Alliance governance: Balancing Trust and Control in Dealing with Risk

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Every alliance requires that at the outset there are ways and means to establish sufficient trust for the parties to share information fully and to make timely decisions regarding joint investments and activities. Additionally, there are always times during the life cycle of an alliance when trust is challenged (key people change, surprises happen, partners become complacent and let communications lapse, etc.). So how do alliance managers develop and preserve a sufficient level of trust and deal with situations where trust erodes and needs to be shored up again?

When designing an alliance governance structure, managers have to choose between approaches based on control or on trust. This presentations proposes a framework to help managers decide which of the two is appropriate in a particular situation. Are control and trust substitutes or complements? What is the link between control, trust and risk? Our approach proposes that whether control and trust are substitutes or complements depends on the level and type of risk an alliance faces. In high risk situations companies use complex combinations of control and trust in a complementary way.

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  • Li & Fung, is a Hong Kong–based trading company. Li & Fung makes no products of its own. Rather, it “orchestrates” the production of goods by others, drawing on a vast global network of highly focused providers to arrange for private-label manufacturing, primarily on behalf of US and European clothiers. For a specific product or client, Li & Fung assembles a customized set of specialized providers to handle everything from product development to the sourcing of raw materials, production planning and management, and, eventually, shipping. If glitches pop up at any stage of the intricate process along the network, the company can quickly shift an activity from one provider to another. Such flexibility promotes high-output performance. Rather than squeeze supply chain costs by tightly integrating activities, Li & Fung gains efficiencies through the specialization of suppliers.This is also an example of using intermediaries to protect trust by preventing supply chains from breaking down because of mutual misgivings amongchain partners. Li & Fung enforces a code of ethics precluding Asiannetwork members from using child labor or bribing government officials. It also denies multinational companies accessto its network if they make frivolous demands on suppliers or refuse to take delivery of products at contracted prices. Li &Fung’s reputation for integrity reduces the need for formal contracts.
  • Alliance governance: Balancing Trust and Control in Dealing with Risk

    1. 1. Alliance Governance<br />Balancing Trust and Control in Dealing with Risk<br />Alex Todd<br />January 21, 2010<br />
    2. 2. Agenda<br />Some Alliances - a perspective<br />Risk, Uncertainty, Control and Trust<br />Exercise: Trust Optimizer Scorecard<br />Reducing Uncertainty<br />Exercise: Conditions for Trust Worksheet<br />Trust Enablement Framework<br />Alliance Governance<br />Exercise: Alliance Governance Structure<br />Diagnosing Conditions for Trust<br />
    3. 3.
    4. 4. Trust to Create High Value<br />Innovative & Sustainable<br />Effective<br />Trust Equity<br />Efficient<br />Blazer Barn<br />Expedient<br />Strategic<br />Tactical<br />“Trust Enabled Supply Networks: Uncovering the trust-building secrets of highly collaborative supply chains”, Alex Todd<br />
    5. 5. Coordinators Risk Costs<br />
    6. 6. Collaborators Coordination Costs<br />Source: Report on Business, May 2008<br />
    7. 7. Agenda<br />Some Alliances - a perspective<br />Risk, Uncertainty, Control and Trust<br />Exercise: Trust Optimizer Scorecard<br />Reducing Uncertainty<br />Exercise: Conditions for Trust Worksheet<br />Trust Enablement Framework<br />Alliance Governance<br />Exercise: Alliance Governance Structure<br />Diagnosing Conditions for Trust<br />
    8. 8. Risks & Uncertainties<br />Risk<br />Uncertainty<br />Reward<br />Possibility<br />
    9. 9. Uncertainty<br />Risk Management<br />Innovation<br />
    10. 10. Control is Confining<br />Trust is Liberating<br />
    11. 11. Trust Definitions<br />Trust = Acceptable Uncertainty<br />Trust is a person's willingness to accept and/or increase their vulnerability by relying on implicit or explicit information.<br />
    12. 12. Agenda<br />Some Alliances - a perspective<br />Risk, Uncertainty, Control and Trust<br />Exercise: Trust Optimizer Scorecard<br />Reducing Uncertainty<br />Exercise: Conditions for Trust Worksheet<br />Trust Enablement Framework<br />Alliance Governance<br />Exercise: Alliance Governance Structure<br />Diagnosing Conditions for Trust<br />
    13. 13. Trust Optimizer Scorecard<br />
    14. 14. Agenda<br />Some Alliances - a perspective<br />Risk, Uncertainty, Control and Trust<br />Exercise: Trust Optimizer Scorecard<br />Reducing Uncertainty<br />Exercise: Conditions for Trust Worksheet<br />Trust Enablement Framework<br />Alliance Governance<br />Exercise: Alliance Governance Structure<br />Diagnosing Conditions for Trust<br />
    15. 15. Reducing Uncertainty<br />Information<br />Information<br />
    16. 16. Source of Information<br />Sources of Trust<br />
    17. 17. Agenda<br />Some Alliances - a perspective<br />Risk, Uncertainty, Control and Trust<br />Exercise: Trust Optimizer Scorecard<br />Reducing Uncertainty<br />Exercise: Conditions for Trust Worksheet<br />Trust Enablement Framework<br />Alliance Governance<br />Exercise: Alliance Governance Structure<br />Diagnosing Conditions for Trust<br />
    18. 18. Is it true that ____________?<br />Interpretive Sources of Trust (opinion, i.e. expert witnesses)<br />Experiential Sources of Trust (observation, i.e. eye witnesses)<br />
    19. 19. Agenda<br />Some Alliances - a perspective<br />Risk, Uncertainty, Control and Trust<br />Exercise: Trust Optimizer Scorecard<br />Reducing Uncertainty<br />Exercise: Conditions for Trust Worksheet<br />Trust Enablement Framework<br />Alliance Governance<br />Exercise: Alliance Governance Structure<br />Diagnosing Conditions for Trust<br />
    20. 20. Acceptability<br />Trust<br />Control<br />Shield<br />
    21. 21. Certainty<br />Acceptability<br />Develop Trust<br />Protect Trust<br />Interpretive Sources of Trust<br />Subjective assertions of the source of the information or third parties.<br />Empowerment<br />Relying party’s ability to choose.<br />Trust Enablement®Framework<br />Experiential Sources of Trust<br />Personal experiences of the relying party or those of objective witnesses.<br />Motive Forces<br />Factors influencing the actions of the beneficiary (trusted party).<br />Proficiencies<br />Aptitude, knowledge, behaviour and disciplines employed to consistently deliver expected value (people, processes & technology).<br />Risk Transference<br />Mechanisms and processes that transfer risk away from the relying party.<br />
    22. 22. Agenda<br />Some Alliances - a perspective<br />Risk, Uncertainty, Control and Trust<br />Exercise: Trust Optimizer Scorecard<br />Reducing Uncertainty<br />Exercise: Conditions for Trust Worksheet<br />Trust Enablement Framework<br />Alliance Governance<br />Exercise: Alliance Governance Structure<br />Diagnosing Conditions for Trust<br />
    23. 23. What does “alliance governance” mean to you?<br />It seeks to create a climate of equity and collaboration by guiding the design of mutually productive policies, structures and processes.<br />It sets the tone from the top (by leaders) to create alignment by defining, monitoring and adapting principles and policies to alliance stakeholders' motivators ("strategic intent" and external forces) and risk/return preferences for preserving equity beyond the narrow scope of previously established contracts (future ≠ past).<br />It creates an environment within which the alliance can flourish to the benefit of key stakeholders.<br />It "memorializes" the tone from the top (by senior leaders) with parameters that guide management decision-making.<br />It is especially valuable in large/complex alliances.<br />It helps to identify and create new possibilities and (re)define the rules of the game for the alliance.<br />It is a "pact", a process for cultivating a "relationship" and "cadence“.<br />It enables trust, but where control is required (if trust is undesirable or impractical) governance may not be appropriate - however, alliance governance must also deal with a broader set of functional business performance considerations.<br />It helps to enable trust between alliance stakeholders in order to improve mutual performance.<br />
    24. 24. Alliance Governance Defined<br />Alliance<br />“An alliance is an agreement between two or more parties, made in order to advance common goals and to secure common interests.” – Wikipedia<br />Corporate Governance<br />“Procedures and processes according to which an organisation is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making.” - OECD<br />Alliance Governance<br />Procedures and processes according to which an alliance is directed and controlled. The alliance governance structure specifies the distribution of rights and responsibilities among the different participants in the alliance – such as the boards, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making.<br />
    25. 25. Alliance Governance Structures<br />Hierarchy<br />Control<br />Equity Controlling Interest<br />Joint Venture<br />Equity Participating Alliance<br />International Alliance with Central Secretariat<br />Bilateral Contract Alliance<br />Co-marketing Agreements<br />National Buying Clubs<br />Loose Affiliations<br />Trust<br />Market<br />Operations (risks)<br />Possibilities (uncertainties)<br />
    26. 26. Agenda<br />Some Alliances - a perspective<br />Risk, Uncertainty, Control and Trust<br />Exercise: Trust Optimizer Scorecard<br />Reducing Uncertainty<br />Exercise: Conditions for Trust Worksheet<br />Trust Enablement Framework<br />Alliance Governance<br />Exercise: Alliance Governance Structure<br />Diagnosing Conditions for Trust<br />
    27. 27. Alliance Governance Structures<br />Hierarchy<br />Control<br />Equity Controlling Interest<br />Joint Venture<br />Equity Participating Alliance<br />International Alliance with Central Secretariat<br />Bilateral Contract Alliance<br />Co-marketing Agreements<br />National Buying Clubs<br />Loose Affiliations<br />Trust<br />Market<br />Operations (risks)<br />Possibilities (uncertainties)<br />
    28. 28. Agenda<br />Some Alliances - a perspective<br />Risk, Uncertainty, Control and Trust<br />Exercise: Trust Optimizer Scorecard<br />Reducing Uncertainty<br />Exercise: Conditions for Trust Worksheet<br />Trust Enablement Framework<br />Alliance Governance<br />Exercise: Alliance Governance Structure<br />Diagnosing Conditions for Trust<br />
    29. 29. Alliance Governance System Framework<br />
    30. 30. Develop Trust<br />Protect Trust<br />Interpretive Sources of Trust<br />Empowerment<br />Trust Enablement® Assessment of Alliance Governance Model Parameters<br />Experiential Sources of Trust<br />Motive Forces<br /><ul><li>Coordination: Direct Supervision
    31. 31. Coordination: Standardization of Output
    32. 32. Centralization
    33. 33. Specialization
    34. 34. Formalization
    35. 35. Monitoring: Macroculture
    36. 36. Synergy Allocation Rules</li></ul>Proficiencies<br /><ul><li>Coordination: Standardization of Work
    37. 37. Monitoring: Performance Indicators
    38. 38. Monitoring: Cooperative Scorecard
    39. 39. Monitoring: Virtual Accounting System</li></ul>Risk Transference<br /><ul><li>Motivation: Safeguards
    40. 40. Coordination: Mutual Adjustment
    41. 41. Coordination: Transfer Prices</li></ul>StructureMechanisms<br />
    42. 42. Diagnosing Conditions for Trust<br />
    43. 43. The Trust Optimizer <br />Program<br />Starter Kit<br />Alex Todd<br />AlexTodd@TrustEnablement.com<br />Trust Enabling Strategies<br />http://TrustOptimizer.com<br />Tel: 416.487.1497 Fax: 416.487.9646<br />

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