Resource dependency theory

Resource dependency theory views organisations as part of a larger resource system in which there is constant struggle and interaction as organisations compete to acquire and secure the resources they need to achieve their ambitions (Cook & Emerson 1978, Pfeffer & Salancik 1978). Competition for finite resources, changes to funding arrangements and increasing demands for services are leading to high levels of organisational uncertainty in the health industry. Uncertainty motivates organisations to act in ways that assist them to maintain and extend control over territory and resources. Territory claimed by health service organisations includes space, resources and functions. These may include, for example, claims about the illnesses addressed, the population served, and the services provided (Provan & Milward 1995). The drive to maintain and extend control may take a number of forms, including competition (‘business is war’) or cooperation, in which case some form of contractual arrangement may be involved (Limerick et al 1998, Mandell & Steelman 2003).

The starting place for many interorganisational contractual arrangements is a strong organisational imperative, such as a need to share financial risks or to gain additional expertise combined with a willingness to collaborate and pursue shared goals. Embedded in collaboration is the concept of shared power (Gray 1989) and a belief that collaboration will not result in loss of autonomy or influence over domain. ‘Stakeholders in a collaboration essentially share the power to define a problem and initiate action to solve it’ (Gray 1989, p 112). They do this, not out of altruism but by using the sources of power available to each of them in an understanding that they have more to gain together than alone. All parties involved have some power, but not necessarily the same amount or kind. Large inequities in power are a disincentive for collaboration and consequently for collaboration in contracting. A contract contains an agreement as to who will do what, when, under what conditions, and the penalties that will apply should the agreement not be adhered to. However, enforcing a contract through the legal system is expensive. Consequently, parties to a contract frequently relate to each other collaboratively to avoid enforcement costs.

Interdependence increases as resource scarcity increases

The interorganisational literature is agreed that interdependency among organisations proliferates under conditions of resource scarcity and increased specialisation or differentiation within an industry (Pfeffer & Salancik 1978). Under such conditions organisations restrict their activities to specific functions, sometimes referred to as focusing on core business, and as a consequence they become increasingly dependent on other organisations to supply them with goods and services which they no longer produce in-house (Kanter 1994). For example, the core business of a small, not-for-profit, aged care and palliative care hospital may be defined as the provision of clinical services to patients, while other services, such as laboratory and cleaning, may be perceived as non-core business. It may decide that it would be more cost effective for it to purchase these services from other organisations. Hence it searches out and enters into contractual arrangements with other organisations for the provision of these services. These contractual arrangements may provide the hospital with benefits, such as cost savings in the employment of staff, improved security and quality in the maintenance of facilities and equipment, and potentially fewer management hassles. Some health service managers report that it is less time consuming and easier to manage a number of contracts than to manage diverse services in-house.

Power among organisations

The power of any organisation vis-à-vis another increases or decreases according to how much other organisations want what they have to offer (Marsden 1983). The more specialised and unique the resources controlled by a particular organisation, the more power that organisation is likely to hold (Alexander & Morlock 1994). At the same time, the more general and readily available within the industry the resources controlled by a particular organisation, the less other organisations will value what it has to offer, hence the less power it will hold. For an organisation to increase its power it must either increase the dependency of other organisations on it or decrease the extent to which it depends on other organisations (Emerson 1972).

The picture that emerges in a local industry is one of many business exchanges between organisations, each of which is constantly engaging in strategy and tactics to enhance its ability to control resources vital to its survival and achievement of future ambitions (Silverman 1987, p 196). Contracts are a device for formalising these exchanges, thereby adding an element of control. This is the situation with ‘shared care’ agreements between small business general practitioners and medical specialists in Australia, where doctors are largely remunerated on a fee-for-service system (see Case Study 14.1). As previously indicated, these contracts may be based on verbal understandings which may or may not be confirmed in writing.

Pooled interdependence

Pooled interdependence occurs when organisations which are not necessarily closely connected pool certain of their tasks or resources to achieve their various objectives (Alexander 1995, p 3). In the health industry, pooled interdependence is most evident in the public sector and in other situations of resource scarcity, such as in rural areas. Under such environmental conditions, organisations may pool certain tasks and resources (e.g. planning and evaluation) to achieve greater cost effectiveness in the provision of services to patients. On the other hand, in the private sector, competition for resources may lead organisations that would normally compete with one another to consider pooling their expertise for their mutual benefit. For example, they may pool their resources to enhance their ability to attract patients or consumers or to enhance their negotiating power with larger organisations (e.g. pharmaceutical companies and government funding bodies).

Sequential interdependence

Sequential interdependence occurs when one organisation’s, or unit’s, output provides the input for another (Alexander 1995). For example, in a large vertically integrated service delivery system the flow of patients may be from a diagnostic assessment centre to an inpatient medical centre, to admission to a rehabilitation unit, to discharge home, with support services provided by a community health centre. In other words the flow of inputs and outputs of each unit is serial in nature through the course of an episode of patient care. However, there is also a pooled dimension because the inputs and outputs of each health care unit contribute to the overall objectives of the wider patient care system.

Reciprocal interdependence

Reciprocal interdependence is more complex in that there is a two-way exchange of outputs and inputs between organisations (Alexander 1995, p 32). For example, an acute hospital may reach an agreement with a rehabilitation service to cooperate in the care of patients, and as a result the number of exchanges (patient referrals, communications etc) between them will increase. Importantly, these exchanges will flow in both directions, with the acute hospital discharging patients routinely to the rehabilitation service and the rehabilitation service routinely referring patients to the hospital if acute episodes of illness occur. Reciprocal interdependence implies that the parties to a contract acknowledge that there are benefits for each of them in the relationship. For example, in a ‘shared care’ contractual arrangement, the expected benefit for each private medical practice is a reduction of uncertainty over the future viability of their practice through increased control over their exchanges. Hence, the interdependence is reciprocal and there are costs to both parties should the relationship break down.

Contract negotiations and social exchange

The basic premise of social exchange theory is that a given behaviour is maintained by the pay-offs that individuals receive (Blau 1964, Homans 1958, 1974). The more mutually rewarding and less costly the behaviour required of each party in the exchange, the more desirable the outcome (Starkweather 1981, p 59) and the more likely that exchanges between the parties will be maintained. Inherent within this construct is the first principle of economics, namely, that people ‘calculate the long-range consequences of their actions in the marketplace in an attempt to maximise their material profits in their transactions’ (Turner 1991, p 311). Homans (1974) argues that people do not always seek to maximise profits but only to make some profit, and that exchanges are not only monetary but include social commodities, such as approval, esteem, compliance and friendship. This is true with respect to the negotiation and management of interorganisational contracts in the health industry.

Social exchange theory proposes that members of high-status groups are more able to bestow rewards and punishments than are members of a group with lower status. Differences in social status are very evident in the health industry, despite strong support for notions of equality and participatory decision-making. These observable differences in social status have led to health service organisations being described as highly stratified social systems in which individuals work together to achieve a common purpose. Stratification is associated with differences in social class, professional status, wealth and organisational power, or delegated authority (Bullough 1988). At the top of the professional status ranking within health service organisations are doctors, followed by dentists, pharmacists, health administrators, technicians, therapists, registered nurses, dietitians, practical nurses, health aides and nursing aides, and orderlies (US Bureau of the Census 1984). Stratification within professions is also evident. For example, specialists usually rank more highly than general practitioners, and this is reflected in levels of reimbursement. These differences in social status within health service organisations affect exchanges or interactions between individuals, groups and organisations. They are particularly important in interorganisational contract negotiations. Case Study 14.2 illustrates the point that interorganisational agreements proceed to successful outcomes more smoothly when stratification in each group is taken into account.

Social exchange and the maintenance of contracts

The maintenance of contractual arrangements should be viewed as a dynamic, ongoing, cyclical process, rather than a linear process, in which each party monitors and assesses the costs and benefits of the contract and makes judgments about whether to continue on the basis of the other party’s past actions. For the individuals involved in managing a contract, social costs or punishments include tension, conflict and troublesome, time-consuming communications, while rewards include social approval and enhanced feelings of self-worth. For the organisation, potential costs include dissatisfied patients through the other party delivering a poor-quality product or not meeting expected deadlines. This is bad for reputation and ultimately for business. Among the potential rewards for the organisation are enhanced long-term viability, cost savings, access to needed technical expertise and skills (e.g. information support services), managerial efficiency and improved patient/client satisfaction, which is ultimately good for business. With some interorganisational arrangements, ‘contracting can create opportunity for an organisation to self-improve and compare its performance with another specialist operator’ (Young 2001).