English Summary of the PAVE project: A Study of Business Relationships Between Finnish Electricity Distribution Companies and The Service Suppliers

Transcription

1 English Summary of the PAVE project: A Study of Business Relationships Between Finnish Electricity Distribution Companies and The Service Suppliers D.Sc., Senior Researcher, Hannu Makkonen D.Sc. Professor, Rami Olkkonen Turku School of Economics/University of Turku, Finland Correspondence: Hannu.makkonen@utu.fi Introduction There has been a trend within the Finnish energy industry wherein the electricity distribution companies increasingly outsource their non-core functions such as electricity network construction, maintenance, and fault repair (see Aminoff et al. 2009). This has not only fostered various relationships among electricity distribution companies and service suppliers but has also created a viable new service sector. However, the service markets are still emerging as are the practices and policies on how to deal with the new situation. Both electricity distribution companies and service suppliers have faced some challenges in finding a way forward. The Finnish Energy Industries Association (Energiateollisuus ry) funded by Tekes (Serve), STpooli, Fortum Sähkönsiirto Oy, and Empower Oy and other ways supported by Vattenfall Verkko Oy, established a project to describe the current situation within the industry and explore ways in which to improve the results from the perspective of both the service suppliers and electricity distribution companies. This summary presents the main points of the study, which was conducted between December 2010 and January 2012 and reported in Finnish. The study was based on 57 formal interviews (individuals from 11 electricity distribution companies, 19 supplier companies and 2 authorities) in the field and various discussions and presententation in industry seminars during the project. The theoretical framework of the study Given its aim to understand the relationships and networks within electricity distribution companies and service suppliers, the study builds on the industrial network approach (see e.g. Håkansson 1982). The role of the explicit theoretical backbone is to identify systematically the structures and processes of relationships prior to empirical study. 1

2 The industrial network approach focuses on the interaction between buyer and seller (Håkansson, 1982; Campbell, 1985). This interaction comprises the flow of mutual actions that are frequent or infrequent, regular or irregular, explicit or implicit, conscious or unconscious, and as a result constitute a relationship between two reciprocally committed organizations (Ford, Håkansson & Johanson, 1986; Håkansson & Snehota, 1995). Thus, each delivery of a product, price negotiation or business meeting is a part of this flow constituting the relationship and taking place within it. Hence, the exchange between buyer and seller is a relational exchange involving continual interaction between the organizations in a relationship, rather than discrete transactional exchanges of specified content and duration governed by market forces (Möller, 1994). A research framework was constituted on the basis of the theoretical approach (see Figure 1). Macro-environment Supplier s network Customer s network Supplier Relationship Supplier s Goals Supplier s Value Creation Processes Social and Technical Setting Business Exchange Customer s Value Creation Processes Customer s Goals Adaptation, Coordination Supplier organization Customer organization Performance related results of the relationship Psycho-social results of the relationship Figure 1. The research framework for the empirical study 2

3 The model depicted in Figure 1 presents the key supplier relationship as embedded into the wider context comprising the customer and supplier organizations, their goals, value creation processes and networks as well as macro environment. The results of the relationship are divided to performance related and psycho social. All these elements significantly impact the supplier relationships that were the main focus of the study. The model splits the key supplier relationship into structural elements (the technical and the social setting) and interaction elements (business exchange, adaptation, and coordination). The social setting refers to the emotional-cognitive structures affected by history, as well as expectations of the relationship with regard to atmosphere, trust, and commitment (Håkansson & Ford, 2002; Halinen, 1997). The technical setting, in turn, includes activity links and resource ties (Håkansson & Snehota, 1995), which may be technological (information systems), procedural (pre-determined communication practices) or legal (contracts) arrangements, all of which in combination provide a context and a structure to the interaction between the parties (see Möller, 1994). Business exchange relates to the flow of interlinked acts, actions and episodes that comprise the service production (see Vargo & Lusch, 2004) in interaction with the actors (cf. Holmlund, 2004). The business exchange, the structural elements, and the characteristics of the actors and individuals are in continuous interplay through individual cognition (see e.g. Daft & Weick, 1984). First, the characteristics of a supplier and a customer at the company (e.g. relative size, preferred interaction style, relative familiarity) and individual (e.g. preferred interaction style, perceived importance, relative familiarity, and risk aversion) levels affect how individuals in organizations perceive and interpret the social and technical settings of a relationship, and how this steers organizational action (see Håkansson, 1982; Campbell, 1985). Secondly, the social and technical settings are not merely given and external to the network actors and individuals; they are interacted or enacted jointly as the actors continuously produce and reproduce these elements through their actions, partly unconsciously and partly consciously with reference to their characteristics and organizational and individual goals (Ford, Håkansson & Johanson, 1986; Weick, 1969). Consequently, the business exchange and the technical and social settings reflect each other, and the fit between them evolves over time. Adaptation and coordination activities (see Håkansson & Snehota, 1995) in the model refer to flows of acts and actions aimed at intentionally improving the mutual fit between the elements of business exchange and the social and technical settings, as well as the fit between the relationship and 3

4 organizational goals and the value creation process. In the former case, it is a question of the consistency of the relationship, in other words how the technical and social setting supports the business exchange, whereas in the latter it is a matter of how the value creation processes outside (in other relationships) and within the focal relationship contribute to each other, and what the organizational goals are in this respect (e.g. downsize/concentrate on some business areas/particular relationships). Results and Conclusions The reader might ask why the theoretical framework was so heavily grounded in this type of practice oriented project, which aims to provide tools and practical level understanding of the management of supplier relationships between the electricity distribution companies and their service providers, and why it was depicted so widely in this summary. The studied relationships clearly pointed out that the people working within electricity distribution companies and service suppliers were highly competent in technical content regarding service production (fault repair, maintenance, electricity network construction). Also, the interviewed persons were highly reflective, quite self-critical and expressed themselves in a structured manner. However, the business competence to locate different issues regarding the relationships and service delivery taking the big picture into account was largely absent. When the study and its preliminary findings were presented in industry and company workshops, quite a general comment made was that this type of dyadic approach that takes both parties and their goals into account is completely new to many: We ve never thought that we could have joint goals. Of course, for some these issues were clear, and they were more professional and competent in seeing the bigger picture; but in general it was surprising to see how mechanistic and self-oriented the views of the parties to a relationship were. Hopefully, the type of holistic approach that is captured in the model (Figure 1) and explained in detail in the Finnish language report would be an eye opener and lead to open discussions within the industry. The emergence of the service sector stems from outsourcing the functions (network construction, fault repair, maintenance) that used to be conducted by electricity distribution companies in-house. Outsourcing, as always, builds on the idea that acquiring the service or product outside the company is more effective than doing so in-house. In this sense, the service companies have a must and also a great challenge in converting old routines and old ways of conducting these operations more effectively and efficiently. This requires changes in the operations themselves as well as in the 4

5 supporting activities and organization. Thus, the first step in relationship management is to define the mutual goals in the short and long term that sketch where the organizations are going together. The second issue is to define what the framework is in order to reach the goals effectively: what are the parties roles and liabilities, and what kind of activities, resources and organizations do those require. This discussion is still evolving or in fact absent in the industry. The reason is in part that after the outsourcing decision both parties are still a little confused about the new situation and about what the next moves should be. Current ongoing discussions revolve around more minor issues that are only one part of the whole, such as contract terms. To some degree, the separation of supplier and buyer has led to a situation where the other party is seen as an opponent and the aim has been to increase the distance between the companies. This has generated certain benefits but left certain areas underdeveloped. The benefits have been of the kind that the parties to a relationship have been compelled to build up the technical setting of the relationship: contracts, integrated ICT systems, structured meeting patterns, supplier evaluation, etc. On the other hand, the mutual development of activities, the optimal division of tasks, and social setting of the relationship are still developing. The parties to a relationship are slowly realizing what the nature of these relationships is and where the service sector as a whole and the distribution companies as emerging service markets are developing. The big issues related to this and the discussion on mutual goals in a relationship are the targeted nature of the relationships and the optimal exchange. The services have largely been bought and delivered as separate items, and the nature of the relationships has been largely distant. These relationships are slowly developing towards being closer in nature, and the focus of products exchange will move towards value co-creation: the service suppliers will be empowered with greater responsibilities, and be evaluated and credited on the basis of the impact or total value that the service supplier is capable of delivering, rather than on the market price of the service. In this sense, the service suppliers will gain more opportunities to improve and optimize their resource base, capabilities and value creation processes in order to improve organizational effectiveness and efficiency that will benefit both parties to the relationship. That kind of development in the current situation is dependent mostly on trust between the parties, and the development of industry level key performance indicators according to which the suppliers can be evaluated. Also, the mutual interdependence between the parties will become more balanced. Following that kind of development path, the service sector will in the (near) future become more heterogeneous: the 5

6 service suppliers will be more specialized and focused around their core competences and the value processes will be more tailored within the different service relationships. References Anna Aminoff, Ilmari Lappeteläinen, Jarmo Partanen, Satu Viljainen, Kaisa Tahvanainen, Pertti Järventausta & Petri Trygg (2009) Ostopalveluiden käyttö verkkoliiketoiminnassa. Campbell, N. C. G. (1985) An interaction approach to organizational buying behavior. Journal of Business Research, 13(1), Håkansson, H. (ed.) (1982) International marketing and purchasing of industrial goods and an interaction approach. Chichester: John Wiley & Sons. Ford, D., Håkansson, H., & Johansson, J. (1986) How do companies interact? Industrial Marketing and Purchasing, 1(1), Håkansson, H., & Snehota, I. (1995) Developing business relationships. London: Routledge. Möller, K. (1994) Interorganizational marketing exchange: Metatheoretical analysis of current research approaches. In: Research traditions in marketing, ed. by Gilles, L., Lilien, G. L., & Pras, B Boston: Kluwer Academic Publishers. Håkansson, H., & Ford, D. (2002) How should companies interact in business networks. Journal of Business Research, 55(2), Halinen, A. (1997) Relationship marketing in professional services: A study of agency and client dynamics in the advertising sector. London: Routledge. Vargo, S., & Lusch, R. (2004) Evolving to a New Dominant Logic for Marketing. Journal of Marketing, 68(1), Weick, K. E. (1969) The social psychology of organizing. Reading: Addison-Wesley Publishing Company. Holmlund, M. (2004) Analyzing Business Relationships and Distinguishing Different Interaction Levels. Industrial Marketing Management, 33 (4), Daft, R. L., & Weick, K. E. (1984) Toward a Model of Organizations as Interpretation Systems. The Academy of Management Review, 9(2),