Page 226 - Performance Leadership

Chapter 12 Performance Networks • 215

belong to the bank where the mortgage is closed. And in some cases,
the complete offering doesn’t even carry the name of the financial serv-
ices institution, but has the label of a large intermediary. In the case of
one mortgage, five or more parties are involved.
On top of all these types of collaboration, outsourcing has become
1
commonplace. Organizations routinely outsource facilities services
such as cleaning, cafeteria services, and security. Increasingly infor-
mation technology tasks, such as helpdesk services, complete data cen-
ters, and even system development have been outsourced as well. The
same trend can be observed in areas such as finance, human resources,
logistics, and other business domains. In many cases, cost savings are
an important driver.
These forms of collaboration need to be managed. There is an exten-
sive body of theory we can draw on called transaction cost economics
(see the sidebar below). The term extended enterprise is fairly widely
2
used and understood. Others speak of business webs or value net-
3
works. In Japan, the term keiretsu is somewhat related, describing a
group of firms having strong financial relationships with one another.
Strangely enough, however, the concept of an extended enterprise has
not had a substantial impact in the field of performance management.
The traditional ways of performance management, using the hierarchy
and focusing on vertical alignment, clearly do not work in these net-
worked environments. What is needed there is a performance network.

TRANSACTION COST ECONOMICS
In economics, transaction cost economics (TCE) is a very well-established disci-
4
pline. However, it seems to be totally unused in performance management.
Despite a more networked approach to business, accounting research to date
has largely ignored the increasing importance of supply chains, planning, budg-
eting, and control processes flowing from one organization into another, as well
as their implications for financial decision making and control. 5

TCE helps organizations understand which activities should be undertaken
within the walls of the organization itself and which should be left to the mar-
ket. Where it is easier, or better, or more efficient to interact with others than to
coordinate activities yourself, relationships should be forged. If transaction costs
between parties or on the open market become too high (due to complexity
and/or uncertainty), TCE recommends that those activities take place within the
organization.