4.3. Elements of the software contracting process model
Next the conceptual model that is based on the above Möller and Wilson model is elaborated. It is composed of two main parts, i.e. the customer context and the supplier context and their interaction see Fig. 26.
However, the focal interest is on the software company and in the development, operations and management of the software contracting processes and their interplay with the software development processes that are at the core of the software company. Therefore, the supplier side is drawn in more detail for future elaboration and the customer side is left under less scrutiny. From the literature examined in previous chapters as well as from the pre-understanding of the researcher in similar activities concerning the contracting, a model of five main building blocks in the supplier context has been constructed. The first includes the environmental factors, supplier and task characteristics and organizational characteristics.
These elements set the surroundings where the focal software companies operate. The environmental factors also explicate the issues that the company must take as given. With regard to other elements in this category the company can influence them with managerial decisions, though they may be in some cases hard to change if they are common in the line of business. The second block includes the prerequisites and formation of relationship. In this, usually once performed, the process element that the companies use in searching for new partners or customers is described and analysed. The third consists of the interaction processes and the fourth of the output of the interaction processes. The interaction process part is the central and most interesting section of this study and it is elaborated extensively in the following chapters. The interaction processes with their outputs and subsequent inputs form the main cycle of the model. The fifth element is the dissolution of the relationship that usually happens only once during the business relationship between two companies. These main elements and their contents are discussed and analysed in more detail below.
4.3.1. Supplier context
The supplier context is described with the environmental factors, supplier and task characteristics and organizational characteristics. They form the larger perspective for the relationship forming, developing and governing environment.
Environmental factors. The environment of software business includes a large array of different issues, however the most relevant and ones of most interest for this study are discussed next.
The new contractual approach includes relevant environmental factors from contracting perspective in Fig. 26. These were presented and discussed more deeply in Section 2.1. Among these matters the distinct ongoing change in the contracting practices came up and was emphasized; from (neo)classical contracting towards relational contracting keenly employing the process-view that is well suited to the software business context. Further contractual issues of interest was the existing information asymmetry between the customer and supplier that demands cooperative relationships to be successful, cf. Section 2.1. One new emerging element of high interest was explicated, i.e. the wide range of IPR –issues (including copyright, patent, trade secrets) related to the software development and markets. These were discussed in more detail in Section 2.3. The cultural differences and issues are also of interest especially as this study examines software companies that operate in Finland as well in the USA. Though this study does not solely concentrate on the matters of cultural differences, however these are treated as they emerge from the empirical data.
Autere et al. has listed several factors that indicate they belong to the environment where the focal software companies are operating. These attributes are all descriptive for the fast changing and developing software industry. These could be further explicated by terms such as high demand capacity, limited production capacity, demand of innovative products, networking, young exchange traditions and short technological life cycle.
Supplier and task characteristics. The main issues from the supplier and task characteristics perspective are the three main categories of software business: commercial-off-the-shelf, professional software service products (tailored) and modified-off-the-shelf as discussed in more detail in Section 2.2.1.
A typical feature characterizing the industry is the small start up company that usually concentrates their efforts around a few innovative solutions as products or services. Usually they are technically complex in their nature. The industry suffers from a continuous resource shortage, so this is both a larger environmental and an individual company problem. In the relationship between the cooperating parties a varied resource and social exchange during the whole life cycle of the cooperation takes place. The products or services in the software industry are also characterized by low substitutability as they are very people dependent, i.e. the expertise is very focused and the skills needed have usually accumulated and developed in past projects. These issues were discussed more in Section 2.2 and the common usage of template contracting is also a relevant form of operations in the focal line of business as discussed in Section 2.3.
Organizational characteristics. Organizational characteristics describe the companies as young and growth aspiring. According to Autere et al. (1999) fastest growing companies focus their resources only on their strategic business area. Further they note that growth is enhanced also by focusing on new technologies as well as on fast growing market segments. The third explaining factor is the company’s explicit aspiration for growth. The substantial growth rate especially during the first years of the company puts demands and pressure on the company’s structure and management as well as on the employees. This is not solely a company internal matter, as the interest groups outside the company should understand the needs and problems of fast growing company as well. In a developing software company the contracting and governance issues discussed in Section 2.1 are important and must be handled properly already from the beginning. These elements are intertwined and they must be handled properly during the negotiations in order to have the full effect during the software development process. Processual software development issues were discussed in Section 2.2 and there the common processual approach was presented together with the project-oriented nature of the software business. Managerial issues belonging to the software development were analysed in Section 2.3. Software business is highly technology driven and the organization must plan their operations accordingly, these issues were discussed in Chapter 1.
4.3.2. Customer context
The customer context is treated only briefly as the emphasis of this study is on the software contracting issues of the software developing company. In Section 2.3.3 the existing software acquisition standards were described and analysed. However, for the software company to know them is important and valuable, as knowing their contents and their possible usage in different contractual situations helps the company to understand and anticipate the behaviour of the customer. Fig. 26 shows the same tri-partition that was illustrated in the supplier context; environmental factors, customer and task characteristics and organisational characteristics. The factors and characteristics suggested in the supplier context could also be viewed from the customer’s viewpoint however, with a different emphasis. Though they must not be seen as opposite issues as the both parties are trying to get into a common understanding during the negotiation process and to joint goal during the actual project working. If both parties perceive same or overlapping issues as important ones then it helps the effort to achieve a common objective.
4.3.3. Prerequisites and formation of relationship
Prerequisites and the formation of a relationship or it could also be described as the “starting an exchange relationship”, is the point in this scheme where it is entered. This process is done only once with a new partner candidate and after a successful partner screening the company moves to the interaction processes box. However, the customer must have found out in its organization a need for a software application, i.e. software product, or a service related to the software applications. After the need is discovered the company starts a search process in order to find a matching supplier for its purposes to solve the prevailing problem. From the supplier’s perspective the software company must be interested in developing the application needed. During the matching process the companies carry out a commencement screening of the prospect partner, see more in (Warsta, Lappi et al. 2001).
Halinen (1994) has analysed the “Prerequisites for starting an exchange relationship” characterizing it with complementary needs and resources between parties, with personal awareness of the other party’s goals, needs and resources and with common interest in building a relationship. She analysed the relationship development in the advertising line of business. Halinen’s elements were chosen for use in the conceptual model as the advertising and software branch are both service oriented in their nature. The complementary needs and resources between parties indicate the client’s perception of the nature of its needs for the company’s services and of the fit of the firm’s resources and capabilities to the customer’s needs. The personal awareness of the other party"s goals, needs and resources depict efforts to build awareness, by existing personal relationships with the personnel of the other party and by referrals from friends and business acquaintances. The third indicator is the common interest in building an exchange relationship and it describes the partner’s statements about their potential to materialize their own interests through the relationship while also benefiting the other party and by lack of potential to materialize their own benefits through the relationship. Halinen found that "there is a continual requirement for the existence of the prerequisites for an exchange relationship and that they are continually assessed by the exchange parties" and that mutual interest must exist between the partners in order to maintain a relationship (ibid, 207 and 212).
4.3.4. Interaction processes
After a successful screening and partner or customer selection process the software company starts with the interaction processes that include the main processes of exchange, adaptation and coordination. These separate processes vary to the extent, depth and duration depending on the software business type, age of the companies, proportion of the application to be developed and stage of the relationship, see also (Håkansson & Snehota 1995) about the business process characteristics.
The separation of the different resource and social interaction processes is somewhat arbitrary as these processes are practically interrelated as most forms of resource exchange presume to some extent a social exchange (Möller & Wilson 1995a). However, this is done for conceptual reasons in this model.
Exchange process. The exchange process constitutes resource and social exchange subprocesses. Where the resource exchange describes the process elements or objects that are exchanged during the relationships. These are e.g. documents, software applications, finance and know-how. The social exchange illustrates the relations between the partners. The exchange processes are described from a software development viewpoint further down. The processes included in these processes are implemented during the definition and production phases. The contract negotiations can be seen either belonging to exchange processes or also to coordination processes as the negotiating parties change mostly information and knowledge during the process. The contracts are aimed to establish a formal governance structure for future cooperation and relationship. When the perspective is changed from an exchange process to a coordination process the empirical analysis always depends on the situation where the processes are introduced and also their main content and purposes. However at this stage of study the negotiations are placed under the coordination processes.
Adaptation process. The adaptation process usually starts after the contracting parties have found a common ground for joint efforts. Either parties or just one party of the partnership can start the adaptation process where the partner adapts its procedures, resources, customs and skills to the other partners needs. The adaptations can be either physical or mental in their nature. Brennan and Turnbull (1998) have revised the literature concerning adaptations in business processes and they argue that the adaptation concept is either difficult to define or the authors perceive the term to be self-evident. To correct the situation they give a definition for the adaptation term that takes into account both sides of the relationships; customer and supplier. They focus on the adaptation process behaviour itself instead of the outcome of the process. "Buyer-seller adaptations are defined as behavioural or structural modifications, at the individual, group or corporate level, carried out by one organisation, which are initially designed to meet specific needs of one other organisation" (ibid, 31).
Further they depict the classification aspects of adaptation to include the following categories: product (design and specification), manufacturing/production process, (production) planning, stocks, payment terms and systems (financial procedures), delivery and administrative procedures. They give alternative adaptations that can be characterized by dimension, resource commitment, proactive-reactive, voluntary-coerced, reciprocal-unilateral, or formal-informal (ibid). Håkansson (1982) describes supplier specific adaptations in the production process as including e.g. special tools acquired, material quality improved, new equipment acquired and quality control processes altered.
Coordination process. The coordination process includes the task by which the partners coordinate and govern the relationship. To do this they can use both contractual and non-contractual means. These are, for example, written formal contracts, minutes of joint meetings, offers and counter offers and other documents. On the other hand, non-contractual means are institutions, and the line of business customs and commitments between partners. These could also be extreme threats and pressure. The processes included in these processes are implemented during the negotiation and assessment phases of the relationship.
Processual modes. The processual viewpoint in the software contracting process is an interesting one. As described and analysed in Section 3.1.3 the four different basic processual theories – life cycle, evolutionary, dialectic and teleological. At this stage of knowledge of the contracting processes there is no clear choice but several useful combinations of them. So the empirical data must be let to speak for itself in the following chapters. After that it is possible to decide the actual processual model(s) to be used in this software-contracting context. The theories (modes) are not explicitly shown in the model as they are embedded characteristics of the processes.
4.3.5. Output of interaction processes
In this study the interesting outcomes of the interaction processes are the contracts, documents, applications and services. These are the concrete outcomes and results from the interaction processes performed. Furthermore the outcomes are different kinds of functional and psychosocial bonds and performance factors. Through these services or applications produced the economical, legal, technological, knowledge, procedural bonds condense and develop as well as the expectations, attraction, trust, commitment, equilibrium and common values and norms develop.
Correspondingly on the performance side of outputs effectiveness and efficiency increase and psychological content and satisfaction grows.
4.3.6. Dissolution of the relationship
Tähtinen (1999) has studied the tailored-software relationship dissolution process with following conceptual characterizations. These conceptualisations stress the processual nature of the business relationships and the internal dynamics of mutual interdependence. She emphasizes that there are several reasons (or combinations of reasons) for business relationships to dissolve.
The existing – possibly dissolving – relationship is described with the following elements:
predisposing factors exist when the partners enter into interaction. These factors can be in their nature task, actor, dyad and network related,
precipitating events emerge during the cooperation and possibly accelerating the relationship dissolution and
attenuating factors may again slow down the development. It may even stop the unsatisfactory process as it gives time to the partners to straighten out the prevailing problems (ibid).
Fig. 27 depicts the key factors affecting the dissolution process. It includes the type of the relationship, i.e. the history, form, age, etc. elements and the reasons and attenuating factors, i.e. events, environment etc. that affect the dissolution process.
She describes further that the evaluation of the relationship is made at the assessment stage which is the first step in her concept of dissolution process. As she notes this evaluation may already disturb the relationship as the other party may interpret this as early warning signs of a forthcoming dissolution (ibid).