In complex business structures the core enterprise needs to manage the

performance not only of its own activities, but also those of the partners to some
extent. The obvious problem is that the core enterprise does not usually own the
partners, so has no legal right to try to manage them. Performance management
issues must therefore be agreed with each partner as part of the terms of business.

Typically a contract or service level agreement will specify what activities are
expected of each partner, what the minimum standards are in terms of quality, and
the price that will be paid. These agreements may also describe reporting
requirements, whereby partners are required to report their own performance using
agreed metrics, such as % of late deliveries, and number of customer complaints.
There may also be fines for repeated failure to achieve some of the standards.

Planning

In traditional organisations, planning and control is based on the budget. The

process of preparing the budget requires the different parts of the organisation to
coordinate their activities for the following year, and this requires some central
coordination. Budgets also aim to ensure that costs of production are controlled. At
the end of each accounting period, actual results are compared with budgets and
action taken to remedy any significant variances.

In a complex business structure, the core organisation does not need to have a
detailed analysis of costs incurred by the business partners. From a financial point of
view, the core is only interested the prices that partners will charge, and these will
already have been agreed in the service level agreement. The core does need to be
sure that suppliers will have the capacity to meet its demand on time, even though it
may not be possible to specify how much that demand will be at the start of the year.
Some type of planning will therefore be required to ensure that all parts of the
structure have the flexibility and capacity to meet the potential demand from the core
organisation.

Control

The core is mainly interested in non-financial aspects of the performance of the

partners. Quality of goods or services are obvious areas. Other aspects may include
delivery times, quality of customer service and ethical behaviour. Several large
multinational companies have had their reputations damaged by the behaviour of
partners in third world countries who employ child labour for example, or operate
sweat shop style operations where employees are paid subsistence wages, and
made to work long hours. Poor ethical behaviour of such partners can harm the
reputation of the whole structure.

Expected standards must be specified in service level agreements. If a partner is

required to fulfil sales orders to customers for example, there may be requirements
about the minimum period within which such orders must be completed. The service
level agreement may also require compliance with a corporate code of ethics.
Partners will be expected to provide performance reports showing appropriate
measures of performance and must allow inspections and audits to be performed by
the core organisation.

Monitoring the workforce

Where the structure makes use of freelance workers and employees who work from
home, traditional methods of control over the work force become less useful. It is not
possible to clock employees in each morning when they work from home, for
example, and they cannot be watched to ensure that they are working diligently. One
solution is to simply pay by results. Remuneration may be based on quantitative
measures of the output such as number of customer queries dealt with. Trust is likely
to be a key factor in any such relationship, and the use of cultural controls, which
involves employing people who are self-motivated.

Information technology can also be used to keep tabs on employees. System logs
can record what time employees log onto and off the system, although there is of
course no guarantee that they are being productive all of the time they are logged in.

Performance management problems

While performance measures and expected targets will be specified in the service
level agreements, there can still be disagreements when things go wrong.
Disagreements can arise about the value of metrics calculated. In the exam question
Callisto Retail (June 2012 – see 'Related links'), there was disagreement about the
amount of days inventory held by one of the wholesalers, and this required detailed
reconciliation to be performed. Disagreement may also arise over who is to blame
when things go wrong. If customers are not happy about the service they receive,
there could be a number of partners who are potentially to blame.

Confidentiality of information becomes a risk, due to the fact that the core
organisation is sharing key information with its partners. This may include
commercially sensitive information such as production methods, or names and
addresses of customers. Procedures need to be in place to ensure that such
information is secure. This would include requirements relating to the security
surrounding the information systems.

Motivation can also be an issue. Where all business processes are carried out in
house, it can be easier to motivate employees using reward systems. Where the
processes are carried out by an outside partner, it may not be so easy to motivate
them. It is essential therefore that all partners share the same objectives and
understand how they contribute to the success of the whole organisation. In some
relationships, there is an element of profit share or bonus paid to the partners to
motivate them to perform well.
Role of IT

Information systems often play a crucial role in complex business structures. The
core organisation may invest in the development of an information system that it
requires all partners to use. This can mitigate many of the challenges relating to
performance management discussed above. Its role in monitoring the work of
employees has already been noted above. Having one system used by all partners
means that everyone is using the same data. There should be less difficulty
collecting information about the performance of partners since the information will all
be stored on one system. The core party has greater control over the security of
data, and communication between the parties will be much more fluid allowing
greater coordination.

Conclusion

The greater use of business partners to perform crucial business processes may
lead to lower costs and greater specialisation. However, the reliance on external
partners can lead to additional challenges for performance management. These
must be considered in drafting of contracts with the partners. The use of shared IT
systems can also assist in many of the challenges.