Managing appropriation concerns and coordination costs in complex vendor relationships: Integration and isolation as governance strategies

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Many studies have shown that the inter-organizational governance mechanisms required to manage appropriation concerns come into conflict with the mechanisms needed to manage coordination costs. Research has, however, largely left unanswered the question of how client organizations govern complex vendor relationships that involve multiple categories, transactions, and activities where appropriation concerns and coordination costs must be managed simultaneously. We propose that this may be achieved by utilizing two strategies; while integrating some activities, transactions and categories, others can be isolated. Drawing on 23 interviews as well as procedural documents associated with vendor management, this study examines how a leading automotive manufacturer governs relationships with three vendors. The analysis reveals how corporate and operational-level staff combine formal and informal governance mechanisms as they pursue integration and isolation strategies, enabling the client organization to maintain and develop long-term complex relationships. Our findings lead us to question a tendency in the literature to regard isolation as negative and integration as an ideal strategy for managing long-term relationships. Only when utilized in tandem will isolation and integration strategies enable organizations to align the conflicting governance mechanisms required to manage appropriation concerns and coordination costs.