The Transitional Role of Institutional Trust in Online Interorganizational ...

The Transitional Role of Institutional Trust in Online Interorganizational Relationships Paul A. Pavlou University of Southern California [email protected]

Yao-Hua Tan Free University Amsterdam [email protected]

Abstract Given the uncertainty of the online environment, institutional trust is fundamental in building and retaining online interorganizational relationships. The authors propose two types of institutional trust (a) third-party institution-based trust, which deals with intermediary driven structures, such as those in online B2B marketplaces, and (b) bilateral institutionalized trust, which deals with dyadic interorganizational processes, standards, and norms. We examine how institutional trust develops through their underlyding dimensions (i) structural assurances, (ii) facilitating conditions, and (iii) situational normality to engender trust and influence relationship continuity. This study focuses on the time-dependent nature of institutional trust from the exploratory to the maturity phase by describing (a) the role of bilateral relative to thirdparty institutional trust on buyer-supplier trust, and (b) the transition of the three underlying institutional dimensions on trust over the relationship’s life cycle. This research has implications for (1) the longitudinal role of institutional trust in online relationship building, (2) the design of trust-building mechanisms in online B2B marketplaces, (3) the safe and cost-effective building of online interorganizational relationships, and (4) the literature on initial trust formation.

1. Introduction Today’s online interorganizational relationships are notably characterized by the impersonal nature of the online environment and the extensive use of IT, as opposed to face-to-face contact for transactions. Given this increased uncertainty of the digital economy, institutional provisions that aim to engender interorganizational trust and facilitate online interfirm relationship building are encouraged, especially at a relationship’s early stages. Today’s online business context resembles the environment where institutional trust would be particularly important by necessitating

the certification of business partners [40]. This paper attempts to shed light on initial trust formation in online buyer-seller relationships and the transition that occurs in the process of developing interorganizational trust. The institutional trust mechanisms examined are (a) third-party institutionbased structures, commonly available by online intermediaries such as B2B marketplaces, and (b) bilateral institutionalized practices shaped by dyadic interorganizational processes, standards, and norms. Since an increasingly large number of firms attempt to initiate online relationships with new partners, the proposed focus is on initial trust formation in online interorganizational relationships that start with a long-term prospect, not one-time transactions. The study highlights the transitional role of institutional trust, arguing for a longitudinal analysis of the specific types and dimensions of institutional trust and their time-dependent role on online interorganizational relationships. The traditional business relationships heavily relied on legal bonds in their early relationship building phases as a way of managing uncertainty. This may not work as well in the online environment because of the unclear legal environment of the Internet, where for many trade documents, it is unclear if the electronic version has the same status as the paper one across countries. Also, digital signatures do not yet have a clear legal status in many countries. Due to this uncertainty, many companies are rightfully reluctant to initiate online relationships, forfeiting the potential cost savings of doing business online. To reduce the uncertainty of the online environment many third-party intermediaries, such as B2B marketplaces, have been introduced to help organizations transact within a controlled networked environment through specific structures, guarantees, and safety nets [37]. This study proposes a model of how the relative effects of several institutional trust antecedents shift as the relationship matures. The antecedent role of institutional trust is explained in with specific reallife instances of (a) third-party institution-based

Proceedings of the 36th Hawaii International Conference on System Sciences (HICSS’03)

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David Gefen Drexel University [email protected]

provisions, and (b) bilateral institutionalized provisions that arise beyond third-party assurances. The study aims to help the strategic design of institutional provisions of online B2B marketplaces, highlighting how trust formation changes as the relationship matures. We also aim to predict when institutional third-party structures should be used to build trust, and when companies should rely on bilateral provisions, cautioning for overreliance both on third parties during the maturity stage of the relationship and also on bilateral mechanisms during the initial trust formation. In sum, the study examines: (1) How online interfirm relationships can be built based on third-party institution-based and bilateral institutionalized practices; (2) the role of institutional trust on interorganizational trust and relationship continuity; (3) the nature and antecedents of the types (third-party and bilateral) and dimensions (structural

assurances, facilitating conditions, and situational normality) of institutional trust; and (4) how the relationship life cycle influences the relative antecedent role of (i) bilateral versus third-party institutional trust on buyer-supplier trust, and (ii) the three underlying institutional dimensions on trust.

2. Conceptual Development The proposed research model and research hypotheses are shown in Figure 1. The phase of the relationship is a critical moderator on the relative antecedent role of the two types of institutional trust and their three dimensions.

Figure 1. Conceptual Model and Research Hypotheses THIRD-PARTY PROVISIONS Structural Assurances • General Contracts

Facilitating Conditions

Situational Normality • Secure Marketplace communication

• Market Standards

H3a

H3b

H3c H7a

Relationship Phase Exploration Maturity

Third-party Institution-based Trust H2

INSTITUTIONAL TRUST

Bilateral Institutionalized Trust

H6

H4

H7b H5a

Structural Assurances • Bilateral Contracts

H5b

Facilitating Conditions • Dyadic Standards

H5c

Situational Normality • Secure Dyadic Communication

BILATERAL PROVISIONS Proceedings of the 36th Hawaii International Conference on System Sciences (HICSS’03)

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Interorganizational Trust

H1

Relationship Continuity

2.1 Online Relationship Building A long-term relationalship is a benefit to many interfirm interactions [10, 11, 34]. The difficulties in building such a relational exchange starts as early as the initiation phase. This study examines how online relationship building can be longitudinally facilitated by third-party institututionbased trust and by bilateral institutionalized practices. This study focuses on a specific case of online relationship building, namely initial interfrim trust formation, where two companies unfamiliar with each other meet and perform transactions online. The promise of B2B e-commerce largely depends on such purely online relationships. The managerial relevance of online relationship building is how to cost-effectively build and rely on trust to promote relationship continuity.

2.2 Interorganizational Trust Interorganizational trust is defined as one organization’s (trustor’s) belief that the other party (trustee) in the exchange relationship will behave in accordance with the trustor’s confident expectations. Interfirm trust has been related to desirable outcomes such as firm performance, conflict and opportunism reduction [39], competitive advantage [5], satisfaction [17], and other favorable economic outcomes [9]. While there are probably several factors that are critical to relationship success, following Morgan and Hunt [28], we theorize the presence of interorganizational trust as a key mediating variable in relationship building, continuity, and success. Relationship continuity is defined as the perception of an organization’ expectation of future transactions with another organization. There is evidence in the literature to suggest a strong association between trust and continuity. Morgan and Hunt [28] show that trust leads to a willingness to continue a relationship. According to Ganesan [15], trust is a necessary ingredient for longterm orientation by shifting the focus to future conditions. Similarly, Anderson and Weitz [2] show that trust is key to maintaining continuity in buyersupplier relations. Since the above do not limit themselves to specific scenarios, it is hypothesized that this will also apply in online relationships. H1: Interorganizational trust positively influences online relationship continuity. The positive effect of interorganizational trust on relationship continuity has been theorized and empirically validated in multiple contexts; hence, it is expected to be particularly influential in online relationship building where the level of uncertainty of B2B e-commerce is generally higher than in traditional

contexts. The practical implication of this hypothesis is that relationship continuity is an integral factor for practicing managers that endeavor to build and sustain online interorganizational relationships; hence, recognizing the role of trust as a critical antecedent calls for further research on external variables that help build trust over time. Following McKnight and Chervany [24], this study proposes that institutional factors are critical trust antecedents. Drawing upon Doney and Cannon [9] and Sako and Helper [35], we propose three dimensions of interorganizational trust – competence, credibility, and benevolence. Competence refers to the capacity to fulfill promises and contracts. Credibility refers to predictability, reliability, and honesty toward fulfilling contractual obligations [2]. Benevolence refers to the expectation that a party will act fairly and will not take unfair advantage of the trustor, even given the chance [1]. Benevolence is a higher level of trust compared to credibility and competence since cooperative behavior is not based on calculation and ability, but on goodwill. While not explicitly theorized in this study, institutional trust is likely to have different effects on these three proposed trust dimensions. Future research could explore the finegrained set of relationships among the dimensions of institutional trust with the three proposed dimensions of interorganizational trust.

2.3 Institutional Trust In her seminal study, Zucker [40] suggested that institutional trust is the most important mode by which trust is created in an impersonal economic environment where the sense of a community with common values is lacking. Such a community does not currently exist online because of varying cultural understanding and values [14]. Zucker describes two dimensions of institutional trust. First, third-party certification that defines a party’s trustworthiness. Second, escrows that guarantee the expected outcome of a transaction. The institutional view of trust has been widely adopted by e-commerce researchers, perhaps because e-commerce brings together organizations with no familiarity and similarity. Pavlou and Gefen [32] examine the role of institutional structures in building trust in consumer auction marketplaces. Tan and Thoen [38] propose the term control trust to describe trust built by institutionalized procedures. McKnight and Chervany [24] describe institution-based trust as a critical part of Internet transactions. Pavlou [30]examines the role of several institutional structures in building trust in sellers participating in B2B marketplaces. In sum,


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there is a growing literature that aims to explicate the role of institutional trust on e-commerce success. Institutional trust means that intentions and behaviors are generated by the situation that facilitates outcome success. Following McKnight and Chervany [24], institutional trust is defined as ‘the organization’s belief that favorable conditions are in place that are beneficial to outcome success’. Shapiro [37]describes institutional trust as the belief that a trustor has about the security of a situation because of guarantees, safety nets, and other performance structures. McKnight et al. [25] describe two dimensions of institutional trust – situational normality and structural assurances. Structural assurances are beliefs that favorable outcomes are likely because of contextual structures, such as contracts, regulations, and guarantees. Situational normality are beliefs that success is anticipated because the situation is normal. The typical normality example in e-business is that the communication infrastructure is secure in the sense that authorization, integrity, non-repudiation, and confidentiality are guaranteed [8]. We posit a third dimension of institutional trust – facilitating conditions, which are less formal than structural assurances, but more tanagible than mere situational normality. Facilitating conditions are shared standards, relationship values, and common beliefs about behaviors and goals [19, 21, 28]. The latter usually refer more to trust in ongoing relationships and are positied in general as more important in ongoing relationships. We define facilitating conditions as ‘the underlying non-governance mechanisms that support transaction success’. Typical examples of faciltating conditions are standards, which can be considered facilitating conditions by supporting (a) the use of interoperable IT platforms, (b) business message standards like EDI, or (c) common processes for uniform product descriptions. Industry reports show a growing recognition of the need to establish such standards [26].

2.4 Third-party Institution-based Trust Online B2B marketplaces have received a considerable attention in e-business [4, 29, 36] since many transactions occur over their technology platforms. Forrester Research (www.forrester.com) predicts that transactions through these B2B marketplaces will reach $2.7 trillion by 2004 [7]. Online B2B marketplaces are virtual networked organizational forms [31], which provide infrastructure technologies and services to enable online buyer-seller relationships [20]. The proposed third-party trust-building institutional provisions draw upon Zucker’s [40] trust building mechanisms (escrows and certification). McKnight and

Chervany [24] argue that third-party institution-based trust helps engender trust in e-commerce. Pavlou [30] shows how institutional structures build trust in industrial sellers. Following Palmer et al. [29] and Sarkar et al.[36], we propose a positive relationship between third-party institution-based trust and interoganizational trust. In fact, industry reports strongly support these propositions [14]. H2: Third party institution-based trust positively influences interorganizational trust. A typical example of an online B2B marketplace that offers third-party institution-based services is Covisint (www.covisint.com). In terms of structural assurances, Covisint provides a contractual outline for setting up new business relations between car manufacturers and their suppliers. If two companies would have met online outside Covisint’s marketplace they would have had to negotiate an electronic contract online. If this contract concerns the just-in-time delivery of large supplies, such a contract tends to be very complicated. Covisint facilitates such complicated online contracting. By joining Covisint, a single legal generic contract replaces a multitude of different contracts that a car manufacturer should have negotiated separately with different suppliers. Covisint is also a good example of facilitating conditions. For a marketplace to create enough liquidity, it requires the use of standards for open IT software applications and product description. Covisint promotes an open IT environment that enables companies to connect to itsmarketplace. To facilitate the creation of new supply chains, Covisint also provides an online fulfillment and connection service to exchange transport documents, such as forecasts and shipping schedules. Bolero (www.bolero.net) is another example of a third-party exchange service that provides institutional structural assurances. Bolero is completely dedicated to exchanging a variety of electronic trade documents for its affiliated members. Some of these trade documents are legally very complicated, such as the bill of lading that entails the transfer of titlement of goods among trading partners. Bolero acts as a an electronic notary (the title registry is a secured database that contains information about who has possesion of a bill of lading and hence has title right of the corresponding goods). Bolero also logs and time stamps the exchange of the electronic documents; it also provides advanced monitoring services, another example of a structural assurance. Where Covisint only allows the use of a few trade documents, Bolero provides over fifty trade


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documents, and what is more important these are covered by its Legal Rulebook, and that makes these electronic trade documents legally valid in most countries in the world. Both Covisint and Bolero are good examples of situational normality. In both cases, the online transaction infrastructure is secure since authorization, non-repudiation and confidentiality are guaranteed. In sum, third-party intermediaries, commonly represented in today’s online B2B marketplaces have an extensive set of institutional provisions to facilitate institutional trust. These institutional provisions can be classified in the proposed categories – structural assurances, facilitating conditions, and situational normality. The preceding examples illustrate the basic dimensions that comprise third-party institution-based trust, leading to the following hypothesis: H3: There is a positive relationship between thirdparty institution-based trust and (a) structural assurances, (b) facilitating conditions, and (c) situational normality.

2.5 Bilateral Institutionalized Trust Iinstitutional trust mainly deals with third parties. But organizations can establish their own institutionalized processes, standards, and norms to manage transactions. Following Dyer [11] bilateral institutionalized trust is defined as ‘the subjective belief or confidence that there are fair, stable, and predictable shared routines, processes, and norms to enable successful transactions’. The standards of conduct are expected transaction patterns, or the ground rules, which set the context for successful buyer-seller relationships [10]. It is important to clarify the difference between bilateral institutionalized trust and interorganizational trust. Process or experience-based trust [40] through repeated interaction is the major means of building interpersonal trust. However, interorganizational relationships contain both the notion of interpersonal relations among managers and also interorganizational relations, as described by Zaheer et al. [39]. Institutionalized practices are the means to establish trust beyond which specific people and interpersonal relationships. As Dyer [11] describes, Japanese automakes do not rely on specific people that happen to be there, but on bilateral institutionalized practices that entail future contractsand norms of interaction. Therefore, even when specific people leave, institutionalized provisions, not interpersonal relations secure relationship continuity. Hence, institutionalized bilateral trust differs from interorganizational (party) trust in the sense that the basis of trust is on processes and routines (situation), and not the organization or its

specific members [11]. Through interaction, trading partners interdependently coordinate their key processes and develop norms, behaviors, and shared attitudes and standards, which gradually become institutionalized in a bilateral relationship. This type of institutional trust is built upon shared structures, processes, and routines that create a stable context for online relationship building. Following Dyer [11], we hypothesize the following: H4: Bilateral institutionalized trust positively influences interorganizational trust. We propose that bilateral institutionalized trust also has three dimensions – structural assurances, facilitating conditions, and situational normality. Despite this similarity, it is important to clarify that bilateral institutionalized trust is distinct from thirdparty institution-based trust because the situational provisions are driven within the bilateral relationship, and are not provided by or intermediaries. In fact, once a trust-based relationship is established, these shared expectations become the major force behind ongoing trust [22], while the other firm’s reliance on institutional guarantees reduces this trust [21] With respect to bilateral institutionalized structural assurances, legal contracting is a prominent example since companies often negotiate the terms governing their business relationship. With respect to bilateral institutionalized facilitating conditions, companies also need to check for compatibility of standards (trade messages, product information, IT infrastructures), similar to traditional EDI standards. In addition, companies also have to develop their own electronic catalogs and uniform product information. With respect to the compatibility of IT infrastructure, web-based applications and XML facilitate online transactions. Norms are also likely to play a prominent role in business relationships. With respect to bilateral institutionalized situational normality, companies can set up their own public key infrastructure for secure communication and act as their own certification authority. These examples illustrate the basic dimensions that comprise bilateral institutionalized trust, leading to the following: H5: There is a positive relationship between bilateral institutionalized trust and (a) structural assurances, (b) facilitating conditions, and (c) situational normality.

2.6 Relationship Phase Relationship phase refers to the major transitions in how organizations regard each other [10]. Following Jap and Ganesan [21], we propose two major phases


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of relationship building: exploration and maturity. This distinction aims to discriminate between the initial phase of the relationship with no familiarity, and the stage where there are multiple shared experiences. Based on past research [16, 18, 23], we expect interorganizational trust to increase when the relationship moves from the exploration to maturity. Familiarity is what positive repeated interaction brings into the relationship. This study focuses on the moderating effects of relationship phase that have bearings on the transitional role of the types and dimensions of institutional trust. Specifically, we examine the moderating effect of relationship phase by describing (a) the role of bilateral relative to third-party institutional trust on interorganizational trust, and (b) the relative effect of the three underlying institutional dimensions (structural assurances, facilitating conditions, and situational normality) on institutional trust over the course of the relationship’s life cycle.

2.7 Third-party Institution-based Trust Vs Bilateral Institutionalized Trust In the initial phases, we expect third-party intermediaries, such as B2B marketplaces, to influence interorganizational trust more effectively than bilateral institutionalized trust. In later phases, when shared norms materialize, bilateral institutionalized provisions should become more important than third-party provisions for interorganizational trust [40]. This is consistent with Bensaou and Anderson [6] who argue that ongoing relationships that provide general purpose provisions relieve the need for added third-party transaction supports. If anything, explicitly relying on such third party guarantees eventually reduces trust in the long-term by introducing suspicion in the relationship [21] Hence, bilateral institutionalized trust should be the method of choice in successful mature interorganizational relationships. More specifically, in terms of bilateral legal contracting, companies are typically unable to judge whether they have included all essential terms in the contract to protect their own interests, and may lack confidence in the legal validity of signed electronic contracts. Hence, third-party institution-based structural assurances are much simpler than bilateral institutional trust in the exploratory relationship phase, if only because the situation does not yet exist for the latter to take effect. In terms of facilitating conditions, initial assessment of IT competence is much more difficult for bilateral institutional trust than for a dedicated thirdparty that usually has high in-house IT expertise to do such an assessment. In terms of situational normality, outsourcing authentication to dedicated third-party

certificate issuer (e.g. Verisign) is an ideal alternative at the early relationship phases since the legal validity of online trade messages is difficult to assess. And so, trusted third parties provide cost-effective means to build trust at early relationship phases. However, bilateral structural assurances, facilitating conditions, and situational normality become increasingly more effective as these bilateral institutionalized factors are customized to the mutual needs of the two partners in a business relationship. In other words, in the exploratory phase, third parties play a more important role than the two trading partners themselves in establishing trust in online relationships. Bilateral institutionalized norms are typical examples of trust-building mechanisms that develops over time. Hence, as the relationship matures, bilateral institutionalized trust should increase since familiarity facilitates the establishment of norms [21]. In addition, commited parties are more willing to do the investment to set up bilaterally the common standards for business processes, product descriptions, and IT interoperability and connectivity. Therefore, in the maturity phase, trading partners themselves should play a more important role than third parties in building interfirm trust. In sum, the effect of third-party institution-based trust on interorganizational trust will attenuate as the relationship matures, whereas the impact of bilateral institutionalized trust on trust will gradually increase. H6: The positive effect of third-party institution-based trust on interorganizational trust will diminish as the relationship moves from the exploration to the maturity phase, while the positive effect of bilateral institutionalized trust on interorganizational trust will intensify. However, institutional effects are largely bilateral as opposed to third-party driven, as H6 hypothesizes. Namely, there is always a need for structural assurances (in case anything goes wrong), but it is commonly achieved through dyadic, custom-tailored contracts as opposed to generic ones. More important, as H5b suggests, facilitating conditions, such as common standards for business processes, product descriptions, IT interoperability and connectivity are crucial [26] for relationship success. These conditions are not driven by familiarity; hence, they are distinct from experience-based trust.

2.8 Dimensions of Institutional Trust The generic effects of structural assurances, facilitating conditions, and situational normality on


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institutional trust change over time, as shown in Figure 2. In general, structural assurances will be the most prominent factor in initial trust formation since parties have no other basis for trust and calculative (rational) means are the only means to build trust. Similarly, situational normality has to be high in the exploration phase of the relationship since any abnormality is detrimental on trust. However, as the relationship starts building up, facilitating conditions that were relatively negligible, gradually become the most important basis for trust. This time lag is expected since relationship bonds require a long time to develop because companies need repeated interaction to realize what to expect from their partners. There is liitle reason to rely primarily on governance structures and any anomaly

can be treated without much conflict. In sum, in the initial stages of online relationship building, structural assurances will be more important than facilitating conditions, but in later phases, relationship standards, norms, and values will gradually overshadow contracts as the primary means to build institutional trust. H7: The positive effect of structural assurances and situational normality on (a) third-party institution-based trust and (b) bilateral institutionalized trust will diminish as the relationship moves from the exploration to the maturity phase, while the positive effect of facilitating conditions on both types of institutional trust will intensify.

Figure 2. The Effect of Dimensions of Institutional Trust on Trust over time

Institutional Trust

Structural Assurances Situational Normality Facilitating Conditions Exploration

3. Research Methodology To provide empirical support for the proposed research model, we will survey a large number of companies that are in the process of initiating and building online business relationships. Respondents will be asked to assess the degree to which the proposed variables exist in a focal online relationship their organization has recently established. To test the longitudinal nature and role of the two types and three basic dimensions of institutional trust, companies will be asked to report the current stage in which their focal relationship [21], which is expected to vary from exploratory to mature. In addition, to ensure that all institutional provisions (third-party and bilateral) are present, the sample will consist of companies participating in online B2B marketplaces (e.g. Covisint, Bolero, and others), which have established third-party institutional provisions for companies to rely upon. Rather than

Maturity

directly operationalizing the underlying dimensions of institutional trust (bilateral and third-party), proxies will be used for specific representative provisions commonly utilized in practice. These institutional provisions will be chosen based on theoretical rationale and practical evidence from exploratory interviews with practicing managers.

4. Discussion This study aims to provide several new insights on the role of institutional trust in building and nurturing online interorganizational relationships. First, this study proposes and describes the nature and role of two fundamental types of institutional trust (third-party institution-based and bilateral institutionalized trust) on initial trust formation. Given the increasing importance of institutional trust in B2B e-commerce, it has become important to shed light on its nature and underlying dimensions.


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Relationship Phase

Second, rather than focusing on the general concept of certification and escrows, this study extends previous research [40] by proposing a comprehensive set of specific institutional dimensions (structural assurances, facilitating conditions, and situational normality) that are proposed to constitute the two types of institutional trust (third-party and bilateral). Third, this study explicitly proposes the concept of facilitating conditions to describe an institutional trust dimension that relies on shared norms, values, and beliefs, both in a bilateral or a third-party driven environment. Fourth, this research highlights the role of online B2B marketplaces in building third-party driven trust by providing institutional structures, assurances, and norms. Given the increasing importance of these marketplaces in B2B e-commerce, understanding which institutional dimensions help build trust is of fundamental theoretical and managerial importance. Fifth, this study describes (a) the role of institutional trust relative to process-based trust on interorganizational trust, (b) the role of process-based trust relative to third-party institutional trust on buyersupplier trust, and (c) the role of the three underlying institutional dimensions on trust over the course of the relationship’s life cycle. Given the time-dependent nature of institutional trust, it becomes important to understand the relative effectiveness of its types and underlying dimensions over the relationship life cycle. Not only is it theoretically interesting to understand the longitudinal nature and role of institutional trust in interorganizational relationships, but it is also important for managers to understand how to safely and costeffectively take advantage of the power of institutional provisions in facilitating online relationship building over time. Finally, this paper extends the theory on how B2B marketplaces can be strategically used beyond mere cost reduction and bargaining power [3]. B2B marketplaces are prescribed as the method of choice to initiate online relationships, while stressing the need to gradually build bilateral institutionalized trust to avoid relying on intermediaries over the long-term. This paper aims to shed light on the shift from third-party to bilateral institutional trust that takes place when interfirm relationships move toward maturity. First, it is important to recognize that the shift does not happen automatically, but that third party and bilateral types are basically two time-dependent modes to build institutional trust. Second, it is important to recognize the implicit role of familiarity that unavoidably enters the picture. While familiarity gradually complements [38] and also substitutes institutional trust as an antecedent of interorganizational trust, familiarity also changes the relative effect of third party versus bilateral institutional provisions, in addition to the relative effect of the proposed three dimensions. By analyzing the

longitudinal role of institutional trust, this study has implications for the safe and cost-effective means of building interfirm relationships in the uncertain context of B2B e-commerce. In principle, companies could skip third party involvement in the exploratory phase, and directly start building institutional trust through bilateral means. However, we argue that this way of establishing institutional trust is much more complicated than using the services of a third party, such as online B2B marketplaces. Similarly, it is important to gradually build dyadic customized institutionalized provisions to avoid relying on generic third party structures. Eventually, it becomes important to build the facilitating conditions that could serve as lubricants in interfirm relationships, and prevent reliance on costly contracts [12].

4.1 Theoretical Implications The importance of institutional structures to build trust and facilitate transactions has elevated in the digital economy, similar to the way institutional became vital in American business in the 19th century [40]. Drawing upon McKnight et al. [25], we posit a fine-grained description of the different types and dimensions of institutional trust and the role of relationship phase on its underlying dimensions and consequences. By explicating the role of third-party institutions on facilitating online relationship building, this paper stresses the strategic role of thirdparty intermediaries in providing value-added trustbuilding services beyond simple auction and catalog hosting [33]. This study also prescribes what specific institutional provisions are most needed based on the relationship maturity phase. In the initial relationship phase third-party institution-based trust is more prominent and cost-effective than bilateral institutionalized trust that requires time and effort to build. However, when bilateral provisions emerge, the role of third parties on facilitating trust diminishes. The proposed model has implications for both third parties and experience-based relationships toward optimizing the trade-off between third party and institutional trust toward achieving the least risky and most cost-effective combination of engendering new online buyer-seller relationships over time.

4.2 Managerial Implications The main managerial contribution of this paper is to introduce a practical framework based on an elaborated notion of institutional trust to analyze the current trend in online B2B marketplaces toward diversifying their portfolio of value-added services through a sophisticated design of IT-enabled services


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around the transaction process [13]. This has implications for the survival of online B2B marketplaces, which have gone under scrutiny given their inability to deliver measurable value [27]. However, our model could explain the rationale behind this development in a more structured way, following an institutional trust perspective, in particular third party institution-based trust. This study explains why trusted third parties play a crucial intermediary role in promoting institutional trust, essentially aiming to complement bilateral institutionalized provisions. The proposed model identifies distinct institutional dimensions, such as structural assurances, facilitating conditions, and situational normality that can be used to position new value-added trust-building services. Possibly, the proposed conceptual model could apply equally well for third parties that are completely focused on online B2B marketplaces (e.g. Covisint), as well as secure message exchanges, such as Bolero. Initially, most people would have argued that Covisint and Bolero have very little in common, but recently a remarkable convergence can be noticed in the valueadded trust-building services that both provide. The proposed model can explain this convergence by giving the underlying rationale behind these trust-building services. This model can be potentially used to predict new trends in value-added services of third parties that provide specific institution-based trust services. Therefore, online B2B marketplaces should utilize the findings of this study to improve the design of their trust-building structural mechanisms to institute a costeffective trustworthy trading environment. Perhaps the most important challenge for B2B marketplaces would be to provide customized institutional provisions to complement, or even substitute bilateral provisions. The proposed model could also be used by companies that aim to initiate long-term online relationships. Managers could take advantage of the proposed model to identify the safest and most costeffective combination of using third party and bilateral institutional provisions over the life cycle of their initial online relationship building. Managers should assess the capability of online B2B marketplaces to provide trust-building services.

help prescribe the safest and most cost-effective combination of building and sustaining online interfirm relationships. Second, we also aim to encourage future research to theoretically derive and empirically test specific institutional structures that B2B marketplaces offer. While this study aims to empirically assess a representative sample of these institutional provisions, it is important to assess the relative effectiveness of multiple methods to build structural assurances, facilitating conditions, and situational normality. Finally, drawing upon El Sawy and Pavlou [13], this paper aims to entice future research on designing trust-building IT-enabled services to facilitate online relationship building processes.

5. Conclusion An important challenge for many organizations is to identify how to move to trust-based, long-term relationships. Given the cost effectiveness of online transactions, interfirm relationships could preferably take place online. Despite the potential benefits of online trust-based relationships, the difficulty arises from the required leap of faith that some organizations are not willing to take [8]. We propose that the two types of institutional trust can be the initial step toward building the required trust to safely and cost-effectively enable new trust-based relationships. Online B2B marketplaces can initially provide the institutional third-party provisions where initial trust forms without the need for risky bilateral investments. Until familiarity grows, bilateral institutionalized processes could provide the basis for interfirm trust. In sum, institutional trust could be the driving force behind allowing organizations the freedom to engage in online relationship building that would otherwise may be viewed as excessive risk.

6. References 1. 2.

4.3 Suggestions for Future Research This study aims to entice future empirical research to validate the proposed theoretical model by showing how the two types of institutional trust and their underlying three dimensions could engender interorganizational trust and encourage relationship continuity over time. It would be interesting to empirically assess the relative effect of the various antecedents of online relationship building that could

3. 4. 5.


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