versa. We find that in this case the various formal governance mechanisms were

developed sequentially over time; that each of them could be used for both control and

coordination, although from the supplier’s perspective certain tools had dominant

functions; and that as a suite the mechanisms evolved over time from more a more

coercive toward a more enabling character.

Key words: interorganizational governance, coordination, control

1. INTRODUCTION

There is a considerable body of research on the governance of interorganizational

relationships (IORs) among nonintegrated firms (Hendrikse and Windsperger, 2009).

Studies (e.g., Noordewier et al., 1990; Celly and Frazier, 1996; Vlaar et al., 2007;

Mellewigt et al., 2007) argue that there are two main reasons why partners in IORs draw

up interorganizational formal governance (IFG) mechanisms: control and coordination.

Mellewigt and colleagues (2007) propose to analyze through a longitudinal study

whether contracts serve more as safeguards in the initial stages and subsequently evolve

toward a coordinating function as a relationship develops. But contracts are only a part

of IFG mechanisms, and because in real life contracts are incomplete, they need to be

complemented by other control systems (Gulati and Singh, 1998; Baiman and Rajan,

2002). Managers combine different mechanisms to govern IORs (Baiman and Rajan,

2002); thus, studying only a specific mechanism in isolation from other parts of the IFG

system may show only partial results.

In this paper we study how the control and coordination functions of IFG

mechanisms evolve, emphasizing the relationship between these two functions and IOR

evolution. This project contributes to the related literature in several ways. First, we

widen our study to include IFG mechanisms beyond the contract: a commission system,

shared software, shared information, an evaluation system, and an operational manual.

This allows us to analyze whether all IFG mechanisms develop both functions

simultaneously, or whether each mechanism is designed and used for only one function.

Second, we keep in mind that different mechanisms that make up the IFG system can

have different attributes. Adler and Borys (1996) argued that there are two types of

formalization—enabling vs. coercive—and analyzed their characteristics (internal

transparency, global transparency, flexibility, and repair), the design process, and

implementation differences. Applying this framework allows us to study whether

mechanisms’ attributes foster one function rather than the other. Third, through a

longitudinal case study, we analyze whether different mechanisms are developed over

time to complete the contract. In fact, new IFG mechanisms can change the balance

between the two key functions either by being used predominantly for one of them

rather than the other, or by causing a decrease in the use of other mechanisms. Finally,

following the proposal of Mellewigt, Madhok, and Weibel (2007), we explore whether

the evolution of the IOR partly explains the evolution of both functions, or vice versa.

For the most part, research in this area has been conducted at the level of the

dyad; we examine a larger group: a marketing channel. A marketing channel can be

understood as a nonequity and open-ended IOR in which a set of smaller downstream

distributors assumes part of the value chain functions from a bigger upstream

manufacturer (Stern et al., 1996). Marketing channels are vertical and asymmetrical,

with a dominant firm determining the terms of the nonownership contractual

arrangement (Lassar and Kerr, 1996; Frazier, 1999).

IORs are developed and maintained over time, requiring the use of longitudinal

research designs. We study a long period, from 1985 to the present, from both sides of

the relationship. From the supplier side, the controlling firm unilaterally developed a set

of IFG mechanisms in order to increase the likelihood of attaining its objectives. From

the distributors’ side, controlled firms used IFG mechanisms to facilitate better-

informed decision-making.

2. THE STRUCTURE AND NATURE OF INTERORGANIZATIONAL

FORMAL GOVERNANCE FUNCTIONS

One important decision that executives make when forming an IOR is allocating duties,

risks, procedures, and so on through contractual provisions, which determine exchanges

in more precise terms (Ariño and Reuer, 2004; Mellewigt et al., 2007). These

contractual terms try to help firms devise remedies for foreseeable contingencies or

design processes for unforeseeable outcomes, protecting each firm against self-

interested behaviors by the other party. Moreover, contracts clarify mutual expectations,

enable goal congruence, and establish common ground. In order to manage their IORs,

firms have a range of contractual options available (Lassar and Kerr, 1996).

However, even if the partners clearly understand their relationship’s objective

and their mutual interests, it is not feasible to design a contract that anticipates all

possible eventualities, no matter how complex the contract may be (Ariño and Reuer,

2004). In real settings, complex and complete contracts are impossible to define because

of ex ante contingencies and ex post renegotiations (Gietzmann, 1996; Gulati and Singh,

1998). Furthermore, when a contract becomes excessively detailed, it will be inflexible

(Poppo and Zenger, 2002). Thus, researchers often describe interfirm contracts as

incomplete (Baiman and Rajan, 2002), pointing out that it may be impossible to

envisage all future contingencies, or may be costly or impossible to account for them in

the contract, so contracts never fully reflect working relationships (Gietzmann, 1996).

Sometimes contracts are merely legal bases on which long-term relationships can be

built.1 Since self-interest makes partners likely to take advantage of any loopholes

(Geyskens et al., 2006), there are authors who maintain that contracts should be

complemented by other control mechanisms to mitigate the inefficiency of incomplete

contracts (Baiman and Rajan, 2002; Langfield-Smith, 2008). Firms can choose a set of

governance mechanisms shaping their IFG.

IFG mechanisms are generally understood as formal (written and standardized)

procedures and statements used by managers to monitor and influence the behavior and

activities in an IOR. IFG mechanisms include contracts, organizational structures,

performance measures, administrative controls, and operational procedures, among

others. They can play a vital role in creating a range of acceptable behaviors,

performance expectations, and dispute resolution mechanisms, and also in facilitating

knowledge transfer and structuring communication flows. To prevent IORs from

failing, IFGs have to realize a twofold goal: control the risks of opportunistic behaviors,

and coordinate activities and resources across firms (Mitchell et al., 2002; Gulati et al.,

2005; Vlaar et al., 2007; Mellewigt et al., 2007). However, as Hendrikse and

Windsperger (2009) note, the large majority of governance studies focus on mitigating

the risks of opportunistic behavior.

The conventional view held by users of agency theory and transaction cost

economics is that in an exchange relationship, agents tend to behave opportunistically,

prompting the principal to adopt mechanisms for curbing such opportunism.

Opportunistic behavior can arise from several sources, even in the absence of specific

assets. A firm can misrepresent its capabilities or resources during the selection process,

and/or during the relationship it can fail to contribute what it promised or can misapply

the resources it gains from the relationship. IFG mechanisms can assert control, provide

monitoring, and align incentives (Gulati and Singh, 1998), and thus mitigate agency

problems. In this control function, IFG mechanisms try to motivate the partners to

achieve desirable outcomes, inciting the agents to adopt the behavior required, and/or

dissuading them from adopting others.

From the resource-based perspective, an IOR enables firms, in their quest for competitive advantage, to attain, through sharing and combining their resources, some beneficial outcome that they could

1 Vlaar et al (2007) note that contractual agreements in the United Kingdom, for example, are frequently the result of exhaustive negotiations in which each party attempts to impose conditions on the other. In Germany, in contrast, contracts are used to reassure partners of the common or shared legal principles to which they wish to adhere.

not attain on their own (Mellewigt et al., 2006), even without the threat of

partners’ opportunistic behavior. IORs entail mutual dependence, because tasks

decomposed among partners need coordination and therefore communication and joint

decision-making. As the tasks become more interdependent and more uncertain, this

need increases (Gulati and Singh, 1998). Pooling resources, dividing labor across

partners, and subsequently integrating the dispersed activities are critical to the

generation of value in an IOR (Mitchell et al., 2002). Accomplishing this coordination

requires developing complex linkages between different and interdependent task units

(Mayer and Argyres, 2004). From the perspective of the resource-based view, as

coordinating devices (Mellewigt et al., 2006), IFG offer the proper information flow

between each partner firm, enabling goal congruence, and establishing common ground.

Some authors, like Dekker (2004), maintain that each mechanism is used

simultaneously for both functions: “A contract is not only used to reduce a partner’s

incentives to behave opportunistically, but in addition serves as a framework for

coordination in which the cooperation proceeds. And a joint venture’s administrative

hierarchy not only coordinates the joint venture’s day to day functioning and addresses

problems as they arise; simultaneously it is used to detect opportunism when it occurs”

(2004:31). However, other authors, like Hendrikse and Windsperger (2009), seem to

indicate that each function will have specific mechanisms: “Situations with a joint

interest problem require coordination by some mechanism, whereas situations with

conflicting interests require alignment of incentives (by allocating ownership, control,

and income rights) to a certain extent” (2009:3).

We must bear in mind that different tools that make up the IFG can have

different attributes that may determine whether a given mechanism is used for both

functions simultaneously, or whether different mechanisms suit each specific function.

Adler and Borys (1996) argued that there are two types of formalization—enabling vs.

coercive. Table 1 summarizes their framework. Any IFG mechanism can be categorized

on the enabling vs. coercive continuum, because formalization is a continuous variable

with a zone of indifference. Enabling tools provide detailed, objective, accurate

information; build connections among people and business units, giving people a sense

of the whole; and facilitate analysis and what-if thinking. Adler and Borys propose that

enabling formalization provides needed guidance and clarifies responsibilities, helping

individuals be and feel more effective. We may add that these characteristics favor

coordination, and vice versa. Thus it is possible to determine which function each IFG

mechanism serves by analyzing its characteristics as enabling or coercive.

RQ 1. Do mechanisms’ characteristics indicate their main function for control

vs. coordination purposes?

-- Table 1 here --

Negotiating and forming an IOR initiates a dynamic relationship that must

evolve if it is to be successful (Inkpen and Curral, 2004; Doz, 1996; Ariño and de la

Torre, 1998; Ring and Van de Ven, 1994; Inkpen and Curral, 2004). Interorganizational

governance is not static (Vlaar et al., 2007). During the relationship, managers wish to

bring about changes in the coordination and control mechanisms that they adopt

(Bijlsma-Frankema and Costa, 2005). Chenhall (2003) argued that control systems that

are valid today might lose validity as they evolve through time, and recent research calls

for further studies on IFG evolution.

As a logical extension of our first research question, we focus on the dynamics

of the twofold IFG function, and its potential association with IOR evolution over time.

The arguments above suggest that different mechanisms are developed over time,

completing the contract, and that this development can change both functions and

rebalance them. According to Baiman and Rajan (2002), IFGs may facilitate new

interfirm arrangements. Thus it is arguable that the evolution of the IOR is rooted in the

evolution of the two functions. In contrast, Mellewigt et al. (2007) propose that the

twofold function may vary over the life cycle of an IOR, the primary driver being the

level of trust. It could well be that IFGs serve more of a safeguarding function in the

initial stages of a relationship and subsequently evolve toward a coordinating function.

These contrasting arguments open our second research question, about what leads to

what:

RQ 2. Could the evolution of IORs be explained by / explain the evolution of

control and coordination functions?

3. CASE STUDY RESEARCH

In this paper we have adopted an exploratory longitudinal case study approach (Yin,

1984) to grasp the dynamics and complexities of IORs. We examined the distribution

channel of a supplier that has externalized its distribution functions, offering partners a

consignment contract, a geographical area, and a client portfolio. As a part of a bigger

research project, our nonrandom choice of this IOR was influenced by several factors

(Eisenhardt, 1989). First, the IOR is consolidated, longstanding, and stable. In 2010,

over 95 percent of the distributors had been part of the relationship for over two

decades. Second, this IOR is high performing: in 2010, the supplier’s return on

investment ratio from its IOR was 3.8 times higher than from direct sales. Third, this

IOR is long term and open ended. During the period of study (1985-present), the

supplier progressively introduced several IFG mechanisms to manage the relationship,

making observable the differences between IFG functions.

3.1. Research design and data sources

For proper triangulation (Eisenhardt, 1989) we obtained information from published

sources, internal documents, direct observations, and interviews. Archival data dating

back to 1985 included governance and financial documents; partners’ contracts;

journals, norms, and procedures; materials and slides used in meetings; and computer

reports. These data allowed us to identify the progression, objectives, and content of

IFG mechanisms, and to confirm what we learned from interviews.

Our semistructured interviews had a dual purpose: to gain more information on

topics whose clarification would be particularly interesting for the study; and to

complete and contrast information previously gathered, by tapping the wealth of

experience of those people who actually observed the IFG development. We held 35

interviews (from 2002 to the present) with supplier personnel who held or had held

management positions. We also interviewed 13 partners, whom the supplier categorized

into three groups: group A, with sales exceeding 600 thousand Euros per year; group B,

with sales of 360 to 600 thousand Euros per year; and group C, with sales of less than

360 thousand Euros per year. Our interviewees were chosen randomly from these three

groups (three representatives from group A, and five each from groups B and C). On

average, these interviews lasted about 120-150 minutes. All interviews were tape-

recorded and transcribed, and the completed write-ups were sent to the interviewees to

ensure their accuracy.

Also, we carried out direct observations at the supplier’s head office and in work

centers, as well as at several residential training and meeting sessions. Informally, our

presence at breaks during and after our interviews and direct observations meant that we

could listen to participants’ observations about the functions and objectives of IFG

mechanisms. We have been able to triangulate oral histories of the earlier years with the

archival data, because these materials were often presented and discussed during

interviews; we consider these narrations very useful to help us to understand how IFG

mechanisms were used (Chenhall and Langfield-Smith, 2003). We decided to terminate

our fieldwork after we felt that we had developed a clear sense of the IFG mechanisms’

functions within the IOR, as proposed by Miles and Huberman (1994).

Once the data collection ended, we carefully analyzed the interview transcripts

to understand areas of agreements between interviewees (Eisenhardt, 1989). Archival

data were used to confirm findings that arose in interviews and direct observations. We

then designed a table to reorganize the original transcripts around issues of significance

in order to elucidate the functions, characteristics, and objectives of IFG mechanisms.

Also, interview transcripts and archival data were organized chronologically, and the

common issues in the cells were analyzed, focusing on “what led to what and when”

(Miles and Huberman, 1994:110).

4. THE CASE STUDY

4.1. The supplier’s distribution channel

The supplier firm, CMD (a pseudonym), was established in the late nineteenth century.

It is currently one of the leading firms in the Spanish chemical sector and belongs to a

multinational group. This sector is characterized by a relatively stable market, in which

five giant companies share most of the world markets. CMD is organized into regional

districts, and its activity is now basically commercial, although it also packages its

industrial products into special containers. These containers are an important asset,

often outvaluing the cost of their contents. They are also an important source of income,

since daily rent is charged to the client, and they must be collected for reuse. Industrial

products are sold directly to major clients or through the IOR to a large number of small

and medium clients.

The IOR is configured as a nonequity alliance with a set of smaller partners.

Currently, its importance for the supplier can be seen from the fact that, in 2010, the

IOR accounted for 85 percent of CMD’s sales and catered to 95 percent of its clients.

Nowadays, distributors receive the products on consignment and are entrusted with

commercialization, storage, transport, and the management of CMD’s client portfolio in

exchange for a commission on sales. While delivery sales are carried out through the

IOR, CMD bills the client directly. CMD’s industrial products do not differ from those

of its competitors; its main added value is its distribution system, as its partners supply

the clients with a satisfactory standard of service while maintaining premium market

prices.

4.2. The development and functions of IFG mechanisms (1985-2010)

Practically from its foundation, CMD delegated the tasks of warehousing and transport,

for two primary reasons: logistical costs and market positioning. The 1980s were “a

moment when product demand outran our production capacity; therefore we were

oriented towards production, not sales” (District Director). Distributors were selected

mainly from existing transportation and client firms, entrusted with warehouse and

delivery tasks, and remunerated in different ways: by fees per container in storage or

sold, by remittance of a fixed monthly sum for storage or sales, or by reimbursement of

expenses. "It was difficult to maintain a transport network that could get to the furthest

client, so we thought we should have intermediate firms" (former CEO).

After 1980, gradually CMD began to regularize the IOR, focusing on its legal

and labor aspects. From 1985 onwards, only one standard contract was used for these

independent entities, regardless of their varying sizes, legal constitutions, and other

business activities. An analysis of the contract shows that it states only the basic

expectations and does not envisage every possible contingency. "The contract is only

the legal support" (former CEO). It is a starting point, outlining the legal relationship,

what parts of the business are delegated (geographical areas), the assigned client

portfolio, and some general guidelines for action. "The contract is general. Starting from

there, you enter into the business and you go on learning” (Partner B-3).

CMD next took advantage of the contract development to establish a single

system of remuneration: commissions on sales. "It is the system where if you sell more,

you earn more” (CMD manager of partners). “There was great heterogeneity and one of

the steps was to introduce the current commissions system” (District Director). From

the early 1990s onward, partners operated exclusively in a given geographical area and

received commissions on the area’s sales, even though on occasion CMD delivered the

product directly to the client, giving partners higher profitability. Distributors received

the supplier’s products on consignment and carried out their delivery and sales tasks

mainly in a passive way.

At the beginning of the 1990s, CMD’s sales department had new software,

called GESCOM, that provided monitoring information about sales: falls in demand,

registration and sales of new clients, container contracts, sales analyses contrasted with

the previous period (month/year), itemized sales breakdowns, and the total number of

containers per client. This database included sales information about all the firm’s

clients, but reports could be customized to describe concrete products, specific clients,

and/or distributors. However, at that time, this information was used unilaterally, mainly

by the supplier’s sales department, in order to control and monitor distributors.

According to our interviews, CMD employees tried to structure, limit, and regulate

distributors’ behaviors, telling them how to perform their activities. "To daily supervise

absolutely everything that they do, to give them methods, to set performance rules"

(CAC Director). "At all moments we control and investigate their performance" (CAC

manager).

In 1992, CMD incurred losses, for the first and only year in its history. The next

year, as part of a new downsizing strategy, the firm began to outsource more and more

complex functions. Though its relationship with distributors had been successful, it bet

that it could improve and strengthen its distribution channel. "That the partners worked

well did not mean that we could not make them work better, with a greater alignment"

(CEO). “We needed systems that allowed us to give them the same message at the same

time” (CMD manager of partners). Widening its former IFG system, CMD began to

pilot a new set of mechanisms.

In 1997, CMD decided to share its software, obliging distributors to buy a

specific computer on which to install it. In 1998, the supplier reached electronic

integration, supplying its entire channel with computers and delegating yet more

functions (through passwords, partners could now create and maintain client files, get

information on price discounts, monitor clients’ inventory, manage logistic issues,

receive complaints, and control outstanding payments). From this date, distributors had

to use the software to track deliveries and container movements or to open a new client

file. This decreased the mistakes that the previous handling system had generated, and

even allowed CMD to extract truthful private information or market knowledge from

partners. “We were able to free ourselves of a great deal of administrative work” (CAC

Manager). The software permitted it to externalize more product delivery and invoicing,

which from then onwards were solely partners’ responsibility. “They have given us a

very good tool, to see consumptions or levels of inventories. Now we control the

market, and inform the supplier about changes” (Partner B-5, C-2). Thus, CMD was

able to keep track of its containers and gain information on final clients. This shared

system enabled the supplier to monitor distributors’ inventory on line, gaining greater

control of partners and the end market. “We needed tools which would allow us to

retain market control, with the partners carrying out their activities under our

supervision” (CEO). "Integrating our systems, besides making the whole chain more

efficient, allows us to have a greater knowledge of the end market, although the

management is more expensive” (Commercial Director).

Next, CMD designed new reports from the existing GESCOM data base and

began to share them with its partners: falls in demand, registration and sales of new

clients, container contracts, sales analyses contrasted with the previous period

(month/year), itemized sales breakdowns, and the total number of containers per client.

“This step was indispensable; it was a change toward more proactive sales activities”

(Commercial Director). The new scorecard was developed in 1999 and refined in 2000,

by a team formed mainly of the supplier’s sales employees and distributors, that is,

boundary employees. According to the Shared Scorecard Project Report, “this

information would allow the partner to obtain better knowledge of the evolution of its

clients; plan and solve problems more quickly; and coordinate their work with our sales

department.” Monthly comments by the sales staff enabled them to establish shared

sales objectives and get information from partners. "It is very interesting information

that allows us to detect problems, helping in our management, allowing us to make

quicker decisions and to establish plans and targets” (Partner C-5). The supplier

managers felt that “in order to have partners, we needed to improve the systems, and we

started with the idea of giving in order to receive” (Internal Audit Manager). "It is the

second transformation; we have a system that supports operations, now it transforms

them into partners" (CEO). “It allows us to control partners” (CMD manager of

partners).

CMD’s sales department provided training in the use of the new information.

"Thus they are able to detect market opportunities" (Sales Manager). Boundary

employees also analyzed this information monthly, providing an extra management tool

to monitor distributors and enabling both parties to establish and manage sales

objectives. Although partners already had access to the same information (through client

invoice copies), the newly designed format was more organized, useful, and aggregated.

“We devised a tool to let them know that clients must be managed and that they were

responsible” (CAC Director). "It is very useful, to see what happens, to compare…to

negotiate" (Partner A-1). In most cases, this information even improved sales

department activities by providing an extra control tool. “They need more information,

and it allows us to demand more of them” (CEO).

The supplier also drew up a Distributors’ Management Manual to help partners

better perform their daily tasks, with information and forms about client contracts,

products, containers, safety norms, etc. This manual established guidelines for storage,

distribution, administration, and commercialization, as well as templates of documents

and forms both for internal use and for the final client.

In 2001 and 2002 CMD introduced a Distributors Evaluation System (DES)

developed by another team, this one composed of top managers and experts from a

consultant firm. (Although the system was known internally as DES, the supplier

decided to present it initially as the “Distributors Incentives System” to obtain greater

acceptance from partners.) As CMD managers pointed out, this system had two

objectives: “to reward those who obtained the best results and to identify those who

needed more assistance or more support in order to pre-empt possible conflicts” (DES

Project Report). "It is a very important relationship, and the fact that we had so little

control information was not proper. Starting from here you can begin to think about

how we pay and how we establish incentives. The commissions system is very simple,

it is easily calculated and explained, and partners understand it quickly. The

disadvantage is that it does not motivate appropriately. It sets incentives toward serving

the biggest client, more commission with less work [...] if we have the information and

the profile, the following step is to evaluate them" (CMD manager of partners).

Analyzing the IOR value chain, the supplier defined 37 performance measures

(including financial and nonfinancial, and internal and external measures), their relative

weights, and the desired level of development. These performance measures covered all

the channel activities, including warehousing, delivery, administration, and

commercialization. "They know what points we will value, and both parties agree

yearly where they want to arrive in each one of these areas" (District Director). It was a

system for continuous improvement whose principal goal was the enhancement of

partners’ sales activities. “We already have the personnel and systems necessary for

control. What we are after is to clarify, both for us and for them, what we want them to

do, encouraging improvements” (CMD manager of partners). “The supplier now

demands more; they want us to visit and assist clients. Before this was secondary, and

now it is more valued" (Partner C-4). Through this mechanism, CMD obtained a

ranking of its partners every year, so it could reward best performances. The system also

allows the supplier to identify distributors who require more assistance, enhancing

strong points and eliminating weak ones. “It is useful, you can see your defects and you

can try to correct them" (Partner A-2). However, each distributor knows only its own

evaluation, and which distributor is the best in each category (group A > 600,000

Euros/year; group B > 360,000 Euros/year; and group C < 360,000 Euros/year). CMD

can now detect shortfalls item by item and partner by partner, in order to implement

pertinent individual objectives. Each year, the supplier and the partner have meetings in

order to mutually agree exactly what each one is willing to give, establishing joint

improvement projects. "These tools allow us to settle objectives; every year we have a

meeting and we establish them, together with the supplier personnel. The point is that

each one knows what he has to do and where to do it" (Partner B-1).

From 2002 to 2006, CMD designed a distributors’ web page that included all of

the former IFG mechanisms, as well as some new services and information (optional

low-cost responsibility insurance, a safety advisor, ISO-9000 consulting, email, a client

complaint resolution program, processing of client debts, and ISO-14000 consulting).

"To be able to use the web page and the new applications more efficiently, a specific

training program has been elaborated…it is an open environment that will incorporate

all those contents that are considered of interest to the channel. Please, send me any

suggestions" (Agents Manager letter to the channel).

In 2005, the US headquarters decided to change its worldwide enterprise

resource planning (ERP), migrating to SAP. This change over took 4 years, from 2005

to 2009. Initially, because of the need to homogenize all processes, and because the

Spanish business style was different from that of other countries, the parent firm

decided to eliminate the IFG mechanisms described above. Over time group member

companies in other countries had developed different distribution channels focused

mainly on distributors acting as resellers, and they perceived no need to develop any

concrete IFG mechanisms because in their philosophy they saw distributors as end

clients. However, a headquarters team did a deeper analysis and decided to select

CMD’s system as a worldwide best practice, including it in the new SAP, and investing

more time and money in their distribution channels. In a first step, CMD decided to

maintain the distribution channel’s software in a parallel way, while it adapted its own

procedures and software to the new context. In the second step, the supplier developed

new interfaces and software for distributors in order to update former shared software,

making it compatible with the SAP environment. This model of IOR management was

being exported to other European countries with excellent results, as CMD’s CEO

stated. One of the managers underlined the reasons for implementing this system

throughout Europe. First, distribution costs: “At the moment, in France, our trucks are

half loaded. Second, we will offload a heap of administrative work”. Second, inventory

reduction: “Currently we have 325 distributors in France who have at least 15,000

containers. If we improve routes and rotation, we improve asset management and reduce

costs.” Third, improved market presence: “We will improve our proximity to the clients.

Usually, these are two conflicting concepts: if you reduce costs you reduce service. But

in this case, curiously, by reducing costs we improve service.”

Currently, the distribution channel management is based on this set of IFG

mechanisms: contract, commission system, updated software, shared management

information, distributor evaluation system, and distributor operating manual. The

content has changed slightly to correct some errors, but overall CMD maintains the

same philosophy: give to receive. In most of these changes, the supplier took into

account distributors’ suggestions. Now, distributors work in SAP and have new

software to do the same tasks, with a few improvements. For example, since 1998

distributors have opened new client files; nowadays, they have a concrete program with

more fields to fill (e.g., more contact fields, information about timetable, special

discounts, etc). Or, for example, since 2005, distributors have had a client complaint

program, and now they have an improved version in the SAP environment.

As a result, interviewees commented that IFG had brought about operating

improvements, greater efficiency in externalization of existing and new functions, lower

personnel and structural costs, greater control of stocks and of the end market, the

optimization of logistic routes, and the ability to track assets (containers). As

interviewees stated, they previously had only sales data; they were unaware of the

impact of the partners’ behavior, the excellence of their management, the potential of

their zones. Both parties did have data, but dispersed; now, with these new shared IFG

mechanisms, data are better and more concise, known to both parties, and jointly

assessed and validated each year. In order to avoid suspicion, the supplier’s policy was

to “give in order to demand,” because, as managers argued, they must always sell what

they do. They wanted to share systems that eased partners’ management and at the same

time allowed them to gather more information. “You must always sell what you do. We

want to devise systems which ease [partners’] management, at the same time allowing

us to gather better information” (Former CEO). This approach evidently worked;

Partner B-2 commented, "With these changes, now we have more responsibilities, for

the same commissions…I believe that the supplier has opted for us; they are setting up

more means and tools…they provide us with all the data that interest us for our

management."

Likewise, our interviewees drew attention to market positioning, highlighting the

importance of the sales and commercial tasks in the new partner profile, and of reaching

remote clients while maintaining acceptable operating costs and a high, homogeneous

level of quality – better than that of their competitors, as CMD’s CEO argued. An

increase in sales after 1999 (see Table 2) can be attributed to several factors, among

which are the evolution of the market itself, the premium prices policy, and the

introduction of new services supplied to end clients by partners (services that were

billed by the supplier to the final clients). The profitability of the IOR is more than three

times that of the direct sales, because “partners cater to small clients at a higher price,

with a range of more profitable products, smaller structural costs, and more timely

payment” (controller). According to interviewees, the more consolidated market that the

IOR had achieved played an important role in this growth, as it permitted a sharp

increase in prices while maintaining market share. It also freed CMD’s sales staff for

other functions (development of new applications for products, attention to strategic

clients, etc.). “Although our system is more costly [than those of competitors], we know

who our partners sell to, when, and in what way” (Sales Manager). “Clients value

having closer distribution centers, able to offer an agile delivery service, 24 hours, to

assist with urgencies; and not all companies do that. Clients value that the distribution

channel is able to offer other services, such as advice, facilities, training, and

maintenance; and that differentiates us" (Commercial Director).

5. ANALYSIS AND DISCUSSION

In this section, using the framework of Adler and Borys (1996), we analyze the

formal mechanisms’ characteristics on the coercive vs. enabling continuum to determine

how each mechanism relates to the two main functions. Second, we discuss whether

IOR evolution causes or results from the evolution of the IFG mechanisms.

5.1. Analysis of the formal mechanisms’ characteristics and their function

Since 1985, when CMD decided to formalize its distribution channel, the complexity of

its IFG has progressively increased. The supplier increased the number of formal

mechanisms from 2 to 6, also increasing the variety of their characteristics. Taking into

account the evidence about the function of each mechanism, we can differentiate two

clear periods of time, each of which presents different mechanisms and IFG functions.

Table 2 lists the similarities and differences between the early period (1985-1997),

when the supplier introduced mechanisms to monitor the IOR unilaterally; and the later

period (1998-2010), when the supplier began to share its IFG information with its

multiple partners, allowing them to use it also. We differentiate between dual use,

meaning that both parties in the relationship can use a given mechanism, and twofold

functions, referring to use for different purposes (to control and coordinate). Overall, the

IOR has evolved from an arm’s-length toward a partnership relationship.

-- Table 2 here --

5.1.1. Unilateral use of IFGs (1985-1997)

From 1985 to 1997, CMD had a simple IFG (according to Stern et al., 1996), formed by

two mainly coercive mechanisms (see Table 3): the contract and the commission

system. The consignment contract was standard for the entire channel, and established

the duties and risks assumed by all members. The commission system aligned the

supplier’s and distributors’ objectives. It was calculated on the basis of sales over the

period – more sales more commission – regardless of what led to them, and did not

facilitate “what if analysis.” Both tools were imposed by the supplier, take it or leave us,

shaping a rigid operational rule that all distributors had to accept. Both mechanisms

were inflexible and did not recognize exceptions nor customizations. These mechanisms

were unilaterally developed by CMD, and unilaterally used by its own employees, who

sought to reach the firm’s desired results by dissuading distributors from opportunistic

behaviors. For example, sales employees had a data base (GESCOM) that stored

information about clients, sales, prices, units, and so on. This internal tool provided

them with standard and/or ad hoc reports. This information could be classified by

distributors, but the firm did not share it with the distribution channel. Only its own

employees used its information. During this period, IFG tools were monitoring devices

that took into consideration only the results and not how they were achieved. The only

exception was the contract, which obligated both sides, and was lightly used by

distributors in order to know what they had to do, and by the supplier as a coordination

device (e.g., to assign geographical areas and the client portfolio).

-- Table 3 here –

5.1.2. Dual use of IFGs (1998-2010)

Since 1998, CMD has gradually developed four additional mechanisms to complete and

improve its IFG (see Table 3): shared software, a management manual, an evaluation

system, and the GESCOM scorecard. These mechanisms were developed progressively

without discarding the older tools, increasing IFG complexity and the variety of tool

characteristics in terms of Adler and Borys’s framework. In this period of time,

information began to be shared with distributors, and distributors began to use the

information to coordinate with the supplier (dual interorganizational use). From the

qualitative analysis shown in Table 3, we have established Figure 1, which represents

from the supplier’s perspective how the tools serve both functions and where they fit on

a coercive-enabling continuum.

-- Figure 1 here --

Some of the new tools are very enabling (the scorecard) and others very coercive

(the evaluation system), but all are more enabling than the previous tools (contract and

commission). Basically, we found that CMD has become more interested in managing

the distribution channel, taking into account the interest and opinions of distributors

when its employees are designing and developing the new mechanisms, and being more

flexible in their design and use. This seems to show that IFG tools present more

coercive characteristics in the initial stages of a relationship and subsequently evolve

toward a more enabling nature.

In accord with Dekker’s (2004) arguments, when one considers both sides of the

relationship the evidence shows that all of these new tools are used simultaneously for

control and coordination. However, when each side is contemplated alone some

differences can be appreciated. From CMD’s perspective, generally, all the new shared

tools, regardless of their characteristics, allow the supplier to delineate roles, rules,

programs, and procedures, and thus to integrate more and more complex externalized

activities. CMD coordinates and gets better control, seeing the end market through

distributors’ eyes. But Figure 1 also shows that some tools are used more for control

than for coordination (e.g., the evaluation systems) and vice versa (e.g., the scorecard).

Although CMD employees recognize that all the tools can be used for both functions,

the supplier’s dominant use of each tool seems to be related in some degree to its

enabling/coercive attributes.

From the partners’ perspective, shared tools are used to coordinate the

relationship. They support partners, putting them in a better position to manage their

client portfolio and to make better decisions. Distributors’ use seems not to be affected

by IFG tool characteristics: distributors seem to see all IFG mechanisms as

complementary devices that allow them to understand the supplier’s expectations, and

as ways in which the supplier empowers them and values them. It is the more enabling

character of the tools that is affecting the distributors’ positive view of the supplier’s

monitoring, which they now consider friendlier and less aggressive.

5.2. Analysis of the evolution of IFG

In the earlier period (1985-1997), distributors received CMD products on

consignment and carried out their distribution and sales tasks. IFG mechanisms were

used, mainly by CMD’s sales department, in order to control and monitor partners.

Through this unilateral use, the supplier tried to structure, limit, and regulate

distributors’ behaviors. The outsourced tasks were few and not complex, and the scant

necessity for coordination was formalized by the contract, and in an informal way

through the sales employees. The commission system pressured distributors only to

increase sales, and distributors were evaluated only by their sales/commission evolution.

The sales department was the only link between the supplier and partners, a situation

that often led to misinterpretation, oversight, or loss of information. In fact, top CMD

managers found that not all the partners were receiving the same message at the same

time, and they lacked the proper information to manage their geographical areas and

client portfolios. In sum, CMD managers thought that they had dispersed and sporadic

information and little influence over partners’ behaviors. They felt limited capacity for

monitoring (as argued by Celly and Frazier, 1996), as neither the contract nor the sales

department communicated to the partners exactly what the supplier expected of them.

The IFG tools, basic and commonplace in distribution channel management (Stern et

al., 1996), failed to define proper efforts and behaviors for the distributors. For example:

(a) distributors could be satisfied to maintain the current client portfolio, not seeking

new market opportunities. With a portfolio assigned by the supplier, partners had a

fixed remuneration, which meant that bad distributors in good areas could obtain bigger

commissions, and vice versa. (b) Distributors could deliver inadequate goods or

services, acting inefficiently or providing distorted information, and thus harming the

supplier’s reputation. (c) The commission system also failed to motivate container

collection, so CMD could not meet its targets for container rotation. (d) Some

distributors favored high-volume clients that generated high profits, a problem when a

client made an urgent order that the partner had to fulfil, even though the service cost

outweighed the commission. Furthermore, partners, although they had exclusive sales

territories, could also carry out other economic activities that took their time and

attention away from CMD business.

These control problems, although perceived, did not provoke an IFG change

because CMD did not then value distributors’ activities as strategically relevant. In this

period of time, CMD was more focused on production. After 1992, the company moved

toward a market-based strategy, valuing distributors’ activities and closeness to the end

market. Willing to externalize more and more complex functions and impelled by

control problems with the previous tools, CMD started step-by-step to develop new IFG

tools and share IFG information with distributors.

CMD began with limited and standardized information; shared software allowed

distributors to execute routine jobs that were new administrative tasks for them. Partners

had private information regarding their geographical areas, and their own effort, skills,

and productivity, that the supplier lacked. This tool gave the supplier access to better

and more complete information about end clients’ activities, frequency, and problems,

and about the market in general. Consequently, this IFG mechanism improved both

coordination and control.

The supplier’s effort to outsource more tasks necessarily increased the

distributors’ sales autonomy (empowerment), because the new commercial tasks were

more uncertain and less standardized, needing better knowledge and information about

local business. The coercive characteristic of the older tools left the partners little room

to adapt their actions to local needs and changing circumstances. For that reason, CMD

promoted a joint design that could better satisfy partners’ local information needs. This

new and enabling mechanism allowed distributors to better coordinate their commercial

actions, interacting creatively with clients, other distributors, the supplier, and the local

environment.

But whereas environmental uncertainty requires flexibility, the efficiency of

day-to-day operations requires standardization. The importance of the recently

outsourced tasks brought about the development of a new coercive tool, a management

manual. With this, CMD standardized some basic commercial and administrative

procedures for its partners. This manual specifies in advance some key eventualities and

the operational rules and standards by which to handle them. This new tool clarified the

technical characteristics of each party’s work, preparing distributors and conditioning

their behavior.

Both parties used IFG mechanisms to coordinate former and new and more

complex activities. As Gulati and colleagues (2005) theorize, the supplier realized that it

needed to share information to enable partners to deal more effectively with inevitable

operational contingencies. As they have engaged in more valuable and complex

endeavors that entail greater interdependence, the coordinating role has become

increasingly important (Mellewigt et al., 2007), but IFG also must influence the level of

effort once everything is in place. Accordingly the new evaluation system was

implanted to complete the former commission system. It allowed aligning partners’

behavior with the new strategic tasks, focusing their attention on new functions that

were more relevant from the strategic point of view.

Our evidence shows how IFG functions have evolved intentionally with the

IOR. Figure 1 exhibits the path of IFG development. This development path shows

CMD’s decision to outsource new tasks, provoking the gradual development of new

tools, and in turn the evolution toward coordination. But the execution of these new

tasks necessitates new government mechanisms. Overall, the supplier’s decision to

provoke an IOR evolution makes it necessary for IFG mechanisms to evolve from

control functions towards coordination purposes (see Figure 1). In contrast to Mellewigt

and colleagues’ (2007) proposal, our study also shows that this development gives the

supplier increasingly reliable and timely information to control its partners and the end

market. That is, the control function maintains its importance over time, even when the

IOR evolves.

The case shows that keeping the contract constant, IFG development has created

a frame where information flows to facilitate problem solving, resolve disputes

promptly, improve relation fluency, and manage interdependencies. The combination of

different tools with different formalization attributes (Adler and Boris, 1996) has

allowed the establishment of some minimal structures that define responsibilities,

priorities, and procedures for participants, while at the same time creating for them

“zones of maneuver” within which they can interact, communicate, and create

knowledge, as Van der Meer-Kooistra and Scapens (2008) proposed. As Figure 1

summarizes, in completing the contract and commission system, the supplier developed

a new, less coercive tool in order to externalize new administrative tasks. Next, in order

to outsource proactive sales activities, the supplier established a more enabling tool. To

complete both tools, a more coercive tool was considered necessary to standardize these

activities. Additionally, in order to motivate these new activities, the supplier instituted

the coercive evaluation system. The resulting relationship is highly structured but allows

partners to use their own knowledge and experience to react to environmental changes.

Consequently, the supplier was developing specific tools depending on the

characteristics of each intended outsourced activity.

Although CMD initially sought to outsource more activities, the combination of

tools (with different enabling and coercive characteristics) used by both parties for

control and coordination purposes has created a dynamic “style” maintained over time.

It has allowed the growth of unique organizational capabilities, forming CMD’s main

competitive advantage, capabilities that this supplier transfers to other European

countries as best practices and that have even survive SAP implementation.

6. CONCLUSIONS

According to the agency theory and the resource-based perspective IFG has two

functions, control and coordination. Whereas control tends to mitigate agency costs,

coordination serves the effective actual management of the IOR, facilitating value

creation. This longitudinal case study emphasizes the relationship between both

functions and IOR evolution. Distinguishing two clear periods allows us to deepen our

analysis. The early stage presents a unilateral use of IFG mechanisms for only one

function; it was mainly the supplier that used IFG, and mainly for control purposes. In

this period, by developing basic and commonplace mechanisms, the supplier tried to

mitigate classic agency problems. In the second stage both parties worked with the same

IFG mechanisms, and these mechanisms served both functions. Our analysis of these

mechanisms on the coercive vs. enabling continuum (Adler and Borys, 1996) shows

that each mechanism presents diverse attributes, seeming to highlight two interesting

results:

(1) According to Dekker’s (2004) arguments, both functions are simultaneous.

Our findings highlight that in general, taking into consideration both perspectives, each

tool does simultaneously develop both functions. However, a deeper analysis from each

perspective presents interesting differences. From the supplier’s perspective, some tools

are used more for control than for coordination and vice versa, and the use seems to be

partly related to the tool’s enabling/coercive attributes. From distributors’ perspective,

all IFG mechanisms are complementary devices, opening an interesting research avenue

to analyze why tool characteristics do not affect their use. The more enabling character

of the new tools is reflected in the distributors’ positive view of the supplier’s control

use.

(2) The case suggests that IFG tools present more coercive characteristics in the

initial stages of a relationship and subsequently evolve toward a more enabling nature.

Developing new and more complex mechanisms, the supplier opted to invest in

managing its distribution channel, taking into account distributors’ interest and needs as

its employees were designing and developing the new mechanisms, and being more

flexible in their design and use. The case seems to indicate that the coercive vs. enabling

characteristics of each tool may be determined by the characteristics of each intended

outsourced activity.

The evolution toward dual interorganizational use favored a more structured

relationship that allowed partners to use their own knowledge and experience to react to

environmental changes. Because more activities were outsourced, each tool came to

complement, rather than replace, earlier tools. Different mechanisms were developed

over time, flexibly completing the incomplete contract.

This case shows how IFG can influence the development of a long-term

partnership, completing and redriving the contractual agreement in a flexible and

unforced way. When combined, dual use and the twofold function of IFG can produce

unique organizational capabilities – the distribution channel management style –

creating key competitive advantages.

The results and the constraints of our study suggest avenues for further research.

It would be interesting to compare and contrast these results with data from other case

studies. For example, our results might not be applicable to nonvertical relations. Also,

we focused on common aspects of the relationships between the supplier and all of its

distribution channel members. An extension of this work could carry out another

research strategy to consider each dyadic relationship, in order to analyze different rates

of IOR evolution provoked by IFG development, as well as moderating variables that

can explain such differences, such as different levels of trust.

REFERENCES

Adler P, Borys B. 1996. Two types of bureaucracy: enabling and coercive.

Administrative Science Quarterly 41(1): 61–89.

Anderson E, Weitz BA. 1992. The use of pledges to build and sustain commitment in

distribution channels. Journal of Marketing Research 29(1): 28–34.

Ariño A, de la Torre J. 1998. Learning from failure: toward an evolutionary model of

collaborative ventures. Organization Science 9: 306–325.

Ariño A, Reuer JJ. 2004. Designing and renegotiating strategic alliance contracts.

Academy of Management Executive 18(3): 37–48.

Baiman S, Rajan MV. 2002. Incentive issues in inter-firm relationships. Accounting,

Organizations and Society 27: 213–238.

Baiman S, Sivaramakrishnan K. 1991. The value of private pre-decision information in

a principal-agent context. Accounting Review 66: 747–766.

Bergen M, Dutta S, Walker O. 1992. Agency relationships in marketing: a review of the

implications and applications of agency and related theories. Journal of Marketing

56: 1–24.

Bijlsma-Frankema K, Costa AC. 2005. Understanding the trust–control nexus.

International Sociology 20(3): 259–282.

Celly KS, Frazier GL. 1996. Outcome based and behavior based coordination efforts in

channel relationships. Journal of Marketing Research 33: 200–210.

Chenhall RH. 2003. Management control systems design within its organizational

context: findings from contingency-based research and directions for the future.

Accounting, Organizations and Society 28: 127–168.

Chenhall RH, Langfield-Smith K. 2003. Performance measurement and reward systems,

trust, and strategic change. Journal of Management Accounting Research 15: 117–

143.

Dekker HC. 2004. Control of inter-organizational relationships: evidence on

appropriation concerns and coordination requirements. Accounting, Organizations

and Society 29: 27–49.

Doz YL. 1996. The evolution of cooperation in strategic alliances: initial conditions or

learning processes. Strategic Management Journal 17: 55–83.

Eisenhardt KM. 1989. Building theories from case study research. Academy of

Management Review 14: 532–550.

Fiala P. 2005. Information sharing in supply chains. Omega 33: 419–423.

Frazier GL. 1999. Organizing and managing channels of distribution. Journal of the

Academy of Marketing Science 27: 226–240.

Geyskens I, Steenkamp JEM, Kumar N. 2006. Make, buy, or ally: a transaction cost

theory meta-analysis. Academy of Management Journal 49(3): 519–543.

Gietzmann M. 1996. Incomplete contracts and the make or buy decision: governance

design and attainable flexibility. Accounting, Organizations and Society 21(6): 611–

626.

Gulati R, Lawrence PR, Puranam P. 2005. Adaptation in vertical relationships: beyond

incentive conflict. Strategic Management Journal 26: 415–440.

Gulati R, Singh H. 1998. The architecture of cooperation: managing coordination costs

and appropriation concerns in strategic alliances. Administrative Science Quarterly

43: 781–814.

Hendrikse G, Windsperger J. 2009. Preface on network governance. International

Studies of Management & Organization 39(4): 3–7.

Inkpen AC, Curral SC. 2004. The coevolution of trust, control, and learning in joint

ventures. Organization Science 15(5): 586–599.

Langfield-Smith K. 2008. The relations between transactional characteristics, trust and

risk in the start-up phase of a collaborative alliance. Management Accounting

Research 19: 344–364.

Lassar WM, Kerr JL. 1996. Strategy and control in supplier-distributor relationships: an

agency perspective. Strategic Management Journal 17: 613–632.

Li G, Yan H, Wang S, Xia Y. 2005. Comparative analysis on value of information

sharing in supply chains. Supply Chain Management: An International Journal 10:

34–46.

Liang PJ. 2000. Accounting recognition, moral hazard and communication.

Contemporary Accounting Research 17: 457–490.

Mayer KJ, Argyres NS. 2004. Learning to contract: evidence from the personal

computer industry. Organization Science 15(4): 394–410.

Mellewigt T, Madhok A, Weibel A. 2007. Trust and formal contracts in

interorganizational relationships - substitutes and complements. Managerial and

Decision Economics 28: 833–847.

Miles B, Huberman A. 1984. Qualitative Data Analysis: A Sourcebook of New

Methods. Sage: Beverly Hills, CA.

Mitchell W, Dussauge P, Garrette B. 2002. Alliances with competitors: how to combine

and protect key resources. Journal of Creativity and Innovation Management 11(3):

203–223.

Mundy J. 2010. Creating dynamic tensions through a balanced use of management

control systems. Accounting, Organizations and Society 35(5): 499–523.

Noordewier TG, John G, Nevin JR. 1990. Performance outcomes of purchasing

arrangements in industrial buyer-vendor relationships. Journal of Marketing 54: 80–

93.

Poppo L, Zenger T. 2002. Do formal contracts and relational governance function as

substitutes or complements? Strategic Management Journal 23(8): 707–726.

Ring PS, Van de Ven AH. 1994. Developmental processes of cooperative

interorganizational relationships. Academy of Management Review 19(1): 90–118.

Stern L, El-Ansary A, Coughlan A. 1996. Marketing Channels. 5th ed. Prentice Hall:

Upper Saddle River, NJ.

Tomkins C. 2001. Interdependences, trust and information in relationships, alliances

and networks. Accounting, Organizations and Society 26: 161–191.

Van der Meer-Kooistra J, Scapens RW. 2008. The governance of lateral relations

between and within organisations. Management Accounting Research 19: 365–384.

Vlaar PWL, Van den Bosch FAJ, Volberda HW. 2007. On the evolution of trust,

distrust, and formal coordination and control in interorganizational relationships:

toward an integrative framework. Group & Organization Management 32(4): 407–

429.

Yin RK. 1984. Case Study Research: Design and Methods. Sage: Beverly Hills, CA.

Table 1. Adler and Borys’s (1996) FrameworkCharacteristics Enabling To a great extent To a minimal extent Coercive

Repair

This refers to the breakdown of control processes, providing capabilities for fixing them. The intuition is that not everything can be foreseen, and some intellectual work (and consequent freedom) must be left to users to determine the appropriate course of action in such unforeseen circumstances.

More enabling tools integrate information about process and task to reach targets and to search for solutions to potential problems. They generate information that facilitates responses to real work contingencies. So an IFG tool will be considered more enabling if it 1. is designed and implemented so that it might be reconfigured by users, 2. is designed and implemented so that it might be reconfigured by designers following users’ recommendations,3. acts as a valuable resource informing users about their actions,4. signals problems and opportunities for improvement,5. gives users access to very detailed information in order to investigate problems or deviations,6. is designed so that user-driven changes to the format and make-up in terms of measurements of reports are possible,7. facilitates what-if analysis and investigation about causes of performance rather than simply facilitating the production

of routine reports, focused only on target achievement.Internal transparency

This is about understanding the working of local processes.

More enabling tools explicate the key components of processes, guide understanding of processes, and give users quick feedback on their performance by providing metrics that help them to assess their performance. So an IFG tool will be considered more enabling if 1. It is a working tool instead of a monitoring device. 2. It seeks to give a common data set and clearly mapped business processes. 3. It helps to clarify the activities that make up every business unit.4. It increases the user’s knowledge of the operations of every business unit.5. It provides an excellent platform that can inform its users in detail concerning the inner workings of the processes it acts

upon.6. It gives detailed information on the drivers of results, allowing a better understanding of what drives revenue/cost levels.7. Its integrated measures are objective and accurate. 8. It increases the knowledge of how each business unit works as a whole.

Global transparencyThis refers to understanding where and how the local

processes fit into the organization as a whole. If a system is to facilitate responses to emerging contingencies, then it must be used to provide a sense of where local actions sit

in relation to larger organizational strategies, goals, and agendas. Enabling formalization is not simply an exercise in decentralization and delegation; it is an attempt to harness local creativity and flexibility. So an IFG tool will be considered more enabling if 1. It offers a wide range of contextual information designed to help users interact with the broader organization and

environment. 2. It helps to communicate business unit strategy.3. It is explained in detail to all users. 4. It signals areas in which we may need to change business unit strategy.5. It reflects the users’ contribution to the organization. 6. It shows users where their own tasks fit into the whole, showing a larger representation of organizational activities and

Characteristics Enabling To a great extent To a minimal extent Coercive

business.7. It helps the business unit to understand the overall context in which it is working.8. It encourages interaction between previously distant individuals. 9. It generates regular and frequent flows of strategic information between operational and senior management10. It allows analyzing information in order to come up with ideas for improving operations under control.11. It allows thinking of new ways of doing things.12. It positions individual units within a larger representation of organizational activities.

Flexibility This captures members’ discretion over the use of control

processes (i.e., the extent to which they can turn them off).

Because unconstrained flexibility is unlikely to be beneficial, IFG can offer an effective framework for mapping out individuals’ areas of responsibility and control. Flexible tools encourage users to adapt tools to their specific work demands. So a tool will be considered more enabling if 1. It seeks to facilitate flexible responses to emerging events to the extent that the control systems can be turned off when

not needed.2. It allows customization.3. It allows for the setting of a variety of options ranging from blocking specific actions to automatic reporting options.4. It allows activities that have not been built into the agreements. 5. It assumes that deviations are also learning opportunities, allowing a detailed analysis, and providing a flexible guide

to act. 6. It allows for members’ discretion to use it. It is not compulsory, allowing exceptions.7. It is not focused on ensuring strict adherence to original assumptions and action plans.

Development process (Design and implementation activities)

The manner in which the development process is carried out affects how the tool will be perceived. So a tool will be considered more enabling if 1. It allows users’ involvement.2. Its development process is experience-based.3. It utilizes local knowledge.

Source: Adapted from Adler and Borys (1996), Wouters and Wilderom (2008), and Chapman and Kihn (2009)

Table 2. IFG Usage and Main Characteristics of the Interorganizational Relationship

Unilateral use of IFG1985-1997

Dual use of IFG1998-2010

Supplier orientation Production Market-Clients Main targets Logistics. To create a distribution

channel to cut logistic costs.Client services. Giving to receive. To reduce the supplier’s costs, outsourcing administrative and sales activities. To detect weak points in the relationship and to create a closer IOR with a team feeling

Relationship benefits for the supplier

Cost and investment reductionsClient proximity

Centers, staff, and cost reductionsClient proximity Homogeneous client serviceHigher quality service

Percentage of the supplier total sales (average) 66 % 85 %

% supplier total client accounts (average) 80% 95%

IFG users Supplier employees Supplier employees and distributorsIFG functions Control Control and coordinationIFG mechanisms Contract, commission system and direct

supervisionContract, commission system, software GESCOM, management manual, DES

IFG designers Lawyers and top managers Marketing, logistics, control, and sales managers (middle managers)

IFG effects Sporadic and dispersed information gathered in a nonhomogeneous, sparse way A feeling of poor control

Gathering and sharing information in a homogeneous way

A feeling of proper controlInvolved supplier departments

Sales department Sales, logistics, and control departments and client attention center

Problems Higher LowerControl focus Output Output, activities, and relationshipCommunication flows and links

SporadicSales department

Continuous and formalized IFGAll departments

Relationship type Arm’s length Partnership

Table 3. Main Features and Functions Associated with IFG Tools Control / Coordination Enabling / Coercive characteristics

Con

trac

t

Control

“It is only a legal framework” (Supplier and

distributors). “Mainly, the contract gathers the

legal relations, the geographical area assigned,

general instructions and economic conditions”

(Supplier).

It is the same contract for all distributors, not accepting changes or customizations. It establishes only the main legal provisions, not

generating responses to actual contingencies. It does not provide a guide to understand the processes. It is only a legal framework, but

clarifies the main activities and their geographical scope. It provides task delegation, but not a sense of how local actions fit with

organizational goals. Although it is explained in detail it does not help people communicate or interact. From a variety of optional

clauses, the supplier set a homogeneous contract, not allowing customizations or exceptions. It was designed by lawyers and supplier

managers.

“We established an unique contract for all distributors” (Supplier).

“The main goal was legal” (Supplier and distributors).

“It allowed us to dismiss some distributors, contracting others” (Supplier).

Com

mis

sion

syst

em

Control

“We give a report with sales detail, and the

commissions […] We compensate cash sales

with commissions. The distributor will give us a

promissory note with the difference. When the

distributors have discrepancies, we will negotiate

the following month” (Contract clauses).

It is the same system for all distributors, allowing only a few changes in special cases. It merely establishes the economic amount to

be paid, not allowing any analysis of it. It does not provide a guide to understand how to improve distributors’ commissions, only

showing their commission per product and per client. Although it is explained in detail and can be used to interact, it does not provide

a sense of how local actions fit with organizational goals. It is automatically calculated. It was created by supplier managers, and

established without their partners’ participation.

“It is a system where if you have more sales, you earn more money” (Supplier).

“It is a system which is clear, simple, understandable and reliable” (Supplier and distributors).

Control / Coordination Enabling / Coercive characteristicsSh

ared

soft

war

e

Control & Coordination

“We needed systems allowing us to maintain

control, processing the activities through

distributors, under the supervision of our sales

managers.” “Integrating our systems facilitates a

more efficient chain, increasing your knowledge

about the final market. Although now the

management is more costly, we needed to invest

in it, with more resources and time” (Supplier

managers). “It is a part of a big program. They

bet on us, and now we have the same tools [...]

They incentive us, valuing our work”

(Distributors).

It facilitates routine jobs and reports. The supplier’s top managers decide the list of tasks to be included. It is not open to suggestions

by distributors, because in the end they all use the same supplier’s system. It flatly asserts tasks and activities. It establishes all

distributors’ administrative activities but does not increase distributors’ knowledge of their main operations. It does not provide

distributors with the rationale for their work process. Information is presented in language familiar to the supplier, but not to

distributors. It does not allow a global vision of the contribution from each distributor to the global strategy. The information is

available to distributors on a restrictive need-to-know basis. It is a compulsory tool; they were forced to buy new computers. It was

developed by supplier demand, to satisfy the need for control and to increase outsourcing. It was designed by top managers;

distributors did not participate in any phase of its development.

“We installed specific software to develop our tasks and to control the activities. It allowed us to reduce duplicated activities.

Furthermore, we reduced our structure through distributors” (Supplier).

“Now we develop the work of the supplier” (Distributors).

Scor

ecar

d

Control & Coordination

''It is very useful, to analyze, to compare, to

negotiate" (Supplier). "It allows an ongoing

dialogue, helping in the analysis of contingencies

[…] It allows us to have our independence and

not to depend on the supplier […] It allows us to

have a more direct relationship with the supplier.

This tool allows us to be more integrated”

(Distributors).

Information can be reconfigured by both boundary employees and distributors. One year after implementation, the tool was changed

to include information suggested by users. It provides details in order to investigate causes of deviations. It provides objective,

accurate, monthly feedback on how each distributor works, showing their internal process as a whole. It provides information on the

drivers of sales, distributors’ source of revenues. It provides information designed to help distributors interact creatively with clients,

other distributors, the supplier, and the environment. It shares information that was previously considered private. It allows

distributors to interact with previously distant supplier employees. It is voluntary and can be customized for different purposes by

both sides. It was derived from the distributors’ daily work. It was developed by a team that included distributors. A pilot experience

that also involved some distributors allowed correcting the tool before its definitive development.

“It is a working tool” “It picks up information that some distributors were already demanding” (Supplier).

“It helps in our management, allowing us to take quicker decisions and to establish plans”

“This tool allows us to control our market” (Distributors).

Control / Coordination Enabling / Coercive characteristicsM

anag

emen

t man

ual Control & Coordination

“It allows us to have all the needed information

and forms (contracts, safety norms, etc.) to give

proper information to our clients” (Distributors).

Coercive. It establishes rules and task procedures. It looks for a homogeneous service, and cannot be reconfigured by users, not

allowing customization. It is a working tool that seeks to give a common data set and clearly mapped business processes. It helps to

clarify the activities that make up every business unit, increasing the distributors’ knowledge of the operations of every business unit.

It provides a wide range of information designed to help users interact with the supplier and clients. However, it does not help to

communicate business unit strategy and it does not show users where their own tasks fit into the whole. It seeks to facilitate

homogenous responses to emerging events. It cannot be turned off, and does not allow customization. It was designed by top

managers; distributors did not participate in any phase of its development

“This manual was edited as a support tool for the distributors’ daily work” (Management manual report)

Eva

luat

ion

syst

em

Control & Coordination

“We agree with them, each year, what each one

is willing to give” (Supplier).

“We can see our defects and try to correct them”

(Distributors).

It facilitates routine reports. The supplier’s top managers decide the list of performance measures. It is not open to suggestions by

distributors. It flatly asserts duties. It provides aggregated information on the execution of objectives. It highlights weak points to

improve, but it does not show how to improve them. It provides yearly feedback on 37 performance indicators. Some measures are

seen as subjective and inaccurate. It assesses all activities but does not increase distributors’ knowledge of their operations. It does not

provide distributors with the rationale for their work process. Information is presented in language familiar to the supplier, but not to

distributors. It shows each distributor’s absolute results, but not ranking. It informs distributors about strategic aspects of the channel,

allowing a global vision of the contribution from each distributor to the global strategy. It signals areas in which distributors need to

change. The information is available to distributors on a restrictive need-to-know basis. It is a compulsory tool. All distributors are

measured with the same parameters. It was developed by supplier demand, to satisfy the need for control. It was designed by top

managers, with the help of an external consultant firm; distributors did not participate in any phase of its development and did not

even know that the supplier was working on it. It was completely new for distributors. Its items and measures had never been used

until then.

“We do not want distributors knowing the results of others” (Supplier).

“The supplier gives us a list of targets and objectives to reach”

“It is an evaluating device” “The supplier controls us” “They tell us only how an ideal distributor is” “We miss our participation to

create a mixed system that was good for both parties” (Distributors).

Figure 1. IFG functions on a coercive-enabling continuum from the supplier’s perspective