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Journal of Management Accounting Research
Volume 26, Number 1, 2014
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24 Anderson, Christ, Dekker, and Sedatole
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
Use of Management Controls to Mitigate Risk in Strategic Alliances: Field and Survey Evidence 25
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.
Journal of Management Accounting Research
Volume 26, Number I, 2014
26 Anderson, Christ, Dekker, and Sedatole
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Use of Management Controls to Mitigate Risk in Strategic Alliances: Field and Survey Evidence 27
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 *'"'"
28 Anderson, Christ, Dekker, and Sedatole
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
Journal of Management Accounting Research
Volume 26, Number 1, 2014
Use of Management Controls to Mitigate Risk in Strategic Alliances: Field and Survey Evidence 29
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 * ' "
30 Anderson, Christ, Dekker, and Sedatole
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
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Use of Management Controls to Mitigate Risk in Strategic Alliances: Field and Survey Evidence 31
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Journal of Management Accounting Research
Volume 26, Number I, 2014