Abstract

     Many studies have shown that the inter-organizational governance mechanisms required to manage appropriation concerns come into conflict with the mechanisms needed to manage coordination costs. Research has, however, largely left unanswered the question of how client organizations govern complex vendor relationships that involve multiple categories, transactions, and activities where appropriation concerns and coordination costs must be managed simultaneously. We propose that this may be achieved by utilizing two strategies; while integrating some activities, transactions and categories, others can be isolated. Drawing on 23 interviews as well as procedural documents associated with vendor management, this study examines how a leading automotive manufacturer governs relationships with three vendors. The analysis reveals how corporate and operational-level staff combine formal and informal governance mechanisms as they pursue integration and isolation strategies, enabling the client organization to maintain and develop long-term complex relationships. Our findings lead us to question a tendency in the literature to regard isolation as negative and integration as an ideal strategy for managing long-term relationships. Only when utilized in tandem will isolation and integration strategies enable organizations to align the conflicting governance mechanisms required to manage appropriation concerns and coordination costs.

Introduction

     Many studies have shown that non-hierarchical transactions engender appropriation concerns and coordination costs that client organizations must manage by creating appropriate governance structures (e.g., Anderson & Dekker, 2005; Anderson, Dekker, & Van Den Abbeele, 2017; Dekker, 2008; Gulati & Singh’s, 1998). Research has found that, when addressing the risk of opportunism that generates appropriation concerns, governance mechanisms often involve an economic-hostage logic and coercive power (Dekker, 2004; Rindfleisch & Heide, 1997). Clients’ efforts to manage appropriation concerns have therefore frequently been understood as conflict-oriented and intrusive, contributing to creating arm’s-length and potentially short-lived inter-organizational relationships (Agndal & Nilsson, 2010; Kajüter & Kulmala, 2005). Managing coordination costs effectively, however, may require interaction that runs in the opposite direction, such as the cultivation of a collaborative atmosphere and long-term orientated inter-organizational relations (e.g., Birnberg, 1998; Cooper & Slagmulder, 2004; Agndal & Nilsson, 2009; Tomkins, 2001).

     Prior research on inter-organizational governance has thus suggested that mechanisms designed to enable firms to manage appropriation concerns and coordination costs shape inter-organizational relationships in opposite directions (Gulati & Singh, 1998; Litwak & Hylton, 1962; Malhotra & Lumineau, 2011). The question then arises, how do client organizations govern vendor relationships that involve multiple exchanges that involve opposing requirements for governance? Extant research has relatively little to say about how firms act to mitigate the conflicts that arise between inter-organizational governance mechanisms (Caniëls, Gelderman, & Vermeulen, 2012). One reason may be that studies have focused mostly on relatively simple inter-organizational relationships where client firms need not strike a balance between the governance requirements associated with appropriation concerns and coordination costs (Agndal & Nilsson, 2019; Brattström & Richtnér, 2014). Another reason may be a tendency in the literature to treat organizations as unified entities that communicate with a single voice across exchanges (e.g., Anderson & Dekker, 2014; Cooper & Slagmulder, 2004; Dekker, 2004, Dekker, 2008; Frazier, 1999). Therefore, there is little recognition in extant research that the factors determining a client organization’s choice of governance mechanisms can vary across areas of exchange within a particular vendor relationship.

Contributions, implications, and limitations

     The literature on inter-organizational relationships has—often implicitly—assumed that firms adopt governance structures primarily involving mechanisms designed to help them manage either appropriation concerns or coordination costs. Therefore, studies have largely left unanswered the question of how to design a governance structure that aligns the contradictory governance mechanisms associated with appropriation concerns and coordination costs. The literature on intra-organizational governance, however, has suggested that structural separation (Adler et al., 1999; Burns & Stalker, 1961; Drucker, 1985; Lawrence & Lorsch, 1967; McDonough & Leifer, 1983) balanced against integrated action to maintain efficiency (Gibson & Birkinshaw, 2004) represents a purposeful response to conflicting governance requirements. Inspired by this notion, we developed a framework where integration and isolation represent an inter-organizational analogy specifically addressing the governance challenge of simultaneously managing appropriation concerns and coordination costs. We make several contributions to the literature on inter-organizational governance.

     First, to the extent that it has been concerned with relational complexity, prior research suggests integration as a response to coordination needs (Power, 2005). We add to this our own findings that integration may serve as a governance strategy for managing appropriation concerns and that appropriation concerns as well as coordination costs can be managed through isolation. The governance conflict between appropriation concerns and coordination costs can also be addressed by isolating some activities, transactions and categories while simultaneously integrating others. Isolation entails separating activities, transactions, and categories to enable organizations to employ, for example, intrusive monitoring governance mechanisms in some areas while maintaining a trust-based atmosphere in other arenas, such as when an organization wishes to protect joint engineering work from market-based price negotiations. Integration, conversely, involves linking activities, transactions, and categories. A central purpose of integration may be to generate positive effects—for example from trust-oriented governance—across activities, transactions, and categories to enable experiential trust-building (Johanson & Mattsson, 1987; Lambe et al., 2001; Morgan & Hunt, 1994) that complements formal governance mechanisms (Gulati & Singh, 1998; Meyer, 2011). Our findings also suggest that integration may provide a strategy for managing appropriation concerns by leveraging power across categories, transactions and activities, ex-ante as well as ex-post contracting.