Making Sense of Formalization in Interorganizational Relationships: Beyond Coordination and Control

Paul W.L. Vlaar (Obdam, January 4, 1978) obtained his M.Sc. degree in Economics (Cum Laude) from Wageningen University, The Netherlands. He is currently an assistant professor of strategic management at RSM Erasmus University. His research interests include interorganizational cooperation, crossdisciplinary initiatives focusing on organizational structuring and design processes, new business development, and strategic change. His research has been published or is forthcoming in the European Management Journal, several edited books by Elsevier and Palgrave, and the Maandblad voor Accountancy en Bedrijfskunde (Dutch). He currently serves as an ad-hoc reviewer for the Strategic Management Journal and he has presented his research at major international conferences, such as those of the Academy of Management and the Strategic Management Society.Strategic alliances, buyer-supplier relationships, joint ventures and other forms of interorganizational cooperation are of increasing importance for the competitive advantage of organizations. Formalization – in the form of contracts, rules and procedures – is considered to be a crucial factor for these relationships. Nevertheless, an integrative framework of its role in interorganizational relationships has hitherto remained absent in the literature. Drawing on conceptual developments, an in-depth case study and survey data, this study provides such an integrative framework. Six main research findings emerge. First, tensions between the need and the ability to formalize can be reduced by investing in information processing and sensemaking. Second, formalization has functions beyond coordination and control, such as increasing legitimacy and enabling sensemaking. Third, managers are not only occupied with the “right” degree of formalization, but also with managing tensions between the functions and dysfunctions of formalization. Fourth, when formalization is accompanied by standardization, its contribution to interorganizational performance declines, due to lower degrees of “mindfulness” by contracting parties. Fifth, interorganizational performance is highly dependent upon the levels of formalization and trust at the start of relationships, with intermediary levels of both governance forms exhibiting more positive effects than extreme levels. Finally, formalization is substituted and complemented by other governance mechanisms, requiring partners to consider portfolios of mechanisms when deciding on formalization. These findings and the integral framework to which they are connected suggests that researchers and practitioners should regard formalization from multiple disciplines, theories and perspectives. They enrich their understanding of its role in interorganizational relationships, and enable them to utilize formalization so that it contributes to performance.Strategische allianties, klant-leverancier relaties, joint ventures en andere vormen van interorganisatorische samenwerking zijn van toenemend belang voor het concurrentievermogen van ondernemingen. Formalisering – in de vorm van contracten, regels en procedures – wordt beschouwd als een cruciale factor voor het slagen van dergelijke relaties. Desondanks bestaat er in de literatuur tot op heden geen integraal raamwerk dat de rol van formalisering in interorganisatorische relaties beschrijft. Op basis van conceptuele ontwikkelingen, een case studie en enquêtes, voorziet deze studie in een dergelijk raamwerk. De studie leidt tot zes kernbevindingen. Ten eerste kunnen spanningen tussen de behoefte en de mogelijkheid tot formalisering worden gereduceerd door te investeren in informatieverwerking en zingeving. Ten tweede functioneert formalisering niet alleen als middel om coördinatie en beheersing te bewerkstelligen, maar ook als een mechanisme ten behoeve van legitimatie en zingeving. Ten derde zijn managers niet alleen gericht op de “juiste” mate van formalisering, maar ook op het managen van de spanningen tussen de functies en disfuncties van formalisering. Ten vierde wordt de functionaliteit van formalisering in interorganisatorische relaties sterk gereduceerd door het gebruik van standaardprocedures voor onderhandelings- en contracteringsprocessen, omdat dit een lagere mate van “mindfulness” van contractpartijen met zich meebrengt. Ten vijfde zijn interorganisatorische prestaties sterk afhankelijk van initiële niveaus van formalisering en vertrouwen, waarbij intermediaire niveaus van beide beheersingsvormen een positievere invloed hebben op interorganisatorische prestaties dan extreme niveaus. Ten slotte blijkt dat formalisering wordt gesubstitueerd en gecomplementeerd door andere mechanismen. Deze bevindingen en het integrale raamwerk waaraan ze zijn verbonden, geven aan dat onderzoekers en managers formalisering vanuit meerdere disciplines, theorieën en perspectieven dienen te beschouwen. Ze verrijken ons begrip van de rol die formalisering inneemt in interorganisatorische relaties en zorgen ervoor dat formalisering zo wordt ingezet dat het bijdraagt aan interorganisatorische prestaties

Coping with Problems of Understanding in Interorganizational Relationships: Using Formalization as a Means to make Sense

Research into the management of interorganizational relationships has hitherto primarily focused on problems of coordination, control and to a lesser extent, legitimacy. In this article, we assert that partners cooperating in such relationships are also confronted with ‘problems of understanding’. Such problems arise from differences between partners in terms of culture, experience, structure and industry, and from the uncertainty and ambiguity that participants in interorganizational relationships experience in early stages of collaboration. Building on Karl Weick’s theory of sensemaking, we advance that participants in interorganizational relationships use formalization as a means to make sense of their partners, the interorganizational relationships in which they are engaged and the contexts in which these are embedded so as to diminish problems of understanding. We offer a systematic overview of the mechanisms through which formalization facilitates sensemaking, including: (1) focusing participants’ attention; (2) provoking articulation, deliberation and reflection; (3) instigating and maintaining interaction; and (4) reducing judgment errors and individual biases, and diminishing incompleteness and inconsistency of cognitive representations. In this way, the article contributes to a better understanding of the relationships between formalization and sensemaking in collaborative relationships, and it carries Karl Weick’s thinking on the relationship between sensemaking and organizing forward in the context of interorganizational management

Required IT-Related Capabilities For The Utilization of New Opportunities in Creating Interorganizational Competitive Advantage

Developments in information technology (IT) are perceived to promote interorganizational cooperation within and across industry boundaries. IT-enabled cooperation has challenged the creation of interorganizational competitive advantages, as conceptualized in the Relational View (e.g., Dyer and Singh, 1998). The relationship between IT and the conversion of inter-firm value-creating opportunities into interorganizational competitive advantage is still unclear. In this paper, we have developed a conceptual framework regarding the relationship between IT and interorganizational resource complementarity, which is an important determinant of interorganizational competitive advantage. Our analysis suggests that cooperating organizations need to develop three distinctive but interrelated capabilities in order to effectuate interorganizational resource complementarity with regard to IT. We propose that these capabilities form a pre-condition for achieving interorganizational competitive advantage by means of IT-enabled interorganizational relationships. Preliminary support for our framework and proposition is provided by a case study of an interorganizational relationship between a large European financial services firm and a major European telecommunication firm

On the Evolution of Trust, Distrust, and Formal Coordination and Control in Interorganizational Relationships: Towards an Integrative Framework

In this article, we discuss the evolution of trust, distrust, and formal coordination and control in interorganizational relationships. We suggest that the degrees to which managers trust and distrust their partners during initial stages of cooperation leave strong imprints on the development of these relationships in later stages of collaboration. This derives from the impact of trust and distrust on: (1) formal coordination and control; (2) interorganizational performance; and (3) the interpretations that managers attribute to the behavior of their partners. Collectively, our arguments give rise to a conceptual framework, which indicates that there is a high propensity for interorganizational relationships to develop along vicious or virtuous cycles. By integrating and reconciling previous work on the trust-control nexus, and by emphasizing the dynamics associated with it, the article contributes to a more comprehensive and refined understanding of the evolution of interorganizational cooperation

Towards a Dialectic Perspective on Formalization in Interorganizational Relationships: How Alliance Managers Capitalize on the Duality Inherent in Contracts, Rules, and Procedures.

The mainstream literature on contracts, rules and procedures presumes that formalization is directed at coordination and control, and that its influence on performance is contingent upon firm, transaction and contextual characteristics. In response to recent calls for inquiries into dialectics in interorganizational relationships, and in an effort to provide managerial choice with a more prominent position in research on formalization, a complementary perspective is here being developed. We propose a framework in which formalization is presented as a duality, involving trade-offs between its functions and dysfunctions, and eventuating in dialectic tensions with which managers have to cope. In line with this, we argue that researchers should not only be preoccupied with assessing the 'rightness' of governance solutions, but also with the trade-offs and tensions associated with them. Our framework is illustrated by a case study of an alliance between a major European financial services firm and one of the world's leading retailers. The alliance managers in this particular relationship attempted to reduce or capitalize on the tensions associated with formalization by: (1) adopting a semi-structure, in which outcomes were formalized, but behaviour was not; (2) justifying formalization through referring to factors that were beyond their control, and; (3) alternating their emphasis on different requirements by each of the partner firms. The article shows that a dialectic perspective on formalization in interorganizational relationships offers a promising complement to the mainstream literature. Copyright © 2007 SAGE Publications