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The Systemic Contract to manage Complexity
Bridging Classical and Relational Contracting Theories
Maria Kapsali & Jens Roehrich
Setting the scene
• Challenges: Time, cost, quality and contractual governance • Ashby’s (1958) 'law of requisite variety' – more complex org.
settings = more complex contractual governance (e.g. # of contingencies)
• This study’s outcomes: – One of the first comprehensive empirical examinations of the
effectiveness of different contract rules – Offering a framework for an effective systemic contract –
bridging classical, neo-classical and relational contracting theories
RQ: Which are the contract rules that successfully drive desired behavior within complex organisational settings?
Contracts to Manage Organizational Complexity
Explicit and formal agreements specifying legal obligations and roles of parties (Lyons & Mehta, 1997)
• Intended to: (i) reduce uncertainty; (ii) minimise the risk of opportunism; (iii) provide a safeguard against ex-post performance problems
• Complete & optimal contract: stipulates control rules for every possible type of opportunistic behaviour and future contingency at the lowest transaction cost relative to outcome
• Complex contracts: “structures of rules, which are sets of explicit or understood obligations, incentives, rewards and penalties stipulating conduct, action and behavior within particular activities in different situations” (Barthélemy and Quélin, 2006, p. 1776)
• Relational contracting also stresses the importance of the longevity of the relationship and positions time at the center of the agreement (Eisenberg, 2000).
RESULT: Complex Contracts
• Drafting complete contracts – contract complexity • Asymmetric information and incompleteness; bounded rationality • Lengthy and continuous re-negotiations • Time- and cost-consuming • Too rigid to deal with change (classical contract)
Mixture of classical and relational contracting rules?
• In practice: Relationships are governed by either a classical or a relational contract • i.e. equity joint ventures and non-equity partnerships largely follow a
relational contracting perspective whilst licensing contracts seem to use classical contracting (Hagedoorn and Hesen, 2007).
• Which rules are effective in complex organizational settings?
Our aim: the middle way – systemic contract
Contracting theories
Type of studies
Focus of studies Result
Classical deductive modularity in contract structures incomplete
Neo-Classical inductive arbitration, collaboration incomplete
Relational inductive trust, commitment, reputation, networks, relational ties etc
incomplete
Middle-way ? retroductive combinations of factors, both modular and relational, into the causal mechanisms between rules and outcomes
Methods• Qualitative Comparative Analysis (fsQCA) – Combines depths and breath • 23 public-private relationship cases
• N = too large for in-depth case analysis to be able to retain patterns among them, but also too few for conventional statistical techniques to generalise on
• 6 UK construction Public Private Partnership (PPP)• 3 EU Public Health - European Antimicrobial Resistance Surveillance System
(EARSS) – develop national ICT infrastructures to collect and analyse epidemiological data
• 14 ICT EU eHealth projects – develop or deploy R&D for healthcare services
• Similar settings, but a few differences • Similarities: (i) they were large scale projects with multiple diverse actors; (ii)
they delivered public infrastructure and services; (iii) procured and controlled by national and/or supranational public sector clients working with private companies; and (iv) subjected to open tendering and rigorous selection and monitoring procedures.
• Differences: (i) types of contracts – contract complexity; and (ii) their time span, ranging from 2 to 30 years.
• 132 interviews (+ secondary data) • Coding cases for memberships in sets of sub-sets of conditions (3 different
contract rules) and outcomes (non-/compliant behaviour – e.g. renegotiations/changes/problems in interpreting rules)
Fuzzy-set qualitative analysis in multiple case studies
Why fsQCA?• Qualitative comparative analysis has the advantage that it may not
require as many cases as a case survey.
comparative research designs involve small and intermediate-size Ns (e.g., 5-50), but this range of cases is often too large for in-depth case analysis to retain patterns (analysis becomes too complicated), but also too few for conventional statistical techniques
• It can be used with previously conducted studies as well as with new studies, and thus encourages an evolutionary and integrative approach to knowledge creation. It allows easy integration of both qualitative and quantitative forms of evidence, and is transparent and systematic
• Used in : sociology, psychology, political science and history
• ‘fuzzy’ logic is a recent refinement of QCA so that it is not necessary to dichotomise variables so precisely and allows for more variation in set theoretic membership (continuous instead of binary)
Why fsQCA
• We seek causal pathways to the same outcome, which may be achieved in different combinations of conditions, and that causation must be understood in terms of necessary and sufficient conditions
• Complex causal connections (causal complexity) are analysed using Boolean logic to explain pathways to a particular outcome. Complex and multiple patterns of causation may be explored
– statistical techniques assume that social phenomena are driven by unifinality, additivity, and symmetry, therefore it is difficult to model equifinal, conjunctural and asymmetric set relations in terms of sufficiency and necessity (Fiss, 2007: 1190)
– qualitative (written and especially verbal) data formulations are largely set theoretic in nature (Fiss, 2007; Ragin 1987, 2009) we need to study cases inductively as configurations and not as independent, analytically separate settings to acquire measurements from
Why fsQCA?
Linkage control rules to prevent opportunism
Practical decision rules for generating all possible control responses
Emancipatory autonomy rules
formalization of action accountability rewards incentives obligations penalties - punishment exclusionfragmentation in supply chain standardization of tasks
communication at the interfaces co-decision processes formal meetings, boards, panels, conferences evaluation, feedback loops overlap and sharing complement of skills negotiations regarding the definition of the goal, planning, monitoring and executing participation of users
Rules that empower to self-regulate and self-organize knowledge creation coupling and interdependence adjust processes and habits leverage for change
The rules in the contracts categorized into three conditions (Smith, 2006)
Classification of conditions – inductive approach for selecting Amenta and Poulsen (1994) and Yamasaki and Rihoux (2009)
Conditions Outcomes
Linkage rules
*
Compliant (1)
Mostly compliant (0.75)
Ambiguous (0.50)
Insufficiently compliant (0.25)
Non-compliant (0)
Practical rules
*
Emancipatory rules fsQCA anchors
0 0.25 0.50 0.75 1Not significant less significant cross-over point mostly significant highly
significantthe point of maximum ambiguity
The analytic frame (conditions and outcomes) and with the fsQCA measure scale
Program PPP (6 projects) IST/eTEN (14 projects)
EARSS (3 projects)
Nature Highly complex Medium to highly complex
Simple
Duration Up to 30 years 18-36 months 6 years Description
Multiple national projects for the construction of healthcare facilities
Multiple transnational projects for the creation and deployment of telemedicine
Multiple national projects for the creation of a European ICT epidemiology network
Contract type
Outcome Based non-standard contract
Performance Based contract - Classical
Memorandum of agreement Highly relational – minimum critical specifications
Contract structure
Types of Contracts
Healthcare A Healthcare B
Product-service provision
Design, build, finance and operate (DBFO); construction of new hospital; Hard (estate) and soft (e.g. cleaning, portering, catering) service FM
DBFO; construction of new hospital; Hard (estate) and soft service FM
Contract nature and value
Non-standard contract; approx. £150m
Standard contract (Version 3); approx. £150m
Contract duration 30 years 30 years
Case example – PPP Hospitals
Linkage Practical Emancipatory Outcome
EARSS 0.75 0.75 0.75 10.75 0.25 0.75 0.50.5 0.75 0.5 1
IST - eTEN
1 1 0.5 0.750.75 0.5 0.5 1
1 0.5 0.25 0.251 0.5 0.25 0.751 1 0.5 01 1 0.5 0.251 0.5 0.25 01 0.25 0.25 11 0.25 0.25 0.751 0.5 0.5 0.51 0.25 0.5 01 0.5 0.25 11 0.25 0.5 0.251 0.5 0.75 0
PPP 0.75 1 0 0.250.75 0.75 0.25 00.5 0.5 0.25 10.75 0.75 0 0.50.5 0.5 0.25 10.5 0.75 0.25 0.75
Results Table
with the values of each condition for each
project
Findings
Positive Behaviour Significant minimized configurations consistency
EARSS practical* emancipatory 0.75
~linkage*~emancipatory 0.75
~linkage*~practical 0.75
practical 0.75
IST-eTEN
practical* emancipatory 0.66
PPP linkage*~practical* emancipatory 0.75
~practical* emancipatory 0.75
practical 0.71
practical*~emancipatory 0.71
Cross case configurations
Within case configurations of contract rules
Outcome 1 = practical*emancipatory +~linkage*(~emancipatory*~practical) +practical+ ~linkage
Outcome 0 = ~practical*emancipatory*(linkage)
Findings • Observations across successful projects:
• Extensive use of control rules increases complexity of project routines and reinforces inflexible action
• Fewer control rules (~linkage) is both sufficient and necessary for contracts to be effective and more successfully implemented
• Provided a combination of communication and decision-making rules - swift decision making and autonomous action leading to adaptable responses on the project level
• However, the configurations also show that less control rules in contracts should be an inverse proportion of the other two rules.
• Practical and emancipatory rules are significant for communication, but not easily compatible.
• But, transferring more autonomy to projects through emancipatory rules in order to increase flexible local action introduces instability to the entire program because it decreases control of the local parts within the projects
• Communication-practical rules are then necessary for balance because these prevent the projects becoming increasingly modularised and remote from each other
what the results say
The rules depend on a) interdependence and b) modularity within the programs
PPP IST/eTEN EARSS
Mixed Interdependencies Low interdependence High interdependence
Medium Modularity High Modularity High Modularity
less linkage minimum linkage minimum linkage
combine practical & emancipatory
emancipatory practical
averse emancipatory
Conclusions Implications
• Org. complexity should not necessarily be reflected in complex
contracts
• Accept contract incompleteness, but focus on adaptation and
interdependence and use control to a measure
• Consider a combination of minimum critical specifications as control
(linkage) rules and strong combinations of either practical and/or
emancipatory rules (=systemic contract)
• Flexible and enabling, directs evolutionary-emergent action and
desirable behaviour, not just controls to deal with complex
contingencies
Ideas for Improvements & Further Suggestions
Dr Maria Kapsali
Browaldh fellow - Assistant Professor in Projects, Innovation and Networks
Umeå School of Business and Economics Umeå Universitet
Biblioteksgränd 6, 901 87 Umeå, Sweden
w: http://uk.linkedin.com/in/mariakapsali
Dr Jens RoehrichLecturer (Ass. Prof.) in Operations and Supply Management
School of Management
Information, Decision and Operations Group University of Bath e: [email protected]: www.bath.ac.uk/management
