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The essential feature of project organisation is a
temporary organisation which draws on the permanent resources provided by
functionally organised skill containers. This general form of project
organisation is illustrated in figure 2. The functional organisations are
responsible for developing the productive resources required for the
project. This activity may take the form of recruiting, developing, and
retaining appropriate human resources, buying and maintaining production
equipment, and the development of new product technologies and production
techniques. The project organisation is responsible for ensuring that the
appropriate mix of resources is mobilised to meet the clients needs. This
client may either be a real entity, or a virtual client where the
marketing department is responsible for interpreting the requirements of
an as yet unknown group of customers. The skill containers providing the
resources may either be internal departments of a single organisation or
independent organisations. Traditionally, project coordinating functions
were integrated into the skill containing firms, but there has been a
general trend in many industries to establish organisationally distinct
project coordinating organisations.
Transaction
Costs
It is this distinction between the internal and
external provision of resources which is one of the main factors by which
project organisations vary. Williamson (1975, 1985) has developed a
comprehensive analysis of the factors which influence the choice of
transactions. He defines a transaction as occurring when a good or service
crosses a technologically separable interface (1980). In other words, if
the efficient organisation of a production operation requires an
integrated technology then transactions do not occur within it. For
instance, if an assembly line is a technologically efficient choice of
production technology, then transactions only occur at points where inputs
of components arrive at that assembly line, and output of the product
leaves that assembly line. Williamson argues that total costs of an
economic activity are the sum of production costs and transaction costs,
in distinction to the conventional approach which only focuses on
production costs. While developed in order to understand the development
of vertical integration, with particular reference to attempts to regulate
the formation of monopolies, the framework has a more general relevance,
and is particularly appropriate, I would contend, to the analysis of
project organisation.
The basic question posed is that, given that production
is efficiently organised, how can transaction costs be kept to a minimum
as well? Williamson argues that there are three main environmental
contingencies upon which the answer to this question rests. The first is uncertainty,
which is a function of the difference between the amount of information
required for a decision, and the amount of information available
(Galbraith 1977). Uncertainty is generated for two reasons - through
either complexity or dynamism. Complexity is the condition
where the information is in principle available, but its collection or
analysis is either technically impossible within the time available, or
would cost more than the returns from complete information. Dynamism is
the condition where the situation is changing so that present data are
poor guides to future states. The future is inherently unknowable, but
some futures are more unknowable than others due to differing levels of
dynamism in the environment. The second is asset specificity - the
extent to which the resources required are available from a large number
of sources and hence can be bought in a competitive market, or only a few
sources and the market is oligopolistic or even monopolistic. The third is
transaction frequency - whether the input is required on a regular
or occasional basis.
These three environmental contingencies encourage
particular behavioural characteristics. Uncertainty generates bounded
rationality where intendedly rational managers take decisions based on
incomplete information and tend towards satisficing rather than
optimisation in decision-making (March and Simon 1993 chap 6). Asset
specificity generates opportunism where holders of scarce assets take
advantage of their situation by overcharging, or by exerting their power
to distort the behaviour of their customer. Transaction frequency
influences the level of management attention given to the transaction -
infrequent transactions are likely to be less closely managed than
frequent ones. Williamson also emphasises the importance of atmosphere
in transaction governance. This is the commitment of the parties to
non-economic considerations, such as family commitments, preference for
high trust relationships and long term relationships, cultural affinities
and the like. Where atmosphere factors are strong, opportunism is
likely to be suppressed and information to flow more freely between the
parties, reducing bounded rationality and what Williamson calls
"information impactedness".
Where uncertainty and asset specificity are low,
transaction costs are likely to be minimised by the market governance of
transactions. In other words, firms will obtain their supplies of inputs
externally by competitive tender in the marketplace in what is known as market
transaction governance. Low uncertainty means that buyers can clearly
state their requirements in a specification, and low asset specificity
means that prices will be competitive. At the other end of the spectrum,
where uncertainty and asset specificity are high, firms will prefer to
obtain their inputs internally because they are incapable of clearly
specifying their requirements, or they face opportunistic behaviour by
suppliers. This is known as hierarchical transaction governance.
This is usually achieved by vertical integration, or by establishing
internal production facilities.
Many have criticised Williamson's framework for its
specification of mutually exclusive alternatives of market and hierarchy,
when empirically, there are many different forms of relationship between
firms. In particular, the concept of the network governance of
transactions has been posed to describe the variety of collaborative
relationships between firms. There is also some debate about whether the
network is an intermediate form between market and hierarchy, or whether
it can be considered to be an independent form of transaction governance
(Powell 1990). Williamson addresses these issues by identifying the change
that occurs after the "fundamental transformation" (1985 p 61)
between pre-and post-contract relations. Where contracts are not discrete,
and rely upon continuing relations between the parties during execution,
then more elaborate forms of transaction governance tend to emerge. Which
forms actually emerge is a function of transaction frequency and asset
specificity. For a given level of uncertainty, if asset specificity is low,
market governance suffices, but as it gets higher other forms merge. Where
transactions are infrequent, it is not worth investing in
transaction-specific governance structures, and trilateral governance
emerges which relies upon third-party arbitration to resolve disputes.
Where transaction frequency is high, bilateral governance structures
emerge, and as it gets higher hierarchical governance tends to be more
favoured.
Williamson sees these relations very much as a
continuum between the poles of market and hierarchy (1985 p 83). One
problem with holding Powell's position of a non-polar account is the sheer
vagueness in what network governance actually looks like. Market and
hierarchy are clearly defined states; networks are not. One contribution
of this paper will be an attempt to clarify what is meant by such network
forms of transaction governance - which may be more generally defined as collaborative
transaction governance types. It may be suggested that where asset
specificity is low but uncertainty is high, then collaborative forms of
governance may prevail. Similarly, where uncertainty is low but asset
specificity high, collaborative forms may also prevail. Where atmosphere
considerations are strong, this will reduce the tendency towards vertical
integration in conditions of high uncertainty and asset specificity, and
favour other forms of collaboration between firms. These relationships are
illustrated in figure 3.
Transaction frequency also has a profound impact upon
the choice of governance mode. In considering its effects, asset
specificity and uncertainty can be held constant, as they both have
similar implications for the choice of governance mode. Where uncertainty
and/or asset specificity are high, and transaction frequency is high, then
hierarchy is again likely to be appropriate, and the inverse also holds.
Where transaction frequency is high, but asset specificity and uncertainty
low, what Williamson calls bilateral governance, or what Eccles (1981) has
called the quasi-firm, is likely to be appropriate. This is where the firm
buys inputs from a stable network of suppliers. This reduces transaction
costs associated with market governance by reducing search costs and the
need for complete specification writing and by facilitating information
flows between the parties - they know each other already. Where
transaction frequency is low, but asset specificity and/or uncertainty are
high, then what Williamson call trilateral governance is likely to be
selected. This is the situation where the contract between the parties
provides for its continuing renegotiation in the light of circumstances,
and provides for third party resolution of disputes which may arise during
this renegotiation. Again, strong atmosphere considerations are likely to
favour the more collaborative transaction modes. This analysis is
summarised in figure 4.
Production
Costs
The above analysis focuses upon transaction costs. In
order to fully understand the nature of relations between firms,
production costs need to be brought back into the equation. Williamson
tends to assume that production efficiency is attainable within the single
organisation, and that only transaction costs are relevant in considering
relationships between organisations. However, it is clear that there are
many cases where individual organisations cannot achieve economies of
scale internally, and are obliged to collaborate externally in order to
produce efficiently. This is particularly true where different parts of
the value chain have different economies of scale. Under such conditions,
firms also tend to form networks of relationships, in order to gain
production economies for inputs that they do not wish to buy in the market
place, but can only bring inside at the expense of production diseconomies.
A variant of this problem is the case where the firm
can, in principle, achieve economies of scale but cannot raise enough
capital to make the necessary investments. Such capital-sharing
arrangements are common, for instance, in various areas of retailing where
the parent company sells franchises which mean that the expansion of the
branch network is largely financed by the purchasers of the franchises.
This facilitates rapid expansion and the early achievement of economies of
scale in marketing. Similarly a firm may be reluctant to take the entire
responsibility for a project. This could be either because the project is
very large in relation to the size of the firm and its failure would bring
down the whole firm, or because the activity, though attractive is
peripheral to the firm's core business. In these cases, collaboration
reduces risks, and allows the firm to be engaged in activities that its
size would normally place beyond its reach.
Forms
of Collaborative Transaction Governance
The literature on network forms of transaction
governance encompasses a diverse set of organisational forms, with little
attempt to systematically differentiate types. In order to help in the
identification of some different types, the literature on strategic
alliances provides some useful frameworks.
A spectrum of collaborative forms can be identified The
first dimension by which such forms vary is degree of interdependence
- collaborative arrangements can be either project-based and therefore
temporary, with a clean separation of resources allocated to the project
and the returns generated from them at the termination of the project, or
indeterminate in duration with much greater difficulty in separating
returns and the development of relationship-specific investments.
The second dimension is power balance - the
relationship may be one between equals, or power within the network may
clearly favour one member. From these two dimensions, four basic types
emerge as illustrated in figure 5. The consortium is formed when
firms collaborate on a equal basis to achieve a particular end, and then
separate once it has been achieved. Such consortia may be integrated
in that the parties are jointly and severally liable for contract
execution, operate with a common budget, and divide profits and losses at
contract completion according to their original investment, or limited
where one or more of these conditions are not met. The joint venture
is formed between parties who intend a continuing relationship, which is
usually symbolised by the investment of equity in the joint venture and
the right of the joint venture itself to keep at least some of the returns
from that investment.
The coalition is formed when firms come together
on a project basis, but in a clear principal contractor and junior
contractor relationship between the parties. Quasi-firms are formed
where a powerful lead firm with a nodal position in the value chain -
often a final assembler - mobilises a network of suppliers and
distributors. There is again a clear hierarchical relationship between
principal and junior contractor but the relationship is continuous. This
may be because the relationship continues from project to project, or
because production is on a continuous basis. Apart from the human capital
resources which are built up in such continuing relationships, both buyers
and suppliers may make capital investments which are dedicated to the
transaction series, and so the cessation of the relationship may be very
traumatic, particularly for the junior member of the quasi-firm.
Quasi-firms reach their strongest form in franchise networks. Atmosphere
considerations are likely to favour equality of power and longer term
relationships.
The relationships between firms also change through
time, moving between the three basic types of hierarchy, market and
collaboration in response to the changing market and institutional
environment. This is illustrated in figure 6. The shift from market to
hierarchy through merger and acquisition is well known, while the reverse
process of demerger is increasingly common. It might also be suggested
that consortia and coalitions are more market-like forms of collaborative
governance tending to reinforce market transaction governance, while joint
ventures and quasi-firms are closer to hierarchical governance, and may
lead to the formation of fully hierarchical forms.
Uncertainty,
Variability and Risk
Within the concept of uncertainty is the condition that,
although the precise outcome may be unknown, the range of outcomes can be
fully predicted in advance. This condition may called variability
where, in the analogy of the restaurateur trying to predict diners' orders,
a menu of options is offered. The precise option required at any point in
time may not be known, but the range of options is. Applying this
principle to the notion of the project as a flow of information, it can be
argued that uncertainties become variabilities at the screens. The
objective of decision-making at the screen points is to reduce
uncertainties to a clear set of variables, and then to choose between them.
Some choices may remain open for later decision, but they are then made
within a predetermined set of options. It follows from this position that
high variability is only possible in conditions of relatively high
certainty - it must be possible to pre-specify the set of options. Of
course, such transformation of uncertainty into variability can only take
place with respect to internal aspects of the project, for it still
remains vulnerable to uncertainties derived from external dynamism.
The distinction between variability and uncertainty is
an important one. If the production process is merely variable, then
rationality is not bounded, and comprehensive contracts can be written in
advance of the contingent claims type (if X; then Y). Flexibility in
response to customer demands can, in Volberda's terminology (1992) be
operational rather than strategic. If the process is uncertain,
rationality is bounded and forms of contracting are therefore required
which contain means of mutual adaptation between the parties in the face
of the revealed conditions. For instance, one way of handling variability
is through contracts which provide for after-measurement of work completed
against a schedule of rates. It is not possible to deal with uncertainty
in this manner due to the impossibility of drawing up a comprehensive
schedule of rates. Under uncertainty, the contract has to contain
mechanisms for changing the agreement between the parties in an efficient
and mutually agreeable way. Variability, then generates few contractual
problems; uncertainty remains central to the contracting problem and hence
to the organisation of projects.
The conventional distinction between uncertainty and
risk is that the latter is quantifiable on the basis of data derived from
previous experience and hence insurable, while the former remains
inherently unmeasurable. Thus probabilities can be assigned to the risk of
a future event occurring. Much of the work in an area such as risk
management is aimed at turning uncertainty into risk on the basis of the
intensive analysis of previous performance. This may be termed actuarial
risk. There is, however, another use of the term risk which is the
acceptance of the rewards or liabilities from uncertain outcomes. This is
the classical entrepreneurial risk, but also risk in the legal sense of
liability for negative outcomes. Actuarial risk is not conceptually
different from uncertainty as defined above; it is a state of relatively
low uncertainty, where, due to low dynamism, previous experience is a good
predictor of future outcomes. It is the second definition of risk which is
the more interesting, and within the framework developed above, may be
defined as the acceptance of the consequences of uncertainty by an actor.
Thus an actor takes a risk when uncertain outcome X produces
a reward, while uncertain outcome Y produces a liability, where X and Y
are part of a single distribution of indeterminate (i.e. uncertain) shape.
Where the shape of the distribution is determinate, then dynamism has been
reduced to actuarial risk. There remain, outside any distribution, an
additional set of uncertainties which, by definition, remain unknown and
unknowable.
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