Institutional Theory


Institutional Theory

By applying a third perspective, institutional the- ory, we gain further insight. This theory does two things. First, it emphasizes that behavior is shaped by “institutional logics” (i.e., cognitive and nor- mative schemas that enable actors to comprehend their organizational worlds) that are legitimated outside the organization. These schemas can be highly resistant to recombination or change (Thornton & Ocasio, 2008). Second, institutional theory draws attention to the critical role of lan- guage and discourse (Hardy, Lawrence & Grant, 2004; Maguire & Hardy, 2009; Phillips & Hardy, 2002; Phillips & Malhotra, 2008).

When applied to the professional service firm, it can be readily seen that the “line of service” axis encodes a particular definition or logic of profes- sionalism. From a design perspective, the defini- tion is then reinforced by wider organizational arrangements, such as human resource practices that funnel “appropriately” qualified employees to those tasks, and that evaluate them accordingly. Further, information flows are arranged so as to induce professionals to function in a manner con- sistent with the logic of professionalism, and global knowledge centers distribute “best prac- tices” across the firm (Morris & Empson, 1998). These practices and information flows are pro- vided within the organization, but they are pre- scribed and legitimated outside the PSF by the wider professional community. As such, they are robust and resist compromise.

In contrast, the client management systems of transnational PSFs reflect the institution of the market and are driven by the logic of commercial viability rather than by some higher social order (Brint, 1996). As with the professional logic, the commercial logic is reinforced by a variety of organizational design arrangements, such as hu- man resource practices that provide career incen- tives to those optimizing revenues from clients, and information systems that provide client man- agers with detailed information on a client’s mar-

ket context. Critically, the commercial logic may conflict with the prescriptions of the professional logic. In other words, the institutional perspective depicts the transnational PSF as a site of contes- tation between legitimated logics and makes clear that they are each built into the professional ser- vice firm’s structures and processes. The logics offer competing, equally legitimate prescriptions for guiding strategy and operations (Le Breton- Miller, Miller, & Lester, in press).

Professional service firms have long recognized the importance of reconciling these competing logics and have traditionally used a unique orga- nizational form: the professional partnership (Ga- lanter & Palay, 1991; Greenwood & Empson, 2003; Greenwood, Deephouse, & Li, 2007)—a design fundamentally different from that of the public or private corporation because it concen- trates ownership and managerial responsibilities on “partners” who share the risks and the profit- ability of the firm. But, as professional firms grew larger, more complex, and more intent on offering globally coordinated services, traditional struc- tures and processes began to buckle. The tradi- tional partnership form became transformed into a “managed professional bureaucracy” (Cooper et al., 1996; Pinnington & Morris, 2002).

However, the more formal organizational ar- rangements of the managed professional bureau- cracy ran counter to the prevailing identity of professionals as autonomous agents, and so these new arrangements were legitimated in two ways: The partnership form of governance was retained symbolically through use of the terms “partner- ship” and “partners” (Empson, 2007), and the language used to constantly legitimate the man- aged professional bureaucracy deliberately in- voked the traditional image of the professional. Moreover, nontraditional service areas, such as con- sulting, were “theorized” as a response to client re- quests and thus as a professional obligation (Green- wood & Suddaby, 2006). In this way, the use of familiar language and symbols softened the radical shift in organizational form, cloaking the new ar- rangements in the language of the old values.

In short, by pointing to the meanings attached to structures and processes, institutional theory helps us understand members’ perceptions and

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portrayals of organizational design and the mean- ings that they have for organizational members. Organizational designs are both responses to these perceptions and their determinants.


We have argued that by using especially relevant theories in combination and applying them to a type of organization we can get traction into un- derstanding and ultimately addressing the design challenges of today’s complex organizations. Our central assumption is that understanding the rich designs of today’s organizations ought to be the keystone of organization theory and a path to enhancing its relevance. We have asserted that the study of design would be enhanced by focusing on types of organizations so as to identify their defining managerial and organizational chal- lenges. Our contention is that it is only by focus- ing on a recognizably distinct organizational type that the challenges confronting an organization, and their relationship to design issues, can be fully appreciated. We have shown how, through the application of several theories, we can tease out the prerequisites that have to be taken into ac- count when configuring structures, human re- source practices, and information processes that will address these distinctive challenges.

In our illustration, contingency theory was not quite up to the task of prioritizing the axes of transnational PSFs. The complementary use of the resource-based view as a basis for a prioritization of axes lent greater clarity to the design task by providing clues as to how to structure accountabil- ities and orchestrate collaboration through human resources and information processes. Those are important normative lessons. But even these the- ories, taken together, were incomplete. They did not address the tension between demands for pro- fessional discretion and demands for overall com- mercial success. The insights of institutional the- ory were needed to understand how these conflicting logics, inherent in PSFs, might be rec- onciled—so that a more robust design could be created. Theories are inevitably limited and thus insufficient in their explanatory power. It makes sense, therefore, to tailor and use those most rel-

evant additively, especially when attempting to understand complex problems.

Our point, in short, is that the study of complex organizational designs is made more manageable by understanding the fundamental challenges confront- ing an organizational type, followed by the applica- tion and use of multiple relevant theories.


W e believe that organizational theory must re- turn to its roots in the study of organizational design, and we have suggested some ways of

overcoming some research obstacles in order to do that. We believe that the resulting rewards to orga- nizational theory will extend well beyond enhancing its contribution to practice; they will also contribute to the more effective use and development of theory.

Today’s theories retain considerable potential but have been applied to an unnecessarily narrow set of issues and thus are stunted in their devel- opment. They can and should be put to work— put into harness— on tasks such as design that lend them greater potency and insight, and that broaden, deepen, and condition their range and thrust of application (Dunbar & Starbuck, 2006). We have shown how both the complementarity and the situational appropriateness of contin- gency, resource-based, and institutional theory can be clarified by the study of a specific organi- zation design challenge. But it is important also to remember that many theories were actually gener- ated by the study of design. Indeed, many of the most fruitful theories of our rich past came from tackling organizational problems and issues head on, and from closely observing differences across organizations. Contingency theory was birthed not by scholars setting out to invent new theory, but rather in the attempt to solve organizational problems using the lens of bureaucratic theory— which ultimately proved inadequate to the chal- lenge at hand and prompted researchers to de- velop a new “contingent” perspective. Similarly, institutional theory and its surfacing of normative and legitimacy issues arose out of fine-grained studies of educational organizations—and proved to be of vastly broader application to a host of organizations that were initially excluded because they were thought to be more “technically” deter-

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mined. In a similar way, our expectation is that it will be through the study of design that we will not only enrich current theories, but show their limitations and usher in the theories of the future. Bluntly, the source of new theories will be the study of organizations and their managerial and organizational challenges.

We must, however, close with an appeal to relevance. Hambrick (2007, p. 1347) criticized “showy devotion” to theory, and Cummings (2007, p. 357) raised the risk of “being seen as a bunch of monastic fuddy-duddies who pass sacred wisdom among ourselves while holding a tenuous grip on what goes on around us.” Hoffman (2004, p. 214) concluded that unless we reconnect with managers, “organizational theory faces a growing irrelevance.” Taking stock of the position of orga- nization theory is thus an important undertaking. And as Miner (2003) noted, there is no shortage of theories. Unfortunately, these theories are rarely seen as having “value.” Not one recent organization theory included in Miner’s study is rated as useful. Perhaps, implicitly, the unease with the state of organization theory has less to do with the lack of appropriate theories and more, as we have argued here, with the challenges that have, and the challenges that have not, engaged our attention over the past 40 years. It is time to reprioritize the challenge of design, not only to guide design but to enrich theory.

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