The Use of Management Controls To Mitigate Risk in Strategic Alliances: Field and Survey Evidence

JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH American Accounting Association
Vol. 26, No. 1 DOI: 10.2308/jmar-50621

2014
pp. 1-32
The Use of Management Controls to Mitigate
Risk in Strategic Alliances: Field and Survey
Evidence
Shannon W. Anderson
University of California, Davis
Margaret H. Christ
The University of Georgia
Henri C. Dekker
VU University
Karen L. Sedatole
Michigan State University
ABSTRACT: Transaction cost economics (TOE) theory is widely used to study the
governance and management control practices used to mitigate interfirm alliance risk.
Following Williamson (1985, 1991), empirical studies typically measure transaction
characteristics that proxy for risk in alliances (e.g., asset specificity), and test for a
relation between these measures and alliance management control choices. A common
criticism of studies in this literature is that they typically focus on a narrow set of
governance decisions (e.g., make versus buy) or control practices (e.g., specific contract
terms). We posit that an equally limiting aspect of this literature is its reliance on risk
proxies measured at the level of the individual transaction. These proxies fail to explicate
specific alliance risks and, coupled with an undue focus on transactions rather than the
totality of interfirm relationships, limit our understanding of how risks give rise to
management controls more broadly defined. In this study we use field-based research
and survey methods to develop a comprehensive inventory of the specific risks that
managers anticipate and to provide insight regarding their prevalence across different
types of interfirm alliances. Our analysis of the data supports an extant classification
scheme that dichotomizes alliance risk as relational risk or performance risk (Das and
Teng 1996, 2001). However, our analysis reveals another distinct risk category
compliance and regulatory riskthat figures prominently in accounting risk frameworks
(i.e., COSO). Our exploratory analysis of correlation in the use of management controls,
including contracts as well as pre- and post-contractual control processes, reveals six
sets of alliance control practices. Relating these to risks, we find that performance risk is
associated primarily with careful parfner selection and contractual outcome agreements;
This project was funded by a grant from the Institute of Internal Auditors Research Foundation. Professor Dekker
acknowledges support from The University of Melbourne, where he serves as a professorial fellow.
Published Online: September 2013
2 Anderson, Christ, Dekker, and Sedatole
relational risk is associated primarily with explicit exit agreements; and, compliance and
regulatory risk is associated primarily with informal controls. In addition, we find that as
compared to contractual alliances, alliances with shared ownership (i.e., joint ventures)
make greater use of financial controls and informal controls. By identifying specific risks
and controls used in practice and providing preliminary evidence of their relationships,
this study provides a reference for future researchers seeking to provide more
meaningful insight into the relationship between interfirm alliance risk environment and
control systems.
Keywords: strategic alliances; risk; management controls.
INTRODUCTION
S
trategic alliances involve voluntary collaboration between legally independent firms and, as
hybrid organizational forms, fall along the continuum of arms-length market transactions
(i.e., buy) and vertical integration (i.e., make) (Williamson 1991). Alliance activities
typically include some mix of joint activities such as product or process development, knowledge
and technology sharing, production, or marketing. Alliances offer benefits that firms would have
difficulty realizing on their own; for example, allowing firms to reduce costs and/or risk, expand
scale, access new markets, or access knowledge or technology that is critical to innovation. These
collaborations are intended to replace adversarial, transactions-based exchanges with close working
relationships that are characterized by enhanced resource and information sharing, shared expertise,
and joint problem solving (Anderson and Sedatole 2003; Dekker 2004).
At the outset, the joint activities that define alliances are often fraught with uncertainty,
require significant investments by one or both parties in physical or human capital that are
specific to the alliance, and require coordination and communication over an extended time
period. Management control problems stem from overlapping but separate profit motives of
partners, the absence of a central authority that can impose governance through fiat, and the
role of courts of law and other third-party arbitrators in severe cases of alliance failure
(Williamson 1991; Menard 1995). In spite of their popularity, alliances suffer a high incidence
of failure; Lunnan and Haugland (2008) report alliance termination rates between 30 and 70
percent. This high rate of failure is typically attributed to alliance risks, and indeed the alliance
literature views risk management capability as critical for alliance success (Schreiner, Kale, and
Corsten 2009).
Transaction cost economics (TCE) theory is widely used to study the governance and
management control practices used to mitigate interfirm alliance risk. Following Williamson
(1985, 1991), empirical studies typically measure transaction characteristics ihsA proxy for risk in
alliances (e.g., asset specificity), and test for a relation between these measures and alliance
management control choices. A common criticism of studies in this literature is that they typically
take a limited view of alliance management control, focusing on a narrow set of governance
decisions (e.g., make versus buy) or control practices (e.g., specific contract terms) (Caglio and
Ditillo 2008). ' While we agree with this criticism, we posit that an equally limiting aspect of this
literature is its reliance on risk proxies measured at the level of the individual transaction. These
' Studies that do take a broader approach to examining control in interfirm settings typically rely on qualitative
research (e.g.. Van der Meer-Kooistra and Vosselman 2000; Dekker 2004). Management controls are rarely
studied in their specific forms. Rather, controls are studied in aggregate categories suggested by management
control frameworks such as Ouchi' s (1979) widely used categories of outcome controls, behavioral controls, and
social or clan controls.
Y w nuntHig Jouml of Management Accounting Research
y ^ Association Volume 26, Number 1, 2014
Use of Management Controls to Mitigate Risk in Strategic Alliances: Field and Survey Evidence 3
proxies fail to explicate specific alliance risks and, coupled with an undue focus on transactions
rather than the totality of interfirm relationships, limit our understanding of how risks give rise to
management controls more broadly defined. In this study we employ field-based research and
survey methods to develop a comprehensive inventory of the specific risks that managers
anticipate and the broad set of management control practices used to mitigate those risks in
interfirm alliances. In doing so, we seek to provide a foundation for future researchers seeking to
provide more meaningful insights into the relationship between the interfirm alliance risk
environment and control system design.
To explore empirically the specific risks that firms face in alliance activities and the specific
control practices they employ to manage risk, we first assemble an extensive inventory of alliance
risks and management controls from a review of the academic and practitioner literature. We then
conduct field research and survey research, in parallel. In the field research, we probe, in loosely
directed, open-ended interviews, the specific risk exposures and management control responses of
three large U.S. companies with significant alliance activity. We interview 38 key managers with
alliance risk management responsibility and perform content analysis of the interview transcripts
to identify a broad range of alliance risks and use of alliance management controls. We iterate on
the transcripts, using the comprehensive inventory of risks and controls to add structure to the
initial coding. This allows us to assess the prevalence and co-incidence of known alliance risks
and management controls, and to identify risks and controls that were unanticipated.
Simultaneous with the fieldwork, we survey a broader cross section of U.S. firms that make
significant use of strategy alliances to gather data about the incidence of specific risks and the use
of specific management controls. We obtain responses from 56 chief audit executives with
significant responsibility for risk management in alliances. The survey asks the executives to
evaluate one alliance with which they are very familiar that is important for the firm. We use
exploratory factor analysis and regression anafysis to examine patterns of association between
and among the risks and controls.
Data analysis from both research modes corroborates the comprehensiveness of our
inventory of specific risks and highlights their relative importance and prevalence. A strength of
the field research method is the opportunity to "discover" the unanticipated, and indeed our
research surfaces some unidentified specific risks including political risk associated with
international partners, risks associated with failure to maintain the perception of fairness and
equity in the relationship (and related, in the perception of favoritism among competing supply
partners), and risks associated with failed measurement and tracking systems related to resource
consumption.^ Our observations and interviews are guided by prior descriptions of alliance risks
and controls; however, the interview process and subsequent data analysis are robust to new
perspectives. A strength of survey research is the opportunity to assess patterns of association in
larger samples than field research may allow. The exploratory anafysis of covariations among
specific risks from the survey data reveals patterns of association that are largely consistent with
an extant classification scheme from the management literature that dichotomizes the specific
aUiance risks from our inventory into one of two categories: relational risk or performance risk
(Das and Teng 1996, 2001). However, both research methods reveal another distinct risk
^ While a more thorough search of the literature may well have anticipated these risks, the importance of these
discoveries in this study is that they provide evidence that the interviewer did not lead the interviewees to a
circumscribed set of responses.
Journal of Management Accounting Research Vf
Volume 26, Number 1, 2014 V
category: compliance and regulatory risk, which figures prominently in accounting risk
frameworks (i.e., COSO 2004) but has received little mention in the alliance management
literature. Compliance and regulatory risk in the alliance setting is the risk that a partner will
expose the firm to sanctions from a third party by failing to comply with customer requirements,
firm policies, or govemment laws and regulations.^
Data analysis from both research modes also corroborates the relevance of the comprehensive
inventory of controls that we assembled before data collection. However, as in the case of specific
risks, the field research surfaced several management control practices that were not fully
anticipated. Examples include the development of internal partner certification standards, the
development of knowledge databases to capture "learning" in alliances, and the use of internal
organizational design approaches to separate alliance risk management groups from the operating
businesses. Exploratory analysis of the survey data also reveals common patterns of use of specific
alliance controls. When we use exploratory factor analysis to reduce the dimensionality of 31
alliance controls covered by the survey, we find six groups of alliance control practices. This
"bottom-up" approach to asking managers to ascertain the use of specific management controls,
followed by data reduction to identify groups of practices that are used in tandem, differs from prior
studies that take a "top-down" approach of asking managers to directly assess the use of control
categories from an extant management control framework (e.g., outcome, behavior, and social
controls, as in Dekker [2004] and Emsley and Kidon [2007]). To be clear, the results of our
bottom-up analysis of specific controls do not displace familiar management control frameworks
(e.g.. Merchant and Van der Stede 2007; Simons 1995).^ However, we posit that directly measuring
risk and directly assessing management control practices will help to advance our understanding of
how risk translates into decisions about management control. Our analysis thus provides
empirically grounded categories of alliance management control that may help future researchers
assess control more broadly than contracts alone permit, and with specificity that direct
measurement of control categories from extant frameworks may obscure.
Finally, we use survey data to explore associations between risk and control dimensions.^ We
find that performance risk is associated primarily with careful partner selection and contractual
outcome agreements; relational risk is associated primarily with explicit exit agreements; and
compliance and regulatory risk is associated primarily with informal controls. In addition, we find
that use of alliance controls differs between alliances organized as joint ventures (JVs) (i.e., shared
equity) and those that rely on contractual agreements. JVs make relafively greater use of financial
control and informal controls. The survey database includes data on alliances with different
purposes (i.e., upstream, downstream, marketing, and R&D alliances), and we explore whether
these differences are associated with different relationships between risk and control. We find only
Limited evidence of such differences, suggesting that differences in the use of alliance controls are
better explained by risk and governance mode than by the type of alfiance.
Importantly, compliance and regulatory risk is not related to coordination of activities (performance risk), nor to
the partner's attempt to capture an unfair share of the alliance rents (relational risk), but rather to the choices
made by the partner to comply (or not) with rules and regulations, or to act (or not) in a fiscally responsible
manner. This risk, thus, recognizes other parties important to collaboration success such as regulators, lenders,
investors, and customers. Further, while the categories of performance and relational risk focus on the source of
risk, compliance and regulatory risk focuses on how risk jeopardizes firm well being; namely, through third-
party imposed sanctions.
In Anderson, Christ, Dekker, and Sedatole (2013a) we use the field research data to consider how extant
management control frameworks fit with the alliance control practices of the three firms.
Although we also sought to associate risks and controls in the interview data, this proved very difficult. As we
describe later, interviewees tended to discuss groups of risks and groups of controls, so "matching" a risk with
one or more controls was not often possible.
Journal of Management Accounting Research
Volume 26, Number 1, 2014
This study contributes to the literature on management control of alliances by providing
exploratory evidence of the nature and prevalence of specific alliance risks and a comprehensive set
of management controls that are observed in practice. Caglio and Ditillo (2008) note the tendency
of researchers to focus on narrow sets of controls and on control solutions without a clear
understanding and articulation of the risks they were meant to address. This narrow focus conflicts
with practice-based risk management frameworks that reflect the multi-dimensionality of risks (e.g.,
COSO 2004) and with theoretical management control frameworks that describe intra-firm
management control practices as a portfolio of policies and procedures (e.g.. Merchant and Van der
Stede 2007; Simons 1995). This study provides a rich description of the management controls used
to mcinage alliance risk, thereby opening the "black box" of broad risk and control categories used
in prior research, and providing preliminary evidence of associations between them.
The next section of the paper reviews relevant research literature and provides a theoretical
foundation for our research. The third section describes the field research sites and the research
methods and summarizes data from the field studies on firms' exposure to alliance risk and use of
controls. The fourth section describes the survey methods, compares the incidence of risk and the
use of controls between the survey sample and the field research firms, and presents the results of
exploratory analysis of the association between risk and controls usage. The fifth section concludes
with a discussion of directions for future research.
REVIEW OF SELECTED RESEARCH ON RISK AND MANAGEMENT CONTROL IN
STRATEGIC ALLIANCES
Evidence that alliances suffer a high incidence of failure has focused researchers' attention on
alliance risk and risk mitigation practices. Prior research has differentiated between two main
categories of alliance risk: relational risk and performance risk (Das and Teng 1996, 2001).
Relational risk relates to a partner's inability to capture a fair share of the rents generated by an
alliance and arises from behavioral uncertainty of the alliance partner, coupled with investments in
alliance-specific assets and incomplete contracts (Gulati and Singh 1998; Dekker 2004;
Langfield-Smith 2008). Transaction cost economics (Williamson 1985) focuses on governance
choices that efficiently mitigate relational risk. These choices are the alliance analog to intra-rm
agency problems of moral hazard and adverse selection (Caglio and Ditillo 2008). As such,
relational risk is the focus of research that posits that concerns about appropriation influence firms'
choice of governance form (Williamson 1991), as well as earlier and later decisions concerning
partner selection, contract design, and the development of post-contractual control mechanisms.*
Recent studies (e.g., Dekker 2004; Malhotra and Lumineau 2011) note that the mitigation of
relational risks is not the onlyand in many cases not even the most importantrole for controls in
alliances. Controls are also used to mitigate performance risk. Performance risk is the risk of
performance failure despite fuU cooperation (Das and Teng 2001). This may result from
unanticipated extemal changes or events, high complexity of alliance tasks, and ineffective
coordination and communication between alliance partners. The primary role of controls in
mitigating performance risk is effective coordination. Gulati and Singh (1998, 782) define effective
coordination as "the anticipated organizational complexity of decomposing tasks among partners
along with ongoing coordination of activities to be completed jointly or individually across
organization boundaries and the related extent of communication and decisions that would be
necessary." Schreiner et al. (2009) conclude that effective alliance management includes
* See Geyskens, Steenkamp, and Kumar (2006) and Macher and Richman (2008) for recent reviews of the
empirical TCE literature, and Anderson and Dekker (2010) for a review of TCE based research regarding the
governance and control of alliances.
Journal of Management Accounting Research Y *
mechanisms to prevent opportunistic hazards, as well as mechanisms to facilitate coordination and
communication that enable desired alliance outcomes to be realized.
While the notions of relational and performance risk (explicitly and sometimes implicitly)
underUe most empirical analyses of alliance governance, risk exposure is typically measured using
the TCE convention of inferring them indirectly from alliance transaction characteristics.
Characteristics that are commonly considered include the extent of investments in specific assets,
external and internal uncertainties, task or transaction interdependencies, firm dependence, and the
extent of prior interactions between partners (e.g., Anderson and Dekker 2005; Dekker, Sakaguchi
and Kawai 2013; Gulati and Singh 1998; Oxley and Sampson 2004; Reuer and Ario 2007;
Vanneste and Puranam 2010). Evidence of statistically significant associations between transaction
characteristics and observed governance choices is interpreted as support for the theory that
managers recognize risks associated with these characteristics, and respond with governance and
management control choices that mitigate alliance risk. More direct assessments of the specific risks
that managers anticipate (e.g., financial default, product failure, coordination problems, intellectual
property loss, price renegotiation) are rare, and typically restricted to case research in which alliance
managers identify the collaborative problems and risks they face (e.g., Dekker 2004; Mouritsen, A.
Hansen, and C. Hansen 2001; Van der Meer-Kooistra and Vosselman 2000). Prior literature thus
provides only limited guidance on the sources and types of risk exposure that concern alliance
managers, and about the linkage between alliance risks and the specific management controls used.
Risk perceptions are hypothesized to infiuence choices of alliance structure and investments in
control practices (Das and Teng 2001). Thus, we posit that developing a more comprehensive
understanding of the risks that managers anticipate in alliances is an important step in refining our
knowledge of the association between risk and management control practices.
Studies of alliance management controls tend to focus on a narrow subset of control choices.
Control choices include, for example, choosing the organizational governance form (e.g., joint
venture or contractual alliance as in Gulati [1995]; Gulati and Singh [1998]), determining the scope
of aUiance activities (Li, Eden, Hitt, and Ireland 2008; Oxley and Sampson 2004), determining the
collaborative tone of the contract (Krishnan, Miller, and Sedatole 2011), and selecting parmers and
negotiating contracts (e.g., Anderson and Dekker 2005; Dekker 2008; Reuer and Ario 2007). In
their selective review of the accounting literature on interfirm collaboration, Caglio and Ditillo
(2008) identify three streams of research on interfirm management control: studies that develop
general taxonomies of control practices used by different alliance forms (e.g.. Van der
Meer-Kooistra and Vosselman 2000); studies that identify factors associated with the use of
specific alliance controls (e.g., contract terms in Anderson and Dekker [2005] and Krishnan et al.
[2011]; incentive design in Dekker [2004]; performance reviews in Schloetzer [2012]; partner
selection in Dekker [2008]; trust in Emsley and Kidon [2007]); and studies that examine how
alliance partners use accounting data to facilitate alliance activities (e.g., Mouritsen et al. 2001;
Cooper and Slagmulder 2004). All three of these research streams typically make use of TCE
theory. However, few studies examine comprehensively the variety of alliance risks that firms
encounter during the day-to-day operations of the alliance or the full array of management controls
used to manage alliance risk. Thus, the question remains whether alliance managers perceive risks
in the manner predicted by TCE and, if not, what "theory in use" describes the perceived alliance
risks and their management control responses. Accordingly, to develop greater specificity in the
contingent relation between risks and controls in strategic alliances, we propose to take a
"bottom-up" approach of: (1) developing a comprehensive inventory of alliance risks and alliance
management controls, (2) evaluating the prevalence of these risks and controls in firms with
significant alliance activity, and (3) examining the patterns of use and association between and
among these risks and controls. We use both field-based and survey research methodsa combined
"depth" and "breadth" strategyto meet these objectives.
\ r y *Mo'unt"ng Joumal of Management Accounting Research
y y Association Volume 26, Number I, 2014
EXPLORATORY FIELD RESEARCH: SITE SELECTION, INTERVIEWS, AND
ANALYSIS METHODS
Site and Interviewee Selection and Interview Process
Our research sponsor, the Institute of Internal Auditors Research Foundation, identified
approximately 25 large member firms that were willing to collaborate with the researchers. After
studying public records,^ we selected six firms with significant and varied alliance activity and
contacted the chief audit executives. Our goal was to select no more than three firms due to time and
cost constraints. Four firms were willing to participate (two of the six that we contacted were unable
to participate within the specified time frame) and we selected three that, taken together, provided
opportunities to explore, in depth, the risks associated with partnering for a variety of purposes
including: R&D and co-development of products, collaborative supply chain relations,
collaborative distribution or end-customer arrangements, and co-branding and marketing.^
Confidentiality restrictions preclude identifying the firms by name. We thus employ the descriptive
labels: BIOTECH, TECHNOLOGY, and RETAIL (the discarded firm was most similar to the firm
we call RETAIL). The profiles below provide a limited description of each firm and its alliance
activities.
BIOTECH is a large U.S. firm with international R&D, sales, and production that combines
biological, chemical, and manufacturing expertise to create innovative products to industrial
customers. Key alliance activities include collaborative research and development activities
and technology licensing. The firm has a long history of forming (and when appropriate,
dissolving) alliances. These alliances vary in form, including joint ventures and strategic
partnerships. Alliances are as likely to be with international as with domestic firms, and are
frequently formed with competitors;
TECHNOLOGY is a large U.S. firm with international R&D, sales, and production that sells
consumer and business software, hardware, and support services. The critical demands of
marrying hardware and software make strategic alliances pervasive. The firm's critical alliance
activities include collaborative research and development activities, technology licensing,
supply chain management, co-branding products and marketing, and distribution partnerships.
Marketing and distribution partnerships are managed through a formal, standardized
partnership program, aimed at ensuring that all partners adhere to TECHNOLOGY'S terms,
but also receive similar benefits; and
RETAIL is a large U.S. general merchandising firm with domestic sales that pass through three
channelsstores, catalog, and internet. In addition to apparel, accessories, and home
furnishings, the firm provides photography, optical, salon, and decorating services. The firm
operates over 1,000 stores that sell a blend of national brands and private label products. Key
alliance activities include strategic marketing and co-branding relationships, and strategic
supply chain management.
After securing firm participation, we sent a letter to the chief audit executive introducing the
study and its objectives and describing the risk management responsibilities of ideal interviewees.
Consistent with our focus on business continuity management over the full value chain, we noted
our interest in both operational and financial risk management of strategic alliances. All of the firms
These included Thompson's SDC Platinum database on strategic alliance announcements, company press
releases, and the popular business press.
The discarded firm was most similar to the firm we call RETAIL.
have alliances that span the full spectrum from joint ventures to bilateral and unilateral contracts.
Our interviews focused on joint ventures and the middle ground of bilateral exchange.^ In addition
to interviewing 38 managers at these companies, we interviewed a managing director of an
international consultancy firm that specializes in risk management and the chairman of the Global
Board of the Association of Strategic Alliance Professionals (ASAP; see: http://www.strategic-
alhances.org) to obtain a broader, practice-based perspective on alliance risk management. We also
attended local meetings of ASAP chapters, as observers, to become better acquainted with alliance
management issues. Table 1 provides the job titles of the interviewees.
The interviews were conducted by at least two researchers and lasted 45 to 90 minutes,
depending on the interviewee's breadth of responsibility for risk management. We used a brief
common interview protocol with each interviewee; however, the questions were open-ended and
approximately 60 percent of each interview was follow-up questions and inquiries that derived from
the respondents' remarks.'" At the conclusion of the field visit, interviews were transcribed and
reviewed by the researchers for accuracy.
Interview Transcript Coding
Interview coding is typically an iterative process (Bazeley 2007) in which the coder reads the
interview in search of passages related to specific ex ante constructs (i.e., alliance risk, control
mechanisms). However, if the constructs are broad, they are often refined. For example, "alliance
risk" is subdivided into "performance risk" and "relational risk" while retaining the nested
structure to facilitate analysis of the higher order "alliance risk" construct. In field research, it is the
researcher who relates specific practices to underlying theory; we do not expect practitioners to use
academic language to describe their world. Consequently, before entering the field we scanned the
academic and practitioner literature to identify specific alliance risks that might be present at our
sites (e.g., Anderson and Dekker 2005; COSO 1992, 2004; DeLoach 2000; Das and Teng 1996,
2001; Dekker 2004, 2008; Langfield-Smith 2008; Van der Meer-Kooistra and Vosselman 2000).
We identified 19 specific alliance risks (Table 2, Panel A).
Similarly, we reviewed the literature to identify management control practices commonly
found in strategic alliances; in particular, Dekker (2008)." The 31 control practices we identified
(Table 2, Panel B) broadly refiect categories of management control from extant management
control frameworks used in prior studies (e.g., outcome, behavior, and social controls as used by
Dekker [2004], [2008]; Langfield-Smith [2008]; Dekker and Van den Abbeele [2010]; Van der
Meer-Kooistra and Vosselman [2000]). Several practices reflect the use of outcome controls in
terms of ex ante performance agreements (e.g., contract terms about what should be dehvered,
measures to evaluate performance, payment terms) and monitoring of realized performance (e.g..
Unilateral contracting (i.e., technology licensing) is often characterized by relatively complete standard contracts
(Das and Teng 2001). In contrast, bilateral contracts are typically very incomplete and, thus, partners are more
likely to depend on additional control mechanisms. Joint ventures eliminate the need for some controls by
aligning partners' profit incentives; however, with formation of a new entity that quickly acquires a life of its
own, new management control challenges emerge (paraphrased from interview B07, vice president of one of
BIOTECH'S joint ventures).
' " Typical questions asked were: In your capacity as |job title] can you describe the strategic alliances with which
you are involved? What do you see as the key risks of strategic alliances? What are the properties of the risk, in
terms of likelihood of occurrence and magnitude of impact? How does the firm manage these risks? In questions
asked, we explicitly avoided using the language of existing conceptual risk and control frameworks (e.g.. Das
and Teng 2001).
While Dekker (2008) proved useful in developing our comprehensive set of control practices, the overlap is
limited in that Dekker (2008) focuses specifically on control practices used in the management of interfirm
information technology transactions.
l T J AccourtCig Journal of Management Accounting Research
Association - i ^ , j , ^ ^ , ^
TABLE 1
Inventory of Field Interviews
Interview
Interviewee Job Title ID
BIOTECH
VP and Assistant Treasurer BOl
Chief Intellectual Property Counsel B02
Assistant VP and Senior Tax Counsel B03
VP of Internal Audit B04
Senior Intellectual Property Lawyer B05
Assistant VP-Legal B06
Business VP (for JV) B07
Business Unit Controller B08
General Manager Shared Services B09
TECHNOLOGY
Assistant Corporate Controller TOI
Senior Attorney T02
General Manager T03
1. World Wide SMS and P Controller T04
2. World Wide SMB Controller
Senior Manager Risk Controls T05
Senior Audit Manager T06
Director, Einancial Integrity Unit T07
1. Broad Scale Strategy Manager T08
2. Licensing and Pricing Manager
Group Risk Manager T09
General Auditor TIO
1. Assistant Treasurer Ti l
2. Treasury Group Manager
VP Corporate Controller T12
Senior Manager-Compliance T13
Director-Outbound Resellers T14
Director-World Wide AR Program T15
RETAIL
Senior VP, Controller, and Chief Procurement Officer ROI
Associate General Counsel, Transactions, Regulatory, and International R02
VP, Audit Director for Stores/Catalog and Support R03
Senior VP and Director of Auditing R04
1. Senior Product Development Manager for Luggage R05
2. VP of Private Brands-Home Division
Associate Audit Director-Stores/Catalog R06
Senior VP-Director of Product Development and Sourcing R07
VP Merchandise-e-Commerce LP R08
1. Senior VP-Director of Finance, Stores, and Direct R09
2. Controller of Merchandise Finance
OTHER
Managing Director-Risk Management Consultancy COI
Chairman of the Global Board, Association of Strategic Alliance Professionals C02
This table identifies the company affiliation and job titles of the 40 people interviewed along with a reference code for the
35 interviews conducted (five interviews included two people).
Journal of Management Accounting Research i ^ J AO
irican
' Accounting
Volume 26, Number 1, 20J4 "V *"""">''
10
Anderson, Christ, Dekker, and Sedatole
TABLE 2
Inventory of Alliance Risk and Management Controls
Panel A: Alliance Risks and Definitions"
1. Quality perfoimance
2. Price renegotiation
3. Innovation
4. Co-ordination
5. Intellectual property
6. Product/Service failure
7. Misalignment of
incentives
8. Input supply
9. Surge capacity
10. Verification and
evaluation
11. Compliance and
regulatory
12. Partnering lock-in
13. Financial viability
14. Contribution valuation
15. Financial commitment
16. Outside scope
17. Output demand
18. Surge demand
19. Channel effectiveness
The risk that an alliance partner is unable or unwilling to supply key
materials or services according to quality and reliability standards;
The risk that an alliance partner will take advantage of its position at a later
date and seek unexpected price increases after entering into a contract;
The risk that an alliance partner will not maintain adequate levels of
innovation (in products, services, or organizational capabilities) to support
the firm's needs;
The risk that alliance partners fundamentally misunderstand one another's
needs due to complexity or uncertainty associated with the task or due to
the difficulty of coordinating complex actions;
The risk that an alliance partner will make inappropriate use of proprietary
information in a manner that negatively affects the firm;
The risk that the faulty or nonperforming product or service of an alliance
partner exposes the firm to sanctions from its customers;
The risk that an alliance partner has incentives to take actions that negatively
affect the firm;
The risk that the strategic partner is unable or unwilling to supply key
commodities, raw materials, or component parts in a timely manner to
meet the firm's regular demand patterns;
The risk that the strategic partner is unable or unwilling to supply key
commodities, raw materials, or component parts in a timely manner to
meet unusually high, unexpected demand;
The risk that the firm will be unable to verify, monitor, or evaluate its
strategic partner's performance in an accurate or timely manner;
The risk that the strategic partner's failure (intentional or unintentional) to
comply with customer requirements, firm policies, or government laws and
regulations, may expose the firm or its employees to sanctions;
The risk that the choice of a specific strategic partner locks the firm into
a relationship with negative long-term consequences for the firm;
The risk that the strategic partner will experience financial distress that
limits its ability to meet the firm's consumption needs;
The risk that the firm's nonmonetary contribution to the partnership will be
undervalued by the partner;
The risk that entering into a strategic partnership may expose the firm to
credit risk;
The risk that the alliance will create products or services that are
outside the scope of the original agreement;
The risk that actions by downstream partners will negatively affect the
regular demand for the product;
The risk that the downstream strategic partner will generate unusually high,
unexpected demand for the product or service that the company will be
unable to supply in a timely manner; and
The risk that failures in the downstream strategic partner's distribution
channel will negatively affect the company.
" Definitions were available to survey participants as they completed the online survey and are the basis for coding the
field-research interviews.
(continued on next page)
American
Accounting
Association
Panel B: Alliance Management Controls'*
TABLE 2 (continued)
!nt Co
Alliance Management Controls
1. Safeguarding company assets
2. Safeguarding alliance assets
3. Controls over proprietary information
4. Assignment of property rights
5. Methods for managing contract failure
6. Exit clause in contract
7. Contractual cost sharing
8. Contractual payment terms
9. Contractual performance measures
10. Standard contract terms
11. Ongoing review of nonfinancial performance measures
12. Trust
13. Informal reviews of partner's operations
14. Accountability of alliance personnel for alliance performance (e.g., incentive compensation)
15. Interactive feedback between partners
16. Interactive feedback within company
17. Formal review process for partner selection
18. Strategic identification of partners
19. Accountability for partner selection
20. Periodic review of partner's financial performance
21. Ongoing review of financial performance measures
22. Announced audit
23. Code of ethics
24. Written policies and procedures regarding alliance operations
25. Require SAS 70 report
26. Formation of IV or other formal profit sharing arrangement
27. Composition of alliance management team
28. Segregation of duties within the alliance
29. Authorization levels within alliance for investment decisions
30. Unannounced audit
31. Other contract terms
'' Definitions are omitted for parsimony because the terms are likely to be well understood by an accounting audience.
periodic and ongoing reviews of financial and nonfinancial performance and audits). The practices
concerning the specification of agreements on management of the relation, allocation of decision
rights, ownership and responsibilities, and termination (e.g., safeguarding of firm and alliance
assets, assignment of property rights, controls over proprietary information, provisions for cost
sharing, methods for managing failure, and exit clauses) are key behavior controls. The practices
concerning processes for strategic identification of partners, and review processes and
accountability for partner selection capture how firms use the partner selection process to identify
and attract "good" partners. The practices related to feedback processes concerning the selected
partner, management of the alliance, and learning refiect more evolutionary controls that extend
beyond the selection process (Anderson and Sedatole 2003). Finally, the items on the development
of trust between partners and informal reviews of partner operations capture elements of social
controls. In sum, while the inventory of specific management controls that we compile is novel in
its specificity, it does not confiict with the more general categories that have been used in prior
We coded the interview passages in relation to the list of 19 specific alliance risks and the 31
control practices, while remaining open to the discovery of new risks and controls that were not
included in the inventory. All interviews were coded by two researchers who, before beginning the
coding process, agreed on definitions for each risk and control type (risk definitions provided in
Table 2). In total, 129 passages were identified that relate to alliance risk and 260 passages were
identified that relate to alliance management control. After the independent coding of all passages'^
was completed, the researchers returned to the definitions of risks and controls and discussed
revisions to "tighten" the definitions and resolve ambiguities that arose during the coding process.
The researchers then returned to their own coding and made independent revisions subject to the
revised definitions. After completing these revisions, the researchers met to compare and resolve the
few remaining discrepancies.'"^
Analysis of Alliance Risks
The first four columns of Table 3 summarize the interview content analysis of alliance risk at
the field sites with simple frequency counts of the incidence of these risks in the interviews.
Alliance risk is evident in all three firms and each firm exhibits a variety of alliance risks.'^ Risk
related to intellectual property is raised most often during the interviews, in particular by BIOTECH
and TECHNOLOGY managers. This is understandable in light of the prevalence in these
companies of alliances for joint-product development. The VP Corporate Controller at
TECHNOLOGY (T12) describes some of the intellectual property risk associated with developing
and controlling source code as foUows:
[We must make] sure that they're not giving out code. That things aren't getting released
. . . Piracy is a huge issue for us. Again, protecting IP. Particularly in the emerging
countries . . . There [are] versions of your software out there in different regions that are . . .
pretty close to what we're developing. So somebody's leaking it out. So again, there is a
lot of work to do around that, to make sure it's well protected. But your partners and your
channel group that you work with, you have to make sure they are secure as well. And
even the authorized replicators . . . [are] making sure you're protected. They're protecting
your goods.
The second most often mentioned risk is product/service failure risk, in particular in interviews
at RETAIL, where alliances are predominantly transactional in nature. Risks are concentrated in
failures to supply defect-free product using agreed upon business practices according to contract
In Anderson et al. (2013a) we use extant intra-firm management control frameworks to describe interfirm
controls used in strategic alliance management in the three field research sites.
' ' Passages may be linked to multiple codes, which in part represent the researchers' decisions about what to define
as a "passage." Instead of defining a passage narrowly to ensure one-for-one mappings to single risk or control
types, we chose to define a passage as a coherent group of sentences discussing a particular risk or control. This
exposes the coder to the broader context of the discussion, which increases coding reliability. In some cases it
was impossible to disentangle a passage into risk and control pieces without breaking important linkages.
Discussion and clarification resulted in relatively straightforward resolution of these cases, in some instances
after amplification of the construct definitions.
" For the sake of parsimony we do not tabulate content analysis of each interview; however, it is important to note
that passages related to risk and controls are evident in all interviews, and not concentrated within a few
interviewees or functional areas of the firm.
Accounting Joumal of Management Accounting Research
y^j^^^ 26, Number 1, 2014
TABLE 3
Summary of Interview Data and Statistical Description of Survey Responses Related to
Alliance Risk Exposure
Firm Survey"
1. Financial commitment risk
2. Contribution valuation risk
3. Partnering lock-in risk
4. Misalignment of incentives
5. Outside scope risk
6. Intellectual property risk
7. Compliance and regulatory risk
8. Product/Service failure risk
9. Coordination risk
10. Quality performance risk
11. Price renegotiation risk
12. Innovation risk
13. Financial viability risk
14. Verification and evaluation risk
15. Input supply risk''
16. Surge capacity risk''
17. Output demand risk''
18. Surge demand risk''
19. Channel effectiveness risk''
20. Other (raised by interviewee)'
Total
BIO-
TECH
2
4
0
4
4
11
2
4
0
1
0
1
0
0
0
0
0
0
0
1
34
TECH-
NOLOGY
0
0
0
3
1
30
5
12
2
5
0
0
0
5
1
0
1
0
0
2
67
RE-
TAIL
1
0
1
1
0
2
4
17
2
2
0
1
1
1
6
0
0
0
0
1
40
Total
3
4
1
8
5
43
11
33
4
8
0
2
1
6
7
0
1
0
0
4
141
n
56
56
56
56
56
56
56
56
56
56
56
56
56
56
43
42
14
14
13
NA
Mean
3.46
3.54
3.96
3.91
2.88
4.25
4.71
4.96
4.64
4.61
4.25
4.05
4.57
4.66
5.33
4.86
5.00
3.29
5.00
NA
Cronbach's
Sd.
1.93
1.63
1.73
1.62
1.78
1.79
1.84
1.57
1.48
1.82
1.79
.66
.62
.52
1.57
1.56
1.47
1.77
.53
NA
Alpha
A, h
0.79
0.78
0.60
0.58
0.55
0.46
0.71
0.86 NA
A3
0.73
0.71
0.66
0.63
0.58
0.54
0.43
0.84
This table summarizes the interview content analysis of 38 interviews in three field research companies, and a statistical
description of 56 survey responses on specific alliance risks. In the interview data, we identified 129 distinct passages
related to alliance risk and coded each based on the specific risk described. For the critical strategic partner that was
selected for the survey, respondents indicated their "best estimate of the potential impact of the indicated risk" on a
seven-point scale anchored by the responses, 1 = no impact, 7 = major impact.
^ The factor loadings reflect relational risk (/Ij), compliance and regulatory risk (/I2), and performance risk (/I3) (variance
explained 54.5 percent).
'' Items omitted from the factor analysis because of missing values.
^ Other risks were: negative market reaction to new company (or to an acquisition), political risks related to foreign
locations, maintaining fairness and equity in relationships with all partners and consequences of perceived favoritism,
difficulty tracking consumption, and ensuring that it is accurately recorded.
terms, or relate to co-branding partnerships in which the primary risks are based on the partner
generally someone with a personal and recognizable brandnot meeting expectations personally
and professionally. With respect to co-branding relationships, a Controller at RETAIL (R09)
described an element of product/service faure risk as follows:
I think if you were to look at it from the one role, the spokesperson role. The key element
there is one of they are personalities. Personalities can have faults, and if those faults were
to be realized, you want to be in the driver's seat to walk away, or have it addressed. So
there is a representation by the other party as to what standards they have to maintain. And
American
Accounting
Association
if those are breached then there are . . . [risks] . . . The other element is that these
[spokespersons] are individuals who have a particular style. That style may or may not
survive over time. The customer is a fickle customer. You know, our tastes change and
evolve. Does the provider change and evolve with it? So you have a design risk . . . that's
an element to it.
While other risk types were mentioned less frequently by interviewees, this does not per se
make them less important. Indeed, the breadth of exposure to the 19 identified risks for all three
firms indicates that managers perceive alliance risk as multi-faceted. For four of the 19 risks we find
no indication of managerial concern in the three firms. For three of these (surge capacity, surge
demand, and channel effectiveness) the apparent lack of concern may be because they are specific
only to one particular type of alliance (i.e., upstream manufacturing supply chain partners).'^ For
the fourth, price renegotiation risk, it is striking in light of the enthusiasm in the TCE literature for
the "hold-up problem" as a prominent hazard of hybrid organizational forms, that none of the
interviewees explicitly raised this risk as a significant concern. We examined interviewee quotes
related to partner selection to determine whether hold-up concerns were addressed primarily
through partner selection (i.e., explicitly choosing partners who would not pose this risk); however,
we found no evidence of this.'^ In sum, the mix of risks described by interviewees provides initial
evidence of significant concern about risks of potential opportunistic behaviors (i.e., relational risk)
and risks of nonperformance (i.e., performance risk). This observation is consistent with the
hypothesis that in many collaborative relations, value creation and performance concerns are at least
as important as the dominant TCE-motivated concerns about value appropriation (Zajac and Olsen
1993; Anderson, Dekker and Van den Abbeele 2013b).
Compliance and regulatory risk and verification and evaluation risk, which are pronounced
concerns for TECHNOLOGY and RETAIL, are primarily raised by accounting and finance
managers. Although their concerns are not mirrored in high frequency counts, it would be
inappropriate to discount these risks as less important based on the interview analysis. A more
balanced conclusion is that, while many alliance risks are broadly understood and managed across
functions, the awareness and understanding of specific risks may be concentrated with functional
specialists. Indeed, for the interviewees who identified them, they were considered very
important.'^
Almost all of the risk passages could be classified in one of the 19 risks in the inventory.
However, interviewees also raised several risks that we had not identified ex ante; specifically,
political risks related to foreign locations, risks of failure to maintain fairness and equity in
relationships with all partners, the consequences of perceived favoritism, and risks hnked to
This is supported by the high number of NA responses on these items in the survey.
Miller, Kurunmki, and O'Leary (2008, 948-951) critique the over reliance of economists and legal scholars on
the hold-up problem and the associated role of asset specificity and the inconsistencies that emerge when these
theories are juxtaposed with evidence on the prevalence of "unsustainable" hybrid forms.
For example, when describing a partnership whereby some finance and accounting functions are outsourced to a
strategic partner, TECHNOLOGY'S Senior Manager of Risks and Controls (T05) expressed these concerns,
"The accounting and compliance risk is more critical. The accounting piecewhat happens essentially is these
folks are executing whatever their style is of transaction in the course of a month or a quarter. And all of those
transactions are being captured in the context of their control environment. Meaning we hope that segregation of
duties exist where they should exist. And that their systems are functioning as they should function, and are
being captured in a holding system. And that somehow needs to make its way into our general ledger . . . the
extent that those numbers are somewhat reasonable and reliable . . . causes me more sleepless nights than the
market risks."
Joumal of Management Accounting Research
difficulty in tracking and ensuring that consumption is accurately recorded.'^ A more thorough
literature search may have turned up these risks for the inventory. Thus, the real value of these
discoveries is that they provide evidence that the research process was rohust to identifying
unanticipated risks and controls.
In addition to coding the interviews in relation to the inventory of risks, most of the risk
passages were also easily classified in relation to the Das and Teng (1996) framework of
performance risk and relational risk. The exception was compliance and regulatory risk, which is
more closely aligned with the COSO risk management framework. Because the content-based
mapping of risks into the categories of performance and relational risk aligns with the result of the
later statistical atialysis of survey data, we defer this discussion for the next section.
We conclude that the inventory of risks captures the variety of specific risks in the three field
sites adequately. In particular, our granular assessment of alliance risk matched to a structured risk
framework provides a practice-based measurement alternative for management accounting
researchers who have relied almost exclusively on transaction characteristics to indirectly assess
ex ante risk.^ We turn now to the analysis of alliance management controls.
Analysis of Alliance Controls
Turning to the specific control mechanisms used to manage alhance risks, the first four
columns of Table 4 summarize the content analysis of alliance controls at the field sites with
frequency counts of the incidence of 31 controls in the interviews. All of the controls have at least
one coded incident in the ktterviews, and most of the controls are found in all three companies.
Partner selection procedures is the most frequently mentioned alliance control, a finding that
corresponds with prior research that identifies pre-contracting processes as critical to mitigating
alliance risk (Dekker 2004, 2008; Li et al. 2008). In particular, we find that our firms purposefully
match partner characteristics and capabilities to specific alliance activities. The importance of
partner fit, as it pertains to co-branding alliances, was highlighted by a Senior Product Development
Manager at RETAIL (R05):
What was consciously discussed, however, was the fit. And as we looked at all of these
different personalities, did their personality, did their style refiect our customer? And our
customer base? So understanding who our customer target was, and understanding the
appeal that this person [the co-branding partner] would have was critical.^'
These risks are related loosely to several risks in the risk inventory, suggesting that their nature (instead of their
specific form) is covered by the risk inventory. For instance, risks on maintaining fairness and equity relate to
contribution valuation risk, and the risk of difficulty in tracking and recording consumption relates most closely
to verification/evaluation risk. Political risk concerning foreign locations is unique for international alliances and
is well recognized in the literature in this area (e.g.. Das and Teng 1996). Negative market reaction to alliances is
a more general firm-level alliance risk that is not specific to risk within a specific alliancethe focus of the risk
inventory.
TCE posits that transaction characteristics proxy for ex ante risk. Thus, it is important that interview and survey
questions clearly distinguish between "residual" risks (i.e., the risks that remain after the alliance partners enact
management controls) and ex ante risk (i.e., the risks present at the outset of the alliance, before control design).
Anderson et al. (2013b) examine the relation between ex ante risk, control investments, and residual risk.
This manager continued to describe how this particular relationship was characterized by strong coordination and
cooperation, as considered during partner selection: "I think another critical part of our decision making process
was attitude and willingness to work within RETAIL. In other words, somebody who wasn't there to just tell us
what to do, but somebody who was willing to create a partnership. And so, that led to us, in terms of risk
management, knowing that we would be able to influence and guide and direct with a minimal amount of pain
and suffering on our part." (R05)
Journal of Management Accounting Research \ ^ j A"ti'ntl"ng
Volume 26, Number 1, 2014 V *""'"'"
TABLE 4
Summary of Interview Data and Statistical Description of Survey Responses Related to
Alliance Controls
Firm Survey
Alliance
Management Controls
BIO- TECH- RE-
TECH NOLOGY TAIL Total Mean Sd. A, X2 X3 A4 A5
1. Exit/termination clauses 4 0 4
2. Cost sharing 1 0 0
arrangements
3. Assignment of property 1 2 4
rights
4. Methods for managing 2 2 4
failure
5. Safeguarding aUiance 0 1 0
assets
6. Safeguarding company 0 7 1
assets
7. Controls over proprietary 14 16 0
information
8. Contractual payment 2 1 1
terms
9. Contractual performance 1 0 0
measures
10. Standard contract terms 2 3 2
11. Review nonfinancial 2 9 10
performance measures
12. Periodic announced audit 6 13 8
13. Periodic review of 0 2 2
partner's financial
performance
14. Ongoing review of 1 4 3
financial performance
measures
15. Segregation of duties 1 0 0
16. Authorization levels 1 0 0
17. Accountability for 1 0 0
parmer selection
18. Formal review of partner 29 11 13
selection
19. Strategic identification of 2 0 6
partners
20. Interactive feedback for 1 12 4
leaming between
partners
21. Interactive feedback 2 3 0
about partner selection,
alliance, management, etc.
22. Trust between partners 0 3 0
23. Informal reviews partner 1 1 3
operations
American
Accounting
Association
8 3.46 1.38 0.70
1 3.46 1.33 0.66
7 3.13 1.61 0.61 0.58
8 3.16 1.44 0.46 0.42
1 2.57 1.45
8 2.71 1.42
30 3.27 1.53
4 3.93 1.22
1 3.64 1.38
7 2.80 1.34
21 3.20 1.33
27 2.70 1.55
4 3.11 1.46
8 3.30 1.39
1 2.53 1.32
I 2.62 1.55
I 3.43 1.43
53 3.11 1.52
8 2.77 1.45
17 2.73 1.41
5 2.82 1.40
3 3.68 1.32
5 3.18 1.36
0.78
0.82
0.48
0.82
0.76
0.46
0.45
0.58
0.80
0.86
0.47
0.39
0.67
0.91
0.63
0.51
0.48 0.44
0.75
0.57
(continued on next page)
TABLE 4 (continued)
Firm Survey
Alliance
Management Controls
BIO-
TECH
TECH-
NOLOGY
RE-
TAIL Total Mean
24. Accountability of
alliance personnel for
alliance performance
12 2.77
Sd.
1.51
X3
0.65
25. Policies and procedures
26. Code of ethics*"
27. Require SAS 70 report""
28. Other contract terms'"
29. Composition alliance
management team*"
30. Unannounced audit""
31. Formation of JV/profit
sharing arrangement""
32. Other (raised by
interviewee)'^
Total
1
1
0
1
5
0
2
7
93
1
1
1
6
1
1
0
6
116
1
1
1
4
1
1
0
4
79
3
3
2
11
7
2
2
17
288
3.09
2.53
2.04
2.57
2.25
2.05
1.94
N/A
Cronbach's
Alpha
1.42
1.48
1.58
1.59
1.50
1.42
1.49
N/A
0.82
This table summarizes the content analysis of 38 interviews in three field research companies and statistically describes
the survey responses on alliance control use. We identified 260 passages related to alliance control practices. For the
critical strategic partner selected, respondents indicated, "the extent to which your company relies on the following
controls to manage risks related to the critical strategic partner that you have identified" ( 1 = very little reliance, 5 = very
heavy reliance) (n = 56).
" Item dropped because of insignificant loading (note: for this item the sample size is 55).
^ Items omitted as they have too many missing values and/or NA scores from respondents, indicating they are not equally
relevant to all alliances.
'^ Other controls mentioned during the interviews were: consolidation of supply base, requirements for business
continuity plans, membership in anti-terrorism alliance, requiring compliance with laws and regulations of partners'
home country, partner certification, intemally developed risk management tools, variety of functional groups assessing
risk from different perspectives, internal compliance monitoring, insurance, having a risk management group in each
business unit, rebranding JV as a new company, assessing market viability of new products before forming alliance,
evaluating whether partner companies have similar viewpoints, transparency of marketing plans for new business, and
novel financial instruments for measuring risk.
The factor analysis was conducted in two stages to have a reasonable sample-to-item ratio. Factor analyzing all items
simultaneously, however, provides a similar factor structure of six factors, with the same items loading on the same
factors. The first factor analysis explains 60.71 percent of all variance, and the second 62.39 percent. The factors are
labeled exit agreements (l\) asset safeguards {Xj), contractual outcome controls ().>), financial control (A4), partner
selection and management procedures (/I5), and informal controls (?.(,).
Consistent with the high incidences of passages on intellectual property risk for BIOTECH and
TECHNOLOGY, controls over proprietary information also have significant entries for these firms.
For example, when discussing the intellectual property risk associated with sharing code with
developers, the Group Risk Manager (T09) described the following control practices used to
safeguard the IP:
When the code is released to the developers, it's released in only little bits and pieces, so
that any one developer or group of developers only have a very small percentage of the
total amount of the code. And that very small percentage is not of much value. And that's
just one of the basic textbook risk management techniques.
American
Accounting
Association
When asked to explain the control mechanisms used for managing aUiance risk, interviewees
frequently mentioned performance measurement in the context of performing regular audits and
reviews of financial and nonfinancial measures. For instance, the Group Risk Manager at
TECHNOLOGY (T09) described the prevalence of audit procedures:
One of the provisions that we haveand it's a standard business practiceis the ability to
audit the records of a business partner. And typically our contracts include the penalties
associated with discoveries via that audit process if they're outside the parameters allowed
in the contract.
As in the case of risk, the lower frequencies of other control mechanisms do not necessarily
make them less important in managing alliance risk. Rather, the evidence suggests that the use of a
broad selection of alliance controls is part of a portfolio strategy for effectively mitigating an
equally diverse set of alliance risks. This finding supports Caglio and Ditillo's (2008) criticism that
studies that examine only a narrow subset of controls provide a limited basis for understanding the
risk-management control relationship.
While the inventory of 31 alliance controls seems to capture most controls that were described
by interviewees, we discovered several additional controls. In particular, interviewees described
partner certification processes, internally developed risk management tools (e.g., "what we learned"
databases, and automated processes for managing initial inquiries regarding potential partners), and
governance structures that separate risk management groups within each business unit. Although
we could not perfectly match these controls with the literature-based inventory of controls, there are
strong similarities.^^ In some cases, the broader perspective and opportunity to explore the firms'
general alliance management experiences that field research offered caused some interviewees to
discuss practices for managing overall alliance risk that cannot be related to individual alliances
(which is the level of analysis of the alliance control inventory). Thus, we conclude that while there
may be a wide range of other specific control practices that firms develop to manage risk, including
structural arrangements to manage risk across all or a range of alliances, the inventory of controls
captures well the variety and breadth of alliance control practices.
In the interviews, specific alliance risks and controls were rarely discussed in a simple one-to-
one mapping. Instead, groups of controls were often associated with groups of risks. We coded only
65 instances of interviewees describing a control practice as a direct response to a specific risk.
Forty-nine of these passages were related to performance risks, while the balance described
relational risks. At face value, this suggests that while managers tend to think of a variety of
concurrently occurring alliance risks and an associated portfolio of controls, they find it easier to
connect performance risk to specific control responses.
The field research provides rich descriptive evidence of the specific alliance risks that firms
face and the variety of controls used to mitigate them. In particular, while managers identify
intellectual property risk and product/service failure risk as their most prominent concerns, the field
sites provide evidence of a broad range of alliance risks to be mitigated. The interviews also reveal
companies' use of a variety of control practices to mitigate risks, with no clear one-to-one mapping
of specific controls to specific risks.
For instance, partner certification can be part of review processes for partner selection, insurance is used to
protect company or alliance assets, and the capturing of alliance learning experiences appears to relate closely to
controls that allow for feedback on learned experiences.
Al"nt"ng Joumal of Management Accounting Research
Volume 26, Number I, 2014
SURVEY METHODS AND RESULTS
Survey Design, Administration, and Response
Contemporaneously to the field research, we conducted an online survey to examine the
prevalence of specific alliance risks and controls in a larger sample of firms engaged in
alliances with the aim of generalizing from the field evidence and exploring patterns of
association between and among risks and controls. We administered the online survey to
members of our research sponsor, the Institute of Internal Auditors (IIA), with the title of
Chief Audit Executive or Internal Audit Director.^^ We focus on respondents in advanced
audit positions because these managers are particularly adept at identifying and quantifying
risk, and are experienced in the establishing and assessing management controls. We were not
permitted to contact IIA members prior to the survey email solicitation. Thus, we had no
opportunity to screen respondents to identify firms with significant alliance activity.
Accordingly, we distributed the survey to the IIA membership at large and used the survey
itself as a screening device to identify (1) firms that have significant alliance activity, and (2)
respondents who are sufficiently knowledgeable to complete questions about alliance
management. In light of these constraints, we expected the response rate to be modest at
best. The survey consists of two parts. The first part gathers data on the respondent, the firm,
and general information on alliance management practices. The second part asks respondents'
to provide details regarding the specific risks and controls for an alliance of the respondents
choosing that is of critical importance to the firm and that is situated either vertically (i.e.,
upstream and downstream alliances) or horizontally (i.e., marketing and R&D alliances) within
the value chain.^"^
An invitation to participate with a link to the survey was mailed electronically to 3,395 IIA
members with appropriate job titles. The IIA permitted us to send a single follow-up mailing several
weeks later to remind participants to respond before the survey end date. We are unable to ascertain
how many of the email invitations were correctly delivered or opened, or how many of the
recipients who opened the email did not participate because they were ineligible (e.g., employed by
firms without alliances). We received 92 responses (3 percent of invitations).^^ Of these, 36 are
omitted because of missing responses on critical risk and control questions, possibly indicating that
the survey recipients lacked the requisite knowledge to complete the survey. Accordingly, for the
analysis that follows, we use 56 responses from those whose firms have significant exposure to
strategic alliance risk and who provided substantially complete surveys.
^^ By using only those job codes from the IIA database, we are confident that the survey was distributed to only one
member from each organization (i.e., the highest-ranking member of the internal audit department). Further,
most (42/56) respondents provided their organization's name, allowing us to verify that we only include one
response per organization.
^* Prior research on alliances often instructs survey respondents to focus on one particular partner or alliance when
answering the survey (e.g., Nicolaou, Sedatole, and Lankton 2011).
^^ This sample size is similar to other studies using the same IIA database to obtain survey responses. For example,
Anderson, Christ, Johnstone, and Rittenberg (2011 ) obtained a response rate of approximately 7 percent of CAEs
contacted for their survey. Further, their survey was applicable to all CAEs, not a more specialized group, such as
was the case in our study in which we only sought responses from CAEs from organizations with considerable
strategic alliance activity.
Journal of Management Accounting Research Y w
The majority of the respondents in our sample (39/56) provide demographic information about
their organization. These data (untabulated) reveal that the sample includes organizations from a
variety of industries including financial (33 percent), technology (14 percent), manufacturing (10
percent), and retail (10 percent). Forty-five percent of respondents are from publicly traded
companies, 50 percent are from private companies, and 5 percent are from governmental agencies.
For those companies with publicly available data, revenues ranged from approximately $6.6 million
to approximately $44 billion.
Because we were unable to limit our mailing to a more targeted population of firms with
significant alliance activity, we are neither able to test for response bias nor to provide evidence of
the representativeness and generalizability of the sample and results to a larger population.
Although small for purposes of statistical analysis, the sample covers a broad set of industries and
the responses encompass a variety of alliance types (e.g., vertical and horizontal, joint venture, and
contractually based). Thus, we believe it is suitable for the purposes for which it is intended:
extending the exploratory analysis of the field research with an aim toward generalizing the
description of specific alliance risks and managers' use of management controls to mitigate risk and
investigating empirically the association between risk and controls.
Description of Respondents and Their Firm's Alliances
The first part of the survey provides descriptive information about the survey respondents and
their firm's alliance activities. Fifty percent of respondents are chief audit executives, 36 percent are
internal audit directors, and remaining respondents are senior internal audit managers. Respondents
have an average of six years in their current position and 13 (4) years of experience performing
internal (external) audit work. All but four respondents work at a corporate or division headquarters
and half are in U.S.-headquartered firms.
The firms' portfoho of alliances are almost equally represented by upstream relationships (i.e.,
direct and indirect material and service suppliers) and downstream relationships (i.e., final assembly
operation, transportation and distribution partner, or franchisee), with modest representation of
marketing alliances and R&D alliances. When asked to assess the overall impact of alliances (i.e.,
across all aUiances) on their firm using a seven-point Likert scale (1 = no effect, 4 = moderate
impact, 7 = major effect) respondents indicated a moderate-to-high expected impact, and
characterized alhance activity as exposing the firm to varying degrees of risk.
Measurement of Alliance Risks and Controls
In the second part of the survey, respondents were asked to select one alhance that is of critical
importance to the firm and to provide details on the nature of the relationship for this "focal
alhance" (e.g., type, duration, transaction frequency), the firm's exposure to specific risks, and the
use of management controls.'^^ The focal alliances that are the basis for our analysis are classified
as: (1) upstream partners, (30 respondents; 54 percent), (2) downstream partners (14 respondents;
25 percent), (3) marketing partners (4 respondents; 7 percent), and (4) research and development
partners (8 respondents; 14 percent).
The second part of the survey is based on the inventory of risks and controls described in the
prior section (see Table 2 for an overview and definitions). To measure alliance risk, respondents
were asked to assess the potential impact of each of the 19 risks in relation to the focal alliance.
As in prior research (e.g., Anderson and Dekker 2005; Dekker et al. 2013) we take the perspective of the focal
firm to test associations between the firm's assessment of risk and its reliance on controls. Thus, this approach
does not consider the risk experienced by the partner firm and its influence on control choices.
Accounting Joumal of Management Accounting Research
* " < " =' = " " Volume 26, Number 1, 2014
Because we seek to understand how risk influences management control choices, respondents were
explicitly asked to describe alliance risks without the control systems in place for the focal
alliance.^^ To avoid biasing respondents toward the more general relational and performjince risk
constructs, risks were presented in random order.
Respondents were also asked to report the level of reliance that the firm placed on each of the
31 alliance controls (Table 2, Panel B) to mitigate risk in the focal alliance. To avoid an unduly long
survey, we did not cycle through the list of controls for each of the 19 alliance risks. Rather,
respondents were asked to evaluate the firm's reliance on particular controls in relation to the set of
risks that they identified for the focal alliance. We do not view this as a significant shortcoming of
the survey design because prior research suggests that individuals are limited in their ability to
identify the unique sources of risk (Cohen and Kunreuther 2007) and seem more adept at
considering groups of controls that cU'e used in response to the variety of risks faced.
Results
Tables 3 and 4 report descriptive statistics and measurement results for the alliance risk and
control items. We conduct a series of factor analyses to test for dimensionality of both the risk and
control items. Given the sample size and ordinal nature of the data, we use principal axis factoring
as the estimation method and apply an oblique rotation to enhance the interpretation of the factors
while allowing for interdependencies between constructs (Fabrigar, Wegener, MacCallum, and
Strahan 1999). We consider item loadings of 0.40 and greater to be significant and useful for
interpreting the factor solution.
Analysis of Risk Types
The second set of columns in Table 3 provides the descriptive statistics for the risk items.
Several items (reported at the bottom of the table) received fewer responses as these were not
relevant for all alliances that populate the sample. While we exclude these items from the factor
analysis, we do report their descriptive statistics to show their importance for the subsamples in
which they are relevant. We base our primary analysis on the items for which we have complete
responses.
Consistent with the high incidence in the field research of product/service failure risk, the mean
items score (4.96) indicates this risk generates the most concern in the sample. Intellectual property
risk, which was most frequently mentioned in the field study, similarly has a relatively high mean
(4.25), although not as high as other risk items (quality, coordination, verification and evaluation,
financial viability) that, as we show in our factor analysis, all relate to performance risk. Also
noticeable is the high mean score for compliance and regulatory risk, which in the field research
similarly was emphasized, in particular, by accounting and finance managers.
The factor analysis of alliance risks provides three factors with an eigenvalue greater than one.
We conclude that the factor solution corresponds well with the Das and Teng (1996) differentiation
between relational risk and performance risk. This provides support for these aggregate risk
dimensions to meaningfully describe how alliance practitioners see and experience alliance risk. In
Measuring risk assessments without this framing would result in risk assessments being endogenous (i.e.,
conditional on the controls that have been put in place to mitigate these risks, resulting in the measurement of
"residual risk"; Anderson et al. [2013b]). Our framing of the question aims to avoid this problem by asking
respondents to put themselves in the situation that there would be no controls present, and the relatively high
mean scores on the risk items support that respondents are unlikely to have provided responses that reflect
residual risk. Important in this measurement approach is the choice of respondents who our field research
indicated are well able to refiect on inherent alliance risks, and through which we expect potential biases such as
ex post inference of risk or legitimization of controls are reduced.
Journal of Management Accounting Research \/3 AluntPng
Volume 26, Number 1, 2014 V *"'''''>"
addition, the analysis identifies compliance and regulatory risk as separate risk category. We
compute factor scores for the multi-item dimensions to be used in subsequent regression analyses.
Construct reliability is high as evidenced by the Cronbach's Alphas of 0.86 and 0.84 for the
relational risk and performance risk factors, respectively. For compliance and regulatory risk we
retain the one item as a separate construct.
The mean scores on the risk items indicate that, on average, performance risk generates greater
concerns than relational risk does. Indeed, a t-test shows a significant difference in the mean item
score of each factor (4.3 versus 3.6; p < 0.01). This again speaks to Zajac and Olsen's (1993)
premise that the risk of insufficient value creation, as reflected by performance risk, is often the
greater managerial concern in alliances, as compared to the relational risk of value appropriation
that is central in TCE-based models of alliance governance and management. In addition, as Table 5
shows, performance risk and relational risk are significantly correlated with each other (r = 0.47; p
< 0.01), as are performance risk and compliance and regulatory risk (r = 0.24; p < 0.10).
Relational risk and compliance and regulatory risk are not significantly correlated. Prior research
argues that different risk types are correlated because they have common sources (i.e., transaction
characteristics, such as asset specificity, uncertainty, and ftequency, proxy for ex ante specific risks
that generate both relational and performance risk; Dekker et al. [2013]).
Analysis of Control Mechanisms
The second set of columns in Table 4 provides descriptive statistics for the management control
items. Again, several items (reported as last in the table) received fewer responses, as these were not
relevant for all types of alliances that populate the sample, and we base our main analysis on the
items for which we received complete responses. The sample means for the items suggest that, in
particular, contractual controls regarding payment terms (3.93), performance measurement (3.64),
cost sharing (3.46), and termination/exit clauses (3.46) are widely used, but that also "softer"
controls regarding trust (3.68) and accountability for partner selection (3.43) are relied upon
significantly.
Table 4 reports the results of the exploratory factor analyses of the alliance control items. To
test the dimensionality of the control items, and given the relatively small sample size, we conduct
two sequential factor analyses: (1) all items that relate closely to the notions of outcome and
behavior control, and (2) all items that link more closely to partner selection and social controls. As
an additional test, we factor analyze all items simultaneously. Even though the sample-to-items
ratio is rather small for this test, we obtain a similar solution with all items loading on the same
factors as in the sequential analysis, supporting the reported factor solution. The analysis provides
evidence of six alliance control factors.
The first two factors that we obtain relate closely to behavior type controls and reflect exit
agreements and asset safeguards. Cronbach's Alphas of 0.82 and 0.87 indicate good measurement
rehability. Exit agreements provide firms with the possibility and methods to dissolve the alliance
under specified conditions and to divide financial (cost) allocations and property rights among
partners. Asset safeguards provide ways to protect firm (intellectual) property and assets within or
outside the alliance and, in that way, also provide protection against failure. The cross-loadings of
the items indeed indicate some (logical) degree of overlap between the two constructs. The third
and fourth factors are more closely related to outcome controls and reflect contractual outcome
agreements and financial control. The item loadings are all significant and Cronbach's Alphas for
these factors are 0.81 and 0.79, respectively, indicating adequate measurement reliability.
Contractual outcome agreements describe contractual agreements between partners, performance
measures for evaluating alliance and partner performance, payment terms on which partners are
rewarded, and the actual measurement of performance using nonfinancial performance measures.
y^J Ao'un1"ng Joumal of Management Accounting Research
^ "' " Volume 26, Number 1, 2014
ON
r-
d
*
*
*
d
*
d
*
*
m
d
-^ "-^ o^ oo "^
oq cN cN ''<
d d
* * * *
* * * * *
^ 00 oo " r-H Tj-
00 m Tf Tf en es
d d d d d d
o o o
S
_2
o
H
O
2 ^ ^ S g
OH
O
S o u
1 ^
| S
2 Z
oe ca
g
o o s
o
ta
o
oo S ^ ^
< S
.S
q
3
U
o o
American
Accounting
Association
Financial control capture the extent to which financial performance and the partners' contribution to
financial performance are reviewed, the use of performance audits, but also administrative controls
on authorization levels for investments, and the segregation of duties between alliance partners and
personnel.^*
The fifth factor reflects partner selection and management procedures and has a Cronbach's
Alpha of 0.81. The factor describes the extent to which formal partner selection procedures are in
place (e.g., identification of alliance partners and accountability for, and reviews of, partner
selection), as well as feedback mechanisms on both the selection and alliance management and
learning during the relationship. This factor broadly captures controls that focus on managing the
relation with the alliance partner from selection to learning during the duration of the alliance
(Anderson and Sedatole 2003), and is consistent with recent research that finds the choice of partner
to be interrelated with practices for managing the interfirm relationship (Dekker et al. 2013).
The last factor labeled informal controls has a Cronbach's Alpha of 0.72. This factor includes
the reliance on trust between partners, informal reviews of partner operations, and the
accountability of alliance personnel for alliance performance. Taken together, these control
mechanisms indicate the importance of informal and cultural controls (Merchant and Van der Stede
2007) and the use of interactive controls (Simons 1995) within the alliance.
In sum, we conclude that the risks and controls identified in our inventory from the literature,
and as verified and detailed by the interviewees at our three research sites, are representative of
those present in a broader sample of firms engaged in significant alliance activity. The findings of
the survey reinforce the earlier conclusion that alliances are characterized by a variety of risks and
controls to mitigate risks. The results also show that the specific risks and controls in our inventory
are reflective of more aggregate structural forms in which risks occur and controls are used. We
examine the associations among them in the following section.
The Association between Risk and Controls
We use the survey data to explore patterns of associations between the alliance risks and
controls. For this purpose, we first examine the correlations between risks and controls and
subsequently conduct a series of regression analyses in which we aim to explain variation in the use
of specific controls by the risk types. For all multi-item constructs, we use the factor scores as
construct measures. Table 5 presents correlations between all risk and control dimensions as
extracted by the factor analyses. The table shows that performance risk is particularly associated
with procedures for partner selection and management and, to a lesser extent, with asset safeguards.
Compliance and regulatory risk correlates primarily with informal controls. Relational risk
correlates primarily with exit agreements and, to a lesser extent, with asset safeguards and
procedures for partner selection and management. Also notable is that many of the correlations
between alliance controls are positive and significant, consistent with our field observations that
alliance controls are typically used in conjunction with others to manage risk.
While the correlations provide initial evidence that the three risk types are significantly
associated with different controls, we employ regression analysis to obtain a better estimation of
how each risk type is uniquely related to each of the alliance controls.^^ In the regression
analyses, we include a number of control variables that prior studies have found to influence
^^ We retain for interpretation the authority item that has a loading (0.394) practically similar to our cutoff rule of
0.40.
^' While we expect a variety of alliance controls to be used in response to multiple risks (and this was evident in the
field interviews), our sample size limits us in conducting more comprehensive analyses in which we model
multiple controls (as a portfolio) simultaneously.
\ ^ J *0'nt"ng Jouml of Management Accounting Research
V *">='"">" Volume 26, Number 1, 2014
control choices in interfirm relationships.'^" First, we include JV that indicates whether the
alliance is formed as a joint venture with shared equity ownership (39.7 percent) or as contractual
alliance (60.3 percent).^' Shared equity ownership by setting up a /V provides a basis for
incentive alignment, entails a separate organizational structure, and generally is characterized by
a higher intensity of management control (Gulati and Singh 1998). Second, we include duration
of relationship (1 = less than one year; 2 = between one and three years; 3 = longer than three
years), which is refiective of experience and the development of social ties and trust between
alliance partners that can reduce the need for control, but also facilitate their development (Gulati
1995; Dekker 2008). Third, we add two indicators to capture the type of alliance. Respondents
indicated whether the alliance was with an upstream, downstream, or marketing and R&D
partner. Upstream partnerships are alliances with suppliers or providers of input goods and
services, and are the reference category in the regression analyses. Downstream alliances take
place with partners who operate between the firm and its customers (e.g., final assembly,
distributors, transporters, retailers) and are included as the first alliance type indicator. For the
second indicator, we combine marketing (e.g., co-branding) and R&D partnerships that each
have a limited number of responses. Correlations between the independent variables
(untabulated) and variance inflation factors (all below 2.0) indicate no significant concerns
about multicoUinearity.
Table 6 reports the results for the associations between alliance risk and the use of alliance
control mechanisms.''^ The results show that, consistent with the correlation analysis, performance
risk is primarily associated with partner selection and management procedures, and with contractual
outcome agreements. This indicates that greater performance risk evokes the use of procedures and
mechanisms for selecting the "right" partner and managing the relationship, contractually
specifying desired performance levels, measuring performance and providing feedback, and
providing incentives by relating payment terms to performance achievements. This is consistent
with prior research on partner selection and alliance management that considers the selection
process of primary importance to identify and select partners that possess the required competencies
and resources for creating alliance value, and similarly emphasizes the use of performance
management to manage the relationship and, in particular, incentive provision, learning, and
performance improvement over time (e.g., Anderson and Sedatole 2003; Dekker 2004; Dekker et
al. 2013; Ireland, Hitt, and Vaidyanath 2002).
The regression results show that relational risk is primarily associated with exit agreements,
indicating that greater concerns about potential opportunism and value appropriation evokes the
development of arrangements for dissolving or exiting the alliance when expectations, agreements,
or desired performance levels are not met. This includes agreements on the assignment of property
rights and the sharing/allocation of costs to partners in case of alliance failure and dissolution.
We also included the frequency of transactions captured by the transaction frequency compared to similar
transactions with other partners, to control for the relative volume of business (Anderson and Dekker 2005). This
variable, however, is insignificant in all analyses and we omit it to simplify reporting and save degrees of
freedom.
Prior based studies have commonly pooled data of equity and nonequity alliances, arguing that 7Vs will be
preferred when inter-firm risk is greater (e.g., Gulati and Singh 1998). In unreported analyses we find no
significant associations between the JV indicator and respondents' risk assessments. Including the JV indicator,
however, helps to control for differences in control use that relates for instance to shared ownership and
organizational form/structure.
While the F-tests in five out of six regressions are insignificant, this is caused by the combination of a small
sample size and inclusion of several control variables that, in most cases, are insignificant (in particular alliance
type). Exclusion of the two-alliance type indicators results in significant F-tests for four out of six regressions.
Given the exploratory nature of the study, we report results including these indicators to show the limited
influence of alliance type.
(U
a
1
I
11
| l
S
-'S
.2
1
1
5
B B
!-
m
t/2
*
' ^ O ^^ n t^ O^
CN ^ (N rf fS p
'-^ ci
I I
did
II
I I
o o o o o o o o o o o o o o o o o o o
I I I
in
d
O - H O O O O O O O - H O O O O O O
i l
Tj- o ^ w^
p r^ p rn

I I I I
.a
O
I
s
I I I I
I
c
o
u
O
I
C3
I
I
5
S
I
I
s,
3
.S
p
q
d
O*
d
V
I
&
American
Accounting
Association
While the correlation with asset safeguards is also positive and marginally significant, this is no
longer the case in the regression analysis. This, however, may be due to the limited sample size and
significant correlations between risk types.
Compliance and regulatory risk is significantly associated only with informal controls. This
suggests that controls in the form of trust, informal reviews of partner operations, and accountability
of alliance personnel for alliance performance gain particular importance when this risk is high.
This finding aligns well with our field observations where many of these risks were described as not
only accounting or reporting issues, but also ethical violations (e.g., bribery, chud labor, safety
issues) that may not only result in requirements for high trust in the partner, but also for use of, for
instance, informal reviews of operations that are part of the informal control construct.
The regression results indicate that financial controls are not significantly associated with risk,
and instead that these controls take on most relevance within particular alliance forms (JVs) where
the boundaries of the alliance are clearly (and formally) delineated. This finding is consistent with
the argument that JVs are characterized by a greater intensity of formal controls (Gulati and Singh
1998), which include financial performance reviews, audits, delineation of authority, and
segregation of duties. In addition, the significant effect of JV on informal controls indicates that
the presence of informal controls is greater with the development of a separate JV entity. In JV
entities, employees of partner firms work together, which allows informal processes and trust to
emerge (Inkpen and Curral 2004). JV entities also provide clear organizational boundaries to hold
personnel accountable for collaborative outcomes (Merchant and Van der Stede 2007).
We also observe that relationships with a longer duration make significantly less use of
procedures for parmer selection and management, financial controls, and exit agreements. These
results are again consistent with prior research that finds negative associations between the extent of
prior interactions between alliance partners and use of formal controls, which is attributed to the
substitution of these formal mechanisms by the familiarity and trust that develop over time (Gulati
1995; Dekker 2008; Dekker and Van den Abbeele 2010). The influence of alliance type on the use
of alliance controls is limited, and only shows a significant positive coefficient of downstream
partnership on use of contractual outcome agreements, indicating that performance based
agreements and measurement are used to a greater extent in alliances with partners who operate
between the firm and its customers. The limited effects of the alliance-type dummies suggest that
use of aUiance controls is more strongly explained by variation in alliance risk.
DISCUSSION
Summary of Findings
Alliances are used to facilitate joint product and process development, knowledge and
technology sharing, and joint production and marketing activities. However, they raise unique
control problems and consequently suffer a high incidence of failure; failure generally attributed to
their inherent riskiness. In this study, we use field study and survey methods to explore the specific
alliance risks that arise when organizations enter into partnerships, as well as the specific control
mechanisms that are employed to manage these risks. While prior research has focused on broad
categories of alliance risk (e.g., performance versus relational risk), we decompose these categories
into specific alliance risks. Further, we examine a variety of specific alliance control mechanisms
rather than focusing on subsets of controls (e.g., contract terms). By exploring the specific alliance
risks that arise and the related control practices employed, we are able to extend the alliance
literature by providing a detailed look at the "black box" of the risk and control categories identified
in prior research.
The results of our inquiry reveal that organizations perceive a wide variety of alliance-based
risks. Although these risks can generally be classified within the broader relational risk and
Journal of Management Accounting Research \ ^ j Accounting
Volume 26, Number 1, 2014 V *'"'"
performance risk categories set forth by Das and Teng (1996, 2001), understanding the linkage
between risk and controls is enhanced by understanding the specific form or risk. As described by
Zajac and Olsen (1993) and consistent with Anderson et al. (2013b), we find evidence that
performance risks, which relate to organizations' quest for value creation is, on average, a greater
concern to alliance managers than relational risks that relate to value appropriation. Our data also
reveal a third risk category not previously identified in the alliance management literature, but
well understood in the accounting literature: compliance and regulatory risk. This risk relates to
an organization being exposed to sanctions from a third party because its partner does not comply
with policies, requirements, and regulations. Compliance and regulatory risk is particularly
salient to alliance personnel responsible for accounting and financial issues, presumably because
it is prominent within various accounting frameworks (e.g., COSO).
We find that organizations use a broad array of control mechanisms to mitigate alliance
risks. Indeed, organizations employ a portfolio of different controls to manage multiple risks
rather than relying on one type or category of controls (e.g., contract terms). Thus, our results
highlight a shortcoming in prior studies that focus on a narrow set of controls. Our data indicate
a much larger portfolio of alliance controls that organizations employ to mitigate alliance risk,
and may serve as a useful point of departure for future studies of management control in
alliances.
Finally, we explore the association between risk and control dimensions to determine whether
certain control practices are commonly implemented to mitigate performance, relational and
compliance, and regulatory risks. Our results indicate that paner selection and management
mechanisms, contractual outcome specifications, and exit agreements are primary mechanisms in
the management of performance and relational risks. Compliance and regulatory risks are primarily
associated with use of informal controls. We find that it is not the type of alhance (e.g., horizontal or
vertical) per se that determines the nature of and exposure to risks and firms' use of alliance
controls. Instead, we observe significant variation across the different types of alliances that
populate our sample in both the exposure to various risks and the use of a wide range of controls.
After controlling for risk exposure, alliance type has limited incremental explanatory power in the
use of alliance controls. One implication for future studies on the control of alliances is that while it
may be important to differentiate between different alhance types to gain an understanding of
differences between these types, identifying alliance risks and the sources of risk may be at least as
important to obtain an adequate understanding of alliance control.
Limitations and Caveats
Of course, our findings are subject to several limitations of the study. First, although we study
risk and control within a range of alliance types, we do not include in the analysis firms' decision to
use an alliance instead of alternative structural governance forms (e.g., vertical integration)a
choice that precedes control design. This means that we are unlikely to observe very high or very
low levels of risk in our sample, as these would favor the hierarchy or market over an alliance as a
governance form. Thus, our results on how risk infiuences alhance control are conditional on the
make-buy ally decision made earlier.
Within the survey analysis, small sample size is a limitation. Although we benefited from
access to IIA members, their survey requirements diminished our control over the survey
administration process. Specifically, we were unable to follow best practice in survey
administration of pre-qualifying survey recipients, follow up twice to enhance response, and
follow up with nonrespondents to understand whether nonresponse was linked to an omitted
correlated variable. We examine the use of management controls through separate regressions
because our sample size limits the ability to examine interrelations between control choices in
response to the same risks (cf., Dekker et al. 2013). Examining such interdependencies is an
important direction for future research, as this would allow drawing inferences about how firms use
multiple controls to manage alliance risks, and about the presence of complementary or substitutive
relations between controls.
Another limitation of survey data is vulnerability to biased or erroneous data. The use of well-
informed respondents who hold a senior audit position helps to ensure that respondents have the
expertise to provide reliable information about the firm's exposure to risk and use of alliance
controls. The use of objective indicators for the control variables (e.g., relationship duration, joint
venture) reduces our reliance on subjective measures that may be more vulnerable to biased
reporting. Nevertheless, had we obtained multiple responses per firm, as well as responses from
alliance partners, we might have reduced measurement error and enhanced reliability. These
approaches would also have offered the potential for analyzing convergent (or divergent)
assessments of risk and control.
Finally, although the results are consistent with prior studies that view risk as antecedents to
contracting and control choices, the analysis of cross-sectional data cannot rule out concerns
about endogeneity and direction of causality between variables. While survey studies will always
suffer to some extent of these concerns, the collection of data on, and analysis of, how
transaction characteristics are associated with alliance managers' risk assessments and
consequent control choices would provide a more complete view of firms' alliance risk
management practices.
Directions for Future Research
Our exploratory examination of the risks that arise and management controls that ire employed
when firms engage in strategic alliances should stimulate future research in several different
directions; including, gaining a more complete understanding of the interplay between risk and
control in an alliance setting, further exploration of specific alliance risks, and additional research
using other methodological approaches.
Several important questions regarding the interplay among risks and control practices in an
alliance setting deserve attention. First, although our study asked alliance managers about their
perception of alliance risk, the key question of how alliance managers form their risk perceptions
remains unexplored. Further, it is unknown to what extent alliance managers recognize the risk
implications of the transaction characteristics described as critical in the TCE literature, as well as
characteristics not recognized by TCE. Thus, future research should examine firms' risk assessment
practices related to alliances.
Second, future research should examine how firms make tradeoffs between the costs of risk and
the benefits of control. In particular, many risks would have a profound impact on the firm if they
manifested; however, the likelihood of occurrence of the risk is often unknown or even deemed
highly improbable. How do firms tradeoff the certain cost of employing management controls
against uncertain risks? While this question could also be explored within the firm, its examination
in an alliance setting is particularly important because the risks of partner opportunism are
significant and unique to interfirm relationships.
Third, future research should examine how the scope of the alliance within the value chain (i.e.,
the type of alliance) influences the specific risks that arise and the portfolio of management controls
used. In this study we made an initial effort to explore this question and selected field study sites
primarily engaged in different alliance types (e.g., BIOTECH was largely involved in research and
development partnerships). Results of our content analysis of field interviews suggest that
meaningful differences in the types and magnitude of risks that emerge exist between different
types of partnerships. However, our survey responses did not yield sufficient variation to further
Journal of Management Accounting Research S L J Accounting
Volume 26, Number 1, 2014 V * ' "
investigate the role of alhance type. Future research specifically focused on this question would not
only extend theory, but may also be directly apphcable to practitioners who could use the results to
focus their control efforts.
Fourth, evidence from our field sites indicates that organizations impose groups of controls to
mitigate groups of risks. Some prior research also finds that a broad package of management control
mechanisms, including informal controls such as trust, are typically used in conjunction to address
the same (set of) risks (e.g., Dekker et al. 2013). Future studies should address the interrelations
among control choices to manage interfirm risks.
Fifth, evidence from our field interviews suggests that there are certain control practices that
firms employ for all alliances (or for all alliances of a certain type), such as standardized contract
templates, but there are also specific (and varied) sets of control practices firms use for specific
partnerships. This suggests that there exists an interesting tradeoff between the costs and benefits of
customizing control practices to the particular risks posed by a specific alliance, versus treating all
alliances as identical and employing standardized control practices. Future research should explore
the determinants of this control decision, as well as its effects on alliance and firm performance.
Additionally, several of our results regarding specific alliance risks warrant further study.
First, more work is needed to examine compliance and regulatory risk in an alliance setting. Our
results show that it is a separate and important risk, distinct from performance and relational risk.
This risk is particularly salient as alliances that cross national boundaries introduce varied
regulatory regimes and norms of business practice. While compliance and regulatory risk is
important to accountants who introduced it as part of the COSO internal control framework, it
has not received attention in the strategy literature and, therefore, there is scant empirical
examination of this type of risk in an alliance context. Accounting scholars thus have an
advantage in studying compliance and regulatory risk, given their familiarity with this type of
risk as it relates to financial reporting regulations, as well as the control practices often employed
to mitigate it.
We also note the anomalous result that "price renegotiation risk" is not a significant concern of
our survey or interview participants. This finding is in contrast to the focus on the "hold-up"
problem in the TCE literature. One possible explanation is that alhance partners use alternative
strategies to (unofficially) alter their contractual obligations without employing opportunistic tactics
(e.g., Anderson, Glenn, and Sedatole 2000). Future research should explore why this important
theoretical risk does not appear to manifest significantly in practice.
Finally, there are opportunities for future research examining similar questions as those
explored in this study, but with other research methods. For example, more work is needed that
blends the insights and specificity from firms and their partners with the broader implications
gained from large sample statistical inquiry. Also, like most studies on alliance risk, ours relies
solely on one alliance partner to describe the alliance risks and control practices. Although it poses a
number of methodological challenges, a significant opportunity remains to study alliance risk and
management control from both parties' perspective. Such studies could explore how each firm
chooses to control its partner, as well as how partners react to control mechanisms imposed by
partners. Factors such as the relative power of each partner could influence partners' compliance
with, or aversion to, different control practices.
In sum, we believe that there are many significant research questions regarding risk
management in strategic alliances that accounting research can address, which can have impact on
both theory development and practitioners in guiding their control strategies and efforts. The
inventory of specific risks and control practices developed in this study serve as a useful reference
for future researchers seeking to address the many important research questions that remain.
A ^ t u n i r n g Journal of Management Accounting Research
REFERENCES
Anderson, S. W., and H. C. Dekker. 2005. Management conU-ol for market transactions: The relation
between transaction costs, incomplete contract design and subsequent performance. Management
Science 51 (12): 1734-1752.
Anderson, S. W., and H. C. Dekker. 2010. Accounting in networks: The transaction cost economics
perspective. In Accounting in Networks, edited by Hkansson, H., K. Kraus, and J. Lind. New York,
NY: Routledge.
Anderson, S. W., and K. L. Sedatole. 2003. Management accounting for the extended enterprise:
Performance management for strategic alliances and networked partners. In Management Accounting
in the Digital Economy, edited by Bhimani, A. 37-73. Oxford, U.K.: Oxford University Press.
Anderson, S. W., D. Glenn, and K. L. Sedatole. 2000. Sourcing parts of complex products: Evidence on
transactions costs, high-powered incentives and ex post opportunism. Accounting, Organizations and
Society 25 (8): 723-749.
Anderson, S. W., M. Christ, H. C. Dekker, and K. L. Sedatole. 2013a. Risk Management in Strategic
Alliances: Field Evidence. Working paper. University of Califomia, Davis.
Anderson, S. W., H. C. Dekker, and A. Van den Abbeele. 2013b. Control and Residual Risk in Interfirm
Transactions. Working paper. University of Califomia, Davis.
Anderson, U., M. H. Christ, K. Johnstone, and L. Rittenherg. 2011. A post-SOX examination of factors
associated with the size of intemal audit departments. Accounting Horizons 26 (2): 167-191.
Bazeley, P. 2007. Qualitative Data Analysis with NVivo. Los Angeles, CA: Sage Publications.
Caglio, A., and A. Ditillo. 2008. A review and discussion of management control in inter-firm relationships:
Achievements and future directions. Accounting, Organizations and Society 33 (7/8): 865-898.
Cohen, M. A., and H. Kunreuther. 2007. Operations risk management: Overview of Paul Kleindorfer's
contributions. Production and Operations Management 16 (5): 525-541.
Committee of Sponsoring Organizations of the Treadway Commission (COSO). 2004. Enterprise Risk
Management-Integrated Framework. New York, NY: American Institute of Certified Public
Accountants.
Committee of Sponsoring Organizations of the Treadway Commission (COSO). 1992. Internal Control-
Integrated Framework. lersey City, NJ: COSO.
Cooper, R., and R. Slagmulder. 2004. Interorganizational cost management and relational context.
Accounting, Organizations and Society 29 (1): 1-26.
Das, T. K., and B. Teng. 2001. Trust, control, and risk in strategic alliances: An integrated framework.
Organization Studies 22 (2): 251-283.
Das, T., and B. S. Teng. 1996. Risk types and interfirm alliances structures. Journal of Management Studies
33: 827-843.
Dekker, H. C. 2008. Partner selection and govemance design in inter-firm relationships. Accounting,
Organizations and Society 33 (7/8): 915-941.
Dekker, H. C. 2004. Control of inter-firm relationships: Evidence on coordination requirements and
appropriation concems. Accounting, Organizations and Society 29 (1): 27^9.
Dekker, H. C, and A. Van den Abbeele. 2010. Organizational leaming and interfirm control: The effects of
partner search and prior exchange experiences. Organization Science 21 (6): 1233-1250.
Dekker, H. C, J. Sakaguchi, and T. Kawai. 2013. Beyond the contract: Managing risk in supply chain
relations. Management Accounting Research 24: 122-139.
DeLoach, I. W. 2000. Enterprise-Wide Risk Management. London, U.K.: Pearson Education Ltd.
Emsley, D., and F. Kidon. 2007. Trust and control in intemational joint ventures: Evidence from the airline
industry. Contemporary Accounting Research 24 (3): 1-32.
Fabrigar, L. R., D. T. Wegener, R. C. MacCallum, and E. J. Strahan. 1999. Evaluating the use of
exploratory factor analysis in psychological research. Psychological Methods 4 (3): 272-299.
Geyskens, I., Jan-Benedict E. M. Steenkamp, and N. Kumar. 2006. Make, buy, or ally: A transaction cost
theory meta-analysis. Academy of Management Journal 49 (3): 519-543.
Gulati, R. 1995. Does familiarity breed trust? The implications of repeated ties for contractual choice in
alliances. Academy of Management Journal 38 (1): 85-113.
Gulati, R., and H. Singh. 1998. The architecture of cooperation: Managing coordination costs and
appropriation risks in strategic alliances. Administrative Science Quarterly 43 (4): 781-814.
Itikpen, A. C, and S. C. Curral. 2004. The co-evolution of trust, control, and leaming in joint ventures.
Organization Science 15 (5): 586-599.
Ireland, R. D., M. A. Hitt, and D. Vaidyanath. 2002. Alliance tnanagetnent as a source of cotnpetitive
advantage. Journal of Management 28 (3): 413446.
Krishnan, R., F. F., Miller, and K. L. Sedatole. 2011. The use of collaborative interfinn contracts in the
presence of task and demand uncertainty. Contemporary Accounting Research 28 (4): 1397-1422.
Langfield-Stnith, K. 2008. The relations between tratisactional characteristics, trust, and risk in the start-up
phase of a collaborative alliance. Management Accounting Research 19 (4): 344-364.
Li, D., L. Eden, M. A. Hitt, and R. D. Ireland. 2008. Friends, acquaintances, or strangers? Partner selection
in R&D alliances. Academy of Management Journal 51 (2): 315-334.
Lunnan, R., and S. A. Haugland. 2008. Predicting and measuring alliance performance: A multidimensional
analysis. Strategic Management Journal 29: 545-556.
Macher, J. T., and B. D. Richtnan. 2008. Transaction cost econotnics: An assessment of etnpirical research
in the social sciences. Business and Politics 10: 1-63.
Malhotra, D., and F. Lumineau. 2011. Trust and collaboration in the aftennath of conflict: The effects of
contract structure. Academy of Management Journal 54: (5) 981-998.
Menard, C. 1995. Markets as institutions versus organizations as markets? Disentangling some fundamental
concepts. Journal of Economic Behavior & Organization 28 (2): 161-182.
Merchant, K. A., and W. A. Van der Stede. 2007. Management Control Systems: Peiformance
Measurement, Evaluation, and Incentives. Upper Saddle River, NJ: Prentice Hall.
Miller, P., L. Kumnmki, atid T. O'Leary. 2008. Accounting, hybrids and the management of risk.
Accounting, Organizations and Society 33 (3): 942-967.
Mouritsen, J., A. Hansen, and C. 0. Hansen. 2001. Inter-organizational controls and organizational
competencies: Episodes around target cost management/functional analysis and open book
accounting. Management Accounting Research 12: 221-244.
Nicolaou, A., K. L. Sedatole, atid N. Lankton. 2011. Integrated information systems and alliance partner
trust. Contemporary Accounting Research 2 (3): 1018-1045.
Ouchi, W. G. 1979. A conceptual framework for the design of organizational control mechanisms.
Management Science 25: 833-848.
Oxley, J. E., and R. C. Sampson. 2004. The scope and govemance of intemational R&D alliances. Strategic
Management Journal 25: 723-749.
Reuer, J. J., and A. Ario. 2007. Strategic alliance contracts: Dimensions and determinants of contractual
complexity. Strategic Management Journal 28: 313-330.
Schloetzer, J. D. 2012. Process integration and itiformation sharing in supply chains. The Accounting
Review 87 (3): 1005-1032.
Schreiner, M., P. Kale, and D. Corsten. 2009. What really is alliance management capability and how does
it impact alliance outcomes and success? Strategic Management Journal 30: 1395-1419.
Simons, R. 1995. Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic
Renewal. Boston, MA: Harvard Business School Press.
Van der Meer-Kooistra, J., and E. J. G. Vosselman. 2000. Management control of interfirm transactional
relationships: The case of industrial renovation and maintenance. Accounting, Organizations and
Society 25: 51-77.
Vanneste, B. S., and P. Puranam. 2010. Repeated interactions and contractual detail: Identifying the
leaniing effect. Organization Science 21 (1): 186-201.
Williamson, O. E. 1985. The Economic Institutions of Capitalism. New York, NY: The Free Press.
Williamson, O. E. 1991. Comparative economic orgatiization: The analysis of discrete structural
altematives. Administrative Science Quarterly 36: 269-296.
Zajac, E. J., and C. P. Olsen. 1993. From transactioti cost to transactional value analysis: Implications for
the study of interorganizatiotial strategies. Journal of Management Studies 30: 131-145.

The Use of Management Controls To Mitigate Risk in Strategic Alliances: Field and Survey Evidence

Загружено:

Сведения о документе

Исходное описание:

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

The Use of Management Controls To Mitigate Risk in Strategic Alliances: Field and Survey Evidence

Загружено:

Авторское право:

Доступные форматы

JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH American Accounting Association

Vol. 26, No. 1 DOI: 10.2308/jmar-50621

Вам также может понравиться