A new breed of matchmaker is helping small companies jump onto the fast track by getting them into the right strategic alliances
Picture Dorothy as she approached the Emerald City.
That's just about how Richard Farrell felt as he approached Microsoft's Redmond campus for the first time, in September 1998. Like Miss Dorothy (minus the smart gingham jumper), Farrell had a mission, and had come a long and winding way to accomplish it. If he could get the folks at Microsoft to give their blessing to his software product, then his 12-person Boston-based company, Full Armor Corp., would be home sweet home.
Full Armor's software allows information-technology departments to customize which applications users can load at their desktops. But Farrell had encountered hesitation from corporate IT mavens during the sales process. They were nervous about purchasing the software unless Farrell could show that his technology would be compatible with future Windows releases. But that meant Farrell needed to obtain inside technical information from Microsoft, not to mention the go-ahead to communicate that information to his customers.
After three months the hard part seemed to be over. Farrell had identified the right internal contacts who could ensure that his product would align technologically with Windows 2000, then still in the design stage. Now he needed the marketing cooperation from Microsoft to help guarantee distribution and street cred for his fledgling software.
But as he listened to Oscar Newkerk, his initial Microsoft contact, Farrell's heart sank. Newkerk was skeptical--but not about Farrell or his company or its product. Newkerk's main concern, according to Farrell, was how difficult it would be for a company of Full Armor's size to navigate the sprawling maze that is Microsoft. "He was really up front with us," recalls Farrell. "I remember him saying, 'Look, we're impossible to deal with. You only have 10 people. You'd need 10 people just in your marketing department." Farrell learned that Microsoft consisted of seemingly innumerable independent clusters, each doing so many different things that it was unlikely that any one Microsoft contact would know how to navigate the maze.
But Newkerk did give Farrell one big tip. To work with a company as large and complex as Microsoft, he offered, "you're gonna need help."
Enter Sarah Gerdes.
Gerdes, CEO of Business Marketing Group Inc. (BMG), a sort of strategic-partnership matchmaker with headquarters in Microsoft's backyard, had been recommended to Farrell before. But he had figured he didn't need outside help to develop a relationship with the software giant. After he left the Microsoft campus, he contacted Gerdes immediately.
Gerdes had worked with Newkerk on another occasion and knew that she could help Farrell identify and capitalize on the numerous but widely scattered marketing opportunities at Microsoft. Gerdes, who is more than a mere perambulatory Rolodex, has the inside dish on the strategic focus of the various and diffuse fiefdoms within the Microsoft realm and in fact probably knows more about Microsoft's strategic direction than many Microsoft employees.
To gain access to Gerdes and her intricate and expanding web of information, plenty of start-ups are willing to shell out $6,500 and up for Gerdes to create a relationship for them with a company. The full program, in which BMG helps maintain a relationship from beginning to end, can cost $75,000 and up--not to mention a commission of 1.5% to 3% on any licensing and acquisition deals. Gerdes has even persuaded about a third of her clients to serve her a slice of their equity pie. "Sarah's taking advantage of a unique confluence of events, building the relationships that start-ups today need to grow as fast as they can," says Kevin Armitage, senior vice-president at FAC/Equities, the investment-banking division of First Albany Corp., which has worked with Gerdes during the past few years. "It's a win-win--she builds a thriving business if her clients do."
Gerdes's success in building such sought-after services in just three years is a sure sign that in today's breakneck economy, strategic partnerships are becoming an increasingly critical part of growing a company. Gerdes has simply figured out how to cash in on that swell of opportunity. "Strategic alliances are definitely becoming crucial in building businesses of all kinds and at an earlier stage than ever before," says Gene Slowinski, director of strategic-alliance studies at Rutgers University's Graduate School of Management. "You can see it in the number of deals being struck but also in the number of conferences, books, and articles on the subject and in the cocktail-party interest I get when I tell people what I do."
Strategic alliances are certainly an established part of the pharmaceutical and high-tech fields, but these days they're also becoming significant in such non-technology-related industries as consumer products, entertainment, fast food, airlines, manufacturing, and insurance. "Strategic alliances are an important part of every industry," observes Slowinski. "It goes way beyond technology and the Web. They can significantly decrease cycle time for start-ups by allowing them access to someone else's world-class resources." With so much opportunity available to those smart enough and fast enough to grab it, strategic partnerships are rapidly morphing from the occasional shortcut to an essential part of growth.
That's something that Gerdes learned well during her years doing marketing for various high-tech start-ups, including WordPerfect Corp., PI Systems, and Documentum Inc. Gerdes started working full-time even before she had finished her sophomore year at Brigham Young University. In the mid '80s she had seen both her older brother and sister earn master's degrees that didn't help them get jobs in their chosen fields. "I didn't want to get a degree and be a receptionist," she says. So in 1986 she took a position at nearby WordPerfect, then still a relative start-up with about 350 employees. Since the company didn't offer part-time positions or internships at the time, she came on board in the marketing department full-time and attended classes at night.
Gerdes spent much of her time in corporate marketing, scrutinizing the business plans of companies eager to form alliances with her then-employer. But she noticed that although most of those plans advanced ample ideas for product development, manufacturing, and finance, few of them focused on building strategic partnerships. And those that did revealed a remarkable naïveté regarding the time, expense, and complexity of nurturing those relationships. "It was amazing to me that CEOs would tell me that between 25% and 30% of their time was spent 'creating alliances,' but so few knew how to create, structure, and execute them, let alone put it on paper," she says. "But that represents a ripe opportunity for BMG."
Plus, to Gerdes's eye, there seemed to be a communication disconnect among potential partners. Many of the small companies didn't have the context or contacts to know who the decision makers were or where the opportunities lay. And the large companies often lacked the resources to investigate which of the hot young businesses had the best fit or to shepherd fledgling start-ups through the alliance process. "If it weren't for BMG, somebody else in the equation would have to do more than their fair share," says Mike Dusche, product manager at Microsoft. "For us, that's usually difficult to justify, because the investment isn't always commensurate with the opportunity." Dusche says he gets a couple hundred partnership requests a month. "To get my time or my developers' time, they really need to show us an articulate, crisp business plan about why we should be willing to invest our resources. And BMG helps them get to that point."
But for Gerdes herself to get to that point, she first needed to augment her network of relationships. Although she had developed many technology-industry contacts, most were at PeopleSoft, IBM, and Oracle, and the majority of her prospective clients were more interested in partnerships with SAP (PeopleSoft's chief rival), Hewlett-Packard (rival of IBM), and Microsoft (rival to all, basically). "So I went with the market demand and developed my key contacts from there," she says. "The value of my past experience was primarily in identifying an opportunity, correctly targeting the decision maker, pitching the idea, and then delivering the goods."
Although Gerdes had dealt with Microsoft in the past, when she first approached the company as the greenhorn CEO of BMG, she needed to target a new contact. "I saw a very specific market need for E-commerce solutions," she says, an area in which she had never worked with Microsoft, "but I knew that their E-commerce strategy was embryonic and needed partner validation and adoption." She figured she could help Microsoft find appropriate strategic partners to work with. So she got the contact name from a Microsoft press release. "How's that for methodical research?" she says, laughing. "Elapsed time: 10 minutes." She then pitched her corporate-courtship service to that person in a cold call. "He answered on the first ring," she says. Two weeks and three meetings later, her first big-company relationship was up and running.
From there, Gerdes followed the lead of her clients and spotted further opportunities to play matchmaker by specific product area. For example, companies that were looking to enter the manufacturing or financial-technology arenas typically sought to hook up with Hewlett-Packard for the hardware and Oracle for the database. Small content providers (from on-line grocery stores to used-book sellers) wanted to hook up with Yahoo and America Online and other media groups such as Time Warner, NBC, and Disney. Gerdes responded by cementing relationships with nearly all the above.
To prove that she was for real, Gerdes gave away her services to BMG's first two clients. Once she established credibility with her larger-partner organizations, Gerdes was able to gain enough access to strategic information beyond telephone directories and organizational charts that she was privy to the companies' strategic planning. "They realized that if I could do this without their insight, then I could increase the quality of the relationships even more significantly if I had more knowledge of their strategy," she says. Mike Dusche agrees that Gerdes's knowledge of Microsoft saves him valuable time in talking with other companies. "When I show up, I don't need to spend time bringing them up to speed," he says. "We can move right forward with the tough questions as fast as possible."
BMG is now a nine-person consulting firm with offices in Seattle, San Francisco, and Austin. Gerdes counts among her staff a technical team of engineers who evaluate her clients' technologies and determine how they might align with the technologies of potential large partners. She also employs what she calls "business-relationship managers," typically M.B.A.'s who have experience in developing high-tech businesses. Such a diversity of expertise ensures that Gerdes is not the only BMG staffer with negotiation skills and a killer address book.
But Gerdes is selling much more than a rundown of who does what, where, and why. She also brings her own special brand of chutzpah, which somehow enables her to prod both sides of a partnership without offending either. "It's a real art to be able to keep things moving without appearing obnoxious," says Mike Walsh, vice-president of worldwide database operations at Navigation Technologies Corp. (NavTech) and a recent Gerdes client. "But that's really what Sarah does." Gerdes's energy and enthusiasm are obvious and infectious. In meetings she can't keep herself from pulling out her laptop and calling up her well-prepared charts and graphs to illustrate a point. In this day of proliferating acronyms and swarming buzzwords, Gerdes supplies a working knowledge of corporation-specific nomenclature. "She knows how they speak at Microsoft," says Mike Grandinetti, another recent client. "She knows the words that are most meaningful to them and has a lot of credibility within Microsoft as a result."
By the time Gerdes met up with Richard Farrell at Full Armor, she had facilitated more than 30 deals. Even so, and despite Oscar Newkerk's urging, Farrell was skeptical. "I thought, 'We're making headway on our own here. Why do we need BMG?" he says. But the more Farrell heard about Microsoft, the more a relationship with BMG made sense. He quickly learned about the disparate nature of Microsoft's independent groups--independent to the point where one group doesn't always know what the others are doing. Plus there was the issue of how his time as CEO was best spent. When Farrell found that working with Microsoft would mean ferreting out and negotiating with six or seven Microsoft subgroups, he decided that he would regret not working with BMG. "It was expensive," he says, "but if we tried to do it alone, how many opportunities would we never even know about?"
Like, for instance, the Microsoft Global Summit, an annual invitation-only expo that the company holds for vendors to present their wares to thousands of Microsoft salespeople. Attendees must be nominated by someone within Microsoft, but BMG knew whom to approach to get Full Armor invited. Gerdes also helped Farrell set some goals for the marketing boost he could expect from Microsoft, including a press release describing the relationship, Full Armor case studies posted on Microsoft's Web site, intercompany Web links, and introductions to some of Microsoft's top customers. "It really means the future of our company," says Farrell. "Without this relationship with Microsoft we really wouldn't be able to grow. BMG hands us the ball, but then we need to run with it."
Most of the relationships that Gerdes facilitates involve more than just marketing synergies. Many involve complicated financial and licensing arrangements. Jim Harkins approached Gerdes in the fall of 1998 just as he was at the tail end of closing a key licensing deal with Intel. Harkins, CEO of Convergence Corp., a 12-person wireless-communications-technology company in Atlanta, had no trouble locating the right contacts at Intel since they all stemmed from personal relationships Harkins and his staff had made in past employment lives. Convergence produces software for wireless E-commerce, which basically involves buying and selling by cell phone, pager, or other mobile technology. And Intel's wireless-technology code would enable that software to run on any phone or portable device.
But Harkins, although no novice in the field, was new to that particular type of licensing arrangement. "Here we were, negotiating our butts off with a very shrewd company that does these deals every day," he says. Harkins knew that Gerdes had expedited similar deals with Intel. So he brought her in to help ensure an equitable deal for Convergence. "When I came in, the deal was already partly structured, but Convergence didn't know what to ask for," says Gerdes. "Could they expect to get development assistance? Financial consideration? Marketing support?" Gerdes also knew from experience that bargaining with Intel was not easy. "There's some debate about the most challenging companies to work with from a legal perspective, but Intel is definitely up there," she says. In the guise of protecting the Intel brand, Gerdes says that the company restricts nearly every aspect of how its partner companies use its name in public and in contractual language. "I have to tell clients they can't take it personally," says Gerdes.
Harkins continued to work with Intel directly while Gerdes coached from the sidelines, reviewing contract drafts and making suggestions. Because she knew about Intel's controlling nature, she made sure that the contract specified how Convergence was permitted to use the Intel name. Eventually, Intel granted Convergence a fairly broad license, but the fee the company was asking for seemed high to Harkins. "It wasn't just the amount per se," he says, declining to specify the amount. "But a cash arrangement was less desirable, especially for a cash-strapped prerevenue start-up." Gerdes told Harkins that Intel often struck "enabling deals" with small companies that focused on areas that advanced Intel's interests. Harkins suggested offering Intel a minority stake in the company--very small (less than 10%), but enough to keep Intel interested.
Harkins could see the advantages of such a relationship. Beyond the obvious benefit that the Intel name would have with potential customers, the affiliation would have unexpected PR bounce. "Having Intel as a minority shareholder gave us credibility," he says. "They actually valued our company in that process, and that level of due diligence helps us say to current and future investors, 'Look, here's what someone that's pretty savvy at this says about us."
In lieu of 35% of her $75,000 fee, Gerdes took equity in Convergence. "Wireless is a huge area, so we thought it was a good risk," she says. Like many service-company owners today, Gerdes tries to maneuver an equity stake in her clients whenever possible--typically 1% to 3%. (See " Put Skin in the Game," June 1999, and " How to Get Rich in America," April 1999.) Although her equity pool currently stands at $4.8 million, she confides that she doesn't receive equity payment nearly as often as she'd like. "Unfortunately, too many companies these days seem to have a lot of cash," she jokes. The value of her annual equity intake, however, has already outpaced BMG's annual revenues.
Beneficial as BMG was to him on the Intel deal, Harkins is expecting a lot more from Gerdes in the future. He hopes to establish relationships with numerous groups at Microsoft. "We're hoping she separates us from any other small company that walks in the door," he says. And he also hopes to take advantage of Gerdes's connections at Tivoli Systems and Cisco Systems. "I could bang my head for six months and get nowhere, where Sarah could get me in in six weeks," he says.
Even when you have someone as connected as Gerdes working for you, sometimes, despite conscientious efforts, the Fates prevail. When Mike Grandinetti was vice-president of marketing at Connected Corp., in Framingham, Mass., he read an article about Gerdes's company and was intrigued. Grandinetti, who has since moved to MarketSoft Corp., in Lexington, Mass., had worked on a licensing deal between Connected and Intel, and he hoped to strike a similar deal with Microsoft.
Connected's product was an on-line system that allowed remote workers to back up their laptops daily onto a centralized hard drive and also to perform various support functions such as repairing files and updating software. Grandinetti wanted Gerdes's help in figuring out how to piggyback on Microsoft's distribution chain through its 18,000 resellers. Gerdes quickly made things happen at Microsoft for Grandinetti. After a number of meetings, contacts at Microsoft introduced Grandinetti to some of the company's field salespeople. The final step was to get the product in front of the resellers, and Microsoft started organizing meetings. On a pilot basis, Connected started working with Microsoft resellers in the Southwest and was moving toward a national rollout.
But at the eleventh hour, the key players at Microsoft moved into different positions. The shuffle left Connected, well, disconnected. The new Microsoft powers-that-were had different priorities--ones that didn't include Connected. And that's a situation that Gerdes says is hair-pullingly common. "You never know what's going to happen at these large organizations," she says. "That's why there's this sense of urgency in every meeting, because you know the right environment may not last." For his part, Grandinetti is philosophical. "Some opportunities just die their own natural death," he says. "You just have to hope you've got enough things in the pipeline that something will come to fruition."
Though strategic alliances may be fraught with potential pitfalls, Gerdes's experience demonstrates that with persistence even troubled deals can be turned around. In early 1998, Gerdes received a call from Mike Walsh at NavTech. Discussions regarding licensing NavTech's database to Microsoft had stalled after a somewhat torturous two-year process. NavTech's database provides detailed digital maps for in-vehicle navigation--such as the talking directional devices installed in certain rental and upscale cars. Microsoft was interested in using the database in its street-navigation and trip-planning Auto PC software and potentially in Internet applications.
Walsh stresses that, particularly for a product-based company like NavTech, interconnectedness is the name of the game. "We're relationship dependent," says Walsh. Whereas early-stage companies in the past might have been far less willing to share information, it has now become imperative for start-ups to have major partners on board from the launch of their first product. "With markets moving as quickly as they are, a multiplicity of relationships is very advantageous," says Walsh. "If we spend a huge amount of time cementing one relationship, then we're going to miss out on a lot of others. These relationships make us or break us."
And the Microsoft relationship almost broke NavTech. What had started as a straightforward licensing deal had descended into a caustic battle of wills. "The ship was going down," says Gerdes. "It was a very destructive situation." The first danger sign Gerdes spied was too many lawyers--at least 12 for both companies. Another part of the problem, according to Walsh, was that the relationship had been relegated to inappropriate people in both companies: a marketing vice-president on NavTech's side and a software technician at Microsoft. "They couldn't see beyond their own requirements, and the whole thing got mired," says Walsh. "We were flailing, and we needed help."
Gerdes requested new contact people on each side to start with a clean slate. She then functioned somewhat like a marriage counselor, communicating to both sides that, believe it or not, all that pain and agony was a normal part of the process.
Gerdes helped negotiate a deal in which Microsoft would use NavTech's database for its immediate product needs, but the two sides would agree to revisit other key long-term issues at a future date. "With the complexity of the relationships," says Walsh, "I doubt whether we would have reached any kind of closure without Sarah."
As for Gerdes's own company, its future looks bright. BMG's revenues and stock holdings have tripled each year since the company's founding--and Gerdes is projecting sales of $4 million for 1999. She sees no signs of that pace's abating and is crafty enough to ride the crest of the partnership wave. She's even taking her services "down market"--for those companies and entrepreneur wanna-bes that can't afford to hire a BMG--by offering one-day seminars as well as books, tapes, and interactive CDs that outline the BMG approach to partnership development.
But even with such ambitious plans, Gerdes realizes that to stay competitive in the long run, she may have to practice what she preaches. "We don't have the name or the money to fight a Booz Allen & Hamilton if they come into this after us," she says. "We create partnerships for other companies, and we will probably have to do the exact same thing for ourselves." That means either teaming up in some way with a large consulting service or somehow developing the financial and marketing wherewithal to compete with one. "So," Gerdes says, "we're running just as hard as the start-ups that we serve."
Christopher Caggiano is a senior staff writer at Inc.
The smart way to create alliances
By Sarah Gerdes
If you're hoping to land that killer partnership for your company and you're looking for inspiration, try looking at the vineyards of Napa Valley, at least metaphorically. Even under the perfect environmental conditions, the roots and vines of those precious grapes need care. But with proper maintenance--and some luck--the product gets better, stronger, and more valuable every year. So it is with alliances-- the real work begins once the roots are planted. But before you can even start tending your "plant," you have a lot of preparation to do. So...
- USE YOUR "SIX DEGREES." Maybe you've seen the movie Six Degrees of Separation or are familiar with the concept: anyone on earth is only six or fewer contacts away from anyone else. That's a powerful idea, especially when you're researching potential partnerships. A good place to start is with the industry analysts who follow your market. Those folks get paid to learn, listen, and provide their insights to the media. In the process, they form opinions about partner strategies and opportunities and are often open to solicitation. Another group to approach is executive recruiters. They often spy partner opportunities but do little with the information. The fact that they could provide their services for your company in the future is the leverage to get the information without an up-front cost. Other groups to approach include your PR agency, local business reporters, and even the government, which probably has special-interest groups for the dominant industry in that area. Don't be shy; ask for names and referrals. Those people love to provide value from their perch as industry experts. The best part of your leveraged network--apart from being quick, easy, and free--is that all your efforts build brand awareness in the industry, setting the stage for future efforts.
- AIM SMART, NOT HIGH. Identifying and contacting the right partners is only half the battle. Getting the callback is the other. Most sales-and-marketing books will tell you to "dial high" at the vice-president or president level. But that works only with small or midsize companies. The reverse is true when you're targeting large, complex organizations with thousands of employees. Often, people with mere "manager" titles have budgets in the millions of dollars and make all the business decisions associated with their group. If you seek funding or an equity position, avoid soliciting the organization's investment group directly; otherwise you will typically enter a six-month due-diligence process, after which your letter will be routed to the product group you should have spoken with in the first place. Save yourself time by finding the product people first.
- SHOW THEM THE MONEY. Once you've got your partner on board, measure every component of the partnership and establish a monetary value. That will attract your partner's attention and support. Some companies believe in measuring only levels of "satisfaction." I believe in hard-and-cold dollar paybacks. Be sure to include and measure performance incentives for overachievement as well as penalties for missed opportunities. If joint sales are a component of the alliance, keep monthly revenue totals for both companies, produce quarterly forecasts, and discuss both during intercompany meetings. Tie marketing activities to technical or product milestones whenever possible so that each company is dependent on the other. Ideally, make your own company the lead so you have a better chance of controlling project completion.
- KEEP ADDING VALUE. OK, so you've convinced your partner of the financial benefits of a relationship with your company. Don't stop there. Extend training, education, and product-awareness activities throughout your partner's organization whenever it is realistic to do so. Volunteer to participate in focus groups, advisory boards, and marketing events. Look for opportunities to create and deliver solutions for the partner, even if they don't necessarily involve your company or its products. Show that you deliver value to the partner across multiple fronts and, by so doing, that you and your organization become more strategic to the partner. That way you'll be more likely to get your opinion heard and advanced among the partner's hierarchy.
- LEARN THE VOCABULARY. Perhaps the biggest challenge to a successful partnership is understanding how the other side speaks. Most individuals don't ask for clarity for fear of tipping their hand. Here, then, are some sample translations that might make facing your potential partners easier.
|When they say...||They really mean...|
|"You need to think about X."||"If you don't do X, you're |
|"We need to be more aligned."||"You're competing with us in |
certain areas, and that had
better change quickly."
|"What's your partner strategy?"||"Who else are you talking to?"|
|"It would be interesting to see X."||"You have a revenue |
opportunity in X here."
|"Your window of opportunity
seems to be three years."
|"We will have a product |
for your area in three years, so
Why partnerships fail
Like any other business relationship, successful strategic alliances are subject to misunderstandings, poor planning, and sheer caprice. According to Gene Slowinski, director of strategic-alliance studies at the Rutgers Graduate School of Management, before you even approach a potential strategic partner, you need to make sure you have something of genuine value to offer. "Unilateral deals fail," says Slowinski. "Probably 80% of the deals that we see include company A providing some unique product or technology and company B providing access to markets and distribution."
Slowinski also warns that although personal relationships are useful in forging partner relationships, it would be wise to look beyond social acquaintances. "Be careful not to create alliances based solely on personal relationships," he says. "Many people merely approach the company that they're comfortable approaching, not necessarily the one that will make the best partner." Also beware of the "drive-by" alliance--the kind in which two CEOs meet on a golf course, get to talking, and cut the deal before any of the actual implementers even know about it. Through his research, Slowinski has found the most common reasons strategic alliances fail:
- A STRATEGY CHANGE. With companies of all sizes reevaluating and shifting their strategic focus in much tighter time frames than ever before, it's no surprise that many alliances bite the dust when one partner abruptly takes a new strategic tack. Just as small boats tack faster, small companies are more likely to change their strategy than large firms are because they can respond more quickly to the marketplace. You need to ask, "Who is this company, and will they be the same six months from now?"