ABSTRACT

This paper is bassed on the article “inter-organizational cost management: towards an

evolutionary perspective” it emphasis on how evolutionary theories might further our
understanding of inter-organisational cost management. Core concepts of institutionalization,
capabilities, and learning and change are explored in the con-text of a longitudinal case study.
In addition to this article we have discussed how IOCM Works, five conditioning factors
were identified: products, components, relationship levels, chain categories and mechanisms.
The most of these factors were present in the two value chains. We also discussed the relation
of IOCM and Cost Reduction, IOCM Challenges. This paper makes three main contributions.
First it highlights the blurring of the boundaries between intra-and inter-organisational
phenomena. The processes of institutionalisation, capabilities in resource utilisation, and
learning and change appear to spill over from the organisational domain to the inter-
organisational domain and vice versa. Second, the temporal dimension of evolutionary
theories distances us from the apparently instantaneous cost minimising boundary decisions
of other theoretical perspectives. Nevertheless, we caution against an overly deterministic
view of path dependence. Third, further reflection on the empirical evidence leads to the
suggestion that existing routines may blind us to conflicts of interest and power asymmetries
in inter- and intra-organisational relationships, opening up the possibility that what previous
studies have interpreted as trust, may have in fact been stability in behaviour afforded by
inter- and intra-organisational routines.
 INTER ORGANIZATION COST MANAGEMENT (IOCM)

IOCM can be defined as a structured approach to the coordination of the activities of

companies included in a value chain, resulting in a reduction of the costs involved along an
entire supply chain (Cooper & Slagmulder, 1999; Hoffjan & Kruse, 2006). According to
Souza and Rocha (2008), however, the scope of ICM goes beyond the supply network, as
highlighted by Cooper and Slagmulder (1999) and Hoffjan and Kruse (2006). Thus, it can
be inferred that ICM comprises a cooperative process that, through cost management, aims
for the optimization of the total return of the value chain, besides the company’s own return.

To implement the ICM, some mechanisms need to be used that offer support for the
exchange of information among the members of the entire value chain, such as open-book
accounting (Cooper & Slagmulder, 2003; Kajüter & Kumala, 2005; Souza & Rocha, 2009).
Kajüter dan Kumala (2005) describe the concept of open-book accounting as a tool used to
share information on the costs involved in the productive processes.

As the transparency of the cost structures can be an important element for the emergence of
cost reduction opportunities, through the chain members’ joint efforts, open-book
accounting gains an im-portant function in terms of support for the application of ICM
(Cooper & Slagmulder, 1999; Dekker, 2003; Coad & Cullen, 2006; Agndal & Nilsson,
2010), as it can improve the cost efficiency in the chain and establish trust in the relation of
partnership between buyer and supplier (Kajüter & Kumala, 2005).

Traditionally, companies have focused on costs that they can control from within, which are
known as internal cost management (ICM). But with the advent of technology capable of
measuring and tracking costs along a supply chain, there is an emerging trend to manage
costs associated with supply chain partners, too. As an example, a manager at a French
multinational company explained that his former job description was to “manage” or
“supervise” his suppliers. In his current role, however, he is expected to “collaborate with”
suppliers. He further explained that one of his company’s primary goals was to work with
suppliers to reduce costs. This collaborative approach is known as inter-organizational cost
management (IOCM), which is quite different from the more traditional model where a
more powerful partner benefits at the expense of a weaker one.

How IOCM Works

Here is an example of how IOCM can benefit both parties in a business transaction. A
chocolate company initially supplies chocolate to a customer by following these six steps:
(1) Supplier produces liquid chocolate;
(2) sup-plier solidifies chocolate into chocolate bars;
(3) supplier wraps the bars and packages them on pallets;
(4) sup-plier ships the pallets;
(5) customer unwraps the pack-aging;
(6) customer melts the bars back to liquid form. It was only after the supplier and customer
began working together that they realized both companies’ costs could be reduced
substantially by shipping the chocolate in liquid form.

This example leads to several specific questions regarding interorganizational cost

management: In what types of IOCM activities do companies engage? What practices can
firms in supply chains employ to facilitate the development of IOCM activities? What are the
pay-offs, if any, to companies that engage heavily in IOCM?

organizations today employ a variety of internal and inter-organizational cost management

activities. ICM consists of practices and routines that allow organizations to manage internal
costs and make cost management decisions within the firm’s own internal value chain. These
typically include procedures such as standards and budgets, activity-based costing (ABC),
target costing, quality improve-ment, and continuous improvement (Kaizen costing), as well
as inventory management procedures.

IOCM activities, on the other hand, sometimes are described as an inter-organizational

extension of ICM activities, with the same planning and control capabilities
fundamental to ICM being applied to IOCM.

IOCM conditioning factors

The likelihood of successful IOCM implementation depends on five main variables: product,
product components, relationship levels, value chain categories and governance mechanisms.
Each of these factors is discussed below.

1. Products
From the product point of view two aspects have to be analyzed: profit margin and
functionality.

As to the first aspect – either gross margin or contribution margin – ICM is more
favorable for products presenting lower margins, when comparing to the target margin. By
expanding the cost management process beyond the limits of the organization, the range of
possibilities for cost optimization also expands, thus improving the margin toward the target.

Functionality should be decomposed into the different properties or product attributes.

The higher the number of functionalities, the wider the field of cost management possibilities
beyond the organization’s frontiers; so, the possibilities of successfully applying ICM are
greater for multiple functionality products.

For each product, a viability zone has to be defined, so as to classify it in four areas
and identify if applying ICM would produce favorable results.
 2. Components

IOCM does not necessarily apply to all suppliers of all product components; it is
necessary to identify the components whose suppliers are recommendable for applying
IOCM. In this sense, two variables have to be analyzed: technological constraints and value
ratio.

The technological restriction level determines if it is strategic, and whether the

company intends to keep it in strict confidence or not. If not, research and development can
be candidates for using partners and a good solution for technological advances, or even,
according to Mouritsen et al (2001, p. 228), the only way out of the rapid advancement of
new technologies.

Each component’s value ratio measures its cost-benefit relation; that relation is
measured through the equation:

Value ratio = level of importance / cost

The lower the value ratio, the greater the need for cost management, as the cost tends
to be higher than the benefit offered by the functionality of the component. The applicability
of IOCM is verified by analyzing the two characteristics.

3. Relationship levels

The next phase of the IOCM process is the analysis of the partnership relations and
the classification of the suppliers (common, auxiliary, main or family). According to Cooper
and Slagmulder (1999), to apply IOCM successfully, a favorable relationship among
companies is needed. This involves interdependence, stability, cooperation, mutual benefits
and trust. The more intense the relationship level, the more favorable the IOCM.

Interdependence. A company and its suppliers are said mutually dependents if the
former cannot conclude its product without the latter’s input and, at the same time, the
inexistence of the product makes the supplier lose a large part of its production volume. So,
the higher the interdependence level, the more favorable IOCM.

Trust is the certainty that a transaction is real. It is generally built over time, through
knowledge about attitudes, transactions and information. The more correct information
occurs in a relationship, the better it is positively conceived, thus increasing trust; the higher
the level of trust, the more favorable the IOCM.

Stability. A stable relationship is solid, lasting, secure, constant, so increasing the

chances of a continued partnership. According to Cooper and Slagmulder (1999) a stable
relationship is built on four main factors: trust relationships, security in goals achievement,
cooperation in investments and activity coordination.

Cooperation is mutual help between entities to achieve common goals; this requires
interaction, collaboration, complementariness and reciprocity, common goals, joint and
coordinates activities and actions. According to Cooper and Slagmulder (1999), a cooperative
relationship is a characteristic that allows companies to work together in order to manage
costs and solve problems raised by the pressure from external adversities. Information about
product projects, processes, costs etc. are shared, allowing companies to increase their
innovation level. A cooperative relationship is a strong characteristic of IOCM, as it enables
joint work in the search for cost management.

Mutual benefit is the sharing of the gains obtained among organizations, encouraging
the maintenance of the relationship. Some benefits can be generated for suppliers (increased
production and access to new technologies) and others for clients (increased functionality and
cost reduction).

4. Value chain categories

Cooper and Slagmulder (1999) identify three categories of value chains: kingdom,
barony and republic. This classification is determined by the number of companies holding
power in the value chain and the goal is to identify which of them is/are favorable to the
application of ICM.

In the kingdom chain type, only one company dominates and commands; it has great
power and the transactions occur in favorable conditions for this company, which sets the
rules. Protocols and control mechanisms are imposed, as well as shared values. According to
Cooper and Slagmulder (1999), improving the efficiency of this type of network depends on
the kingdom company’s ability to promote, or not, information sharing and on adequate
infrastructure. Bacic and Souza (2007) believe that, normally, the negotiated price is close to
a kind of “price set” by the kingdom company. For clients, the kingdom company can
strongly restrict cost management, as it generally provides important input and has great
price-setting power. This chain type is quite favorable to Inter-Organizational Cost
Management.

In the barony chains, two or more companies dominate and command; the power is
shared among the barony companies and none of them has sufficient negotiation power to
dominate the others. Like in the kingdom type, transaction conditions are favorable for the
barony companies, but clients and suppliers can minimize this power by negotiating with
other barony companies. According to Cooper and Slagmulder (1999), protocols can be
established formally or informally. Information sharing or not, the distribution of adequate
competition and cooperation levels and adequate infrastructure are discussed among the
barony companies.
 In the republic type, no single or small group of organizations is in command; the
firms should build alliances, since they all have at about the same power level. Negotiation
conditions are rather similar for the companies, their clients and suppliers. This kind of value
chain structure minimizes ICM possibilities; however, in case of strong negotiation power
between two companies, ICM can become favorable. On the other hand, when negotiation
power is low in both, according to Bacic and Souza (2007), negotiations occur in low
asymmetry conditions, and mutual pressure can result in lower profit margins on both sides.
Protocols are developed through mutual agreements, generally informally. This chain
structure decreases the possibilities of ICM.

Cooper and Slagmulder (1999) state that ICM is favorable in kingdom and barony
chain types, when the kingdom or barony companies can directly manage; the closer the
characteristics get to the kingdom type, the more favorable its ICM implementation.

5. Mechanisms

The mechanisms are the managerial tools that provide support to the cost management
process between the companies in order to orient, control, measure, inform, provide
parameters, serving as a guide for the organizations, making possible the ICM. These
mechanisms, according to Cooper and Slagmulder (1999), can be separated into two types:
disciplining and enabling.

Disciplining mechanisms rule, train, develop, create obligations that rule

organizational relationships with a view to observing and correcting aspects that do not
comply with certain conditions. These mechanisms generate rules to control actions and must
be used as the base to reward organizations that comply with their obligations; these rewards
can be monetary (bonus for targets achieved) or non monetary (long-term relationships).
According to Cooper and Slagmulder (1999), the goal of this kind of mechanism is to
transmit cost pressure across the chain by establishing cost reduction targets. However, in
fact, these mechanisms are rules for relationships, which serve to put pressure on the chain’s
total return on investments, not only on cost reductions: the goal is to set the rules.
Differently from punishments, which are used in situations after rules have been broken, but
that by themselves do not discipline, these mechanisms are aimed at avoiding illegal
practices, deviations, transgressions and, consequently, punishments. Examples of
disciplining mechanisms are: target costing, network protocols and inter-organizational
budgets.

Enabling mechanisms are instruments or tools that provide skills, competences and
possibilities, aiming at solving difficulties in the ICM process and helping to resolve the
problems. According to Cooper and Slagmulder (1999), the goal is to help companies in the
value chain to find out ways for conciliating their skills and coordinating efforts so as to
collectively reach their cost management targets. Differently from gratification, which is used
after the target set has been reached and serves to reward, remunerate for goals achieved, but
that by itself does not enable, enabling mechanisms are aimed at advising, teaching,
instructing the organizations. Examples: activity-based management, value engineering, e-
business, open book accounting, inter-organizational cost investigation, concurrent cost
management, kaizen costing, collaborative forecasts and inter-organizational training. These
mechanisms’ activity range goes from creation over production to logistics.

IOCM and Cost Reduction

The benefits of an inter-organizational costing approach were reviewed by Bastl, Grubic,

Templar, Harrison, and Fan (2010). It is argued that the successful implementation of inter-
organizational costing results in improved business relationships, increased visibility of
product profitability, transferal of competitive pressure upstream of a supply chain, increased
knowledge of firm’s process-related cost and business process, a better understanding of the
real cost of doing business, and improved decision-making.

Generally, IOCM is recognized as a cost reduction programme in inter-organizational

relationships. It is argued that IOCM assists firms to reduce costs in two ways: firstly, it may
help to identify ways to make the interface between firms in networks more effective and
efficient. Secondly, it can help a firm and its buyers and suppliers to find ways to lower the
manufacturing costs of the product (Kulmala et al., 2002). According to Cooper and
Slagmulder (2004), the outsourcing of items introduces the issue of information asymmetry
between the partners in the make or-buy decision. This information asymmetry can cause the
buyer to establish product specifications that unnecessarily increase the costs incurred by the
supplier. In order to lower the costs associated with this information asymmetry, teams from
both sides may meet during the product development process and identify opportunities to
alter the buyer’s specifications in ways that reduce the overall costs.

In a conceptual study on proactive cost management in supply chains, Kajiiter (2002)

suggested that IOCM requires close collaboration between suppliers and buyers to achieve
cost reduction. Therefore, this practice involves the relationship and product as the main
dimensions to establish the environment for joint cost management efforts and improve inter-
organizational costs during the product life cycle. In the same way, Slagmulder (2002)
indicated that IOCM is a development programme that enables firms to jointly reduce costs
during the product design and manufacturing stages. To achieve its benefits, it is emphasized
that IOCM should start as a cultural process with the establishment of the appropriate
supplier-buyer relationships. This is because IOCM is mainly based on the degree of
cooperation, stability and mutual benefit.

Arguably, supply chain management aims at reducing costs that require specific concepts of
cost management, such as supply chain costing, proactive cost management, lean
management accounting and IOCM (Surowiec, 2013). Surowiec argued that the
implementation of IOCM requires firms to determine the specific goals of cost reduction with
regard to suppliers. Furthermore, firms need to collaborate with suppliers and customers to
find ways to lower costs taking into account the suppliers’ profitability when negotiating the
price and in ensuring effective collaboration with suppliers and customers.

In a nutshell, IOCM practices can help partners to either jointly find ways for the suppliers to
manufacture the components at a reduced cost, or move activities and functions between
them so that these activities and functions can be performed more efficiently at a reduced cost
.

IOCM Challenges

Although it has been argued that IOCM practices have the potential to provide advantages to
collaborating partners, these practices can confront firms with exchange hazards and expose
them to risks due to the reluctance to share the information needed for cost minimization
(Anderson and Dekker, 2009). This reluctance stems from the concern about equity and the
sensitive nature of accounting information required. Thus, Anderson and Dekker (2009)
stated that appropriate safeguards and incentives are required to share accounting information
and stimulate active engagement by partners in cost reduction activities. Therefore, a value
creation perspective has been emphasized in IOCM studies by focusing on the prospect of
potential collaborative advantages. Similarly, Chenhall (2006) argued that motivating
partners to enhance their own returns in a manner that increases rather than decreases returns
for the entire value chain may be recognized as a unique challenge of managing costs across
firms’ boundaries. In addition, Cooper and Slagmulder (2004) indicated that if one of the
firms encountered an engineering challenge, it is not unusual for engineers from other firms
in the chain to help solve the problem.

A recent study by Farias and Gasparetto (2016) sought to highlight the difficulties and factors
relating to IOCM. The study divided these factors into three groups. First, factors relating to
the formation of collaborative relationships and strategies of firms, such as the lack of
resources to execute the project and differences between the strategic plans of firms. Second,
factors relating to the development of processes and construction of relationships. These
include factors, such as lack of trust among the partners and opportunism. Third, factors
relating to the results, reviews, and adjustments that occur in relationships, such as lack of
regular performance reviews and uneven distribution of benefits
 7

INTER-ORGANISATIONAL COST MANAGEMENT: TOWARDS AN

EVOLUTIONARY PERSPECTIVE

Evolutionary theories:

Evolutionary theories have a long tradition in the literatures of socio-economics and strategic
management, and have influenced recent studies of the evolution of management accounting
systems. These theories do not form a uni-form or entirely consistent view of organizations.
They are themselves still evolving, and there is as yet incomplete consensus regarding key terms
and concepts. Evolutionary theories of economic phenomena often make use of the analogy of
biological theories of evolution to study the processes out of which novelty is generated.
The literature review of evolutionary economics indicates that three main concepts are at the core
of evolutionary thinking: institutionalisation, capabilities, and learning and change. Although the
choice of these concepts is parsimonious, but it is believed it captures the main elements of
evolutionary theory.

1. Institutionalisation

In evolutionary theories the choice of institutionalisation is intended to reflect the processes of

habituation of social activity, where repeated actions in organisational life become routinized,
and such routinization provides a relatively stable environment for social actors that simplifies
organisational decision making and reduces the overheads incurred when confronting novel but
similar activities. It appears paradoxical that on the one hand evolutionary theory is concerned
with innovation and change in organisations, yet on the other hand institutions represent a great
source of stability. Such stability suggests a degree of path dependence in organisational life,
where the present repertoire of productive habits and routines constrains future behaviour and
limits consideration of alternative work strategies.

2. Capabilities

The term capabilities refer to the ability of an organisation to perform a coordinated set of tasks,
utilizing organisational resources for the purpose of achieving a particular end result. The
concept of capabilities is highly related to institutionalization and based on the work of Penrose
(1959). Penrose (1959) regarded the primary economic function of an organisation is to make
use of productive resources for the purpose of supplying goods and services to the economy.
Rather than the mere possession of resources, it is the knowledge of the services provided by a
firm’s resources, in addition to an understanding of the threats, opportunities, and constraints
presented by its environment, that allow organisational actors to create an image of productive
opportunities that can be leveraged for competitive advantage. Resources may be physical,
human, or organisational. They may be tangible or intangible. But whilst resources underpin
competitive position, it is the manner in which they are assembled, integrated and utilised that
bestows competitive advantage. Hence resources may be regarded as inputs to the production
process, whereas the term capabilities refers to the capacity of knowledge-based humans to
leverage services from resources to perform economic activity. But it is important to emphasize
key interrelationships between resources and capabilities. However, services and the human
capabilities that leverage them from resources are firm specific and difficult for competitors to
imitate, and are therefore a potential source of rent. In this manner, resources become
strategically significant when they take on similar characteristics to the firm-specific assets
described by Williamson (1975, 1985).

3. Learning and change

The processes of learning and change were also central to the contribution of Penrose (1959).
Her theory represented a powerful critique against certain aspects of the neo-classical theory of
the firm. In particular, neo-classical economics includes no notion of an internal process of
development in organisations, leading to cumulative movements in any one direction. Rather,
neo-classical economics regards growth as simply a matter of adjusting to the equilibrium size of
a firm. But Penrose (1959) argued that if services are produced endogenously through various
intra-firm learning processes involving increased knowledge of resources, new combinations of
resources are possible, resulting in an expanding opportunity set, and no equilibrium size of the
firm. In this way, organisational development is depicted as an evolutionary and cumulative
process of learning about organisational resources, in which increased knowledge creates
opportunities for further growth of the firm.
Somewhat ironically, Penrose (1952) had earlier criticised the use of biological analogy in
economics. In particular, she had argued that human agents are guided by purposes and
intentions, whereas Darwinian natural selection makes the assumption that organisms are
programmed by their genes. But these criticisms were met by Winter (1964) who argued that
organisational routines are analogous with the relatively enduring genes found in organisms.
Routines include characteristics of organisations that range from well-specified technical
routines for production, through procedures for hiring and firing, ordering new inventory or
stepping up production of items in high demand, to policies regarding investment, research and
development, advertising, and business strategies about product diversification or overseas
development (Nelson and Winter, 1982).
During the past two decades, the evolutionary perspective has itself continued to evolve. For
example, a distinction has now been made between “operational” and “dynamic” capabilities.
Operational capability involves the performance of an activity for a specific purpose, such as
manufacturing a particular product, using a collection of routines to execute and coordinate the
variety of tasks required to perform the activity. Dynamic capabilities, on the other hand, do not
involve the production of a product or provision of a marketable service.

Evolutionary processes, management accounting and IOCM:

Scapens(1994) and Burns and Scapens(2000) produced a framework for conceptualizing change
in institutions. In this framework change is depicted as consequences of human action and for
this reason it is called evolutionary. This provides a useful starting point for case studies in
organizations. The. framework provides that a simple narrative of phenomena is insufficient.
Rather, explanation of how change takes place is required. Burns developed the framework by
highlighting the importance of how change takes place. Power and politics both are important In
providing explanation.
The uses of evolutionary theories to explore the processes of ICOM is limited. Mouritsen et
al.(2001) used a Latourian framework to explore the possibilities for Management Accounting
intervention in inter-organizational relations. Open book accounting is also used as a mechanism
for developing capabilities. Consequently, IOCM had both inter-organizational and intra-
organizational effects. Structuration theory is often used to explore relationship between the
realms of action and institutions over a period of time. A skeletal framework provides the outline
for further research based on evolutionary processes. The elements of the framework depict the
interrelationship between Institutionalization(I),capabilities (C), and learning & change(L&c)
with Activities(A) over time.
The focus of this paper is on the evolution of cost management practices in inter-organizational
domains. For this, it is assumed that IOCM takes place between two organisations within a wider
environment. Evolutionary processes analyzed at inter-organizational domain and wider
environmental domain.
The activities of agents within the domain will incur costs and will also create value through the
creation of products and services. Within each domain freeze frame the evolutionary processes
conceptually.In the freeze frame capabilities act as modalities which link between institutions
and activities. To capture the evolutionary nature of these relationships it is needed to release the
freeze frame to enable incorporation of the processes of L&C.
By analysing IOCM activities and their interpretation by organisational actors over time, the
framework will highlight the influence of sicial institutions and capabilities in the inter-
organisational domain. Managers can use this framework in both intra and inter-organisational
domains to analyse how capabilities have evolved over time.
Case study
The focus of this case study is School Trends Ltd., a small enterprise based in Sheffield,
England. Its core business is the sale of customized school wear to both primary and secondary
school sectors. For the purposes of our research, its supply chain was understood to comprise:

(1) suppliers of commodity products such as sweatshirts, tee-shirts, etc.,

(2) an external supplier of decorative embroidery services,
(3) School Trends itself, which marketed the products and undertook decorative embroidery and
printing,
(4) a logistics distributor which handled finished goods and transported them to customers, and
(5) customers in both primary and secondary school sectors.

Methods
This research was for the case study over a period of 5 years from April 2000 to March 2005 the
corporate governance of School Trends Ltd. Managing director and director of personnel, which
provided background to the company and various documentation in the preliminary meetings.
These were followed by two series of semi-structured interviews. The first series was with the
six most senior managers of the company, and was conducted during the summer of 2000. The
second series was with 12 other members of staff, selected randomly from a list of staff below
senior management level. In addition to the semi-structured interviews, several informal
meetings have taken place between the researchers and members of the company.

The main focus in this paper was on the cost management practices of the company, and how
they had evolved during the 5 years of this study. Research specifically focusing on the changing
cost management practices that are reported below took place during the period September 2002
to July 2003. The scheme provided an academic placement for one of the authors of this paper
for 20 days in collaboration with School Trends Ltd. But the role of the researcher was not solely
observational because it entailed an element of giving advice to the company. Follow-up
interviews with 12 employees during March 2005 had the objective of gaining insights into their
reflections on the changes that had taken place through the cost management initiatives described
below. The case study has been presented to company participants for verification.

In methodological terms, this research can be classified as an exploratory case study to develop
emergent theory (Scapens, 1990; Otley and Berry, 1994). In addition, the fieldwork can be
classified as action research. this study would appear to meet the criteria that Eden and Huxham
(1996) argued are needed to justify action research as “quality research”. Triangulation of data
was provided by the “opportunity for cyclical data collection through exploring more continuous
and varied opportunities than is occasioned by more controlled research” (Eden and Huxham,
1996, p. 83).
Institutionalized capabilities for learning and change

By the year 2000, Peter Beeby (Managing Director) and Rick Norris (Director of Personnel)
sought to record their understanding of what had made the company successful, what motivated
its workforce, and how the company compared with other business entities. Their reflections
resulted in the production of a formal statement of the practices of governance of the company
that was referred to as “The Community Company Model”. It included a statement of the rights
and responsibilities of members of the community, which were incorporated in contracts of
employment. Rights included opportunities for training and development, involvement in
decision-making, and protection of employment. In return, the workforce had responsibilities for
meeting development objectives, for open and honest participation, endeavor and commitment,
and for flexibility and adaptability.

It is the mission of School Trends Ltd. to offer people with shared goals and values the
opportunity for continued personal and professional development, by cultivating a caring and
rewarding environment where people feel inspired, respected and appreciated.
The mission was reinforced by a variety of appraisal and training practices. Furthermore, part of
the 64-item questionnaire issued to all staff of the company in 2001 was designed to examine
issues positively correlated with a climate of innovation in companies (Ekvall, 1996; Dorabjee et
al., 1998). For example, at School Trends Ltd. it indicated very high scores on measures such as
inspirational atmosphere, people skills and learning, trust, involvement in decision-making, idea
support, teamwork and idea time. Further details of the company’s approach to corporate
governance can be found in Coad (2002) and Dietz et al. (2005).

The evolution of cost management practices within School Trends Ltd.

The concept of change of cost management practices have been introduced at a 2-day workshop
on strategic management organized by a local university for nine of the senior managers of
School Trends Ltd. in the spring of 2001. In it, the managers were introduced to the concept of
value chain analysis. In particular Peter Beedy, Managing Director of School Trends Ltd., was
interested in how the concept could be put into operation by the company. As a result, a
consultant from a subsidiary of Smith and Nephew plc. who had experience in and managing
value chain analysis (VCA) projects, was employed to coach staff at School Trends Ltd. in its
methods. Derry -Mather, the company’s Financial Controller, took a special interest in learning
the approach being advocated by the consultant, who introduced him to the methodologies of
process mapping. This is a systematic way of recording in detail all of the activities performed in
an organization. But the activities are not regarded as standing alone; rather the perspective
views the business as a linked set of activities which cross functional boundaries within the
organization and also link with the activities of suppliers and customers beyond organizational
boundaries. Once the activities have been mapped, such things as process flows, process layout,
process time, wastage, and process costs are examined for their potential for efficiencies or
elimination. In this manner, the methodologies adopted by School Trends Ltd. had similarities
with activity-based cost management (ABCM) and business process reengineering (BPR).
ABCM is based on the premise that activities consume costs; therefore the key to managing costs
is managing activities, whereas BPR usually entails a much more radical reconfiguration of the
value chain. It often involves abandoning current practices and reinventing completely new
methods of performing business processes.

The VCA project began with Derry mapping the internal processes within School Trends Ltd.,
including boundary-spanning activities linking the company with its suppliers and buyers. The
maps were based on both documentary evidence and observation of the processes at work. The
form required analysis under the headings: description of weakness identified, proposed solution,
external relationships, cost benefit analysis, lessons learned, planned completion date and actual
completion date. Weaknesses addressed included embroidery machine downtime, the relatively
high levels of stock maintained as buffers to meet customer service levels, and the high level of
queries arising out of errors on customer order forms.

Early successes in the VCA project encouraged the management of School Trends Ltd. to
replicate its methods beyond its organizational boundaries, as a basis for IOCM. As with cost
management within the company, our skeletal framework suggests that IOCM can only be
understood in the wider context of institutionalized practices between School Trends Ltd. and its
suppliers and buyers.

Institutionalized relationships between members of the supply chain

The importance of developing trusting relationships between suppliers and customers are very
much essential to build relationship between the members of the supply chain. But, the definition
of trust is problematic; it is often described as an assumption of the continuity of that with which
we are familiar. The adoption of a belief by one party in a relationship that the other party will
not act against his or her interests, where this belief is held without undue doubt or suspicion and
in the absence of detailed information about the actions of the other party.

Defining trust in this manner, as a belief that is held with some continuity, points to its
institutional character in the sense that institutions are often described as habits of thought or
action shared by a group of people. Moreover, three primary sources of trust have been
identified: familiarity through repeated interaction, behavioral norms, and calculation, all of
which may be supported by organizational and inter-organizational routines. In this sense
routines, a key building block of evolutionary theories, act as a basis for trust, and many of the
institutionalized routines across the boundaries of School Trends Ltd. and its suppliers and
buyers may be interpreted as supporting trusting relationships. It was the policy of the company
to have a major supplier and a minor supplier so as to meet fluctuations in demand and to cope
with any problems arising at the main source. The development of close and trusting
relationships was supported by institutionalized policies to retain suppliers long-term and to
encourage the sharing of information about problems such as delay in supply or quality
standards.
With the growth of the company, Peter Beeby sought to maintain this approach by concentrating
marketing expenditure on the recruitment, selection and training of high quality sales
representatives, with very little money spent on any form of advertising. The sales
representatives were organized on a regional basis and usually worked from home. The sales
representatives were highly trained, in-house. Based on the experience of long-serving staff, they
had scripts to follow that anticipated any objections to obtaining access, making presentations or
closing a sale. The approach was deliberately low-key so as not to discourage the school with the
view that they might be opening their doors to a hard-sell sales representative. New
representatives were taught the “sales model”, which followed tried and tested ways for making
a sales presentation, including such things as introducing the brochure, presenting the products,
dealing with concerns and objections, and closing the presentation. Similarly, there was an “after
care model” to promote new garments and maintain friendly contact with existing customers.
The models were developed by School Trend’s more experienced sales representatives, who
consequently felt high levels of ownership. They were used as a basis for coaching sales staff by
sales managers and came to represent institutionalized capabilities and actions governing the
relationship between School Trends Ltd. and its customers.

The evolution of IOCM practices

The inter-organizational cost management element of the VCA project involved visits to an
external supplier of decorative embroidery, a supplier of garments, a logistics supplier, and
schools within both the primary and secondary sectors. Access to all of these was thought
possible because of the high levels of trust that had resulted from effective long-term
relationships. In most cases, Derry Mather replicated the use of process mapping and activities
management routines across the organizational boundaries, as they had been used within the
company.

The supplier of decorative embroidery had been a sub-contractor for much of the life of School
Trends Ltd. Prior to his visit, Derry Mather had identified from the internal VCA of School
Trends opportunities for improvement of the boundary-spanning routines with the supplier. A
major focus was to be on turnaround time, and how that could be improved so as to benefit
School Trends’ customers, School Trends Ltd., and the supplier.
Following the VCA project, School Trends Ltd. took a major strategic decision to outsource a
majority of its decorative embroidery activities. Part of the logic of this decision was to re-focus
on what it considered to be its core competences, which it identified as relational marketing
activities with schools, its abilities in the design of customized decoration, and its culture, based
on the Community Company Model. A relatively limited capacity for decorative embroidery was
retained in-house, so as to enable the production of swatches and provide a reserve capacity. The
institutional aspects of evolutionary theories point towards path dependency and resistance to
change in organizational life. So it would be expected that a major change, such as the
outsourcing of a majority of embroidery work, would meet with some organizational opposition.
Employees in the embroidery department spoke of their fears when it was announced that the
intention was to significantly reduce staff numbers working in that department.

Following the initial VCA project between September 2002 and 2003, use of the changed cost
management practices continued. In 2005, a decision was taken also to outsource a major part of
the print operation. Similar fears over redundancies as in the embroidery department were
expressed amongst print room staff. Once again staff were consulted over relocation to other jobs
within the company. In both departments some staff welcomed the opportunity to re-train, whilst
other resented this necessity, and some left the company.
In another part of the VCA project, a visit was arranged to a second supplier, a garment
manufacturer. The purpose of the visit was to review the process of garment manufacture from
the placing of a purchase order by School Trends Ltd. to receiving the product in Sheffield so as
to learn how the process might be improved or activities eliminated. The visit enabled Derry
Mather to produce a detailed process map of activities performed by the supplier, which was
forwarded to them for checking. This revealed a number of non-value adding activities.
Another key part of School Trends’ supply chain involved the efficient movement of goods
between different parts of the system. School Trends Ltd. used an external logistics supplier to
transport its finished goods to customers. One of the key criteria for selecting this sub-contractor
in 2002 was to have a local contact for processing queries. The management of School Trends
Ltd., disapproved of the many companies that had “faceless” call Centre’s. In contrast, School
Trends’ management felt they had an excellent working relationship with the management of the
logistics supplier, who appeared very customer focused and willing to commit time to
maintaining their relationship.

The last elements of the supply chain to be investigated in the VCA project were the customers
in both primary and secondary school sectors. Derry Mather and the researcher shadowed a sales
manager on visits to several schools. School contacts were either school secretaries or school
bursars. Whilst much of the time was spent discussing new products and potential orders, the
opportunity was taken to open up dialogue about School Trends’ facilities for ordering goods,
the impact of packaging on handling within the schools, and the general quality of goods and
services received from School Trends Ltd. Packaging appeared to cause no problems, and the
school contacts were very pleased with the level of service and the quality of goods sold.
Further research in March 2005 found that the routines that had been established in the original
VCA project had continued to be used by the company, with equipment being moved around to
reduce the number of process steps and the amount of walking between facilities. A consequence
of these continued changes was expressions of concern by some staff over the continually
changing physical make-up of their work area and the fact that the space they were operating in
was continually being squeezed. This continuous pursuit of reductions in non-value adding
activities illustrates the attention that came to be given to the reduction of waste in both products
and processes.

Discussion

The aim of this paper has been to investigate how evolutionary theories might inform the
understanding of IOCM. The initial interpretation of the case findings is that the skeletal
framework including institutionalisation, capabilities, and learning and change both within and
between organisations, did indeed provide a useful point of departure for analysis of the case
evidence. Additionally, the initial interpretation is that the IOCM project was facilitated by trust
between members of the supply chain, which had, at least in part, been fostered by taken-for-
granted routines in supplier relationships and customer care.
The case study indicated a number of consistencies with the path dependency perspective. In
particular, intra-organisational emphases on personal development, flexibility, open and honest
participation, and teamwork, appeared to foster a climate of willingness to adopt new routines.
Additionally, apparently well-established trusting relationships with suppliers and customers
enabled access to be gained to investigate IOCM through the use of process mapping and
activities management routines. Whilst few would doubt that history has in some sense mattered
in providing a facilitating context for IOCM, the concept of path dependency lacks explanatory
power.

The evolutionary perspective is very sceptical about foresight in cost management. Instead, it
favours the biological analogy of pre-adaptation. That is to say that skills and capabilities are
developed in search routines that have no predictive knowledge of the innovative behaviours that
will subsequently be selected.
Specifically, two different underlying goals are important in the context of our discussion:
performance goals and learning goals.
Individuals with a performance goal orientation are concerned with achieving positive
evaluations (and avoiding negative evaluations) from important others of their current abilities
and performance. There is concern with being judged able, and the individual demonstrates
evidence of ability by being successful, by outperforming others, or by achieving success with
relatively little effort. Performance oriented individuals tend to attribute success or failure to
their ability levels, which they believe to be a fixed entity. They are reluctant to experiment with
new approaches for fear of poor outcomes and the consequently negative evaluations of their
abilities and performance. In contrast, individuals with a learning orientation are concerned with
increasing their competence.
The importance of learning oriented individuals to the successful adoption of new search
routines, heuristics and trial-and-error approaches should be obvious: they value the opportunity
to develop new competences and regard set-backs as part of the learning process. Whereas
performance oriented individuals will avoid search routines for fear of being placed in a position
of apparent failure. Less obvious are research findings indicating that the social setting of tasks
can affect the relative salience of learning goals over performance goals.
The case site provided a context of institutional practices involving personal development, work
flexibility and the charismatic leadership of the Managing Director that likely encouraged a
learning orientation on the part of the Financial Controller, motivating the adoption and
persistent application of new search routines. In this manner, the concept of learning goal
orientation suggests a previously neglected link between institutional context and the adoption of
new cost management practices that warrants further research.

In addition to institutional context holding the potential to promote learning goals, the author
further observed its potential to mask issues of conflict, power and politics from organisational
actors and from researchers. Some theorists have argued that understanding these issues is
fundamental to understanding relation-ships in supply chains. The possession of power enables
companies to appropriate value from their relationships with others, whether these are with
customers, employees or suppliers.
There are inevitable conflicts of interest between participants in a supply chain, because
everyone in the chain has the objective of the appropriation of value for themselves. Resource
and competence-based theories suggest that heterogeneous command over resources and
capabilities inevitably introduce such asymmetries. Whilst conflicts of interest are likely to be
persistent between supply chains partners, institutional theories indicate political activity will
likely follow largely predictable paths and stay within predictable bounds that are consistent with
existing routines. Consequently, institutional routines facilitate a truce in inter-organizational
conflict.
Another aspect of power and politics the author observed in the case analysis was the importance
of intentional agency in the evolutionary process. The ability to influence changes in institutions
and routines in organizations usually has to be built on some source of power.
It is author’s interpretation that the VCA project was initiated and gained momentum because it
had the full support of the Managing Director. It was ultimately his authority that gave weight to
the investigations, analyses and recommendations made by the Financial Controller. Yet the
power of the Managing Director may be masked from organizational members in the day-to-day
routines that form the basis of governance of the company. Consequently, authors agree with the
view of Burns (2000), that evolutionary theories would benefit from the explicit addition of
notions of power and politics.
Whilst the research has indicated that evolutionary theories usefully complement previous
studies of IOCM, there are a number of important limitations in this work. In particular, a lack of
resources for longitudinal research of this sort has meant that, whilst visiting a range of suppliers
and customers during the IOCM project, they were unable to undertake an in-depth study of the
suppliers and customers of School Trends Ltd.
Other limitations of the work presented here also suggest directions for future research. The
study has focused on evolutionary processes within a focal organization and between it and its
suppliers and buyers. As such, it fails to incorporate the wider contextual environment.
Organizational activity is embedded in social and cultural beliefs and values, and cannot be fully
understood apart from the context in which it takes place.
A further limitation of our work is that it inherits a number of problems from other recent studies
in the evolutionary tradition. Amongst the most important is the theoretical weakness of certain
conceptual formulations.
Furthermore, disconfirming the evolutionary perspective is very difficult. The theory is
supported by any evidence that variation in inter-organizational capabilities results in
performance differences. Yet, evidence to the contrary does not invalidate the theory, it merely
suggests inferior capabilities. Clearly, this state of affairs creates a number of opportunities for
future theoretical contributions to more clearly define key constructs and their relationships, and
to develop methodologies that more rigorously examine the theories through empirical research.

Conclusion

Iocm is the process of combining the value chain activities of an organization to manage internal
costs and make cost management decisions within the firm’s own internal value chain. There is
some mechanism of IOCM for the exchange of information among the members of the entire
value chain, such as open-book accounting. IOCM implementation depends on five main
variables. In the article inter-organizational cost management: towards an evolutionary
perspective we identified institutionalization, capabilities, and learning and change as its core
concepts. In this article authors found broad support for an evolutionary interpretation of the changes in cost
management practices at the case study site. they found broad support for an evolutionary interpretation of the
changes in cost management practices at the case study site. they had found it expedient to describe cost
management prac-tices within and between organizations