3.2. Business processes and relationships
Business processes are the means by which a company conducts its business by producing value for customers. The previous functional organization paradigm with hierarchical control has been superseded by a more modern process paradigm also in the management literature and there is abundant literature on business processes (Porter 1985, Hammer & Champy 1993, Bask, Kallio et al. 1996, Tikkanen 1997, Tinnilä 1997, Galliers & Swan 1998, Anderson & Narus 1999). Tikkanen (1997) talks in this context about process movement by which he means emergence of the concepts: business processes, BPR and process organization. The interest in business processes soared considerably and its importance was understood within the information technology community in order to automate and to develop possible organizational processes. Scherr (1993, 82) defines a business process as “a series of customer-supplier relationships that produces specific results at specific points in time”, see also (Laamanen & Tinnilä 1998). Hammer and Champy (1993) define a business process again as a collection of activities that takes one or more kinds of inputs and creates an output that is of value to the customer. In their definition the focus is on value for the customer. The business processes typically have a specified duration and place, beginning and end, as well as inputs and outputs (Kutschker 1994). Characteristically the processes may pass intra and inter organizational boundaries and the set business processes vary from company to company. Kutschker (ibid) suggests that firms have from ten to twenty business processes, also as few as five processes are mentioned. This again depends on how the scope of the processes is defined. As in general processes so in business processes the ownership and hence the responsibility to manage and to develop the process is an important feature.
According to Zahran (1998) the process approach helps the business to perform more effectively as the process focus:
Helps to identify areas for investment that are likely to provide the most effective return.
Improves the effectiveness and efficiency of the business activities, thus assisting project managers to meet their budgets and time scales.
Helps communication, productivity and team building. A common process means that the same method and terminology are used and shared across the team.
Enhances the management visibility of the process performance and business results.
Davies (Davies 1996) notes that the key point in characterizing the business processes are that the transformed resources originate from outside the firm boundaries and again the outputs leave the firms’ boundaries. In Fig. 19 the thicker single-headed arrows indicate the flow of deliverable resources and the thinner double-headed arrows depict the flow of supporting resources (ibid, 222).
Fig. 19 depicts the main parts of a business process: the suppliers of resources, the process itself where the transformation is done and the customer who receives the process output. The process is enlarged to show the acquisition, transformation and distribution subprocesses belonging to the main process itself. This subdivision helps to analyse the process in more detail. The management may have an impact on the process flow by implicit consequences of their decisions concerning the organization, availability of resources and specification of organizational roles and by impacts of their established policy and day-to-day flow of decisions. The learning has an important role as to keep the process viable management must observe the environment and be ready to adapt to the changes when necessary (ibid).
3.2.1. Business relationships
Proceeding contextual analysis from plain business processes to customer-supplier business processes in this section is done by a short examination on what is understood by the relationship between the customer and the supplier. Though this study emphasizes the supplier view over the customer this short cross-border discussion is tenable in order to posit correctly the software company in its business environment.
Business relationships stem from the wisdom that in the competitive and turbulent business environment present day companies do not manage the growth by acting alone. The companies focus on developing their core competences in order to be competitive in the market. Following this reasoning the companies evaluate what is the firm’s knowledge base and which functions produce the most value for the customer. What functions and even processes, can be outsourced and which processes and know-how areas are strengthened and by what means (Anderson, Håkansson et al. 1994). Should the company hire more experts or start a co-operational relationship with another company who possesses the know-how needed? Both companies in the relationship actually bring their entire relationship network to the cooperation effort as the individual firms do not operate alone, but they usually belong to several different networks of companies. Håkansson and Snehota (1995) define the relationship approach to be the inter-company relationship development followed over time, rather than on single exchange episodes and transactions.
The network interaction and relationship research got momentum with the IMP Group’s studies in the early 1980s (Håkansson 1982). The shift in emphasis in marketing research has been from discrete purchases in the market to business relationships and relationship networks.
The literature describing the business relationships shows a plethora of diverse attempts to characterize and describe the relationship concept as the relationship is examined from different perspectives (Axelsson & Easton 1992, Håkansson & Snehota 1995, Holmlund & Törnroos 1997, Ford, Gadde et al. 1998, Naudé & Turnbull 1998). This is due to the variety of business environments where these relationships originate, develop and break up. Depending on the business context the relationships have their distinct personalities and no two relationships are alike. This heterogeneity is a problem but it also can be positive for the relationships.
3.2.2. The features of relationships
Holmlund and Törnroos (1997) define as the main attributes contributing to the relationships to be mutuality, long-term character, process nature and context dependence, Fig. 20, (see also Brennan & Turnbull 1998).
Mutuality is further described by four core features. The degree of mutuality that dominates the relationship, it may vary between the partners during the life cycle of the partnership. The multitude of different bonds – technical, economical, social, knowledge and legal – between the partners helps to sustain the relationship even though some bonds may have lower mutuality. The symmetrical nature of the relationship again describes how balanced the relationship is from an influence point of view. A partner may contribute to the relationship by superior technological know-how, by financial status, or by sheer capacity of resources, but in the long run the relationship needs a balance in order to be interesting for both parties (Håkansson & Snehota 1995). Deep one-sided asymmetry in a relationship may cause loss of interest from the other partner in the relationship development.
The power-dependence structure is also a feature that changes over time as the relationship develops. The power positions depends more on the resources, know-how, or finance the partners make disposable in the relationship than just on the mere size of the companies participating in cooperation. The resource dependence characterizes again how dependent the partners are on each other’s resources and on which resources. This dependence is at the same time a strength and a risk. The strength comes from the consequence of companies working together as they gain access to resources that they do not hold themselves. In the software business environment the mutuality is a complex thing stemming from the rapid development and from the innovative character of the business line. For example, small innovative companies working together with global high-tech leaders of the industry makes the balancing hard as the small ones have to adapt to the culture of the big companies. But the big companies have also found the situation productive, as the small companies are also more agile in their movements. In this situation the different aspects of mutuality are counterbalanced by common interest. On the other side a wrong dependency on the other partner embodies a risk that must be attenuated by contracts, norms, work habits and social contacts.
Usually aspiring companies see cooperation as a long-term investment. This gives the relationship a long-term character. The process from the first engagements to smoothly running cooperation takes time to build up. It is built up usually in small steps (Håkansson & Snehota 1995). During this building up period the partners learn to know each other; company wise as well as individuals social wise. Continuation of the relationship reflects the strength of using learning effects and built-in skills for mutual benefit (Holmlund & Törnroos 1997). This further strengthens the ties between the companies and gives them more joint competitive edge compared to their competitors. This relationships development generates strength and resistance to disruption in a relationship. During a longer period of continued cooperation, possibly carrying out several projects together, the partners are also able to show their commitment to joint efforts and building through this a common trust base. Strength and commitment also makes it possible to settle inevitable problem situations. In the software business the characteristics of the long-term relationships depends much on the selected company strategy, on the available resources, on the required adaptive investments and on the software business sector where the company operates. The long-term nature may also in some cases be or become a burden for one or both companies as the relationship may start to wither due to failing interest in developing the relationship further. The relationship may also hinder companies to develop and bind new more prosperous co-operations with other companies (ibid).
The process nature epitomizes the interactivity and dynamism of the relationship building. The process changes in time as the environment outside as well as inside the relationship changes giving its own independent impetus for the development between the partners. If the changes are critical then the strength and endurance of the relationships comes into play, how the relationship withstands these inevitable adjustments. One of the main reasons for relationship building is the enlargement of the resource base beyond the company’s own existing resources. This potential access to complementing know-how resources enhances companies to fare better on the business markets. The process nature of the business is very deep rooted in software industry and it is specific to the software business and software development. It is almost an imperative mode of operations. Again the interaction process between the customer and supplier is dependant on the software product in question. If the customer and the software firm engages in tailor made application development for the customer then the partners have closer interaction over a longer period of time exchanging information, know-how, resources and money. On the other hand the companies may only be in a transactional interaction (ibid).
The relationship between two cooperating companies is not a lone island in a sea of businesses; instead companies interact with each other. The relationships between all companies again form a network of relationships. In this business network the economic and social actions and their outcomes of the dyadic business relationship affect the network and vice versa, i.e. the relationships are highly context dependent. This embeddedness is very true in the software business as the markets are highly volatile and constantly developing. New innovations emerge continuously affecting the existing relationships, compelling them to change their nature, to find new partners, or even causing them to dissolve (ibid).
Håkansson and Snehota (1995) bring two more aspects to the relationships, namely complexity and informality.
The business relationships are complex as the contacts vary on different levels between the companies. They are multi-faceted between managers, marketing people, experts and other individuals in both organizations. Also the number, scope and use of the relationships vary during the whole relationship life cycle. Different kinds of products and services are exchanged during the relationship. According to Håkansson and Snehota (ibid) the relationships operating well encompass several facets, of which only a certain subset is activated in each situation. This is very true in the software business where e.g. during a whole life cycle of an application development process from both companies meet managers, analysts and designers as well as other experts. This complexity is also the one of the problems in the software development as the different manager and specialist groups are not able to communicate clearly enough with each others resulting in misunderstandings and wrong decisions.
Informality is peculiar to business relationships; they often show a low degree of formalization. These relationships build on past experience of trust and commitment. Though formal contracts exist, their role is only limited and they are often ineffective in taking care of the uncertainties (ibid). As the software business is innovative and fast moving the companies have developed a common culture of openness where they exchange information about future developments and technology between companies through informal personal channels. The experts speak and rely on other experts in the same field. The informality is also expressed by the atmosphere of the relationships as to how the dialectic nature of every relationship is handled between conflict and cooperation (Axelsson & Easton 1992).
3.2.3. The interdependencies of relationships
The relationship features have been depicted above. Next the different kinds of structures of interdependences found in business relationships are analysed. The cooperating companies can capitalize on these dependencies. Usually they are intertwined and it may be difficult to separate them from each other, their influence on each other. Håkansson and Snehota (1995) have defined five different interdependencies.
Technology in use and the technical know-how are important to business activities. Especially in the software business the technology mastered by cooperating companies is the strategic competitive advantage in respect to the competitors. Companies may seek partners either to boost the resource base in the same technology or they may complement each other’s technical skills and enhance their positions in the market. The relationships may also produce new innovations that emerge from a cooperation that without common technical know-how would not have been possible. The software industry is characterized by fast development and new innovations emerging continuously and this constant race with the technical development forces the small companies either to focus or join forces with companies (ibid).
The existing knowledge of the firms can be either explicit or implicit. It is understood by explicit knowledge the know-how of the company and its experts that is possible to state and transfer to other experts and individuals e.g. in written form. The implicit know-how, also called the tacit knowledge, in its turn is more difficult to present openly as it is more skills oriented and based on the individuals and their past experience (Nonaka, Takeuchi et al. 1995). The software business is a textbook example of an industry based on a strong dependence of knowledge. This also makes the companies vulnerable, as the experts tend to be more loyal to their profession than to their company. The social relations form the base of interactions between individuals. Normally social relations start to grow as the companies cooperate in close development projects and people start to trust each other. This further helps the exchange of knowledge and smoothens the cooperation as people begin to take contacts more freely. Also different organizations outside the work environment enhance the information exchange between experts (Håkansson & Snehota 1995).
The administrative routines and systems form the base for rules and norms that are to be obeyed. These include e.g. meetings; papers and documents are written and exchanged. But the following of these rules depends much on the culture of the companies as well as on the partner’s common past experience. The duration of the relationship and trust are also the basic factors affecting how the partners rest on administrative and sometimes bureaucratic systems. For this study the last is the focal texture of interdependence. The legal ties that the companies must or at least should have besides the more general system of institutionalised administrative rules and norms. Chapter 2 has already analysed the different forms of agreements between companies and especially between companies where the other partner is a software producing company. It was found that the multitude of legal ties vary from the life cycle of relationships to the objects and needs of contracts. The significance of formal contracts grows in the software industry as well as in the accompanying multimedia industry with the enlargement of the Internet based global markets. Companies setting up varied forms of joint ventures must know their rights and obligations thoroughly also in the juridical sense. The next paragraph briefly analyses the three different explicit types of contractual relationships. Axelsson and Easton (1992) argue that legal bonds with written contracts are highly visible, but their relevance and their binding nature is less than they appear. If partners emphasize the contractual bonds it may on the other hand suggest that the relationship is not working smoothly. They further define the economic dimension as indispensable in the business context. Otherwise the relationship and whole network would not be economic in nature.
The relationship can also be analysed from the contractual perspective. In the markets where the terms of contracts are determined by the price mechanism of homogenous products and services, the companies establish discrete contracts (Matikainen 1995). In the procurement process the determining decision factor is the price that is also the object of bargaining. No continuance between the partners exists as the outcome of the next possible procurement process depends solely on the market price. Transactions of this nature are common in markets where the products or services are well defined and identical in their character, e.g. pre-packaged software application for office use. Though in this case the purchaser has to posses enough knowledge to manage independently with the possible problem situation as the seller is not obliged to serve the customer, at least not without any compensation, cf. Section 2.1.3.
The screening and contracting process itself is time consuming and resource binding, that is why the companies try to decrease the number of their cooperating partners. One solution is to facilitate the contacts with their suppliers with recurrent contracts. In this operation mode the companies establish weak ties and they do not utilize their bargaining positions fully. Instead they start to build the business advantage to be exploitable during the future relationship and they do not compete in an open market situation with other companies. They have gained a trustworthy reputation that the supplier tries to enhance and develop it into a long-standing business relationship (ibid).
Business relationships are illustrated by relational contracts that can handle the different situations unfolding during complex and long-term cooperation (Williamson 1985). The contracts are open-ended with known gaps, but the possibility of opportunism is attenuated as in a long-standing relationship the partners have developed mutual trust and commitment showing it with relationship specific investments and adaptations. Also it is many times hard to make the contracts water tight as the cooperatively developed applications or systems are quite complex in their structure and even the customer does not always know in advance the scope and requirements of the software.