Baltic Journal of Management

The role of control systems in partner selection/evaluation processes in established

distribution channels
Jose Manuel Sanchez Vazquez, Gloria Cuevas Rodriguez, Tauno Kekale,
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Jose Manuel Sanchez Vazquez, Gloria Cuevas Rodriguez, Tauno Kekale, (2014) "The role of control
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Management, Vol. 9 Issue: 4, pp.426-445, doi: 10.1108/BJM-11-2011-0102
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BJM
9,4
The role of control systems in
partner selection/evaluation
processes in established
426 distribution channels
Received 28 November 2011
Revised 28 November 2011
Jose Manuel Sanchez Vazquez
21 May 2013 Cadiz University, Cadiz, Spain
11 November 2013
27 January 2014
Gloria Cuevas Rodriguez
12 March 2014 Pablo de Olavide University, Seville, Spain, and
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22 March 2014 Tauno Kekale

21 April 2014
Accepted 27 April 2014 Vaasa University for Applied Sciences, Vaasa, Finland

Abstract
Purpose The purpose of this paper is to investigate the partner selection/evaluation processes
in established distribution channels (DCs) and the role played by control systems (CS) over major
changes in the internal complexity and the external uncertainty of the distribution network.
Design/methodology/approach The research is based on a longitudinal case study of a
manufacturing firm and its outsourced DC.
Findings Over time, the manufacturers market-focused strategy provoked the adoption through
CS of more objective and formal selection processes. It was very clear in this case that while the
growth of internal complexity indeed required changes towards formalisation, only the rapidly
increasing environmental uncertainty in the 1990s required significantly more elaborate CS to evaluate
partners.
Research limitations/implications Original longitudinal case limitations typical for such
design of study, e.g. not possible to expand the findings out of company type and historical periods.
Practical implications The process of selecting partners, because it is ongoing, requires a formal
and active involvement from CS; no CS are indefinitely stable but must be developed whenever
significant internal or environmental changes occur. The changes to counter internal complexity seem
less elaborate than the changes required by external uncertainty.
Originality/value Original longitudinal case illustrates the screening and signalling mechanisms
used by both parties to provide information to each other in three different internal complexity/
environmental uncertainty scenarios.
Keywords Case study, Distribution channels, Control systems, Partner evaluation, Selection process
Paper type Research paper

Baltic Journal of Management
Vol. 9 No. 4, 2014
pp. 426-445
r Emerald Group Publishing Limited
1746-5265
DOI 10.1108/BJM-11-2011-0102
Introduction
In todays competitive and uncertain environment, a number of innovative operational
strategies are being introduced to improve the manufacturers flexibility among
others, outsourcing of the distribution (Altinay and Wang, 2006; Moeller, 2010).
A distribution channel (DC) may be defined as an open-ended cooperative agreement
between legally separable organisations, in which one upstream manufacturer
outsources part of its value chain to a set of downstream independent partners
This research was partly financed by research project SEJ-5061 from the government of
Andalucia. The authors also would like to thank the participants of the case study companies for
their time and data generously provided.
 (Stern et al., 1996). DC management is often regarded as a key strategic asset of The role of
a manufacturer because decisions about the delivery of goods and services to target control systems
markets are critical (Lin and Chen, 2008). Research suggests that collaborating firms
realise financial benefits, competitive advantages, or the creation of customer value in partner
(Hitt et al., 2000; Altinay and Wang, 2006). However DCs may also increase risk and selection
vulnerability for the manufacturing firm (Frazier and Antia, 1995; Velez et al., 2008), as
partners have a large and direct impact on the cost, quality, technology, and time-to- 427
market of products. As a result, the success of such outsourcing stems largely from the
manufacturers capacity to select, evaluate and control its partners (Vandaele and
Gemmel, 2007).
Partner selection is a critical aspect of successful DC development: even superior
management may not be sufficient to overcome poor initial partner screening and
selection efforts (Cummings and Holmberg, 2012). However, there are still significant
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gaps in the knowledge base relating to processes that can be used by focal firms to
select appropriate partners who can sustain a firms competitive advantage in the face
of changing relations, market, technological and institutional conditions (Gulati, 1998;
Meuleman et al., 2010). Furthermore, most prior studies have focused on vendor/buyer
selection, which has long been a central focus of industrial marketing and supply chain
research (Lin and Chen, 2008; Meuleman et al., 2010), and analysing this process from
an upstream perspective, boosted by the trend towards supplier consolidation. But also
the success of manufacturers is often dependent on strong downstream relationships
performing the necessary distribution tasks to reach the desired targets (Rosenbloom,
2004). The strategic relevance of downstream relationships demands by itself more
research about how focal firms can improve their selection process (Wang and Kess,
2006; Lin and Chen, 2008).
Likewise, there is little research exploring partner selection process from
a longitudinal perspective. When the interfirm relationships duration is limited to
one specific project, activity or venture, it is probably true to say that partner selection
is an ex-ante process. However, in open-ended relationships, the stability of mature
stages could provide a platform for continuous evolution (Velez et al., 2008). Thus,
and because of the evolutionary nature of contractual relations (Doz, 1996; Arino and
De la Torre, 1998; Velez et al., 2008), we could argue that partner selection and evaluation
could be considered an ongoing process. If interorganisational relationships evolve driven,
at least in part, by internal and environmental considerations, we need deeper studies to
analyse partner selection and recruitment from a dynamic perspective.
Similarly, there is limited knowledge about how control systems (CS) have extended
their traditional roles to include partner selection processes (Dekker, 2008). Likewise,
more attention is needed about the roles of CS in the evolution of cooperative
relationships (Inkpen and Currall, 2004; Vlaar et al., 2007). In interorganisational
contexts, CS can be defined adopting a broader vision as the different policies and
procedures used to ensure that the partners behaviour and decisions are consistent
with the manufacturer objectives and strategies (Velez et al., 2008).
We intend to fill these gaps by examining the role that CS can play in the ongoing
selection and evaluation of partners in a DC as a downstream interorganisational
relationship. To this end, analysing the screening and signalling mechanisms used
to solve the agency problem, we study in depth a long-standing DC network of
a manufacturing firm called CMD (a pseudonym). We focus on three periods that allow
us to compare different selection/evaluation processes. First, a pre-contractual period,
where CMD increased the number of partners it hired, selecting them on the basis of
 BJM previous personal contacts, market knowledge, and reputation. In the second period,
9,4 1980-1995, a big merger of CMD with a bigger competitor forced a more formal system
into place to take care of the added volume. In the third period, 1995-2005, when
stability in the business environment started to disappear, CMD reduced its number of
partners, basing its decisions on information gathered from its CS.
In the next sections we first briefly review some previous studies of partner selection
428 and the role of CS in this process. Subsequently, we report on our case study. We finish
by drawing some conclusions and sketching some directions for future research.

Theoretical background
Many contemporary organisations do not sell or distribute their products by
themselves but use external partners to perform these key activities. Recently,
co-development activities as a way of providing value for consumers have received
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wide attention in the literature (Elg et al., 2012; Gylling et al., 2012; Hakanen and
Jaakkola, 2012; Lee et al., 2012). How companies, consumers, and other stakeholders
interact and co-create value in the context of multiple interactions has become
a strategy for firms in a rapidly changing industrial environment (Benson-Rea et al.,
2013). When a manufacturer lacks adequate knowledge of local markets (Singh and
Mitchell, 1996), a partner located next door to the client can provide high value through
drastic reduction in shipping costs as well as virtually instant access, even if its
product prices are relatively high (Siguaw and Simpson, 2004). Such a manufacturers
reliance on distributors suggests the significance of recruiting capable distributors for
effective channel management (Merritt and Newell, 2001).
Previous research highlights that failing to select the right partner is a major
cause of failure, leading to adverse monetary and strategic effects (Hitt et al., 2000;
Todeva and Knoke, 2005). A body of studies have developed different criteria models
to support partner selection (e.g. Cao and Wang, 2007; Wu et al., 2009, among others).
For example, Lin and Chen (2008) conclude that the selection of distributors is
a multicriteria assessment of both tangible and intangible factors (i.e. firm
infrastructure, marketing capabilities, relationship intensity, and logistics
capabilities), being as critical to firms success as the selection of good employees.
These authors highlight that finding competent distributors is an important issue for
manufacturers, highlighting the importance of gathering sufficient knowledge and
relevant information to select them.

Partner selection and evaluation: an agency problem

Partner selection is one of the most challenging decisions faced in the implementation
of organisational strategy (Dahlstrom and Ingram, 2003). Although prior studies use
predominantly transaction cost economics (e.g. Dekker, 2008; Cummings and Holmberg,
2012), with important insights from other theoretical frameworks (Meuleman et al., 2010;
Kim and Oh, 2002), agency theory also helps to delineate factors that contribute to
the risk of successful partner cooperation in exchange relationships (Meuleman et al.,
2010). In agency theory terms, partners are agents of the manufacturing firm (principal)
(Bergen et al., 1992), which depends on them to perform a variety of functions on its
behalf. Partner selection implies that precontractual problems arise before the principal
(manufacturing firm) decides to offer an agent (partner) a contract.
The major issues here are whether a particular agent has the characteristics the
principal is seeking and what strategy the principal should employ to find out. Adverse
selection is an agency problem that refers to information asymmetry, coming from the
 principals uncertainty regarding the agents willingness and ability to perform specific The role of
tasks (Bergen et al., 1992). That is, the principal does not know whether a particular control systems
agent whom he or she might hire has those desired traits. Prior research recognises the
potential for an agents capabilities to be misrepresented, yet few studies identify in partner
means to overcome these asymmetries (Dahlstrom and Ingram, 2003). selection
According to agency theory (Bergen et al., 1992), a principal can attempt to
overcome this problem of hidden information through two mechanisms: screening or 429
examining signals from potential partners. Screening is performed via assessment of
a broad spectrum of agents abilities and aptitudes, using selection and evaluation
systems that to the greatest possible degree avoid selection of too-opportunistic
partners while simultaneously to the greatest possible degree also select the available
good agents (Dahlstrom and Ingram, 2003). The problem, of course, is that screening
activities add costs to the hiring process. From the principals perspective, then, the
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basic trade-off is between the costs of acquiring better information through screening
before offering a contract to an agent and the loss resulting from poor performance as
a result of hiring an inappropriate agent. Signalling[1] occurs when the agent makes
certain verifiable facts known to the principal to signal that he or she possesses other,
unobservable/hidden but desirable characteristics and is the type of agent the principal
is seeking (Gerlowski, 1996). For example, the large size of a partner firm may signal
a better capability for delivering on commitments or a suitable telephonic attention
to clients, among other functions (Stern et al., 1996). For signalling to be effective, the
manufacturer must believe that the signal is credible.
Traditionally, the vast majority of prior research on partner selection has been
framed in static analysis terms (Cummings and Holmberg, 2012). From this
perspective, partner selection is described as an ex-ante agency problem tightly linked
to the formation stage in any interorganisational relationship (Galbraith, 1998; Ireland
et al., 2002; Kim and Oh, 2002; Wang and Kess, 2006). We can see todays business
environment as more and more characterised by short-term cooperation networks,
where its life cycle is composed of several steps, i.e. identification of needs, partner
selection, operation and dissolution. Most relationships are characterised by a limited
period of time for one specific purpose. Consequently, because the duration of these
interfirm agreements is limited to one specific task, project or venture, it is probably
true to say that partner selection is just an ex-ante process.
But we also can see interorganisational relationships characterised by long-term
or even open-ended collaborative agreements, where the objectives, activities,
dependencies, and assumed risks evolve over time. Interorganisational relationships,
encouraged by favourable results, evolve and enlarge their collaboration, expanding
the scope or complexity of their activities (Doz, 1996; Velez et al., 2008). Internal and
environmental changes could require dynamic relationships, changing the working
environment over time, or the manufacturers strategy, or the facilitating partner
shutting down. In this type of open-ended relationship, even stability in the mature
stages could provide a platform for continuous evolution (Doz, 1996; Halinen et al.,
1999; Velez et al., 2008). And, in turn, this evolution could affect the selection criteria or
factors changing over time, meaning that partner evaluation should consider these
changes for selecting new or former partners.
Consequently, when the duration of the interfirm relationship is limited to one
specific project, activity or venture, it is probably true to say that partner selection is
an ex-ante process. But because of the evolutionary nature of contractual relations
(Doz, 1996; Arino and De la Torre, 1998; Velez et al., 2008), we could think about
 BJM whether partner selection and evaluation should be considered as an ongoing process,
9,4 not only linked to the starting stages, but present over time, along different phases.
Its open-ended and evolving nature could be characterised by an ongoing identification
of needs, partner selection, operation, and dissolution, where continuous partner
selection plays a key role. According to Lin and Chen (2008), we could argue that the
distributor selection process continues as long as channel distribution is in effect.
430 Even further, widening Dahlstrom and Ingrams (2003) research call, if
interorganisational relationships evolve to be driven, at least in part, by internal and
environmental considerations, we need deeper studies to identify proper mechanisms
to overcome partner selection problems and how they evolve over time. As Meuleman
et al. (2010) demand, we need more research about how to develop the mechanisms
and processes that can be used by focal firms to select partners which can sustain
a firms competitive advantage in the face of changing relations, market, technological,
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and institutional conditions.

Role of CS in partner selection

Traditionally, the literature on interfirm governance describes two key ways in which
firms can cope with control problems that arise in their relationships:
(1) by selecting good partners; and
(2) by designing appropriate CS (Dekker, 2004).
Accordingly, there are some studies that suggest that selecting a good partner limits
the need for CS (Buskens et al., 2003; Dekker, 2004), arguing for a substitutive
interaction. Indeed, the logic is first, the partner selection phase precedes the CS phase;
second, proper partner selection mitigates potential control problems; third, the fewer
control problems, the less need for CS. Furthermore, investing more effort in evaluating
and comparing potential partners may increase confidence in the goodwill and
capabilities of the chosen partner (interorganisational trust), thus reducing the need
for CS (Dekker, 2008).
However, we are far from reaching a consensus about when CS start their role, and
about what the role is that CS play in the selection and evaluation of partners. That is,
there are some authors who claim that the partner selection process and CS are different
mechanisms (e.g. Buskens et al., 2003; Dekker, 2004, 2008). But there are others who
maintain that CS and partner selection are unavoidably interrelated topics. For example,
Moeller (2010) defends partner selection as a CS mechanism. Van der Meer-Kooistra and
Vosselmans (2000) framework argues that decisions about the structuring of
interorganisational CS comprise three phases of a transactional relation: a contact
phase, a contract phase and an execution phase, where the contact phase control has to
support the search activities for a suitable partner and the contract phase draws up the
contract. Velez et al. (2008) define social controls in interorganisational relationships
as CS which mitigate control problems by improving selection programmes, among
others. However, our knowledge is limited about how CS develop their roles to attend to
partner selection processes (Dekker, 2008).
In this respect, some studies highlight the role of formal CS to complete contracts
in a more flexible way (e.g. Baiman and Rajan, 2002; Velez et al., 2008). Even if the
partners clearly understand the objective of their relationship and their mutual
interests, it is not feasible to design a contract that anticipates all possible
eventualities, no matter how complex the contract may be (Baiman and Rajan, 2002).
 Contracts should be complemented by other control mechanisms to reduce their The role of
inefficiency (Baiman and Rajan, 2002; Velez et al., 2008), underlying a complementary control systems
interaction between partner selection and CS. In addition, Dekker (2008) also argues
that the selection process function is a learning process which enables the design of in partner
enhanced CS. His findings suggest that selection effort relates positively to governance selection
extensiveness, supporting a complementary relationship. The underlying reason
seems to be the incomplete nature of contractual arrangements. 431
Furthermore, there are arguments that defend not only a complementary but a
simultaneous interaction. Along this line, Ireland et al. (2002) argue that CS could
develop routines as shared beliefs about how activities, such as selecting partners and
managing the firms relationships portfolio, should be accomplished. Appropriate CS
support the management of information flows to satisfy the needs of the relationship,
as well as those of its individual partners (Ireland et al., 2002), as a tool to acquire
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knowledge about them that may be needed in order to inform the partner selection
process. Therefore, proper partner selection could require search firms to attain
specific performance standards, develop desired behaviours, allocate decision rights
and responsibilities, and formal CS can play a key role in identifying these partners.
Consequently, a first research question could be as follows:

RQ1. What is the role that formal CS play in the selection and evaluation of partners?

Likewise, from a dynamic perspective, we could argue that interorganisational

relationships evolve, partner selection could be considered as an ongoing process, and
CS should change over time to adapt to the new conditions. In particular, the role of CS in
the evolution of interorganisational relationships deserves more attention (Inkpen and
Currall, 2004; Vlaar et al., 2007). For example, because to some extent negotiation is
present between all trading organisations, revised requests for information and revised
calculations of costs and benefits for each party are needed. According to Tomkins
(2001), CS should not be seeking a given time-invariant optimal system, but as
a perpetually adapting and modifying system, meet changing relationship needs. In this
sense, CS adaptability and flexibility could provide evolution and responsiveness.
However, as mentioned above, we need more research about how to evolve the
mechanisms and processes that can be used by focal firms to select partners (Meuleman
et al., 2010).
One of the several approaches to understanding and analysing the dynamics,
evolution and changes in CS is the stage-based approach. For example, Tomkins (2001)
distinguished four stages in any relationship life cycle: pre-relationship, exploratory,
developing, and stable, arguing for different characteristics at different stages of
business relationship development. Researchers have focused on the relationship
between stages and a host of organisational variables such as the criteria used in
evaluating effectiveness (Quinn and Cameron, 1983), the priorities of top management
(Smith et al., 1985), dominant problems (Kazanjian, 1988) and the role of stakeholders at
each stage (Jawahar and McLaughlin, 2001), among others. One of the most supported
findings is that complexity (i.e. resource needs, sophistication) and managerial
capabilities vary throughout the different stages of the life cycle of the company
(Jawahar and McLaughlin, 2001).
Another approach, the contingency school, proposes change that is not
systematically caused by a definite life-cycle stage, but, rather, is demanded (or even
forced upon the organisation) by suddenly changing key factors in the organisations
 BJM environment. Uncertainty is a key element of environmental context (Miller, 1987).
9,4 The management interpret the changes in the operating environment and launch
actions that they believe lead to the best result: matching organisational resources with
the corresponding environmental context (so there is no universal set of choices that
are optimal for all businesses and situations: Gingsberg and Venkatraman, 1985). Miles
and Snow (1974) point out that firms that match their actions with their environmental
432 context can improve their performance, but those that respond too slowly to change
will perform poorly. Depicting these arguments, we could define our next research
question as follows:

RQ2. How does CS change over time in the internal complexity and external
uncertainty of the interorganisational relationship?
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Finally, this study widens previous research questions in order to examine what
control tools are used as screening or signalling mechanisms. Because formal CS are
shaped by different control tools (Velez et al., 2008), they could have different purposes,
helping to overcome the hidden information problem among manufacturing firm and
partners, described in the previous section:

RQ3. What are the mechanisms that the focal company and its partners use as
suitable means to deal with the agency selection problem in different situations?

Research design and data sources

In order to provide answers to our research questions, we have conducted
a longitudinal case study following a design by Yin (1989), in which we tracked the
partner selection process from the perspective of a manufacturing firm called CMD
(a pseudonym). We chose this case because the DC was successful, longstanding,
and stable; and the partner selection process evolved significantly over the time of our
study. In line with Yins (1989) suggestions, we followed three principles to provide
construct validity and reliability: using multiple sources of evidence, creating a case
study database, and maintaining a chain of evidence.
We used archival evidence, direct observation, and interview data. The main
archival sources, which were rich and detailed, were the different types of contracts,
the partner evaluation system, the summary of all the periodic joint meetings, the
selection norm, and the projects and procedures documents. Supplementary archival
data contained a large number of management reports, financial and sales reports,
improvement project reports, and internal and external newsletters. Interviews were
employed to triangulate our findings (Eisenhardt, 1989a). We interviewed 23 members
of CMDs management team face-to-face. The interviewees were chosen for their
direct relation to the partner selection process. We also attended four joint meetings
(2001-2004) as well as several informal meetings, and had phone conversations with
some CMD managers and partners. For the earlier periods of the study, the data used
were mainly oral histories, but other sources of information, such as the archival data,
allowed us to avoid bias from social construction of the organisational history
(Chenhall and Langfield-Smith, 2003). We decided to terminate our fieldwork after we
felt that we had developed a clear sense of the CS mechanisms role within the partner
selection process, as proposed by Miles and Huberman (1994).
Once the data collection ended, we carefully analysed the interview transcripts
to understand areas of agreements between the interviewees (Eisenhardt, 1989b).
 Archival data were used to confirm findings that arose in interviews and direct The role of
observations. We then designed a table to reorganise the original transcripts around control systems
issues of significance in order to elucidate the functions, characteristics, and objectives
of CS mechanisms. Also, interview transcripts and archival data were organised in partner
chronologically, and the common issues in the cells were analysed, focusing on what selection
led to what and when (Miles and Huberman, 1994, p. 110).
433
Case study
Research site: CMDs DC
Founded in the late nineteenth century, CMD is currently a force to reckon with in the
chemical sector, with more than 1,000 employees, 30 production factories and
commercialisation centres, and 176 partners. The market for its industrial product lines
is not highly competitive: four giant multinational companies share most of the world
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markets. CMD is organised into regional districts, and its activity is basically
commercial, although it also packages its products. The firms products are sold
directly to major or strategic clients and through its DC to a large number of smaller
and medium-size clients. Furthermore, the commodity nature of CMDs products has
made the company seek its value added in its sales method, through its DC.
Currently, the DC is configured as a non-equity alliance between a bigger
manufacturing firm and a set of smaller partners. The channel is formed by micro-
firms (firms with typically one to four workers) that receive the products on
consignment and are assigned the tasks of warehousing, sales, distribution, and
managing CMDs client portfolio. CMD bills the clients directly. Partners are paid their
commission from the amount for which CMD invoices the client, although they record
the charges and assume the risk of non-payment of invoices. There is no internal
competition: each partner acts exclusively in a given geographical area and receives
commissions on CMDs invoicing, regardless of who actually delivers the products to
the client. The commission system and market stability enable partners to obtain high
and stable profits. In addition, serving as CMD partners is compatible with selling
other industrial supplies, and because of the synergy between businesses, large-scale
investments are not necessary to join the CMD channel. At the end of 2004, the
partnerships averaged 16 years in duration: 42 per cent dated from 1985-1990, and
17 per cent had been contracted in 1999-2004. In 2004, the channels return on
investment was 3.4 times higher than that for direct sales.
From the earlier twentieth century, but mainly in the 1960s and 1970s, the DC was
built without a defined partner profile, and without balancing different geographical
areas. CMD selected the partners on the basis of very limited information. Sales
employees based their selection on their subjective knowledge about the local markets
and potential partners, previous contacts, reputation, and ties with clients and
transporters. Consequently, the partners tended to have good warehouses but scant sales
knowledge and personnel; in some cases, they even lacked transport equipment, because
their sales were very passive. Even territories and CMD client portfolios were allocated
to partners in a subjective way, solely on the basis of the sales personnels knowledge and
criteria. At this stage, the partners were relatively few in number, and business was
stable, because the nation was still developing at a quite slow but steady pace.

The first wave of changes: expanding the volume by merger

The situation described above changed significantly for the first time when CMD felt
the need to acquire a significant national competitor in the early 1980s. Over a very
 BJM short period, the distribution partner network doubled, leading also to a significant
9,4 increase in sales volume. What was maybe more important for the purpose of the
current paper was that the CS of the two companies that were merged were very
dissimilar: one interviewed manager states that the acquired company had a very
primitive system, basically paper and pen. While the system of CMD at that time was
reasonably modern for the period, it was also very simple, and contract contents and
434 remuneration systems varied between areas and individual partners.
With the merger, CMD felt a need to standardise their CS. This was done in several
steps. First in 1983, CMD began to establish a contractual framework. For two years,
various sales managers and legal consultants studied different possibilities for
separating the mercantile from the labour relationship. Since 1985, only one contract
type has been used for these partners, regardless of their size, legal constitution, or
other business activities. At that time CMD began to negotiate with each partner
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to establish the legal framework. Because of the different conditions of each partner,
the process was lengthy, requiring major negotiations that were not finished until the
early 1990s. Although the contract did not envisage every possible contingency,
its clauses showed the basic expectations and outlined the legal relationship, what
parts of the business were delegated (geographical areas), the economic conditions, and
the open-ended nature of the relationship. Nevertheless, as the interviewees argued,
this contract was only the beginning of the relationship, because CMD managers
needed other flexible tools to manage the relationship. Furthermore, in 1985, CMD took
advantage of the contract implementation to establish a single system of remuneration:
a sales commission system. CMD calculated monthly the amount of the partners
commission, a system that allowed CMD to know how sales were evolving. From
this moment onwards, the partners have operated in a given exclusive territory
and received commission on the areas sales. In selecting a new partner, CMD could
presume that the partner would know the potential initial revenues and profits of the
portfolio on offer.
As a final step in the changes made in this first big rework period of the CS in the
late 1980s, CMDs sales department was enlarged and formally established. Among the
sales employee functions, the management especially highlighted the selection of new
partners. Each sales employee analysed his geographical area, contacted clients,
transporters, and industrial supplier firms, and proposed potential partners. CMD
then assigned a group of partners to each sales department member, who was then
responsible for supervising all these partners activities. Then, in a meeting, this
employee, the CMD sales manager and the area director evaluated the candidates and
selected the new partner subjectively, since the sales department still had no defined
partner profile. At the end of the 1980s, the distribution network increased to 300 small
partners.

The second wave of changes: surviving in turbulent global business

The national organisation increased after this reorganisation in a balanced way until
the problematic recession years of the early 1990s. In this period, the business of
CMD suffered, as happened for many companies in different European countries. In the
midst of this first modern recession, new ideas were sought to improve efficiency
and reduce vulnerability, and among these, quality management methods made lots
of new ground. In the ISO 9000 criteria, which made a major impact in industrial
management in the 1990s, the selection of suppliers and other processes were required
to be systematised and standardised, which then also affected the management
 thinking of other areas of activity. It seems that the systematic activity of CMD also The role of
was taken to a completely new level at this time. control systems
In 1999, CMD established a marketing plan for its partners, designed in concert with
the managers of the sales, technical, logistics, control and financial departments and in partner
the Client Attention Centre. This plan was based on three pillars: selection
(1) the definition of a partner profile;
435
(2) a partner scorecard; and
(3) a partner database.
As can be seen in the following, this plan seems to contain a lot of similar thinking as in
the quality management criteria.
(a) Partner profile definition. CMD defined, for the first time, the characteristics it
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sought: a proper partner must: first, be an industrial supplier; second, have good local
market knowledge; third, have a good reputation; and fourth, conduct other related
business (Partners Marketing Plan Report). These features defined an evolution from
warehouse and transport firms towards a more commercial profile, challenging the
company to adapt the relationship with old partners and to search for new ones.
We have consolidated our channel. We defined what the channel type must be,
describing how [partners] should work. This takes us to the following step, to evaluate
the channel against this definition (former Partners Manager). CMD then began to
adapt its contract to these new conditions.
(b) Partner scorecard. This shared information tool, extracted from the CMD sales
databases, covered falls in demand, new clients, analysis of sales, and itemised sales
breakdowns. CMD began to issue a scorecard containing commercial management
information, so that partners could: first, obtain better knowledge of the evolution of
their clients; second, plan and solve problems more quickly; third, coordinate their work
with the sales network (Partners Control Scorecard Report). It is necessary to find
communication and that everyone receives the same message because not all the
commercial staff can or want to transmit things in the same way (Commercial Director).
This information was analysed monthly by the sales employees, providing an extra
management tool to control partners. Likewise, it provided the partners with the
feedback needed to improve their sales management. This aggregated format was
helpful in establishing joint sales objectives. As the interviewees indicated, offering more
information to the partners facilitated demanding more from them, making them
responsible for client management. It is a support tool where each partners situation is
analysed, and it provides a great quantity of information about that partners sales,
stocks, sales analysis regarding the previous year, itemised sales analysis [y] Our
channel members have agile information that allows them to develop their work in
a more coordinated, effective, quick and satisfactory way (Partners Control Scorecard
Report).
(c) Partner database. This tool collects objective and subjective information on the
different partner functions, such as identification data (e.g. address, CMD sales employee
responsible, partners sales staff); contract data (e.g. geographical area, commission
percentage, potential market, market share); activity and size data (e.g. sales, global
business, CMD sales rate, main and additional business); sales data (e.g. sales capacity,
partners sales staff dedication, market and product knowledge, local reputation,
telephone service, number of products sold, client attention hours); warehouse data
(e.g. warehouse type, average stock, stocktaking mistakes, forklifts); logistics data (e.g.
 BJM number and type of trucks); administrative data (e.g. computers, average period of
9,4 payments, solvency); and image data (e.g. signalling, compliance with ISO 9000, forms
and documents). Although some information was updated automatically, each CMD
department was responsible for updating at least monthly and annually.
These three tools, developed within the marketing plan, allowed CMD to maintain
all the information about its partners in a homogeneous and unified way, and to
436 analyse the evolution of the partners results in order to set benchmarks. Definitively,
these tools acted as signalling mechanisms, providing verifiable facts that not only
anticipated desirable characteristics of partners but gave feedback on their objective
performance.
Somewhat later, in 2000, CMD also drew up a set of procedures to assist partners in
their daily tasks. This manual establishes the norms that the partners must follow in
all their activities, as well as templates of documents and forms both for internal use
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and for the final client. Likewise, CMD hired a consultant firm to report on potential
and current partners, including their local market reputation, main clients and
suppliers, and bank and financial statements. In this way, since 2000 CMD has received
an ad hoc report on each candidate for partnership, and also an annual report on each
current partner. Additionally, CMD established a partners training plan in order to
reach the high levels of knowledge that will place them in a privileged position to
confront the level of service that we want to offer to our clients (Extracted from
Partners Training Plan Report).
CMD also began to carry out a client satisfaction survey, assessing the standard of
services offered by the partners to identify weak points and develop new projects that
would enhance the relationship. For example, in 2002 the firm interviewed 2,685 clients
(of 188 partners) and in 2003 2,703 clients (of 181 partners). CMD defined 11 questions
about the partners global image, visit frequency, ease of contact, advice on products
and applications, delivery of documentation, attention during the resolution of
complaints, delivery frequencies, capacity to answer urgent requests, schedules for
taking orders and making deliveries, quality of service during loading and discharge,
and delivery mistakes.
As we noted above, the drawback of the commission system was that it did not
motivate the partner properly. The advantage of the existing commission system is
that it is simple. The drawback is that it does not motivate the partners properly.
It draws them towards the bigger clients, with more commission for less work
(Partners Manager). As a first step to change this system, in 2001 CMD developed
a partner evaluation system based on the partners database information. As the
project report noted, this appraisal system has two objectives: to reward those who
obtain the best results and to pinpoint those who need more assistance or more support
in order to pre-empt possible conflicts. The purposes were to identify each partners
strong and weak points, to define particular objectives, to evaluate all the value chain
activities (sales-warehouse-logistics-administration), and to align the partners interest
with the objectives of CMD (Extracted from Partner Evaluation System Report).
Again, a CMD multifunctional work team defined 37 performance measures
(including financial and non-financial, internal and external, objective and subjective
measures), their relative weights (the relative weights were sales 45 per cent,
warehousing 15 per cent, logistics 25 per cent, administration 15 per cent), and the
desired level of development, with the principal goal being the enhancement of sales
activities. As the interviewees argued, this evaluation system is a flexible tool because
the parameters and weights will change with CMDs objectives.
 This system showed CMD, partner by partner, which were the weak points, and The role of
presented the results in the form of a partner ranking, to make decisions better control systems
informed. It has provided us with information to know objectively how our channel is
doing (Sales Manager). And the partners could know ex-ante the parameters on which in partner
they would be evaluated, so they could adapt their behaviours. In 2003, CMD selection
established a commitment award for partners that exceed the average level defined
by CMDs desired level of development, and an excellence award for partners that 437
exceed the commitment level. In 2003, 9 per cent of partners obtained the excellence
award and 12 per cent the commitment award. Also on a more general level, a much
smaller but standardised network now produces much better results (see Table I).

Discussion
The choice of this case facilitates analysis of the changing working environment, with
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changes in the manufacturers strategy, the partner shutting down, and new selection
over time (as shown in Table I). Similarly to Rosenbloom (2004), this study shows that
CMD enlarged their collaboration, expanding the scope or complexity of their
activities, with partner evaluation playing a key, continuous role. As this author also
argues, this case demonstrates that when CMD makes changes to the channel
structure, increases coverage in different territories, adds additional activities, or
replaces distributors that have left, then distributor selection decisions are frequently
necessary. According to Lin and Chens (2008) arguments, the DC processes are
characterised by an ongoing identification of needs and selection over time. In this
sense, Table II highlights CMD changes between the periods studied: the evolution of
partners activities, departing from basic warehousing and transport to reach more
complex administrative and commercial tasks. This change was accompanied by
a strong growth in the delegation of client portfolio. While the contract term was fixed
at year, the DC grew in the level of cooperation and commitment, with greater
emphasis on empowerment and information interchange.

What is the role that formal CS play in the selection and evaluation of partners?
Because of its open-ended nature, DC management requires a formal and active
involvement from CS as screening and signalling mechanisms. Partner selection is

Partners Targets Targets Sales

Ranking Ranking rewarded set reached increases in
2002 2003 2003 2003 2003 h thousands

Whole DC 5-72 6-72 46 934 (5.1 per 311 (1.7 per 7,361 (8.9%)
partner) partner)
Partners shut down 5-57 2,500
(18 partners)
New hired partners 25-61 1 9 (2.2 per 4 (1 per 500
(4 partners) partner) partner)
Old partners who 42-66 36-67 10 98 (4.9 per 36 (1.8 per 2,600 (47%) Table I.
renegotiated their partner) partner) 2002 vs 2003 results
geographical area of newly hired partners
(19 partners) and old partners who
renegotiated their
Source: Extracted from partner evaluation system results, 2002 and 2003 geographical area
 BJM Developing
9,4 Early subjective subjective selection/
selection/evaluation evaluation processes
(until 1980) (from 1980 to 1999) Formal processes (1999 on)

Screening No defined partner 1983 on: contract New and existing partners
profile, without negotiations and All relevant departments participate
438 balancing different standard clauses systematic, formal CS in place 1999 on
geographical areas 1989 on: more 1999: partner target profiles defined,
By sales force only systematic sales partner scorecards, database, monthly
partners selection on the Area analysis; partner assessment
basis of very limited selection still 2000: client satisfaction surveys
information: subjective subjective 2001: partner manuals
knowledge about the Late 2001: evaluation by 37
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local markets and performance objectives; classification

Signalling
Table II.
Development of control
systems at CMD in
relation to its delivery
chain partners, and the
signalling mechanisms
used by the partners
potential partners, to best performing/support needed
previous contacts, 2002: partner selection norms, CS
reputation, and ties with information solely used as partner
clients and transporters acceptance basis
Amount of local market 1985 on: evolution Lots of subjective and objective data
contacts trend of (fixed) collected about the partners and
Reputation commissions provided by the partners
Previous references 2001 compliance to the partner manual
Late 2001: actual performance figures
on 37 indicators adapted/optimised
behaviour; willingness to develop
(amount of development areas/goals
discussed jointly with CMD, but
a minimum of 2 obligatory)
2002 on: compliance to norm or
withdrawal; partners must show
interest to help grow CMDs business

difficult and complex because it affects CMD profits, image and reputation for more
than one period (Ma, 1991); thus, it can be said that they involve continuous screening.
Naturally, partners are screened at the initial selection stage by CMD; they cannot just
become agents by accident. But, because misunderstandings, conflicts, changing
roles and new expectations among the parties inevitably emerge over time, the
exchange of information between CMD and distributors becomes crucial for rethinking
the terms of the relationship, learning about new activities, developing new plans and
establishing new objectives each year, as Ring and Van de Ven (1992) suggest. This
case allows us to show how, in dynamic relationships, even stability in the mature
stages could provide a platform for continuous evolution, as argued by Doz (1996) or
Halinen et al. (1999). In this ongoing process, CMD included in each new selection pool
new potential partners, and existing partners with whom they had previous relations.
This case shows how this manufacturing firm evaluates current distributors, in order
to consider them for new developments, as well as recruiting new distributors to
replace distributors that leave, or adding new distributors to existing lists due to new
channel design, expansion, or growth. Consequently, it shows that CMD managers
should periodically select and evaluate potential and existing partners in order to
retain, or seek, partners that meet the performance criteria, as Petroni and Braglia
(2000) argue with respect to purchasing managers.
 As Dekker (2008) argues, the design of enhanced CS supports a complementary The role of
relationship with selection processes, and this positive interaction is enhanced because control systems
the evolving nature means that no CS are indefinitely stable but must be developed
whenever significant internal or environmental changes occur, facilitating continuous in partner
adaptation. This case highlights that the transition from production-based manufacturer selection
to service provider through relationship contracts requires a developmental process to
build new routines and new capabilities, changing the relationships with distributors. 439
Furthermore, the case highlights that because complete contracts are impossible to define
due to ex-ante contingencies and ex-post re-negotiations (Baiman and Rajan, 2002; Lai
and Yik, 2006; Velez et al., 2008) the CS play a role in completing contracts, mitigating
their inefficiency, in a flexible way (cf. Baiman and Rajan, 2002). Consequently, the partner
selection processes need flexible CS to analyse new conditions, profiles and situations,
arguing for a complementary and simultaneous interaction. Indeed, at least in this case,
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the partner selection process could be defined as a part of CS, as Moeller (2010) postulates,
departing from a more informal shape towards a more formalised process.
In summary, contrary to some arguments (Buskens et al., 2003; Dekker, 2004), this
case demonstrates that selection of a previous partner does not necessary limit the need
for CS. This case logic seems to be: first, interorganisational relationships may not be
static, but a platform for continuous evolution, and partner selection is an ongoing
phase; second, the incomplete nature of contracts demand flexible control mechanisms;
third, CS and selection processes play a complementary and simultaneous role in
helping to manage the agency problem, offering the needed information to undertake
screening and signalling processes.

How does the internal complexity and external uncertainty of the DC change over time?
This case shows how the CMDs market-focused strategy provoked the adoption
through CS of more objective and formal selection processes. According to Tomkins
(2001), CS are continually adapting systems to meet changing relationship needs. This
study shows, as Arino and De la Torre (1998) argued, that DC evolution over time
prompts adaptation in their CS. This case clearly shows that while the growth of
internal complexity indeed required changes towards more formalisation, only the
rapidly increasing environmental uncertainty in the 1990s required significantly more
elaborate CS to evaluate partners. Lawrence and Lorsch (1967), in their classic
Organisation and the Environment, promote the idea that not only do the choices of
management depend on the internal complexity of an organisation, but they must also
fit the external uncertainty the company meets in its environment.
The case of CMD illustrates these two aspects well: first, the company grew
organically, with very little need to change their CS, until at one stage the company
bought a competitor to double its sales volume and also its DC. In such
a revolutionary increase of internal complexity, merging two companies with quite
different management cultures and also CS, the CS had to be reorganised in a big way.
The DC grew too big and too complex to keep in control through just personal relations
and the knowledge of sales managers. The relation between CMD and the network was
based on long-term history; with the acquired new sales chain, such relations did not
exist, and keeping two different systems would have been too complex and also unfair.
CMD thus redeveloped and standardised the system so that both the old and the new
chains could be controlled with the same system.
In the second part of the case study, the system that was built again survived well
until the 1990s, when the whole monetary system of Europe suffered a crisis that
 BJM demanded a complete restructuring of most industries in Europe. Simultaneously,
9,4 academics and managers sought new ideas (especially from Japanese industries and
US academics) to make companies less vulnerable to external uncertainty. The need
to meet these goals again brought very big changes to the CS of CMD. In a stable
environment the sales managers probably would have been able to rely on the former
system and through it also to keep the sales force in a reasonable state of control. The
440 sudden turmoil in the finance markets, and the recession it caused, painfully reminded
also CMD that maybe it cannot rely on its DC to make the correct downsizing and
adjustment decisions by itself. Thus, another tightening-up of the CS was required.
What we state, on the basis of this case study, is that the CS develop both in stages
over the history of a company and also over sudden environmental events that reveal
discrepancies and shortcomings in the current systems. The changes to counter
internal complexity seem less elaborate than those required by external uncertainty.
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Both internally and externally based changes suggest that the distributor selection
process could be understood as an ongoing process, continuing as long as channel
distribution is in effect, as Lin and Chen (2008) maintain. In the case of CMD, there are
three clear stages visible. First, a relatively small company in a stable market seems to
manage its DC well, with direct influence over the control spans (personal relations) of
the sales managers. Everybody controlled their own networks as they felt best. Second,
when the DC outgrows the control span through a corporate acquisition still in
a stable environment some control standardisation and tighter control schedules
were added. Third, when the environment turns from stable to hostile and uncertain,
the emphasis turns from controlling the result of the DC to controlling the input in
the DC, in order to be able to predict problems rather than react to them. Then the
instability of the environment becomes a given, compared to the earlier stages (which
could also be seen as a fourth separate stage), and the CS demand the ability to
react quickly from the agent network standardisation, but on a much higher level of
control. From other cases that we have studied, it would seem that similar spiralling
stages also exist in the histories of other organisations.
In summary, on the basis of the longitudinal case studied, CS will need to change
both due to reasons internal in the agent relation (i.e. internal complexity), and due to
external reasons (i.e. environmental uncertainty), which increase the vulnerability of
the principal in the relation, or highlight the risks. CS facilitates both screening by
CMD and signalling by distributors (as summarised in Table II) not only for the initial
partner selection, but also for a stable ongoing situation: both are required over their
life cycle.

What are the mechanisms that the focal company and the partners use?
Likewise, regarding our third research question, as defended by Meuleman et al. (2010),
faced with a changing relationship, an evolution in the mechanisms and processes that
CMD uses to select distributors is produced. Table II shows different CS tools in three
different scenarios of internal complexity/environmental uncertainty. Departing from
a non-defined partner profile, CMD relied in their selection process on the sales
forces subjective knowledge and previous references and contacts as screening and
signalling CS tools. In the second stage, the selection process was still subjective but
evolved to a contract with standard clauses, including a commission as compensation
system. Finally, in the third period, the selection process was formalised to engage
all participating departments, developing a set of new CS tools used by both parties to
provide information for each other, including information about new and existing
 partners through reports, scorecards, databases, norms, evaluation systems, manuals, The role of
meetings, and surveys. Overall, whenever significant internal or environmental control systems
changes occur, the ongoing process of selecting partners demands a change towards
formalisation, requiring an active involvement from CS, developing new and more in partner
complex tools, in order to adapt the selection process to the new context. selection
Conclusions 441
Departing from earlier studies that have proposed both qualitative and quantitative
criteria in partner evaluation and selection, this paper contributes to the related
literature in several ways. The first issue is the focus on vertical downstream
collaborations, such as a DC. The prior research on partner selection has been focused
on upstream collaboration, or has not usually differentiated between horizontal and
vertical collaboration, considering general issues of partner selection for strategic
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alliances (Lin and Chen, 2008; Wu et al., 2009).

Second, this research presents a longitudinal study showing the dynamic and
evolving characteristics of the ongoing partner selection process, requiring a formal
and active involvement from CS. When the duration of inter-firm agreements is limited
to one specific task or venture, it is probably true to say that partner selection is just an
ex-ante process, limiting the need for subsequent CS (as argued by Buskens et al., 2003).
However, as in this case, when inter-organisational relationships are open-ended, due to
their incomplete and evolving nature, CS relates positively to selection effort, supporting
a simultaneous, and complementary association (as argued by Dekker, 2008).
As Tomkins (2001) postulates, the analysis from a dynamic perspective offers much
more insight into how CS needs evolve. The study also highlights the broader potential
applications of CS in inter-firm management to complete contracts in a more flexible
way, and shows that while the growth of internal complexity requires changes towards
formalisation, only increasing environmental uncertainty requires a significantly more
elaborate CS. At least partly, it is similar to the situation when a company is small,
when it can make the daily business work with informal control tools, but when the
complexity increases so does the need for formal control tools (Davila and Foster, 2007).
Thus, this study shows a combination of internal complexity and environmental
uncertainty over time, leading to a series of gradually tightening CS solutions.
Simultaneously, the emphasis of the CS changes from the selection of potential partners,
through to evaluating and controlling the agent network itself, and to helping the whole
chain predict the environmental changes by standardisation and love-it-or-leave-it
requirements. In the CMD case, we would say that the first standardisation stages from
about 1980 to 1990 built the CS in the relation; the second wave of standardisation built
the ability of the network to survive the changes in the environment.
This study has important implications for practitioners in DC management, who
need to evaluate potential partners for downstream collaboration, and it highlights the
need to establish complementary CS to face the changing needs. The CS mechanisms
will be used by managers for screening purposes and by potential and existing
partners to signal their objectives. We also suggest that distributor selection cannot be
static. Partner selection and recruitment is an ongoing process crucial to the long-term
success of the DC. The use of a dynamic lens introduces a potential confluence of initial
partner selection and subsequent partner management issues. To operate effectively in
open environments, such as DCs, both partner network and CS must be adaptive.
DC managers can use these results to help them better understand the ongoing nature
of the partner selection process.
 BJM Naturally, a one-industry case cannot do other than propose theory, even if the
9,4 actors studied are the most significant ones in the market. Earlier studies have found
that industries have very different clock speeds (e.g. Fernandez and Kekale, 2006), so
the steps between the stages can be very much quicker, or slower, or even totally
different. It can also be that in some cases not all the stages are as clear as in the
CMD case; two or more of these stages might overlap. Our work with the study of
442 development of CS will thus have to continue. For example, manufacturers selection
of distributors is a dynamic process, involving evaluation and interaction between
both manufacturers and distributors. This case reflects only one party the
manufacturer; future research should explore two-way selection to reach a better
understanding. Furthermore, after the selection process, manufacturers need to retain
good distributors. Future research could be centred on how to retain suitable
distributors to maintain good performance through various ongoing evaluations, and
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through activities evolution, analysing the role of CS in it. Overall, the contributions
and limitations of this case study add to the research agenda of this evolving area.

Note
1. Although signalling mechanisms originally were developed in labour markets (Spence, 1973),
they are applicable in any market with information asymmetry. As Morris (1987) states,
initially sellers in a market are assumed to possess more information about their product than
buyers. Sellers of above average quality products incur an opportunity loss because their
products could sell at a higher price if buyers knew about the superior quality, while sellers
of below average products make an opportunity gain. Sellers of high-quality products have an
incentive to leave the market the phenomenon of adverse selection (Akerlof, 1970) unless
they can communicate their products superior quality to buyers and thus increase its price.
The publication of a device (e.g. a product warranty) would be a signalling mechanism, which
acts as a prediction of superior quality.

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Further reading
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No. 1, pp. 34-46.
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Corresponding author
Dr Tauno Kekale can be contacted at: tke@vamk.fi

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