Management control of interrim transactional relationships

Description
This paper is focused on the way in which inter®rm relations can be drawn up and controlled. Drawing on con-
tracting theories a model is built of the management control structure of inter®rm relationships. The model consists of
three control patterns and of contingency factors that in¯uence the choices between the patterns. Particular attention is
paid to the role of trust. In building our model we take the perspective of the outsourcer. We try to re®ne our model by
conducting case research in the ®eld of industrial renovation and industrial maintenance. In this ®eld we observed
changes in the way outsourcing relationships are controlled. Case research can be very helpful for gaining insights into
factors that in¯uence the establishment of control structures of inter®rm relationships. By comparing the results of our
case research we found institutional, strategic, cultural and historical factors to be of great importance for these control
structure

Management control of inter®rm transactional relationships:
the case of industrial renovation and maintenance
Jeltje van der Meer-Kooistra
a,
*, Ed G.J. Vosselman
b,1
a
Faculty of Management and Organization, University of Groningen, PO Box 800, 9700 AV Groningen, The Netherlands
b
Faculty of Economics, Erasmus University Rotterdam, Burgemeester Oudlaan 50, 3062 PA Rotterdam, The Netherlands
Abstract
This paper is focused on the way in which inter®rm relations can be drawn up and controlled. Drawing on con-
tracting theories a model is built of the management control structure of inter®rm relationships. The model consists of
three control patterns and of contingency factors that in¯uence the choices between the patterns. Particular attention is
paid to the role of trust. In building our model we take the perspective of the outsourcer. We try to re®ne our model by
conducting case research in the ®eld of industrial renovation and industrial maintenance. In this ®eld we observed
changes in the way outsourcing relationships are controlled. Case research can be very helpful for gaining insights into
factors that in¯uence the establishment of control structures of inter®rm relationships. By comparing the results of our
case research we found institutional, strategic, cultural and historical factors to be of great importance for these control
structures. # 1999 Elsevier Science Ltd. All rights reserved.
The boundaries of ®rms are continuously sub-
ject to changes. Firms add new activities, hive o?
existing activities and set up new forms of coop-
eration with other ®rms. The concentration on
core activities is a tendency that already started
several years ago. Non-core activities are hived
o?, so that the ®rm can concentrate on the activ-
ities which it can perform well and which can thus
produce the highest added value. Insight into
which activities belong to the non-core activities is
subject to changes too. We observe that conglom-
erates with a great variety of products hive o?
complete product lines, but we also ®nd that ®rms,
although they do not change their product mix,
leave the production of components to other
®rms. We can also observe that ®rms outsource
the provision of supporting services even more.
Even services which are essential for the continuity
of the ®rm, such as administration, information
technology and maintenance. When the out-
sourcing concerns essential components and ser-
vices we observe the setting up of close forms of
cooperation between ®rms. Hiving o? essential
components and services requires a speci®c
embeddedness of the outsourcing relation in order
to guarantee its continuity and to retain the eco-
nomic advantages of outsourcing in the long run.
This makes demands on the macro as well as
micro level. On the macro level these develop-
ments must be supported by legal and institutional
0361-3682/99/$ - see front matter # 1999 Elsevier Science Ltd. All rights reserved.
PI I : S0361- 3682( 99) 00021- 5
Accounting, Organizations and Society 25 (2000) 51±77
www.elsevier.com/locate/aos
* Corresponding author. Tel.: +31-503-633-829; fax: +31-
503-637-356.
E-mail addresses: [email protected] (J. van
der Meer-Kooistra), [email protected] (E.G.J. Vosselman)
1
Tel.: +31-104-081-334; fax: +31-104-526-280
frameworks (such as contract law and the attitude
of branch organisations and the trade unions). On
the micro level they make demands on the orga-
nisation of the ®rm's own activities, the coordina-
tion with the suppliers and the employees'
willingness to work closely together with people
from outside their own ®rm. The structuring and
control of inter®rm relations require the establish-
ment of suitable management control systems and
processes. This study is in particular aimed at the
demands outsourcing relations make on the micro
level. The question is: how can ®rms which enter
into strategic alliances with other ®rms structure the
management control of such inter®rmrelationships?
Management control and management
accounting research usually concentrates on rela-
tions within organisations with varying degrees of
decentralisation of decision making. Robert
Anthony's (1965, 1988) well-known framework in
which the decomposition of the organisation into
responsibility centers is paramount, is the implicit
or explicit point of departure for a lot of formal
behavioural and contingency research in manage-
ment control. In numerous organisations a hor-
izontalisation of management control relations
can be observed. These control relations are not
hierarchically based but are relations between
equal internal parties. Customer-supplier relation
systems are being set up with forms of internal
contracting (service level agreements), e.g. with
respect to facility services (Van der Meer-Kooistra,
1994; Vosselman, 1996). There used to be captive
buyers and sellers, but now it is no longer excep-
tional for departments to be allowed to deliver or to
buy on external markets within rather ¯exible limits.
Otley (1994) too observes such a horizontalisation
and proposes a broader management control fra-
mework. Research into horizontal management
control relations should not remain restricted to
intra®rm relations, but be extended to inter®rm
relations. Recently Hopwood urged ``(the) exam-
ination of some of the accounting and informational
consequences of more explicit concerns with the
management of the supply chain and a more con-
scious questioning of what activities reside within and
without the enterprise'' (Hopwood, 1996, p. 590).
In the relevant literature little attention is given
to management control issues with regard to
forms of cooperation between independent com-
panies (inter®rm relations). It is in particular the
strategic cost management literature (Cooper,
1995; Shank & Govindarajan, 1993) which draws
attention to the importance of looking beyond
the boundaries of the ®rm. These publications
emphasise the value chain approach, which not
only focuses on the relations between the various
subsequent activities within the ®rm but also on
the ®rm's relations with the suppliers of raw
materials, components etc. and the buyers. Berry
(1995) also focuses on extra-organisational control
problems, in particular control in network orga-
nisations. According to Gietzmann (1996) the role
of the management accountant is changing due to
control beyond the boundaries of the concern.
When deciding on what should or should not be
contracted out this role is much more complex
than just calculating the production costs and
comparing them with the market price. Make or
buy decisions are becoming more and more of a
strategic nature (see e.g. Tayles & Drury, 1997).
``The management accountant should play a cri-
tical support role in the strategy debate concerning
which elements (subcomponents) of product
development can be outsourced, which should be
developed in house and which do not warrant
development since o? the shelf subcomponents
suce'' (Gietzmann, p. 624). Therefore the man-
agement accountant needs not only information
about the production costs and market prices but he
also needs information about the costs and bene®ts
of the speci®c forms of governance connected with
these choices.
Nowadays many make or buy decisions have
evolved into what could be called `extended make
or buy' decisions. An extended make or buy deci-
sion can be divided into three separate, but inter-
related elements. Firstly, the decision to purchase
goods or services on a structural basis from third
parties or to produce the goods or services in-
house. Secondly, in the case of purchasing from
third parties, the decision regarding the party
or parties contracted. The nature of the party or
parties in¯uences the chance, and extent, of
relational risks. Thirdly, decisions regarding the
design of the internal management control system
or the design of the outsourcing relationship. In
52 J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77
fact, in the latter case there is also a management
control relationship, involving more than one
company. Due to bounded rationality, it can be
expected that management accountants and other
decision makers cannot possess all the information
required for making an optimal decision at the
initial decision moment. Many decisions about the
design of inter®rm management control relation-
ships will most likely be made after the ®rst deci-
sion of outsourcing activities has been made. In this
paper we in particular address the second and third
elements of the extended make or buy decision.
Up to now empirical research into inter®rm
relationships has especially centred on sectors like
the automobile industry and consumer electronics.
This paper, however, will focus on service rela-
tions, in particular on the way in which long-term
inter®rm relations between companies with regard
to industrial renovation and maintenance can be
set up and controlled. From recent publications
(cf. i.a. Van den Hoogen & Sjamaar, 1997) it
appears that outsourcing parties and suppliers of
industrial maintenance in the Netherlands are
giving much thought to problems of outsourcing
and the setting up of partnerships and outsourcing
relationships. Partnerships and contract forms are
in a state of ¯ux. An interesting aspect of indus-
trial maintenance is that it is often strongly related
to the primary process of industrial enterprises.
Therefore, continuity in the service relation is very
important. We observe new forms of outsourcing
maintenance activities within which not only the
activities are being outsourced but also the man-
agement and coordination of the maintenance
activities. These new forms require that people
from the supplying and buying ®rm operate as one
group, and that they use the expertise of all people
involved in an integrated manner. In addition, it is
important that the supplying ®rm should be will-
ing to help solve the problems of the outsourcing
®rm and to take initiatives in the interest of this
®rm. These new forms of outsourcing relations
may pose a threat, because they may have con-
sequences for the employment situation in the
outsourcing ®rm, and may lead to discussions
about wages and other labour conditions due to
usually worse conditions in the supplying ®rms.
They may also in¯uence people's positions in the
outsourcing ®rm. Due to these consequences it is
very important to think about how to set up
inter®rm relations, with which partner(s), within
which contractual framework, about how to
coordinate the relationship, and which manage-
ment control mechanisms and processes can be
used for supporting planning, measuring and
assessing the activities and its results.
In this paper we investigate how inter®rm rela-
tionships can be controlled. We build a model of
the management control structure of inter®rm
relationships and indicate which factors in¯uence
the choice of the management control structure.
This model describes how contractual relation-
ships can be established between the outsourcing
party and the supplier, and how the parties can
cooperate with each other and handle the risks
connected with the contracting out of certain
activities. We will use theory, in particular trans-
action cost theory and trust based approaches,
when referring to factors which are relevant for
the drawing up of management control structures.
First, taking the outsourcing party's point of view
we will argue that choices in the structuring of
inter®rm outsourcing relationships are part of a
so-called extended make or buy decision (Section
1). In this section we will also discuss the out-
sourcing decision against the background of the
transaction cost theory. We investigate which fac-
tors according to transaction cost reasoning are
relevant to modelling inter®rm relationships. In
the next section (Section 2) we will focus on the
role of trust for the extended make or buy deci-
sion. We try to understand what trust means dur-
ing the drafting of contracts between independent
parties wishing to cooperate closely and for the
processes of cooperation. Next, in Section 3, we
will build a model concerning the structuring of
management control systems of outsourcing rela-
tionships drawing on factors described in the pre-
vious sections which are derived from concepts of
the transaction cost theory and the notion of trust.
In Section 4 we will describe our case research
design and will present a general description of
developments in the outsourcing of industrial
maintenance in the Netherlands in order to give a
more thorough justi®cation of our choice to per-
form case studies in the branch of industrial
J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77 53
maintenance. In Section 5 we will describe the
results of two case studies into the structuring of
the management control of an inter®rm relation-
ship with regard to outsourcing renovation and
maintenance activities: a contract for renovation
and maintenance at NAM, a Dutch gas and oil
exploration company, and a maintenance contract
at Shell Research and Technology Centre
Amsterdam. In Section 6 we will investigate the
implications of our case studies for our theoretical
model. Finally, in Section 7, we will evaluate the
results of the study and present recommendations
for further research.
Our model is the starting point in a process of
theoretical development in the area of manage-
ment control of inter®rm relationships by means
of case studies. It is important to stress that our
research is not an illustration or a test of transac-
tion cost economics or of trust based approaches.
Nor do we want to test whether one theory (for
instance transaction cost economics) is superior to
another theory (for instance a trust based
approach). Instead, what we are aiming at is the
development of accounting and control theory.
Humphrey and Scapens (1996) observe that the
usual approach in case-study accounting research
is indeed the other way round and that this had
led to a situation ``where theory, or, more appro-
priately, theoretical development, seems largely
to lie outside the world of academic accounting''
(p. 91). By conducting case studies, we will try to
re®ne our initial model. In fact, in doing so we are
working on a process of ``theoretical general-
ization'' (Yin, 1989). We do not claim that we are
developing a theory that is universally true. In our
view, each theoretical model has to be open to
re®nement or, ultimately, rejection. The need for
re®nement of the model can come from the
academic community where rhetorics plays an
important role (Arrington & Schweiker, 1992), but
also from the interaction between academics and
practitioners. Theoretical models can stimulate
practitioners such as managers, controllers and
management accountants to change their beha-
viour, with as a consequence that the model has to
be modi®ed. So by nature accounting theories
seem to be changing through time (Humphrey &
Scapens, 1996).
1. The extended make or buy decision from a
transaction cost economic perspective
Decisions about the structuring of inter®rm
management control systems concern three phases
of a transactional relation: a contact phase, a
contract phase and an execution phase. In the
contact phase control has to support the search
activities for a suitable partner. Drawing up the
contract has priority in the contract phase. In the
contract inter alia the management control struc-
ture and processes are described: parties' authority
and responsibility, the gathering and supplying of
information, evaluation of the activities, payment
structure, etc. The contract in¯uence how the par-
ties will cooperate in the execution phase. In this
phase the transactions take place and the parties
will control whether the activities and output are
in accordance with the contractual rules. The par-
ties also have to react to changes in circumstances
due to which activities may be changed.
Which are the most important factors deter-
mining the structure and control of inter®rm rela-
tionships during the three phases of such a
relation? In this section we will focus on transac-
tion cost economics, because this theory looks at
governance structures which are suitable for con-
trolling transactions. Transaction cost economics
is a reaction to neo-classical economic theory. In
this theory the company is exclusively viewed as a
production function, squeezed in between mar-
kets. Costs are interpreted economically as
opportunity costs: gains missed due to not choos-
ing the best among the non-chosen alternatives. In
investigating the make or buy decision neo-classi-
cal economics uses a highly restrictive model of
interaction between organisations (Gietzmann,
1996). The basic assumption is that the decision is
based on a comparison of the production costs of
the make alternative and the purchasing costs of
the buy alternative, where these purchasing costs
are related to the production costs of the supply-
ing company. In neo-classical economics a full
transparency of present and future market condi-
tions is assumed. There is, in principle, standardi-
sation: the products and the services have, in the
opinion of the buyers, more or less the same
quality. Factors like delivery times and reliability
54 J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77
play no or hardly any role. All information can be
found in the price. In the neo-classical view dis-
tinguishing three phases in a transactional relation
is not relevant, because the price gives all the
information needed during the period of the rela-
tion. Terminating the relation has no con-
sequences, because a new relation can be started at
any moment and on the same conditions.
In reality, this is hardly ever the case. The buy
alternative requires mutual coordination and may
entail dependency. The cooperating companies
run the risk of one of the parties behaving oppor-
tunistically. Such behaviour may in particular
have adverse e?ects when the parties have made
speci®c investments for the sake of the relation-
ship. Such investments may have no or hardly any
value outside the relationship. The outsourcing
party also runs the risk of the maintenance com-
pany performing poorly due to the lack of certain
skills. Even when jobs are contracted out the out-
sourcing party will have to pay attention to
mutual coordination and control of the activities
and the expenses involved. Weighing the pros and
cons of outsourcing is therefore only one part of
the estimation of the costs connected with carrying
out the activities in-house and the costs incurred in
case of outsourcing. The latter costs comprise,
apart from the sums charged for the supplied
maintenance services, also the coordination and
control costs and costs connected with the risk of
opportunistic behaviour and poor performance.
Strategic considerations, such as access to speci®c
raw materials, components, knowledge, etc., or
striving for increasing ¯exibility, or exchanging
skills, may also play a role in decisions whether or
not to outsource.
The outsourcing ®rm also has to pay attention
to consequences for internal labour relations.
Outsourcing activities may cause changes in peo-
ple's positions and in the number of jobs. When
outsourcing implies the cancellation of jobs,
employees can be dissatis®ed with the internal
labour relations. This can cause demotivation and
even strikes which means that the labour relations
will be in¯uenced negatively for a long period.
It is especially transaction cost theory (William-
son, 1979, 1981, 1985, 1986, 1996) which takes the
above mentioned factors into consideration.
Transactions that involve speci®c investments,
that are subject to uncertainty, and that recur at
set times, run a high risk of one of the parties
behaving opportunistically during the completion
of the transactions. In such a situation the parties
are closely related to each other. Although at the
outset there was a situation of competitive bid-
ding, in the course of time the relation has been
changed into a bilateral monopoly, in which (one
of) the parties face(s) high switching costs when
ending the relation. For example, when a con-
tractor has invested in speci®c assets the out-
sourcing party can take advantage of this situation
by forcing a price reduction. As the contractor
cannot use the speci®c investments in another
direction or only at a much lower value, he has to
accept the price reduction. The chance of oppor-
tunistic behaviour can be reduced by placing the
transactions in a hierarchy. Another possibility is
completing the transactions through the market
but reducing transaction risks by means of special
agreements, for example by jointly investing in
speci®c assets, exchanging hostages or linking the
reward of the other party to the results of the
transactions. In short, the transaction cost theory
assumes that transactions can be completed by
means of markets, hierarchies or hybrid govern-
ance forms. The hybrid governance forms require
speci®c contractual agreements based on neo-
classical contract law (Macneil, 1974), because this
is a better guarantee for continuity and supports
ecient adaptation in the course of time. The
choice of the governance structure depends on the
character of the speci®c transactional relation. By
choosing the most suitable governance structure
the ®rm can save on transaction costs.
Transaction costs may decrease in the course of
time due to investments in information technol-
ogy. As early as 1974 Arrow drew attention to the
investment character of some transaction costs, in
particular the costs of gathering and generating
information (Arrow, 1974). Transaction costs may
therefore consist of two elements: an element of
capital investment, and an element of current costs
(Arrow). The readiness of parties to invest in trans-
action costs depends to some extent on the like-
lihood that in the future `gains' will be generated by
the investment.
J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77 55
Thus, according to transaction cost theory the
extended make or buy decision should be made by
comparing the sum of production and transaction
costs of the hierarchy as governance structure or
those of a speci®c contractual agreement as gov-
ernance structure. In case of a speci®c contractual
agreement, transaction cost economics shows that
there are three elements which determine the fea-
tures of the outsourcing relationship and the con-
trol of the relation. These elements are: (1) the
transaction, (2) the transaction environment, and
(3) the parties. Being able to indicate which char-
acteristics of these three elements in¯uence in par-
ticular the design and function of the inter®rm
relationship improves our understanding of the
changes in the cooperation processes. Transaction
cost economics also shows that we have to look at
all the three phases of a transactional relation and
that we have to be aware of the transaction cost
consequences of the control devices that are put in
place in these phases. The factors that in¯uence the
size of the transaction costs concern all the three
elements: transaction, transaction environment, and
parties. Because transaction cost reasoning is based
on the assumption that, in general, human beings
are characterised by bounded rationality and
opportunism, transactions that require speci®c
investments provide for speci®c arrangements in
order to safeguard long-term relations, especially
when the transaction environment is uncertain,
due to which changes in circumstances in the
future are unforeseeable. Frequent changes in
technology, regular introduction of new or
renewed products, and tough competition make
the environment in which parties contract with
each other very uncertain. The type of asset
speci®city also matters, because depending on
the speci®c type di?erent measures can be taken
to mitigate opportunistic behaviour (Armour &
Teece, 1980; Lundgren, 1990; Monteverde &
Teece, 1982; Palay, 1984).
In addition to these factors transaction cost
reasoning stresses the signi®cance of institutional
arrangements on the macro level that de®ne the
boundaries within which governance structures
must be designed. Legal rules, policies of (inter)-
national and local governments, regulations set up
by national organisations, such as trade unions
and branch organisations, in¯uence the options
parties have for establishing inter®rm relationships.
The choice of the governance structure will be
in¯uenced by a certain 'atmosphere' around
transactions. The social context in which transac-
tions are embedded in¯uences the relationship and
the parties' behaviour (Granovetter, 1985). The
social embeddedness of the transactions can
reduce the chance of opportunism. Social
embeddedness will also in¯uence the design of
inter®rm control relationships. Williamson (1993)
holds that transaction cost economics is able to
cope with social embeddedness. Societal devices,
just like other devices such as communication sys-
tems, legal rules and regulations set up by national
organisations, such as trade unions and branch
organisations, are valued because they have the
potential to economise on transaction costs. So,
social embeddedness is part of the institutional
environment of the transactions, in¯uencing the
choices of 'institutions of governance': markets,
hierarchies or hybrids. By treating social embedd-
edness as an environmental factor Williamson
denies the possibility of using trust as a means to
reduce opportunism. Trust is a variable which can
be brought into action in a transactional relation
and which can be strengthened by the parties by
taking the right actions.
There are other theories that stress the impor-
tance of the social embeddedness factor. In these
theories much attention is given to the role of
trust. In the next section we will go further into the
meaning of trust for structuring the management
control of inter®rm relationships.
2. The structuring of inter®rm relationships and
the notion of trust
Various researchers, e.g. Zaheer and Venkatra-
man (1995), Chiles and McMackin (1996), Noote-
boom, Berger and Noorderhaven (1997),
demonstrate that trust play a role in cooperation
and that coercion, incentives and trust are relevant
aspects of governance. The presence of trust
between cooperating parties is especially impor-
tant in situations characterised by uncertainty and
strong dependencies between the parties owing to
56 J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77
speci®c investments. In such situations compre-
hensive contracts cannot be written and will in the
course of time require changes and revisions of the
agreements. In the case of trust between the par-
ties they will at the drafting stage of the contract
assume that such revisions will be made to the
satisfaction of all parties. It is easier for these parties
to come to agreements. Zaheer and Venkatraman's
(1995) studies support the claims of Macneil (1980)
and Granovetter (1985), inter alia, ``that there exists
a signi®cant social component in exchange relation-
ships which may be masked or missed in economic
explanations of exchange'' (p. 389).
Chiles and McMackin (1996) argue that when
there is trust in a transactional relation the parties
will make a lower estimation of the risk connected
with providing incorrect or incomplete informa-
tion, which decreases the need for an elaborate
contract and the cost of drafting one. Chiles and
McMackin claim that ``trust and risk are mutually
interdependent'' (p. 75), where managers see risk
as the possibility of loss. Depending on the cir-
cumstances and the objectives the managers wish
to achieve, the risk attitude of managers may vary
from risk aversion through risk neutrality to risk
seeking (March & Shapira, 1987). Chiles and
McMackin assert that managers with a risk seek-
ing attitude choose the market as governance
structure even when asset speci®city is relatively
high. This in contrast to risk neutral and risk
averse managers.
Trust may stem from previous contractual rela-
tionships between the parties or it may grow dur-
ing a certain transactional relationship. In the
latter case, trust may arise through the parties in a
relationship being able to boast a common system
of values and norms, as well as owing to the exis-
tence or growth of ties of friendship between the
parties (Gulati, 1995). The network approach
throws light on processes of trust creation. Trust is
seen as an important variable for the explanation
of the origin and growth of networks of organisa-
tions. Networks of organisations can be seen as a
competitive strategy. By joining networks enter-
prises gain access to essential resources, enabling
them to have more control over their activities
(Easton, 1989; HaÊ kansson & Johanson, 1988,
Johanson & Mattson, 1987). Through repeated
transactions between the actors in a network there
arises a technical, procedural and social order
between the actors. Transactions lead to mutual
adaptation, which in its turn leads to investment
in the relationship. Trust arises through learning
and adaptation processes. These processes are
necessary because they (a) strengthen the relations
between the parties (adaptations make the parties
mutually more dependent), (b) make the relation
more durable (the parties learn how to handle
possible con¯icts), (c) indicate that there is some
room for change in the relation, and (d) activate
interaction between the parties so that knowledge
is exchanged about each other and consideration
for each other's interests is promoted (Johanson &
Mattson, 1987, p. 39).
Sako (1992) makes a distinction between three
types of trust: contractual trust, competence trust
and goodwill trust. Contractual trust is based on
moral standards of honesty and ``keeping your
word''. It rests on the expectation that the other
party will fully honour the agreements, whether
put down in writing or not. Contractual trust is
greater as people rely more on oral agreements.
The moral standards are inculcated in individuals
through socialisation and education. They contain
the minimum amount of trust (laid down in ethical
codes) needed for a society to function, and form
the precontractual basis of contracts (Durkheim,
1947). A total reliance on legal sanctions implies
zero contractual trust, which would mean that no
oral or written contracts would be concluded.
Contractual trust is embedded in transactions. In
our view, it is this kind of trust Neu is especially
referring to when he claims that ``in less than perfect
markets, trust must exist prior to contracting''
(Neu, 1991, p. 245). Furthermore, the more con-
tractual trust, the less information the outsourcer
wishes to gather for purposes of preventing or
reducing opportunistic behaviour.
In the case of competence trust there is the
expectation that the seller has the necessary tech-
nical and management competences at his dis-
posal. Sometimes the buyer has the same
competences, and sometimes not. Competence
trust is greater according as there is less ex post
inspection by the buyer of the goods or services
supplied, for instance as a result of e?ective quality
J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77 57
guarantees in the past. Competence trust may be
acquired by purchasing existing competences or by
investing in their development. In the latter case
the outsourcing party is for example actively
involved in the development of a product or ser-
vice, or there is `transfer' of technology to the
supplier. Competence trust can be found in the
institutional environment of a transactional rela-
tionship. Parties can improve their market posi-
tion by certi®cation of their products or services or
by educational degrees. Furthermore, they can in
the course of time develop a reputation by executing
transactions in a trustworthy manner. But compe-
tence trust can also be gained during the relation-
ship, through investments by the contracting
parties.
Goodwill trust is based on the expectation that
parties have an open commitment to each other.
Commitment is the readiness to do more than is
formally expected. Open commitment is the
opposite of closed commitment. In the latter case
certain explicit categories of requests are complied
with, whereas in the former case other activities
are also carried out as well, if and when this is
expected to improve performance. In the case of
goodwill trust there are no explicit pledges that
have to be ful®lled (contractual trust) or pre-
determined professional standards that have to be
met (competence trust). Trusting behaviour con-
sists of activities increasing the vulnerability of the
person involved with respect to another person
whose actions he does not necessarily control
(Gambetta, 1988). Shared values and norms are a
necessary but not a sucient condition for devel-
oping goodwill trust (Sako, 1992, p. 44). What is
needed is a norm of open commitment and reci-
procity. The particular form of the relationship is
here characterised by an imbalance between obli-
gations ful®lled and rewards received. In other
words, parties should be prepared to be indebted
to each other. Direct reciprocations are not even
appreciated because they may be interpreted as a
cautious hint that one wishes to terminate the rela-
tionship. Bills are therefore not settled at regular
intervals. Goodwill trust can arise and can be devel-
oped in an established contractual relationship. It
will decrease the perceived need of the outsourcing
party for ex post information gathering.
It can be concluded from the discussion in this
section that trust is an important factor especially
in inter®rm relations which require close coopera-
tion between the parties. Close cooperation is
necessary where the transactions are specially geared
to the demands of the outsourcing party, due to
which switching costs are high and continuity of the
relation is important. In addition, when the trans-
action environment is uncertain, parties know that
in the course of the relation changes in the trans-
action conditions will occur. Parties want to know
before concluding the contract that the contract-
ing party is trustworthy, so that con¯icts can be
prevented when negotiations about contract
renewal are necessary. In the contact phase parties
will look at potential parties with a reputation of
trustworthy behaviour and that have the technical
and management competences to perform the
activities well. Information about trustworthy
behaviour can be acquired by looking at experi-
ences with present or previous cooperation with
other ®rms or with the outsourcing ®rm itself. It is
important to draw up a contract based on rules
and control mechanisms that further trustworthy
behaviour and an open commitment. Such a con-
tract creates an atmosphere in which goodwill
trust can grow during the execution phase.
3. Structuring inter®rm relationships: a model
3.1. Management control patterns of inter®rm
relationships
Using the insights from transaction cost eco-
nomics and the insights based on the notion of
trust we claim that from a management control
point of view inter®rm transactional relationships
can have di?erent patterns, within which di?erent
control mechanisms can be at work. In transaction
cost reasoning inter®rm transactional relations are
hybrid forms of governance. Within these forms
the transaction cost theory asserts that the control
devices can be based more on mechanisms going
with a market situation or on mechanisms used in
a hierarchy. The social approaches which empha-
sise that trust can play a central role in inter®rm
relations, add to these two patterns of control
58 J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77
devices a third pattern in which control devices are
used which ®t in a trust based relation. Thus,
depending on the characteristics of the inter®rm
transactional relationship we can distinguish three
patterns: (1) a market based pattern, (2) a
bureaucracy based pattern, and (3) a trust based
pattern. In the following we will describe these
patterns. In the next section we will link them to
the characteristics of the inter®rm transactional
relationship. In the market based pattern the
market mechanism is dominant. From the out-
sourcer's point of view, the contact phase of the
transactional relationship is characterised by
competitive bidding, because speci®c investments
are not required. Many parties are able to compete
for the contract. In the contract phase the parties
will not spend much e?ort on writing detailed
contracts. In such a situation all the market infor-
mation is in the price and the characteristics of the
parties do not in¯uence the relationship. The
market prices are directly linked to the output of
the supplier's activities. The execution phase could
involve periodical competitive bidding rounds,
where other market parties can make their bids,
thus disciplining the present supplier and stimu-
lating him to work e?ectively and eciently. The
control device which will be used by the outsourcing
party concerns regular measurement and evaluation
of the quantity and quality of the supplier's output
and the timeliness of delivery. The payment for the
supplier's e?orts is directly linked to these measure-
ments. Speci®c control instruments are not
required.
The bureaucracy based pattern is linked to a
bureaucratic mechanism that is dominant in a
hierarchy. Essential to this mechanism is the exis-
tence of speci®ed norms, standards and rules. Such
a mechanism is in particular based on a system of
surveillance, evaluation and direction and on a
well developed system of information processing.
In the contact phase speci®c potential suppliers
are selected according to speci®ed criteria. Next,
the potential suppliers make their o?ers within
prescribed procedures. Selection of the supplier(s)
takes place by means of speci®edcriteria inwhich the
competences of the supplying parties are included.
With regard to the contract phase, there is detailed
and substantive contract writing. Contingencies are
speci®ed and the consequences for the transaction
conditions are indicated in detail. The payment
will be based on realised output or activities. In
the execution phase the control instruments pro-
vide for frequent supervision, performance mea-
surement and evaluation, in which regular
information supply plays an important role. The
quantity and quality of the output or activities will
be measured regularly. Monitoring the perfor-
mance of the supplier's employees is part of the
control activities carried out by the outsourcing
party. The requirements for `ex post' information
processing are described precisely.
In the trust based pattern trust between the
contracting parties is the dominant control
mechanism. In the contact phase, therefore, sup-
pliers are selected on the basis of trust, stemming
either from ties of friendship, from previous con-
tractual relationships or from a reputation of
trustworthiness. There is no detailed contractual
writing in the contract, as the relationship is lar-
gely socially embedded. Contracts are framework
contracts, which will be worked out in more detail
in the course of time through personal consulta-
tion. Payment is not directly linked to activities or
output. Parties could choose lump sum payment.
Besides, there will be much sharing of risks
between the parties. The control mechanisms will
be processed oriented and culture based. Princi-
ples of fairness will dominate the relationship. In
the execution phase control devices are aimed at
the development of competence trust and goodwill
trust. It is important that parties establish an open
commitment to each other.
Our model is summarised in Table 1.
Of course, the three management control pat-
terns of inter®rm relationships are ideal types. In
practice, we would expect to ®nd elements of all
three patterns in contractual relationships. Never-
theless, we would expect one mechanism to be
dominant in a contractual relationship. Some
combinations seem to be possible, such as market
based devices in the contact phase and bureau-
cratic devices in the execution phase. Other com-
binations seem to be rare, such as trust based
devices in the contact phase combined with
strongly bureaucratic devices in the execution
phase. We will use our case research to obtain a
J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77 59
deeper insight into the structuring of inter®rm
relationships.
3.2. Management control patterns and contingency
factors
In this section we link the three management
control patterns with characteristics of the inter-
®rm transactional relationship. We claim that the
characteristics of the following elements of this
relationship are relevant for choosing the most
suitable management control pattern: (1) char-
acteristics of the transaction, (2) characteristics of
the transaction environment (market circum-
stances as well as the institutional environment),
and (3) characteristics of the transaction parties. In
the previous theoretical sections we have discussed
the characteristics the transaction cost theory and
the trust based approaches see as in¯uencing
inter®rm relationships. In Table 2 we sum up these
characteristics.
In which situation may we expect which man-
agement control pattern? The market based pat-
tern can be compared with the governance
structure market in transaction cost reasoning.
Thus, the contingency factors can be derived from
the transaction cost theory. The transaction cost
theory does not give enough points of departure
for discriminating between the other two patterns.
The transaction cost theory does not regard trust,
or in general a social mechanism, as an instrument
which can be deployed. This theory regards trust
at the most as a context variable. That is why we
can only derive from transaction cost reasoning
comparable contingency factors. Negatively for-
mulated, in both patterns it regards circumstances
within which a market mechanism will not be
e?ective. Based on the reasoning of the approa-
ches based on trust we can make di?erences
between the bureaucracy based and the trust based
pattern. We expect that a trust based pattern will
belong to more extreme scores on the contingency
factors, as a bureaucracy based pattern goes with
more moderate scores.
For reasons of clarity we will present ®rst the
two most extreme patterns: the market based pat-
tern and the trust based pattern. Next, we will
discuss the bureaucracy based pattern. We assume
that the transactional relation is for a long-term.
Which are the circumstances which leads to a
choice for a market based pattern? The transac-
tions are not characterised by investments in spe-
ci®c assets. That is why there are many suppliers
during all phases of the relation. The quantity and
quality of the output can be accurately described
and measured. In the case of a longer transaction
period the transactions are repetitive. The trans-
action environment is characterised by low uncer-
tainty about future circumstances. Even when
there are changes in the transaction environment
the outsourcing party can start all over again with
competitive bidding. If one of the parties behaves
opportunistically the other party can choose
another contracting party without high switching
Table 1
Management control patterns of inter®rm relationships
Market based pattern Bureaucracy based pattern Trust based pattern
Contact phase Competitive bidding Preselection of potential
suppliers; bidding procesures;
detailed selection criteria
Trust, stemming from friendship,
former contractual relationships
or reputation
Contract phase No detailed contracting;
payment based on
standardized activities or
output
Detailed and comprehensive
contracting; payment based
on real activites or output
International contracting;
framework contracts; contractual
trust; loose links between payment
and activities and output
Execution phase Periodical, ex post
competitive bidding
Supervision; performance
measurement and evaluation;
detailed ex post information
processing; direct intervention
Personal consultation and
coordination; development of
competence trust and goodwill
trust; process oriented and
culture based control mechanisms
60 J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77
costs, because the parties have not made speci®c
investments. In such a situation the institutional
environment is not very relevant. With regard to
the characteristics of the parties there is hardly
any information asymmetry between them. Repu-
tation and experience with cooperation in net-
works or with speci®c parties are not very
relevant. The parties are in the same negotiation
position and their risk attitude has no relevance
due to low uncertainty.
The transactions which will be controlled by a
trust based pattern are characterised by a high
degree of asset speci®city and high inter-
dependency between the parties. It will be neces-
sary for the supplying party to develop relation
speci®c skills. Zaheer and Venkatraman (1995)
speak in this connection of business process asset
speci®city, which incorporates components of
both human asset speci®city and procedural asset
speci®city. Human asset speci®city concerns
knowledge, skills and experience tailored to the
other party's needs. Procedural asset speci®city
has to do with the knowledge of and experience
with the work¯ows and processes of the other
party, which are invested in by means of training
and learning by doing. As the future contingencies
are uncertain and cannot be predicted the parties
are at each other's mercy. Switching costs are
high, so the continuity of the contracting relation
is of great value. The activities and output cannot
be measured accurately. A contractual relation
with these features must be ®rmly based on trust.
Knowledge about a cooperative attitude and
trustworthiness is required in advance in order to
be sure about the social embeddedness of the
relation. Without trust, especially competence and
goodwill trust, a contractual relation will not be
concluded. In this trust based pattern the control
instruments will be process oriented and will
mainly have an informal and culture-based char-
acter. The institutional environment can stimulate
competence and contractual trust, for example by
certifying ®rms' activities and products and by
legal rules. The parties are prepared to share risks.
Information asymmetry between the parties can
be overcome by developing goodwill trust. Reg-
ular personal contacts and an attitude of commit-
ment can stimulate this. When one of the parties
has more bargaining power, this power will not be
used in order to develop goodwill trust.
A bureaucracy based pattern can be expected as
the transactions are characterised by types of asset
speci®city which can be protected by contractual
rules. Frequency of the transactions is high. The
quantity and quality of the output or activities can
be measured according to rules written down in
the contract. The transaction environment is
characterised by more or less uncertainty; future
circumstances are more or less forseeable. Com-
petence trust and contractual trust are necessary
for such a relationship. The outsourcing party can
acquire information about the competences of
possible contracting parties. This bureaucracy
based pattern is strongly based on control instru-
ments which are more aimed at direct intervention
by the outsourcing party. The authority to inter-
vene directly will be partly based on the bargain-
ing power of the outsourcing party. The scope of
the control structures and processes depends to a
large extent on the nature of the activities to be
carried out and the nature of the investments to be
made by the parties. For example, when speci®c
investments in human knowledge are very impor-
tant for the quality of the work to be done a lot of
Table 2
Characteristics of the contingency factors
Characteristics of the transaction Characteristics of the transaction environment Characteristics of the transaction parties
Degree and type of asset speci®city Uncertainty about future contingencies Information asymmetry
Frequency and reputation Degree of market risks Reputation
Length of transaction period Institutional environment (rules, systems Experience with cooperation in
Measurability of activities and output and organisations networks or with speci®c parties
Risk attitude
Bargaining power
J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77 61
attention will be paid to the quality of the persons
deployed to carry out the activities. In this situa-
tion the parties must perceive high contractual and
competence trust. The control is in such cases
strongly focused on the knowledge and skills of
the supplier's personnel. In addition, the scope of
the control structures and processes will also be
determined by the quanti®ability of the activities
and its output. If the output is very hard to quan-
tify, the emphasis will rather be on the activities
and on the input of personnel and resources. Par-
ties will more likely have a risk averse attitude.
In Table 3 we give an overview of the manage-
ment control patterns and its contingency factors.
In the next section we will justify our choice to
confront our model with case research. First we
will justify the need for case research. Then we will
elaborate our reasons for performing case research
in the area of industrial renovation and main-
tenance. We describe the changes which are taking
place in the outsourcing relationships in the
Netherlands, in particular in the ®eld of industrial
maintenance. Next, we will describe the two cases:
NAM and Shell Research and Technology Centre
Amsterdam.
4. Case research in the area of industrial renovation
and maintenance: a justi®cation
4.1. Case research: research design
As we have seen the management control
aspects of outsourcing maintenance activities are
very complex. Till now the management control
literature has paid little attention to inter-
organisational relations and how ®rms could con-
trol these relations. According to Yin (1989) case
research is very suitable for the description and
explanation of complex phenomena within its real-
life context. Therefore, we have chosen the case
research method. Case research is a research
method which starts from a complex real-life con-
text, and embarks on research in this complex
reality on the basis of concepts and relations of
existing theoretical frameworks. In our study we
have derived the theoretical concepts especially
from transaction cost theory and the notion of
trust. We have structured our case research on the
basis of these concepts.
The research was carried out at two companies
that contract out maintenance. Both had a lot of
Table 3
Contingency factors and management control patterns
Contingency factors Market based pattern Bureaucracy based pattern Trust based pattern
Transaction
characterisics
Low asset speci®city;
high repetition; measurability
of activities and output; short
to medium term contract
Medium to high asset
speci®city which can be
protected by contractual
rules; low to medium repetition;
measurability of activities or
output based on contractual
rules; medium to long term contract
High asset speci®city;
low repetition; activities
or output cannot be measured
well; long term contract
Transaction
environment
characteristics
Many potential transaction
parties; market price contains
all the market information;
social embeddedness and
institutional factors are not
relevant
Future contingencies are more
or less known; medium to high
market risks; institutional factors
in¯uence the contractual rules
Future contingencies are
unknown; high market risks;
social embeddedness; institutional
factors in¯uence the relation
Party characteristics Not important, because there
are many parties with the same
characteristics due to which
switching costs are low
Competence reputation; medium
risk sharing attitude; asymmetry
in bargaining power
Competence reputation;
experience in networks;
experience with contracting
parties; risk sharing attitude;
no asymmetry in bargaining power
62 J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77
experience with contracting out activities. The
outsourcing relations we studied concern extensive
long-term projects. Moreover, at both companies
the outsourcing relations are of a di?erent nature
from the ones they had formerly entered into. The
major di?erences are: (a) the contracting out of
not only the maintenance activities but also the
management of the maintenance, and (b) the
granting of the contract to one party/consortium
standing for numerous other parties (sub-
contractors). We gathered our data through inter-
views and documents. The interviewees are
executives closely involved in all the three phases
of the outsourcing relation. They are members of
the project team which was involved in the design
of the outsourcing relation, in the choice of the
suppliers, in the drafting of the contract and in
supporting the execution of the contract. In our
study we interviewed both the outsourcing party
and the suppliers. The interviews lasted two to six
hours. The interviews were semi-structured. There
was enough room for explanations and discussing
other issues raised by the interviewees. The inter-
view reports were send to the interviewees for
comments. In order to be well-informed about the
developments and problems in the ®eld of out-
sourcing maintenance we also contacted various
maintenance suppliers and some advisers in this
®eld.
4.2. Case research in industrial maintenance: some
developments in the Netherlands
Due to the changes which are taking place in the
outsourcing of maintenance activities studying the
branch of industrial maintenance was quite sui-
table for our research purposes. Research has
shown that many Dutch industrial companies are
opting for maintenance outsourcing (Martin,
1997). Its volume is expected to double in the next
eight years (Van den Hoogen & Sjamaar, 1997),
involving not only short-term outsourcing due to
peaks in the demand for maintenance that cannot
be carried out by the available maintenance capa-
city, but more and more often maintenance out-
sourcing of a structural nature. Especially in the
nineties numerous companies, within the frame-
work of the discussion about concentrating on
core activities, have started to review their out-
sourcing strategies. The major reasons for the
management of industrial companies to contract
out their maintenance activities appear to be the
following (i.a. Martin, 1997):
. focusing on the core activities and the con-
tracting out of non-core activities
. the in-house maintenance activities take
place on such a modest scale that contracting
out leads to `economies of scale';
. external maintenance companies are often
able to perform maintenance services more
eciently than internal maintenance depart-
ments, since external companies feel the dis-
cipline of the market and internal
departments are shielded from the market;
. technological innovations, stricter safety
standards, etc., cause an increasing demand
for the training of maintenance personnel. So
maintenance requires an increasing amount
of attention from the management;
. an increased demand for ¯exibility; the pro-
duction system must be capable of being
adapted quickly to the requirements of a
changing environment. Supposedly, the
complexity of a change is smaller according
as more `professionals' are able to work
more independently and on a comparatively
restricted scale. In the case of outsourcing
maintenance a necessary adaptation mainly
leads to contracts being revised. This means
that the contract-awarding company can
direct its energies especially at the reorganisa-
tion and control of its own speci®c processes;
. the decrease of the economic ties of the
means of production (especially people),
causing cost to be variable, the degree of
which is of course dependent on the con-
tractual agreements.
It appears from a study into the Dutch situation
(Van den Hoogen & Sjamaar, 1997), that the
maintenance and management of installations in
the primary process is increasingly viewed as cri-
tical for the `core business', for the free availability
of such installations is of major importance for
generating the companies' output. Still, the
volume of outsourcing is expected to grow.
J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77 63
The critical importance of maintenance compels
the outsourcing parties to pay a lot of attention to
the design of the outsourcing relationship. It
appears from professional publications (i.a. Mar-
tin, 1997) and from a symposium organised by the
industrial maintenance oriented company HCG
that especially big Dutch suppliers of industrial
maintenance (Stork, GTI, HCG) are trying to
make their services more attractive for their cus-
tomers by developing `new' contractual relation-
ships. The proposed, and partly realised, changes
contain three main elements.
One of the elements which is subject to changes
concerns the de®nition of the outsourced `product'
(the `service'). Though in the past people were often
hired from outside, at present more and more often
a working package is bought. Moreover, there is a
tendency for the supplier to also (help) draft the
maintenance plan for the industrial company. A
further development is for the supplier to assume
the ownership of the means of production to be
managed and maintained, after which the free
capacity is made available to the customer for
valuable consideration. Secondly, there is also a
change in payment, which change is related to the
change in the product de®nition. Until recently
especially the actual use of the means of production
was paid for at a certain precalculated tari?, but
now payment is more and more often based on a
standard activity programme (working package) at
precalculated rates. In some cases the link between
payment and maintenance activities is even com-
pletely severed, for instance when a percentage of
the principal's sales is agreed as payment. Thirdly,
we observe a change in the nature of the `ex post'
information exchange between the contractual
partners. The integration between principal and
contractor is stronger and there is a greater need
for a relationship built on trust.
5. Case results
5.1. Case: NAM (Nederlandse Aardolie
Maatschappij)
NAM is a natural gas and oil producing com-
pany with about 2500 employees. NAM is a joint
venture of two oil companies: Shell and Esso (with
Shell as operator). It is the biggest gas producing
company in the Netherlands and a successful
company which operates in a certain market.
NAM is hierarchically organised; working by ®at
is usual. The organisation can be characterised as
bureaucratic, as manuals and rules have a great
in¯uence on working methods. In the oil, gas and
petrochemical branch safety, well-being, health
and environment are very important strategic
aspects which determine partly how the activities
are performed, how performance is evaluated and
information is processed.
NAM's core business is the exploration (includ-
ing seismics) and production of gas and oil. NAM
itself carries out all activities required for produ-
cing gas and oil and performs the planning of
these activities (e.g. operating the control rooms
and opening the valves). Almost all other activities
are contracted out, such as the maintenance of the
production locations (a couple of hundred) and
rigs (ca. 20). NAM drafts the plans for the con-
struction and maintenance of the locations, speci-
fying the relevant requirements. The detail design
and the work itself is then carried out by the con-
tractors. NAM's attitude towards the way activ-
ities are contracted out is changing. In the past
well-de®ned activities were contracted out to many
di?erent parties. The planning, design and coor-
dination of the activities carried out by the various
parties were performed by NAM itself. This
involved NAM doing the detailed planning, look-
ing after the deployment of personnel, concluding
price agreements, indicating when what main-
tenance is to take place, etc. NAM is currently in a
process of change which concerns the character of
the activities that are being contracted out and the
role of the contractors and NAM itself. The new
way of contracting out activities provides for
outsourcing not only the work itself, but also
the management cum coordination of the work.
Another major di?erence concerns the integrated
approach of the activities. In the past NAM con-
tracted out the various kinds of work to a number
of di?erent parties. For the painting a painting
business was contracted, for the maintenance of
the valves another company, etc. In the new
approach all maintenance activities, from painting
to installation maintenance, are to be contracted
64 J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77
out to one consortium and this consortium hires
subcontractors for the various activities. The inte-
grated approach means that NAM only needs
to conclude a contract with one party. In the
case of the fragmented approach NAM had con-
tracts with all suppliers. NAM has chosen this
contractual form for several reasons. Because the
consortium's members know the market better
and are better informed about the qualities of the
various subcontractors (they know their own
business, whereas NAM is good at the exploration
and production of gas and oil), it is more ecient
for the contractor to do the subcontracting. This
task requires the contractor to carry out the plan-
ning of the activities, and to come to agreements
about prices, product quality, delivery time etc.
with the subcontractors. The contractor in addi-
tion possesses more technical knowledge, as these
activities belong to its core competences. Another
reason is that the consortium's members face
competition and are able to carry out the activities
more eciently and more cheaply than NAM
can. Hiring one party to do all the work leads
to being able to coordinate the activities more
easily.
With reference to transaction cost reasoning,
bringing more activities to the market governance
structure instead of the hierarchical governance
structure means that NAM can bene®t from the
advantages of the market, such as scale and scope
e?ects and cost pressures, but also gain access to
speci®c technical knowledge and knowledge of the
maintenance market. This may pose a threat,
because NAM will become more dependent on the
contractor, and may also lose knowledge about
planning and coordinating the outsourced activ-
ities due to which it will be more dicult to mea-
sure and evaluate the quality of the contractor's
activities and output. To some extent this possible
disadvantage can be anticipated in the contract.
The new approach is a trade-o? between the pros
and cons. Due to NAM's long experience with
outsourcing and NAM's strong bargaining posi-
tion (they have the money and the work), and, in
general, changing attitudes towards outsourcing
activities, in the course of time the pros have out-
weighed the cons. All this has led to the contract
we will be describing.
In May 1997 a new contract with a consortium
of contractors was concluded. In 1998 a second
contract was signed with the same consortium.
The ®rst contract concerns the renovation of all
locations in the north-east of Groningen and the
installation of compressors at these locations. The
second contract concerns the maintenance of these
locations. The entire project, with a duration of 25
years, is referred to as the Groningen Long Term
Project (GLT project). For the GLT project one
quotation was submitted. The project involves an
amount of about NLG 4.5 billion. The contract
for the renovation and installation of compressors
involves NLG 3.5 billion, and the maintenance
contract about NLG 1.0 billion.
The Groningen ®eld is one of the largest gas
reservoirs in the world. The renovation of the
existing locations in this ®eld has become neces-
sary because the installations at these locations are
based on the technology of 30 years ago. In addi-
tion, due to the halving of the gas pressure the
installation of compressors has become necessary.
These compressors increase the gas pressure. Fur-
ther, a change-over to electronic control of the
locations is taking place. The renovation project
has been started in 1997 and will last for about 10
years. The maintenance project starts in 1999
(when the renovation of the ®rst location will have
been completed) and has a duration of 25 years,
from the contract date.
Only one quotation was submitted as there is a
close link between renovation and maintenance.
By making one party responsible for the renova-
tion as well as the maintenance it will be in this
party's interest to organise the renovation so that
the maintenance can be carried out as eciently as
possible. In this way the replacement of parts can
be geared as much as possible to the properties of
the installed installations.
5.1.1. Contact phase
The renovation and maintenance project is cru-
cial for the quality and continuity of NAM's
activities. Outsourcing also the management of the
activities meant a new approach which involves
risks of becoming more dependent on the con-
tractor. So, it was very important for NAM to
know whether the contractor has the required
J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77 65
knowledge and experience to carry out the activ-
ities as e?ectively and eciently as possible and
whether the contractor would not take advantage
of its position in the course of time. NAM could
mitigate these risks by choosing a contractor of
which NAM has a favourable impression based on
past experience and which is known as a reliable
party with an open commitment. But, although
NAM has a lot of experience with maintenance
supplying parties, the contracting out procedure
was open to all parties on this market, because
NAM had to comply with European tendering
legislation. Its most important requirements are
public tendering and a fair tendering procedure.
NAM spent a lot of e?ort on realising an open
and objective procedure so that no party was able
to protest against the tendering outcome after-
wards. All in all the tendering process took two
and a half years.
NAM ®rst of all indicated the main functions of
the project. These functions have to be available in
the consortium. They are: delivering the com-
pressor and electromotor, carrying out the con-
struction work, installing the measuring and
control system, and carrying out the engineering.
For these ®ve main functions NAM published ®ve
acknowledgement regulations. These regulations
describe which tendering method is being used.
For each of the main functions NAM indicated
the requirements. On the basis of these require-
ments NAM selected 50 of the 150 companies that
came forward. Next, NAM asked these 50 com-
panies to form ®ve consortiums and to submit per
consortium an action plan (as yet without any cost
estimate). These ®ve consortiums then submitted
their plans, after which NAM assessed the plans
and their presentation and drew up a provisional
shortlist of three consortiums. The assessment cri-
teria involved the aspects of safety, health, well-
being and the environment (SHWE); track record
and experience with comparable projects; the way
in which the consortiums have incorporated
SHWE; the competiveness of the bid (e.g. the
height of prices, how incentives and penalties are
used, etc.); and the organisation of the con-
sortiums. At the following stage the three remain-
ing consortiums were asked to take part in a (paid
for) design competition. They elaborated their
plans and submitted bids. The plans and the bids
were based on the concept of 'total cost of owner-
ship'. NAM made the ®nal choice on the basis of a
lengthy list of (weighted) criteria in which the
above-mentioned aspects were incorporated. In
order to guarantee an objective evaluation the
GLT project group which was authorised to
organise the tendering procedure, ®led the list of
assessment criteria at another NAM-department
before the invited consortiums presented their
plans.
The design of the contact phase is determined by
the European regulations. It was very important
for NAM to comply with these regulations
because being accused of not acting in accordance
with them would have caused negative e?ects.
NAM is aware of being a role model due to its
strong position in the gas exploration and pro-
duction market and its role in providing for heat-
ing and electricity needs in various countries. This
has to some extent in¯uenced the time and money
spent on the tendering procedure. Another major
aspect that has led to very careful procedures was
that the outsourced renovation and maintenance
activities determine the quality of NAM's core
activities for a very long period. The GLT project
has a duration of 25 years, which is unusual in this
branch. During this period the dependence on the
contractor's activities will increase, because the
market situation that at the start of the project
could be characterised by large numbers of poten-
tial parties will change in the course of time into
small numbers. Through learning by doing, get-
ting adapted to each other and to speci®c circum-
stances, knowing the features of the installations
and being able to supply the required parts in case
of replacement, the outsourcing relation will
acquire even more idiosyncratic characteristics
that will lead to increasing switching costs in the
course of time.
Not only will NAM become more dependent on
the contractor, but the contract is also very
important for the contractor. NAM, in assessing
the parties, did pay attention to the dependence of
a party on this contract. An external party should
not be allowed to become almost completely depen-
dent on the order. This could decrease NAM's abil-
ity to terminate the contract prematurely due to its
66 J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77
moral responsibility. This does not remove the
fact that the order is important for the parties, as
in the case of the renovation contract the parties
have a 10-year horizon, in which they are largely
assured of a certain use of their capacity. Per clus-
ter the sums involved amount to between NLG 120
and NLG130 million. Essential equipment is made
to order.
5.1.2. Contract phase
Both contracts are framework contracts with
options. The renovation contract covers an order
for renovating 11 clusters (cluster=location) and
an option on renovating the remaining 18 clusters.
The option on the remaining 18 clusters means
that NAM, after the renovation of the ®rst 11
clusters, can renew the contract. This renewal will
concern a limited number of clusters (e.g. three),
after which another renewal can be awarded.
NAM wishes to be able to continuously assess
performance. In the case of poor performance
NAM can cancel the contract prematurely. Fra-
mework contracts are highly ¯exible. The exact
details for the daily operations are taken care of in
work orders. In the framework contracts arrange-
ments have been included about: prices and
indexing formula for materials, personnel, com-
puter and software costs; ®nancial preconditions:
incentives and ®nes (e.g. when certain safety stan-
dards are not met, the pro®t mark-up is cut by a
certain percentage); legal conditions (e.g. the con-
sequences of terminating the construction pro-
gramme, insurances, liabilities); NAM sta?
secondment to the consortium's members; doc-
umentation requirements and the requirement of
(weekly and monthly) reports; and preconditions
regarding the subcontractors to be hired by the
consortium (e.g. conditions concerning ®nancial
position, safety, environment, experience and
skills, no labour brokers).
The legal structure of the consortium was also
part of the negotiations. The companies cooperat-
ing in the consortium drew up a legal partnership.
The advantages of this legal form are, ®rstly, that
there is no equity causing problems if one of the
consortium parties should be forced to quit the
cooperation, and secondly, that the companies are
individually liable. During the drafting stage of
the framework contracts attempts were made to
anticipate as fully as possible the various condi-
tions that might occur in the future. Here, NAM's
experience with contracting out activities was uti-
lised. These conditions for example concern the
phasing of the activities (NAM deems it very
important for the planned schedule to be met), the
developments in the labour market (personnel
costs), and important technological developments.
The framework contract mentions the possible
changes in circumstances and indicates how the
parties should handle them (actions are described
and the arbitration strategy in case of disputes is
indicated).
In the contract arrangements have been included
concerning the way of controlling the activities and
performances of the supplying parties. These
arrangements deal with the regular information
processing requirements and personnel meetings,
and how the activities will be evaluated and
rewarded. The contract speci®es that the con-
sortium has to provide monthly information
about: progress, costs, problems, commitments to
be entered into with subcontractors, technical
developments and problems, hours worked
according to the time-clock, delivery of materials
and material stock, and milestones. The format of
the reports are indicated precisely. All changes in
organisational structure and personnel to be
deployed have to be reported. The contract men-
tions by name key personnel to be deployed by the
consortium. Changes of these persons or changes
in their positions have to be reported and author-
ised by NAM. NAM has seconded some of its
own sta? with speci®c expertise to the consortium.
The contract further provides for weekly meetings
between the GLT project group and the con-
sortium's project group in order to discuss the
ongoing operations (in particular technical issues)
and speci®c problems. In these meetings NAM can
discuss their design requirements and can approve
technical designs.
In the contract various evaluation arrangements
are included. NAM has the right to audit the
activities and their registration. Audits will take
place on an ad hoc basis and NAM is to have
access to all information (open book principle).
NAM will also carry out regular `quantity surveys'
J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77 67
by means of which NAM measures the physical
progress. A speci®c evaluation will take place after
the renovation of the ®rst cluster. The renovation
of the ®rst cluster will be completed by the end of
1998. In 1999 the renovation will be evaluated.
The renovation of the three following clusters will
start in 2000. The extensive evaluation of the
renovation of the ®rst cluster, which will last one
year, particularly aims at acquiring a deeper
insight into the eciency of the technical work
and the procedures followed, the hours needed for
the various activities, the costs, technical problems
etc. This makes more detailed planning possible for
the work on the following clusters. The evaluation
method beyond one year has not been speci®ed in
the contract, because NAM is responsible for the
evaluation.
The control methods described in the contract
provide for tight control of the activities and the
commitment of personnel. By being informed
about the commitment of key personnel NAM is
able to evaluate their technical and management
competences and to take action when NAM is not
satis®ed with their competences. In this way NAM
assures itself of the quality of the work to be done.
Another possibility to assess the quality of the
work in advance is the weekly meetings in which
technical plans and designs are discussed. Feed-
back control is carried out by ad hoc audits and
`quantity surveys', and also by evaluating the
monthly reports. These reports give elaborate
information about the daily operations. In order
to be able to draw up precise norms and standards
for the renovation activities NAM has claimed a
one year evaluation after the renovation of the
®rst cluster. In fact the renovation activities are
repetitive. By performing a thorough evaluation
NAM can standardise the next renovation activ-
ities. Standardisation will increase as NAM gains
even more experience with these activities in the
course of time.
NAM runs risks of time and money. The risks
of not conforming to the planning are very crucial,
as NAM has to comply with the gas demand
which is at its peak during wintertime. So NAM
carries out a tight control on realising the plan-
ning and on the accuracy of the planning. NAM
has drafted a comprehensive contract in which
possible changes in circumstances and their con-
sequences are described. In addition, NAM has
built in room for acquiring a deeper insight into
the activities in order to be able to standardise
them. This could also in¯uence the method of
payment.
In this business there are three usual methods of
payment: (1) lump sum: this form is suitable if it is
known in advance which activities are to take
place; (2) reimbursement: the principal pays for
the actually realised activities (man-hours, materi-
als used, machine-hours, etc.) at pre-determined
prices and tari?s; (3) a mixed form: the activities
that are easy to estimate in advance are paid for
according to the lump sum approach, while the
reimbursement approach is used for other activ-
ities. At the start of the GTL project the mixed
form was applied. But due to the evaluation after
one year and the character of the work to be done
Ð the clusters do not di?er from each other Ð the
parties will become more experienced, so the work
can be estimated more and more adequately.
Therefore, expectations are that the method of
payment will change during the duration of the
project and acquire ever more the nature of the
lump sum approach. Furthermore, the contract
describes the situations in which penalties or
incentives will be applied. For example: if the
consortium stays within the budget for certain
categories of activities, or realises a better than
expected performance in the ®elds of safety,
environment or quality, the consortium will
receive extra payments. Should the consortium
underperform, then certain bonuses will not be
paid.
5.2. Case: Shell Research and Technology Centre
Amsterdam
Shell Research and Technology Centre Amster-
dam (SRTCA) is a location at which research and
technical services are carried out for the business
units Oil Products and Chemicals of the Konink-
lijke/Shell Group (Shell). Shell has more research
and technology centres in other countries, which
also operate for both business units. The Amster-
dam location is one of the biggest locations.
SRTCA has a number of research laboratories. At
68 J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77
the 27 ha location there are 160 small and large
buildings and installations. The maintenance of all
SRTCA's buildings and installations is carried out
by Common Amsterdam Site Services (CASS),
which is a supporting department of HSRA. Since
1984 the number of employees has been decreased
strongly, especially by outsourcing ever more sup-
porting services. The maintenance of the buildings
and installations has been outsourced increasingly
to external ®rms. The management, coordination
and engineering of the maintenance was carried
out by CASS itself. The employment at CASS has
been decreased drastically in the past years. At the
moment CASS has about 300 employees. In future
it is expected that this number will decrease fur-
ther. The nature of SRTCA's activities has been
changed in the course of time. In the past much
more attention was paid to fundamental research,
nowadays the research emphasis is on improving
existing processes and products. Supporting the
business units' activities has priority. In doing so
SRTCA has come closer to the market.
In 1995 SRTCA decided to outsource not only
the maintenance activities but also the manage-
ment, coordination and engineering of these
activities. As of July 1 1995 SRTCA concluded a
contract with a consortium. The contract includes
delivery of technical services, maintenance of the
buildings and installations, including test plants,
at the Amsterdam location, and the management,
coordination and engineering. The consortium
consists of four ®rms: HBM, HCG Industrial Ser-
vices, BTO and Ergon. These four ®rms have estab-
lished a new company operating under the name
Huisaannemer Shell Research Amsterdam(HSRA).
A ®ve-year contract has been concluded. HSRA is a
multidisciplinary cooperation that has at its disposal
knowledge of the areas of mechanical engineering,
electrical engineering and instrumentation, process
installations and architecture.
This form of outsourcing maintenance is not
new for Shell. Some Shell research labs in the Uni-
ted States have already got some experience with
this new concept. Within four years the working
hours for maintenance have decreased by 30% and
customer satisfaction has increased substantially.
Also has SRTCA some experience with this con-
cept in the area of purchasing and information
technology. The new outsourcing project di?ers
greatly from the way SRTCA outsourced main-
tenance and technical services before 1995.
SRTCA did the management and coordination,
and gave orders for carrying out speci®c activities
to about 35 ®rms. SRTCA decided how and when
which activities had to be carried out, and did the
engineering. In the new situation the consortium
manages and coordinates the activities and per-
forms the engineering. The activities are carried
out by HSRA itself or HSRA calls in third parties.
SRTCA has now one address instead of 35.
SRTCA's strategy consists of concentrating on
core activities, i.e. research. This strategy is in line
with the Shell strategy. In addition, SRTCA
strives after increasing the productivity and qual-
ity of the technical services in order to decrease
costs. The outsourcing project ®ts into this policy.
The old situation with many supplying ®rms was
very hard to control. There are two types of
maintenance activities. On the one hand they con-
sist of repairs and modi®cations of research
installations. These activities concern a huge
amount of small jobs which cannot be planned.
On the other hand the activities concern institu-
tional maintenance which can be planned. By
outsourcing both types of maintenance to one
party, and by also letting this party manage and
coordinate the activities this party is able to plan
all the work and the commitment of the available
workforce. In addition, these activities belong to
the core activities of this party, and this party has
more speci®c knowledge at its disposal. SRTCA
now only has to deal with one party which pos-
sesses all required specialised knowledge. This
furthers a multidisciplinary approach and also sti-
mulates planned and integrated actions instead of
many ad hoc and often not coordinated actions.
Moreover, SRTCA itself does not have all the
required specialists. Now SRTCA can operate
more ¯exibly. They can react quickly to technical
changes by stopping certain activities and starting
other ones.
The motives for the consortium parties di?er
from those of SRTCA. These parties operate on a
dicult market with ®erce competition and low
pro®tability. They try to spread market risks by
entering into long-term relations with outsourcing
J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77 69
companies. Long-term relations are advantageous
as a part of the workforce is sure to have employ-
ment. In addition, the consortium parties consider
this contract as a pilot project in order to gain
experience with this new form of outsourcing
maintenance and to build up a lead in these
developments.
5.2.1. Contact phase
The selection process for the new contractor was
started early 1994. After the ®rst selection stage a
longlist was reduced to a shortlist of three poten-
tial contractors. These contractors had drawn up
and presented their `terms of references' in which
they described how they would manage and carry
out the maintenance, and elaborated their philo-
sophy with regard to the cooperation. After this
the number of potential contractors was reduced
to two, with whom an intensive three-month per-
iod of getting acquainted followed. It was con-
sidered of paramount importance for the relation
between the companies to be excellent, for both
parties were supposed to invest a great deal of
money and energy into the partnership. Therefore
the risks were to be minimised. This stage consists
of a `kick o?' meeting of two days with either
party and after that a visit to current projects
(three days). In addition, the potential parties vis-
ited the Amsterdam location and they had to work
out assignments. Eventually, in December 1994,
HSRA was selected.
SRTCA used various selection criteria. An
important criterion was that the contractor should
have clear vision on how to manage en carry out
the activities and should dare to take initiatives.
The contractor should have clear identity and
should be aware of his own professional qualities.
This was important because Shell people have
rather well-de®ned opinions. Another criterion
was that the contractor should be able to operate
as an independent ®rm in which the specialists
should carry out the activities in an integrated
way. SRTCA also paid attention to the quality of
the organisation of the activities and its adminis-
tration. An important requirement was transpar-
ency of the cost structure. According to HSRA
they were selected because of their open attitude,
which was aimed at the client's wishes, but also
because they had clear vision on the cooperation
and on how to carry out the activities. Moreover,
the expected work quality was important as laid
down in the quality of the planned approach,
attention to safety and quality, and also the con-
sortium members' reputation was an important
factor.
In this branch of industry the price usually plays
a decisive role. This was not the case in this selec-
tion process in which a good relationship had
priority. The selection of HSRA was based on
their proactive attitude which showed initiative
and clear vision. HSRA also showed an integrated
approach and a transparent organisation.
5.2.2. Contract phase
The ®ve-year contract can be seen as a frame-
work contract in which the scope of the activities
is described. Within this contract SRTCA reg-
ularly places orders. After SRTCA had selected
HSRA as contractor working groups, composed
of both parties, were installed which drafted the
contract and the organisational, technical and
administrative procedures as well as the way of
information processing. They also organised the
required safety and quality certi®cates and the
training of consortium employees. These activities
took half a year.
In the framework contract both parties have
stated their intentions regarding the relation. Both
parties strive after optimalisation of maintenance
during the contractual period and eventually to
realise an integrated technical management. The
intention is to continue the relation if the coop-
eration works out well. It is explicitly mentioned
that opportunism must be combated as much as
possible. The outsourcing party should not think
in terms of `how do I prevent the contractor to
earn too much', nor the contractor in terms of
'how do I at least compensate for my bad contract
price with additional work'. Transparence is stri-
ven after in order to maintain and increase mutual
trust. So the organisation and administration are
set up in a transparent manner. Therefore the con-
sortium is a legally separate ®rm which operates
only for SRTCA.
The more precise implementation of the coop-
eration takes place through mutual consultation.
70 J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77
The parties did not have the intention to draw up
a comprehensive contract. Both parties attach
great importance to building up the relation and
enhancing trust. They work at such a growing
relation by changing the old situation gradually
into the new one. During the early stages HSRA
made use of the earlier contracting ®rms. This
gave them the opportunity to build up their
knowledge of the installations and the site. Also
the organisation of HSRA is being built up gra-
dually and the scope of the activities is increasing
continuously. This o?ers the opportunity to
acquire even more insight into the maintenance
®gures which enables the parties to de®ne perfor-
mance indicators and targets. The parties have not
determined in the contract how to divide the
results of productivity improvements. More than
two years after signing the contract they started the
discussion of this subject. In 1998 a bonus system
has been introduced by which realised improve-
ments are divided between both parties. Important
aspects of this system are the measurability of
improvements and employees' bonuses. Orders are
carried out on a time and material basis, i.e. the
real hours and materials used are paid for at tari?s
agreed in advance. The hour and material tari?s
include jointly agreed mark-ups for overhead costs
of the partners and for pro®ts and risks. The rea-
lisation of targets (the measuring points are the
performance indicators) are bonus-linked.
The parties have made arrangements about the
way of controlling the maintenance activities and
their results. Quality and costs are measured and
reported regularly. SRTCA receives speci®ed
reports which make it possible to analyse main-
tenance. An important issue in the contract are the
performance indicators and the improvement
mechanisms. Productivity is measured every
month by an independent organisation. The par-
ties determine improvement targets. The pro-
ductivity improvement goal in 1997 was to realise
an increase of 5%. Underutilisation of people is
measured and the reasons have to be indicated.
They measure the performers and project man-
agement ratio as well as the indirect and direct
hours ratio. Another performance indicator is the
direct supporting hours and indirect hours ratio
divided by direct working hours. Targets are
drawn up concerning hours realised by HSRA
employees and hours realised by subcontractors.
Absence because of illness is measured. Also cli-
ents' satisfaction is measured by looking at aspects
such as safety, technical quality, service, eciency
and response time. The parties determine whether
the agreed completion date is realised. SRTCA
carries out a random value for money audit. Every
year a ®nancial audit is conducted.
5.2.3. Execution phase
Before this contract SRTCA had to deal with
many contractors which had often carried out
maintenance activities on the site for more than
twenty years. Close ties existed with SRTCA
employees. Because of this SRTCA employees
were not very critical about the quality of the
activities and the prices asked by the contractors.
In the new situation SRTCA has chosen a certain
distance between their own employees and those
of the consortium. This may guarantee an objec-
tive relation. That is the reason why the con-
sortium personnel is located in a separate building
with their own canteen. Also by designing perfor-
mance indicators which are measured partly by
independent parties objectivity can be guaranteed.
SRTCA characterises the relation as an objective
partnership in which the outsourcer carries out
many checks afterwards.
Till 1998 SRTCA clients gave their work orders
to their own planning oce. Now clients give their
work orders right away to HSRA. All the work
orders to an amount of NLG 2.500 are carried out
by HSRA directly. Work orders between NLG
2.500 and 25.000 are ®rst discussed with the client
in which the estimated costs are part of the dis-
cussion. Work orders between NLG 25.000 and
100.000 are tendered publicly.
In the ®rst year of the relation there was great
resistance to HSRA. SRTCA employees related
HSRA's arrival to the reorganisation which
strongly decreased employment. SRTCA employ-
ees tried to give orders to the earlier contractors.
That is why SRTCA has opted for building up the
relation gradually and making use of the earlier
contractors in the beginning, but subsequently
through HSRA. That is also why SRTCA has cher-
ished to a transparent relation in which performance
J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77 71
can be measured and clear goals can be set. HSRA
too is interested in measurable performance in
order to show the quality and eciency of the
activities. The SRTCA management has strongly
supported HSRA's position. This shows the exis-
tence of trust in the relation. At present the resis-
tance mentioned above has been greatly reduced.
6. Comparing the case results with the theoretical
model
6.1. NAM
Looking at the characteristics of the NAM case
we can conclude that the chosen control relation-
ship has the greatest similarity with the bureau-
cracy based control pattern. In the search for
suitable parties meticulously elaborated selection
criteria were used. The eventual choice was based
on a maximally objective assessment of the fea-
tures of the potential parties. Although the con-
tract concerns a framework contract NAM has
tried to write a comprehensive contract which tries
to anticipate as well as possible all future con-
tingencies. In the contract the way of controlling
the activities has been elaborated in detail
enabling NAM to evaluate the quality, timeliness
and costs of the activities precisely. In addition, in
order to be able to work out the execution in
greater detail an evaluation of the renovation of
the ®rst cluster has been built in after a year.
Considering the contingency factors we can
conclude with regard to the transaction character-
istics that we here have a very long term project,
whose output can be measured well and whose
activities are highly repetitive, for the clusters that
have to be renovated are to a large extent iden-
tical. At the start of the contract there were many
contracting parties which could carry out the pro-
ject. The degree of asset speci®city is medium,
although we may expect that asset speci®city will
increase proportionately with the duration of the
relation, because the chosen consortium will gain
more and more experience with the maintenance
activities and with NAM's speci®c requirements.
This is partly stimulated by the concept of total
cost of ownership which implies a close relation
between renovation and maintenance. Due to this
increase in asset speci®city in the course of time
terminating the relation will cause high switching
costs.
The transaction environment characteristics can
be described as uncertain, because the contract
term is very long and it is very dicult to foresee
the developments in the demand and supply of gas
and oil for this long period. Although NAM
speaks of a certain market it is very dicult to
predict so far ahead technological developments
and, for example, the in¯uence of new gas ®nds.
NAM is obliged to guarantee the gas delivery even
in very cold periods. This requires NAM to plan
the renovation according to a very tight schedule.
In this connection the short term risks are also
high because NAM's image is directly linked to a
prompt gas delivery. An all-important institu-
tional factor is that NAM is obliged to tender such
projects according to the European rules. The
transaction environment characteristics might
have led to setting up a trust based relation from
the very start, in which relation also goodwill trust
would have played an important role. This would
have meant that during the selection of the most
appropriate party, in addition to certainty about
technical competence and contractual reliability,
particular priority would have been given to an
attitude of open commitment and of willingness to
realise a joint project, of which all consequences
could not be foreseen in advance. Due to the Eur-
opean rules NAM had to choose a public tender
based on objective criteria.
In addition, the choice of the control relationship
was in¯uenced by the party characteristics.
Although NAM has a lot of experience with out-
sourcing activities, till now the outsourcing projects
have had a much shorter term, with the require-
ments being described in detail and direct super-
vision of the contract execution. Moreover, NAM
is managed in a bureaucratic way, usually with
reference to manuals with detailed written rules
and procedures. NAM does not have any experi-
ence with management based on trust which is
characterised by working out the detailed execu-
tion in mutual consultation in the course of time.
As NAM possesses a strong bargaining position
based on the `who pays determines' principle
72 J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77
NAM has been able to determine the managing
and controlling of the relation.
Looking at the future we may expect that the
relation will acquire ever more idiosyncratic fea-
tures because the parties will become used to each
other and will gain experience with letting various
professionals coming from di?erent ®rms work
together. As more clusters are renovated the par-
ties' knowledge as to how to carry out the reno-
vation as eciently as possible will keep
increasing. The maintenance of the clusters has a
high degree of asset speci®city as well because the
consortium has supplied the installations, and parts
have been specially designed for these installations.
As from the start of the activities the parties have
decided to invest in the relation by learning under
the supervision of an independent expert how to
cooperate and to give each other some freedom of
manoeuvre. We may expect these developments to
lead to a control relation that will increasingly come
to resemble the trust based pattern.
6.2. Shell Research and Technology Centre
Amsterdam
The structuring of the control relationship in the
SRTCA case contains many elements of a trust
based pattern. During the search for suitable par-
ties SRTCA invested in developing trust. An
important selection criterion was also involved the
linkage between the parties. Before making the
de®nite choice SRTCA organised an intensive
period of becoming acquainted with the remaining
parties. The drafting of the contract and the con-
tract contents also reveal a relation which is
strongly based on trust. The contract has been
drawn up in mutual consultation between the two
parties and no attempts have been made to elabo-
rate any ®ne points of the relation in writing. The
point of departure for setting up the contract was
that opportunism must be combated as much as
possible. SRTCA attaches great value the con-
sortium having room for taking initiatives and for
carrying out the activities in accordance with their
own views. Thus SRTCA tries to make use of the
consortium's knowledge and experience and to rea-
lise cost savings. The control of the execution is in
particular aimed at acquiring insight, on a regular
basis, into the degree in which the goal of the out-
sourcing project has been realised, such as realising
quality improvements and cost savings.
The transaction characteristics of the relation
can be characterised as follows. The contract is
aimed at a long-term relation. The contract term is
®ve years, but if the relation develops satisfactorily
SRTCA intends to renew the contract. The main-
tenance activities are partly repetitive and partly
new. The activities and the required recources can
be measured well. At the start of the relation the
degree of asset speci®city could be valued as med-
ium. There were various market parties with the
speci®c knowledge and experience required for
carrying out the maintenance activities and its
management. Asset speci®city may be expected to
increase as the parties learn how to cope with each
other and the consortium gains more knowledge
and experience with the speci®c features of the
buildings and installations and also with the pro-
cedures and customs at SRTCA. Terminating the
relation in future will cause switching costs.
With regard to the transaction environment
characteristics we can conclude that the market
risks are medium. Research belongs to Shell's core
business, even in the future. Nevertheless, the
areas the research is focused on are subject to
change, partly in¯uenced by changes in technol-
ogy. This will a?ect the approach and nature of
the maintenance activities. The institutional factor
of social embeddedness greatly in¯uences the
design of the relation. The earlier situation with
many contractors with whom too close ties devel-
oped will not be allowed to return. Therefore a
transparent relation incorporating as much as
possible an independent position of the con-
sortium and also their own location at the SRTCA
site is greatly valued. The parties strove for the
establishment of a transparent organisation and
administration. All data are accessible and mea-
surable performance indicators and targets are
used. The SRTCA management is also interested
in measuring and evaluating the achieved results
on a regular basis in order to be able to show that
with this new form of outsourcing improvements
can be realised in the quality and eciency of the
maintenance activities. Thus resistance to this
change among SRTCA personnel can be reduced.
J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77 73
In the choice of the consortium competence
reputation has played an important role, involving
technical competence as well as organisational
competence. In addition, a self-starting SRTCA
party with their own views on the maintenance
was appreciated. SRTCA also tried to ®nd a party
with an attitude of open commitment and a risk
sharing attitude. The contract was drafted in
mutual consultation and the detailed outline of the
relation was also agreed in close cooperation. In
this process none of the parties is taking advantage
of possible bargaining power.
7. Conclusions and recommendations
How can the di?erences that can be observed
between the inter®rm control relations outline at
NAM and SRTCA be explained? Which factors
play a decisive explanatory role and can these
factors be found in the theoretical model estab-
lished in this paper? Therefore, the question is:
why has NAM opted for a more bureaucracy
based control pattern and SRTCA for a more
trust based control pattern?
NAM as well as SRTCA have chosen a revision
of the outsourcing form they used until recently.
They have chosen this form because placing the
management and execution of the maintenance
under the control of one party is more ecient
and improves quality. In this way better use is
made of the knowhow of the contractor and the
coordination of the activities is made easier. This
form allows the application of the `total cost of
ownership' concept which enhances the under-
standing of the ®nancial consequences of the
maintenance. The new form of outsourcing makes
for a closer relation between outsourcer and con-
tractor, so that mutual dependence increases.
Entering into such relations is only attractive in
the case of long-term relations in which the parties
can learn how the various kinds of expertise can
be mustered in a maximally integrated manner
and how the roles of the outsourcer and of the
contractor can be de®ned. In the course of time
these relations will acquire increasingly idiosyn-
cratic characteristics and switching costs will
grow.
The di?erence in the way the control relation is
organised may already be seen in the contact
phase. The way in which both parties made the
eventual choice of the most suitable consortium
has in the NAM case clear bureaucratic features,
whereas in the SRTCA case trust features can
clearly be discerned. This di?erence of approach
can in the ®rst place be attributed to European
regulations the NAM has had to comply with. The
NAM was obliged to invite public tenders where
the choice had to be based on objective criteria. In
addition, the outsourcing method is well-suited to
the way in which the NAM is managed, where
written rules and procedures and ®at from higher
up in the hierarchy play an important role.
SRTCA is a research organisation within which
there is more room for initiative and creativity and
within which rules and procedures play a less
prominent role.
In the contract phase di?erences can be
observed as well. These are partly in line with the
described di?erences as to how both companies
are managed. Furthermore, di?erences in main-
tenance situation and Ð related to this Ð employ-
ment situation play a role. Since 1984 SRTCA has
started a policy of increasingly outsourcing sup-
plying services. Due to this the number of
employees has decreased sharply and this number
is expected to fall even more. That is why the
arrival of HSRA was associated with this decrease
in employment and why there was great resistence
to HSRA. In spite of the fact that Shell as an
employer o?ers a high degree of employment
security to its employees this does remove the fact
that the arrival of HSRA in¯uenced the positions
of people. The SRTCA management knew it could
expect resistence and had an interest in supporting
HSRA and in being able to show that the aims of
higher quality and higher eciency could be rea-
lised by HSRA. The SRTCA management was
forced to enter into a trust relation with HSRA in
order to make sure that HSRA would execute the
policy started as well as possible. Further, it was
important to set up a transparent organisation
and administration so that there could not be any
discussions about the measurement and assess-
ment of the results. At NAM the arrival of the
consortium does not have any direct employment
74 J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77
consequences and there is not any resistence either
to the consortium. The project partly concerns new
activities (the renovation) and partly activities (the
maintenance) which had always been outsourced
anyway.
The risk factor plays an important role as well.
The GLT project involves more risks than the
SRTCA project. The GLT project extend over a
very long period and the contractual amount is
also very high. The ®nancial risks are therefore
higher than those connected with the SRTCA
project. Furthermore NAM has to deal with the
possible risk that it cannot meet the demand for
gas at a certain moment because the planned
renovation activities cannot be realised. NAM is
obliged to guarantee gas delivery. For households
and industrial buyers gas is a vital necessity, which
has to be satis®ed at all times. The availability of
gas is a national a?air. Should NAM not be able
to satisfy the demand for gas at peak moments this
will have far-reaching consequences for their
image and perhaps their continuity. There is not
such a high risk for the maintenance activities at
SRTCA. Guaranteeing the safety of the gas loca-
tions and preventing harmful environmental
e?ects also receive a lot of public attention.
Should there be any calamities during the renova-
tions and the maintenance activities, when carried
out badly, this will also have serious consequences
for NAM's image. This also holds for SRTCA,
although NAM is more in the public eye than
SRTCA.
The risks described together with NAM's nego-
tiating clout (`who pays decides') has led to NAM
extensively describing the work to be carried out
and its requirements. In addition, there is a
detailed speci®cation of the control methods with
respect to the execution. SRTCA has opted for
¯eshing out the relation as it develops and has not
tried to write everything into the contract. More-
over, the relation will be worked out further in
joint consultations between SRTCA and HSRA.
Here negotiating clout plays no role.
If we now compare the factors pointed out as
the major explanation of the di?erences between
the two inter®rm control relationships with the
theoretical model we can in the ®rst place establish
that the institutional environment factor is in the
model also considered one of the in¯uencing fac-
tors. In particular, legal rules, institutional orga-
nisations and social embeddedness play a major
role in the cases. Di?erences in negotiating power
may according to the model also be an explana-
tory factor, which we indeed also come across in
practical cases we studied. This also applies to the
risk factor (degree of market risks, uncertainty
about future contingencies) and the risk attitude
of the parties. In the model risk di?erence, how-
ever, has a di?erent e?ect on the design of the
control relation. According to the model a lot of
risk leads to a more trust-based relation, whereas
in the NAM case the GLT project-related risk
leads to elaborate rules and procedures and meti-
culous supervision. The SRTCA project involves
fewer risks, but here, albeit for other special rea-
sons, a trust based relation is chosen. NAM wants
to control the risks as much as possible in advance
by incorporating into the contract measures to this
e?ect and obviously does not wish to neutralise
these risks by entering into a trust relation with
the consortium. This method of risk control
dovetails with the way in which NAM is used to
manage the company. We can conclude that an
organisation's culture, inter alia manifesting itself
in its management methods, is an important in¯u-
encing factor. In the theoretical model this factor
has wrongly not been incorporated. We have in
addition observed that in the cases a company's
history in¯uences choices being made now. Thus
we saw at SRTCA that the previous situation with
the numerous contractors has in¯uenced the
design of the control relation. These historical
situational conditions, too, are lacking in the
theoretical model.
For future research into the design of inter®rm
control relationships it would be advisable to
especially look further into the importance of an
organisation's culture and the (historical) situa-
tional factors. It would also be interesting to study
in other cases what the e?ect of the risk factor is
on the control relationship type. We in addition
are planning, in the NAM and the SRTCA cases,
to follow the developments in the relationships
over a length of time in some detail. Will our
expectations be justi®ed that the relationships
between the parties in the GLT project will
J. van der Meer-Kooistra, E.G.J. Vosselman / Accounting, Organizations and Society 25 (2000) 51±77 75
develop into something more resembling a trust
based control relationship?
Acknowledgements
We would like to thank Robert Scapens,
Anthony Hopwood and two anonymous reviewers
on their comments on an earlier version of this
paper.
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