Flexible Formalization:a Study on the Components of Contractual and Extra-contractual Formal Organization

Anna Grandori (Bocconi University)
Marco Furlotti (Tilburg University)

Abstract: Drawing on organization theory, organizational economics and law, this paper distinguishes two types of documents capable of establishing formal organization: contractual , externally enforceable documents; and extra-contractual internally enforceable documents. Reviewing the extant literature, it is shown that formalization is quite generally believed to be in contrast with flexibility and innovativeness, but necessary to protect against conflicts of interest and to support computational capacity and organizational memory. While a common way to address the problem of ‘optimal formalization’ is to trade-off between these contrasting criteria, this study proposes that a better solution exists. That solution rests on disentangling the dimension of formalization and on identifying components that are both formal (protective) and flexible (adaptive), so that they fit to conditions of high uncertainty and non-negligible conflict potential. An empirical study on a large multinational sample of 500 inter-firm projects provides a test of the model. Results are generally supportive of the theory but also suggestive of interesting refinements.

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