Formal and relational contracts between organizations: proposal of a model for analysis of the transactional and governance structure characteristics of comparative cases

Ambrozini, Luciana Cardoso Siqueira; Martinelli, Dante Pinheiro

doi:10.1016/j.rausp.2017.08.010

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Corporate Governance • Rev. Adm. (São Paulo) 52 (4) • Oct-Dec 2017 • https://doi.org/10.1016/j.rausp.2017.08.010 copy

Formal and relational contracts between organizations: proposal of a model for analysis of the transactional and governance structure characteristics of comparative cases

Contratos formais e relacionais entre organizações: proposição de um modelo para análise das características transacionais e das estruturas de governança a partir de casos comparativos

Contratos formales y relacionales entre organizaciones: proposición de un modelo para el análisis de las características transaccionales y las estructuras de gobernanza a partir de casos comparativos

Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

The literature indicates that the use of formal and relational governance structures have a fundamental role in the conduct and maintenance of inter-organizational relationships. Nevertheless, there are possibilities for discussions about the composition and function of these structures in the presence of different transactional characteristics. Thus, a model based on the literatures of formal contracts, inter-organizational relationships, Relational Contract Theory, and Transaction Cost Economics is proposed. Since this is a qualitative exploratory research, six structured interviews were carried out and interpreted by means of Content Analysis for case comparison and discussion of theoretical propositions. It was observed that some transactional characteristics, when present with greater intensity in the context of a transaction, tend to corroborate the theoretical propositions of formal contractual function, demonstrating that the intensity of these characteristics is a relevant factor for analyzing the adequacy of governance structures. Likewise, the use of different relational norms presents variations within each characteristic analyzed. Other aspects explored in the Content Analysis are suggested in the composition of the analysis model. The propositions explored regarding the composition of the transaction context and the complementarity of governance structure of inter-organizational relationships are also discussed.

Keywords:
Interorganizational relations; Formal contractual content; Relational contractual content; Transaction Context

Contractual function	Safeguard	Coordination	Adaptation
Typical clauses	Property rights	Functions and responsibilities	Price adjustment
	Confidentiality	Communication (reporting)	Engineering changes
	Anticipated unilateral termination	Project scale	Compelling reason clauses
	Dispute resolution	Designation of specific staff

Transactional characteristics	Tendency of the formal contractual function	Authors
Dependence	Coordination	^{Mallewigt et al. (2012)}Mallewigt et al., 2012 Mallewigt, T., Decker, C., & Eckhard, B. (2012). What drives contract design in alliances? Taking stock and how to proceed. Zeitschrift für Betriebswirtschaft, 82(7), 839-864.
Uncertainty (environmental)	Adaptation	^{Mallewigt et al. (2012)}Mallewigt et al., 2012 Mallewigt, T., Decker, C., & Eckhard, B. (2012). What drives contract design in alliances? Taking stock and how to proceed. Zeitschrift für Betriebswirtschaft, 82(7), 839-864., ^{Rindfleisch and Heide (1997)}Rindfleisch and Heide, 1997 Rindfleisch, A., & Heide, J. B. (1997). Transaction cost analysis: Past, present, and future applications. Journal of Marketing, 61(4), 30-54.
Difficulty in measuring performance	Safeguard	^{Poppo and Zenger (2002)}Poppo and Zenger, 2002 Poppo, L., & Zenger, T. (2002). Do formal contracts and relational governance function as substitutes or complements?. Strategic Management Journal, 23, 707-725.
Asset specificity	Safeguard	^{Mallewigt et al. (2012)}Mallewigt et al., 2012 Mallewigt, T., Decker, C., & Eckhard, B. (2012). What drives contract design in alliances? Taking stock and how to proceed. Zeitschrift für Betriebswirtschaft, 82(7), 839-864., ^{Rindfleisch and Heide (1997)}Rindfleisch and Heide, 1997 Rindfleisch, A., & Heide, J. B. (1997). Transaction cost analysis: Past, present, and future applications. Journal of Marketing, 61(4), 30-54.
Transaction frequency	Coordination	^{Batenburg et al. (2003)}Batenburg et al., 2003 Batenburg, R. S., Raub, W., & Snijders, C. (2003). Contracts and contracts: Dyadic embeddedness and the contractual behavior of firms. Research in the Sociology of Organizations, 20, 135-188.
Relationship period	Coordination	^{Zollo et al. (2002)}Zollo et al., 2002 Zollo, M., Reuer, J. J., & Singh, H. (2002). Interorganizational routines and performance in strategic alliances. Organization Science, 13(6), 701-713.
Expectation of relationship continuity	Coordination	^{Reuer and Arino (2007)}Reuer and Arino, 2007 Reuer, J. J., & Arino, A. (2007). Strategic alliance contracts: Dimensions and determinants of contractual complexity. Strategic Management Journal, 28, 313-330.

Characteristics of the relationship which determine the vulnerability of the parties	Type of governance structure (formal/relational)	Authors
Dependence	Need for formal contractual governance sophistication; the parties are relevant in determining the governance structure.	^{Poppo and Zenger (2002)}Poppo and Zenger, 2002 Poppo, L., & Zenger, T. (2002). Do formal contracts and relational governance function as substitutes or complements?. Strategic Management Journal, 23, 707-725., ^{Schepker et al. (2014)}Schepker et al., 2014 Schepker, D. J., Oh, W., Martynov, A., & Poppo, L. (2014). The many futures of contracts: Moving beyond structure and safeguarding to coordination and adaptation. Journal of Management, 40(1), 193-225.
Uncertainty (task and environmental)	Incomplete contracts; need for relationship coordination and adaptation, relational governance becomes relevant. Still, environmental uncertainty results in less complex contracts.	^{Artz and Bush (2000)}Artz and Bush, 2000 Artz, K. W., & Bush, T. H. (2000). Asset specificity, uncertainty and relational norms: An examination of coordination costs in collaborative strategic alliances. Journal of Economic Behavior and Organization, 41, 337-362., ^{Cannon et al., 2000}Cannon et al., 2000 Cannon, J., Achrol, R., & Gunslach, G. (2000). Contracts, norms, and plural form governance. Journal of Academy of Marketing Science, 28(2), 180-194., ^{Crocker and Reynolds (1993)}Crocker and Reynolds, 1993 Crocker, K. J., & Reynolds, K. J. (1993). The efficiency of incomplete contracts: An empirical analysis of air force engine procurement. RAND Journal of Economics, 24(1), 126-146., ^{Williamson (1979)}Williamson, 1979 Williamson, O. (1979). Transaction-cost economics: The governance of contractual relations. Journal of Law and Economics, 22(2), 233-261., ^{Zhou et al. (2008)}Zhou et al., 2008 Zhou, K., Poppo, L., & Yang, Z. (2008). Relational ties or customized contracts? An examination of alternative governance. Journal of International Business Studies, 39, 526-534.
Difficulty in measuring performance	More contractual sophistication; certain contractual flexibility. In case of expectancy of relationship continuity, the relational clauses contribute to the reduction of risks arising due to the difficulty in measuring performance.	^{Mouzas and Blois (2013)}Mouzas and Blois, 2013 Mouzas, S., & Blois, K. (2013). Contract research today: Where do we stand?. Industrial Marketing Management, 42, 1057-1062., ^{Poppo and Zenger (2002)}Poppo and Zenger, 2002 Poppo, L., & Zenger, T. (2002). Do formal contracts and relational governance function as substitutes or complements?. Strategic Management Journal, 23, 707-725., ^{Poppo et al. (2008)}Poppo et al., 2008 Poppo, L., Zhou, K. Z., & Zenger, T. R. (2008). Examining the conditional limits of relational governance: Specialized assets, performance ambiguity, and long-standing ties. Journal of Management Sciences, 45(7), 1195-1216.
Asset specificity	Need for contractual governance sophistication; more complex contracts. Stricter contractual provisions. Contracts focused on safeguarding the parties. More contractual detailing would tend to reduce risk, decreasing the need of reliability.	^{Arranz and de Arroyabe (2012)}Arranz and de Arroyabe, 2012 Arranz, N., & de Arroyabe, J. C. F. (2012). Effect of formal contracts, relational norms and trust on performance of joint research and development projects. British Journal of Management, 23, 575-588., ^{Crocker and Reynolds (1993)}Crocker and Reynolds, 1993 Crocker, K. J., & Reynolds, K. J. (1993). The efficiency of incomplete contracts: An empirical analysis of air force engine procurement. RAND Journal of Economics, 24(1), 126-146., ^{Joskow (1988)}Joskow, 1988 Joskow, P. L. (1988). Asset specificity and the structure of vertical relationships: Empirical evidences. Journal of Law, Economics and Organization, 4(1), 95-117., ^{Lui et al. (2009)}Lui et al., 2009 Lui, S. S., Wong, Y., & Liu, W. (2009). Asset specificity roles in interfirm cooperation: Reducing opportunistic behavior or increasing cooperative behavior. Journal of Business Research, 62, 1214-1219., ^{Malhotra and Munigham (2002)}Malhotra and Munigham, 2002 Malhotra, D., & Munigham, J. K. (2002). The effects of contracts on interpersonal trust. Administrative Science Quarterly, 47, 534-559., ^{Reuer and Arino (2007)}Reuer and Arino, 2007 Reuer, J. J., & Arino, A. (2007). Strategic alliance contracts: Dimensions and determinants of contractual complexity. Strategic Management Journal, 28, 313-330., ^{Riordan and Williamson (1985)}Riordan and Williamson, 1985 Riordan, M. H., & Williamson, O. E. (1985). Asset specificity and economic organization. International Journal of Industrial Organization, 3(4), 365-378., ^{Schepker et al. (2014)}Schepker et al., 2014 Schepker, D. J., Oh, W., Martynov, A., & Poppo, L. (2014). The many futures of contracts: Moving beyond structure and safeguarding to coordination and adaptation. Journal of Management, 40(1), 193-225., ^{Williamson (1979)}Williamson, 1979 Williamson, O. (1979). Transaction-cost economics: The governance of contractual relations. Journal of Law and Economics, 22(2), 233-261., ^{Zhou and Poppo (2010)}Zhou and Poppo, 2010 Zhou, K., & Poppo, L. (2010). Exchange hazards, relational reliability, and contracts in China: The contingent role of legal enforceability. Journal of International Business Studies, 41, 861-881.
Transaction frequency	The greater the relationship frequency, the more information about the other party, and the less relevant the formal contract is. The lower the frequency and the less information about the other party you have, the more relevance the formal contract has.	^{Poppo and Zenger (2002)}Poppo and Zenger, 2002 Poppo, L., & Zenger, T. (2002). Do formal contracts and relational governance function as substitutes or complements?. Strategic Management Journal, 23, 707-725. ^{Williamson (1985)}Williamson, 1985 Williamson, O. (1985). The economic institutions of capitalism: Firms, markets, relational contracting. Nova Iorque: The Free Press.
Duration of relationship	The longer the relationship, the more relational governance is used in conducting inter-organizational relationships, due to the reduction of uncertainty and increase in reliability between the parties. In the use of formal governance, greater contract specification is possible. The less history between the parties, the less the tendency to develop relational practices and norms.	^{Crocker and Reynolds (1993)}Crocker and Reynolds, 1993 Crocker, K. J., & Reynolds, K. J. (1993). The efficiency of incomplete contracts: An empirical analysis of air force engine procurement. RAND Journal of Economics, 24(1), 126-146., ^{Luo (2002)}Luo, 2002 Luo, Y. (2002). Contract, cooperation, and performance in international joint ventures. Strategic Management Journal, 23, 903-919., ^{Poppo and Zenger (2002)}Poppo and Zenger, 2002 Poppo, L., & Zenger, T. (2002). Do formal contracts and relational governance function as substitutes or complements?. Strategic Management Journal, 23, 707-725., ^{Poppo et al. (2008)}Poppo et al., 2008 Poppo, L., Zhou, K. Z., & Zenger, T. R. (2008). Examining the conditional limits of relational governance: Specialized assets, performance ambiguity, and long-standing ties. Journal of Management Sciences, 45(7), 1195-1216., ^{Tsamenyi et al. (2013)}Tsamenyi et al., 2013 Tsamenyi, M., Qureshi, A. Z., & Yazdifar, H. (2013). The contract, accounting and trust: A case study of an international joint venture (IJV) in the United Arab Emirates (UAE). Accounting Forum, 37, 182-195.
Expectation of relationship continuity	The expectancy of relationship continuity decreases the short-term horizon of the parties, thereby also decreasing the tendency of opportunistic behaviors, and having greater relational presence.	^{Poppo and Zenger (2002)}Poppo and Zenger, 2002 Poppo, L., & Zenger, T. (2002). Do formal contracts and relational governance function as substitutes or complements?. Strategic Management Journal, 23, 707-725., ^{Williamson (1993)}Williamson, 1993 Williamson, O. (1993). Calculativeness, trust, and economic organization. Journal of Law and Economics, 36, 453-486.

Propositions	Transaction characteristic	Tendency of the role of formal contracts	Tendency to formal structures	Tendency to relational structures
1st.	Dependence	Coordinate	+	-
2nd.	Uncertainty	Adapt	-	+
3rd.	Measurement difficulty	Safeguard	+	-
4th.	Asset Specificity	Safeguard	+	-
5th.	Frequency	Coordinate	-	+
6th.	Duration of the Relationship	Coordinate	-	+
7th.	Expectation of continuity	Coordinate	-	+

Constructs	Variables analyzed	Work that base the interview protocol	Number of questions per variable
Relational governance structure: norms analyzed from the Theory of Relational Contracts	Integrity function	^{Kaufmann and Dant (1992)}Kaufmann and Dant, 1992 Kaufmann, P. J., & Dant, R. P. (1992). The dimensions of commercial exchange. Marketing Letters, 3(2), 171-185.	7
	Relational focus (composed by the planning norms and consent establishing)	^{Kaufmann and Dant (1992)}Kaufmann and Dant, 1992 Kaufmann, P. J., & Dant, R. P. (1992). The dimensions of commercial exchange. Marketing Letters, 3(2), 171-185.	5
	Reciprocity	^{Kaufmann and Dant (1992)}Kaufmann and Dant, 1992 Kaufmann, P. J., & Dant, R. P. (1992). The dimensions of commercial exchange. Marketing Letters, 3(2), 171-185.	5
	Sympathy		7
	Power limitation	^{Kaufmann and Dant (1992)}Kaufmann and Dant, 1992 Kaufmann, P. J., & Dant, R. P. (1992). The dimensions of commercial exchange. Marketing Letters, 3(2), 171-185.	4
	Harmonization with the social framework - conflict resolution	^{Kaufmann and Dant (1992)}Kaufmann and Dant, 1992 Kaufmann, P. J., & Dant, R. P. (1992). The dimensions of commercial exchange. Marketing Letters, 3(2), 171-185.	2
	Flexibility	^{Kaufmann and Dant (1992)}Kaufmann and Dant, 1992 Kaufmann, P. J., & Dant, R. P. (1992). The dimensions of commercial exchange. Marketing Letters, 3(2), 171-185.	5
	Adequacy of means	^{Blois and Ivens (2007)}Blois and Ivens, 2007 Blois, K., & Ivens, B. S. (2007). Method issues in measurement of relational norms. Journal of Business Research, 60, 556-565.	3

Formal governance structure: formal contractual content and complexity - basis in the contract literature	Prevailing contractual function (presence/lack of safeguard clauses, coordination, adaptation)	^{Mallewigt et al. (2012)}Mallewigt et al., 2012 Mallewigt, T., Decker, C., & Eckhard, B. (2012). What drives contract design in alliances? Taking stock and how to proceed. Zeitschrift für Betriebswirtschaft, 82(7), 839-864., ^{Parkhe (1993)}Parkhe, 1993 Parkhe, A. (1993). Strategic alliance structuring: A game theoretic and transaction cost examination of interfirm cooperation. Academy of Management Journal, 36(4), 794-829.	11
	Contractual complexity - presence/lack of clauses which indicate complexity		8

Transactional characteristics - basis in the Theory of Transaction Costs Economics and literature in inter-organizational relationships	Dependence	^{Heide (1994)}Heide, 1994 Heide, J. B. (1994). Interorganizational governance in marketing channels. Journal of Marketing, 58(1), 71-85.	4
	Uncertainty	^{Artz and Bush (2000)}Artz and Bush, 2000 Artz, K. W., & Bush, T. H. (2000). Asset specificity, uncertainty and relational norms: An examination of coordination costs in collaborative strategic alliances. Journal of Economic Behavior and Organization, 41, 337-362.	3
	Difficulty in measuring performance	^{Weber et al. (2011)}Weber et al., 2011 Weber, L., Mayer, K. J., & Marcher, J. T. (2011). An analysis of extendibility and early termination provision. Academy of Management Journal, 54(1), 182-202.	2
	Asset specificity	^{Artz and Bush (2000)}Artz and Bush, 2000 Artz, K. W., & Bush, T. H. (2000). Asset specificity, uncertainty and relational norms: An examination of coordination costs in collaborative strategic alliances. Journal of Economic Behavior and Organization, 41, 337-362.	3
	Transactional Frequency	^{Poppo and Zhou (2014)}Poppo and Zhou, 2014 Poppo, L., & Zhou, K. Z. (2014). Managing contracts for fairness in buyer–supplier exchanges. Strategic Management Journal, 35(10), 1508-1527.	1
	Relationship duration	^{Poppo and Zhou (2014)}Poppo and Zhou, 2014 Poppo, L., & Zhou, K. Z. (2014). Managing contracts for fairness in buyer–supplier exchanges. Strategic Management Journal, 35(10), 1508-1527., ^{Poppo et al. (2008)}Poppo et al., 2008 Poppo, L., Zhou, K. Z., & Zenger, T. R. (2008). Examining the conditional limits of relational governance: Specialized assets, performance ambiguity, and long-standing ties. Journal of Management Sciences, 45(7), 1195-1216.	1
	Expectation of relationship continuity	^{Heide and Miner (1992)}Heide and Miner, 1992 Heide, J. B., & Miner, A. S. (1992). The shadow of the future: Effects of anticipated interaction and frequency of contact on buyer-seller cooperation. Academy of Management Journal, 35(2), 265-291.	3

Company	Economic sector of the company	Position of the interviewee	Relationship type in analysis
1	Biotechnology - production of techniques for DNA and RNA identification	Company owner	Relationship of pre-incubated company with the incubator
2	Technology - development of interaction platform for education	Company owner	Relationship of incubated company with the incubator
3	Biotechnology - service provider in quality certification in the field of biochemistry and projects incorporating new principles in cosmetics	Company owner	Relationship of associated company with the incubator
4	Medical and hospital equipment - equipment manufacturer	Company owner	Relationship of associated company to the formalized local productive arrangement
5	Footwear: production of children's shoes	Company owner	Relationship with the main input supplier
6	Agriculture: sugar mill	Contract Manager	Relationship with the main input supplier

Company	Interview excerpt	Interpretation	Variable: dependency
1 - Pre-incubated	"I would describe, in general, as a great difficulty" (to replace the resources found in the current partnership). (...) "There would be a lot of difficulty if we didn't have the relationship with the incubator (...)such a structure makes it easier". "On the current condition we are, in the beginning and so on, there are a series of resources, a series of business knowledge". "... (the change of structure) besides burdening, I am not sure we would make it, (...) I am not sure we could get anything more in our field in biotechnology because many times there may be (...) biotechnology has a little different profile, more to long term, so I don't think it would be that easy to find this kind of support".	Dependence perception of great intensity by the interviewee, since he mentions three times how difficult it would be to not have a relationship with the incubator.	High dependence perception of the relationship
		Dependence perception not only regarding the resources found in the incubator structure, but also issues concerning the life cycle of the company.	Perception of influence in the life cycle of the company.
		Perception of the difficulty of adapting the productive system in another structure.	Perception of influence of the company sector regarding dependency.

Constructs	Variables analyzed	Pre-incubated	Incubated	Associated	Medical hospital equipment	Footwear	Mill
Relational governance structure	Integrity role	High - R	Moderate - R/D	Moderate - R/D	Moderate - R/D	Low - D	Lack - D
	Discretion increase (implementation of planning and effectuation of consent)	Low - R	Moderate - R/D	High - D	Low - R	Moderate - R/D	High - D
	Reciprocity	Moderate - R/D	Moderate - R/D	Low - D	High - R	Low - D	Low - D
	Contractual solidarity	High - R	High - R	Moderate - R/D	Moderate - R/D	Low - D	High - R
	Creation and restraint of power;	High - R	High - R	Moderate - R/D	High - R	Moderate - R/D	High - R
	Harmonization of the social matrix	High relational - R	High relational - R	Moderate relational - R/D	High relational - R	Moderate formal - D	High relational - R
	Flexibility	High - R	High - R	High - R	High - R	Moderate - R/D	Low - D
	Propriety of mean	Moderate - R/D	Moderate - R/D	Moderate - R/D	High - R	Moderate - R/D	Alta - R
	Spectrum of discrete relationship and relational tendency	Relational tendency	Relational tendency with lesser intensity	Discrete relationship tendency	Relational tendency	Discrete relationship tendency	Balanced relational and discrete tendencies

Formal governance structure	Predominant contractual function	Balance among the three functions	Predominance in the safeguard function	Balance between the safeguard and coordination functions	Lack of formal contract	Predominance of safeguard function	Predominance of safeguard function
Formal governance structure	Contractual complexity	Moderate	High	Moderate	Lack of formal contract	Moderate	Low

Transactional characteristics	Characteristics of the transactional context with greater intensity	Dependence; expectation of continuity	Difficulty in measuring performance; expectation of continuity	Asset specificity; expectation of continuity	Expectation of continuity	Uncertainty; asset specificity; expectation of continuity	Expectation of continuity

Propositions			Observations regarding the propositions drawn from the literature	Aspects explored from the case analysis for the model composition
1st	Dependence	> Contractual formality Coordination function	Proposition not corroborated.	Dependence may be altered due to the life cycle of the contracting parties and the type of resources traded. If such propositions were corroborated, the data collection method should include such variations to better analyze the influence of dependence between the parties and its effects on the relationship governance.

2nd	Uncertainty	> Contractual informality Adaptation function	Proposition not corroborated, even in extreme cases of greater or lesser uncertainty.	Variations in the institutional aspects (i.e. organization's operation in the international market, perception of consistency in public, economic, and tax policies which affect the organization) influence the uncertainty perception, and consequently the contracting form between the companies.

3rd	Difficulty in measuring performance	> Contractual formality Safeguarding function	Contractual function not corroborated.	In case of difficulty in measuring performance, the life cycle of the organization seems to influence the way the companies contract. Cultural differences hamper the measurement of performance, altering the governance structures.
3rd	Difficulty in measuring performance	> Contractual formality Safeguarding function	Corroborated in cases in which the difficulty of measuring performance is intensive.

4th	Asset specificity	> Contractual formality Safeguarding function	Contractual function corroborated.	The industry sector tends to alter the need for specific investment to the relationship. The use of this variable in the model would play the role of controlling the interaction of asset specificity and governance form for a broader sample.
4th	Asset specificity	> Contractual formality Safeguarding function	Corroborated in cases with greater intensity of asset specificity.

5th	Frequency	> Contractual informality Coordination function	Proposition for more frequent interaction corroborated.	In the most frequent relationships, the relational governance structures tend to be used along with formal contracts, which are not viewed as coordination tools, so it is proposed that the way the contracts are used by the parties be analyzed. The life cycle of the organizations, along with the transactional characteristics of dependence, tend to increase the interaction of the organizations, using mainly relational contracts.

6th	> Duration of relationship	> Contractual informality Coordination function	Proposition not corroborated.	The interviewees point to different uses of contracts in different stages of the relationship. The intensity of the use of formal and relational governance structures vary during the relationship.

7th	> Expectation of continuity	> Contractual informality Coordination function	The presence of expectations was homogeneous in the cases, and was not considered a variable which differentiates the standards of contractual governance structure.	It is proposed that the dependence level of the partner influences the expectation of continuity of the relationship, altering the way the transactions are governed.

Departamento de Administração da Faculdade de Economia, Administração e Contabilidade da Universidade de São Paulo Avenida Professor Luciano Gualberto, 908, sala F184, 05508-900 São Paulo / SP Brasil, Tel./Fax 55 11 3818-4002 - São Paulo - SP - Brazil
E-mail: rausp@usp.br

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[1] * Corresponding author at: Avenida dos Bandeirantes, 3900, CEP 14040-900 Ribeirão Preto, SP, Brazil. E-mail:lucianasiqueira@usp.br (L.C. Ambrozini).