Dynamic governance matching for solution development

The context

To thwart competitive threats and satisfy the needs of their customers, B2B companies more and more often are opting to expand their offering with services integrated in their products, also known as solutions. A solution is, above all, the outcome of intense customer-supplier interaction. In fact, both parties have to combine their resources to co-create an integrated value proposition through a process of negotiating and normalizing their mutual divergencies and by making specific governance choices. But the shift to a service approach brings with it dramatic changes in the relationship between the actors involved, rendering the value proposition customer-centric and obliging each party adapt to the other’s perspective. The direct consequence of this is a highly dynamic process for developing solutions; but if it’s not properly managed, this process can trigger tensions and discourage participation.

The research

We recently ran a study in which we attempt to pinpoint the tensions associated with this process at a governance level, to analyze how they change and to understand how actors adapt accordingly. The basis for our research is an in-depth qualitative investigation which we conducted in an Italian company, a leader in the field of performance measurement and quality control systems. This company’s customers are multinationals that operate in a range of industries, and its strategic objective is to become a solution provider or purely a service provider (for example, carrying out tests in their research center and delivering results to customers).
We applied various qualitative techniques for data collection: structured interviews with a number of managers from the supplier company and customer companies, in-person observations for several days, and opportunistic conversations with other members of the organization. What emerged from our analysis is that the solution development process evolves in three major phases: experimentation, integration, and evolution. But in each phase, tensions can arise between the supplier and the customer. To alleviate them, they must be matched with a series of governance mechanisms to help the actors find an effective alignment.
In the experimentation phase, actors commit to cooperate, while safeguarding themselves from potential opportunistic behaviors, or any competitive threat that might arise from a change in roles and responsibilities. The key mechanisms for successfully completing this phase are temporarily sharing resources (people or equipment) and closing the network to encourage collaboration between the supplier and the customer, to match expected behaviors and to establish a mutually acceptable social matrix. So this first phase is essentially a trial run, a period when the actors test out solution development through simple contractual and relational mechanisms. Our data reveal two possible outcomes at this point: if these initial efforts are successful, the actors will decide to engage even more; if instead this phase is not productive, the interaction will become more and more sporadic. In sum, the first key point for solution development is mutual commitment. If the actors manage to develop this mutual commitment, the integration phase follows, which involves coordinating goals and sharing knowledge, while avoiding the risk that the other party appropriates the latter. Here the actors are willing to work on the necessary co-production processes for solution development, but they have to interact in a condition of interdependence. This inevitably triggers tension, and to contend with it the companies in our sample generate artifacts that reflect the embedded knowledge (for example, co-developed machines, shared layouts, etc.). These artifacts are “boundary objects” which facilitate information exchanges thanks to their shared meaning, and support a more balanced supplier/customer power relationship (for example, by developing shared roadmaps or software interfaces). By adding legal agreements for rights allocation on jointly-created outcomes, actors can avoid feeling overly dependent on one another. The second stage is marked by the emergence of interdependence between the parties as they gradually develop solutions. Our data show that this interdependence can evolve in two directions: if it grows in a balanced way, the actors will continue to co-invest and the development trajectory enters the third phase. If instead this evolution is imbalanced, and one actor becomes less powerful and more dependent on the other, the situation returns to an exchange that more closely resembles a classic market relation as opposed to a collaboration.
As we said, if integration works, the process rolls into the third phase: evolution. At this point, power is balanced, and the actors have to know how to adapt to one another while striving to be proactive at the same time to contend with unexpected contingencies. In this case, co-development efforts have created a symmetrical relationship that benefits all the parties involved, who expect to continue their joint efforts over time to fully exploit their potential to develop solutions. But they can be exposed to sudden unexpected changes in the up/downstream market that could trigger new tensions in managing future contingencies. The actors in our sample try to address these tensions by setting up a new organization role, a “liaison champion,” a link between the supplier and the customer. This champion has the ability to anticipate changes and act like a bilateral governance mechanism to adapt to the market context, and to facilitate alignment even in the face of adversity that can arise in a forward-looking, long-term relationship centered on solution development.

Conclusions and implications

• Despite the qualitative nature of our study, we offer actionable managerial insights for alleviating tensions that arise when developing solutions, namely via appropriate governance mechanisms. The first relates to the fact that the actors involved have to have the right incentive to engage in value creation activities, and to be ever attentive to changing conditions that can characterize their relationships. To this end, a useful method is to design matching contractual and relational mechanisms to manage complexity and deal with possible tensions, which often require differentiated competencies (technical, managerial, and legal) put in a dynamic perspective.
• The second practical implication ties into the radical change in relational habits that the actors need to make. Unlike what normally happens, to be successful in these processes, companies can’t rely on existing relationships which could in fact actually represent obstacles to change. Consequently, managers are called to adopt a learning-by-doing approach, characterized by trials and adjustments in real time to deal with the transitory nature of the benefits associated with governance mechanisms.