Managing Relationship-driven Competence Dynamics in Professional Service Organisations

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Abstract

Client relations play a major role in the competence development of professional service providers. However mutuality and particularity are also key concerns in providers’ client relationships. Therefore four inter-linked frameworks for classifying relationship-related competence dynamics at the levels of the organisation, relationship, and network of relationships are presented. The frameworks are illustrated in a case concerning fault diagnosis software projects undertaken by Finnish contractual R&D provider VTT Electronics. Finally, suggestions are made concerning the use of the frameworks by managers of professional service organisations to develop an increased understanding of their own client relationship-specific competence dynamics.

Introduction

Human relations matter in the realm of professional services. This is due to the substantial interactions between clients and professional service providers that occur before, during and even after the provision of the services. For example, before a service is ordered, the providers must demonstrate their credibility in interactions, i.e. by acting in a trustworthy and competent fashion, demonstrating their understanding of client needs and/or presenting evidence of special qualifications such as references. Thereafter, if the initial demonstration of credibility meets the potential client’s approval, an order will usually be placed. This order, in turn, will also contribute to the service-providing firm’s renewal and further development of its competencies, in that the professional service firm shall ‘learn-by-doing’ through its efforts to meet the needs of the client. It is these competence dynamics that are the focus of this article. Four inter-linked frameworks for measuring, predicting, and managing relationship-driven competence dynamics will be presented and elucidated through a case study.

However, it is necessary first to briefly discuss the fundamental word ‘competence’. Since the publication of Prahalad and Hamel’s seminal article ‘The Core Competence of the Corporation’ (1990), it has attracted much attention in economic and strategic, technology, and human resource management literature. Most authors agree that competence pertains to organisational learning with regard to, in the words of Prahalad and Hamel (1990), ‘a bundle of skills and technologies rather than a single discrete skill or technology’. Competencies are moreover commonly regarded as distinct, heterogeneous resources that enable firms to carry out their business activities. Finally, core competence is competence that is strategically important for the organisation’s business; in order to ensure returns, it must be characterised by ex ante limits to competition, imperfect mobility, heterogeneity and ex post preservation of heterogeneity (Peteraf, 1993).

Unfortunately, in most competence studies, the individual firm has been viewed as a rather isolated unit that gathers its competence much on its own. Because of this, scientists and practitioners have often ignored the effects of inter-organisational relationships on the development of competence. To remedy this situation, we take the relationship perspective in this article.

In the following we present the aforementioned four models, which can help organisations analyse developments in their relationship-driven competence. Thereafter we use the models presented in a case, which serves to illustrate some of the challenges of relationship-driven competence management. The case describes the fault diagnosis projects carried out by VTT Electronics (www.ele.vtt.fi). VTT (Technical Research Centre of Finland) is a State-owned institution that offers contractual R&D services to private firms, and as such, it is a knowledge-intensive professional service organisation marked by a complex network of relationships to other firms and governmental bodies. The organisation is furthermore sometimes subject to the knowledge-transfer paradox (Løwendahl, 2000) typical of these types of organisations: As VTT is constantly closing any knowledge gaps between itself and its clients, it is always to some extent making its competence-based services for specific clients superfluous. This means it must constantly focus upon its competence renewal.

Section snippets

Capturing the Dynamics of Competence in Relationships

The Finnish-Dutch research team, Sivula, Van den Bosch and Elfring (1997) has modelled the building of competence in a client-professional service provider relationship. Their understanding of this process is depicted in Figure 1.

It is shown that a professional service organisation develops its competence internally as well as absorbing competence-related knowledge externally via interactions with a client concerning a particular service delivery during the entire duration of this delivery.

Understanding how Client Demands Affect Mutuality, Particularity and Capability

In relation to the above characteristics, it is not important for managers of professional service organisations to achieve objective measurements. Instead managers should assess differences between their own and their customers’ views on these differences. Moreover, on the basis of this assessment, they should concentrate on three important balancing acts (see Alajoutsijärvi and Tikkanen (1998). As there are risks involved in having either too high or too low levels of particularity,

The Case of VTT Electronics’ Development of Fault Diagnosis Competence

VTT Electronics, one of the nine institutes of VTT, currently employs over 300 persons and has an annual turnover of some 25 million US dollars. As a Government-supported contract R&D organisation, VTT does not maximise profit. Instead it focuses upon efficient use of (limited) subsidies from the Government and ensuring that it receives some 30–40 per cent of its income from the private sector. Within VTT, the development of fault diagnosis systems, i.e. systems used in different kinds of

1988–1991: Balancing Particularity and Mutuality in the Field of Scientific Consulting

This period was strongly affected by interest in knowledge engineering techniques, as the use of knowledge engineering and so-called expert system technologies was widely anticipated to become dominant in computing. As a response to this expectation, ELE aimed at creating expert-to-expert bonds with industrial knowledge engineers of process and machine automation companies, in order to acquire application knowledge and to use the opportunity to deploy knowledge engineering skills to these

1992–1994: Toward Problem-driven Consulting and Competence Development

Around 1992, the focus changed to fault diagnosis functionality, as disappointment emerged worldwide over the lack of practical applications from early expert systems, and automation companies showed increasing interest in automating industrial processes and machines. This interest was especially strong in Finland, probably due to the country’s severe economic recession at the time.

On account of these changes and the fact that ELE considered automation systems a major potential application

1995–1997: Problems in Acquiring New Application-oriented Competence

The third phase saw a revival of interest in knowledge engineering techniques. Additionally, at the beginning of this phase, ELE’s competence in solving fault diagnosis problems in the field of automation was becoming generic, as opposed to merely client relationship-specific, as it had had so many different customers that had educated it on the various aspects of the automations applications. In other words, ELE was able to expand the capabilities it had acquired in specific relationships to a

General Case Analysis

In the ELE case, competence emerged or withered depending mainly on whether client relationship-driven actions enabling knowledge creation and deployment could be realised. Thus one may speak of the paradox of competencies co-evolution via interaction between supplier and client organisations. Only by having a large competencies overlap (i.e. reducing heterogeneity, see Peteraf, 1993) and substantial firm interactions (implying high mutuality, yet risking the jeopardising of some ex post

Concluding Suggestions for Practitioners

The case described demonstrates that the role that client interactions play in the competence development of professional service organisations such as R&D providers can be modelled. Although the path of development is complex and not altogether predictable, patterns can be analysed, using e.g. the descriptive Fig. 1, Fig. 2, Fig. 4 and the more normative Figure 3. This enables decision-makers in such organisations to develop their own heuristics, i.e. experience-based ‘rules of thumb’,

Acknowledgments

This research was generously supported by the Finnish Foundation for Economic Education and the Foundation for the Association of Electronics Engineers in Finland.

MARIA ANNE SKAATES, Department of International Business, Aarhus School of Business, Fuglesangs Allee 4, DK-8210, Aarhus V, Denmark. E-mail:[email protected]

Dr Maria Anne Skaates is Assistant Professor at Aarhus School of Business (Denmark). Her Ph.D. thesis ‘Danish Architecture Sales to Germany in the 1990s’ received the American Marketing Association’s 2001 ‘Liam Glynn Services Research Award’.

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MARIA ANNE SKAATES, Department of International Business, Aarhus School of Business, Fuglesangs Allee 4, DK-8210, Aarhus V, Denmark. E-mail:[email protected]

Dr Maria Anne Skaates is Assistant Professor at Aarhus School of Business (Denmark). Her Ph.D. thesis ‘Danish Architecture Sales to Germany in the 1990s’ received the American Marketing Association’s 2001 ‘Liam Glynn Services Research Award’.

VEIKKO SEPPÄNEN, Department of Marketing, Faculty of Economics and Industrial Management, P.O. Box 4600, FIN-90501 University of Oulu, Finland. E-mail: [email protected]

Dr Veikko Seppänen is a software business research Professor at the University of Oulu, with an almost 20-year long background in embedded systems software research and development.

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