How to Build Business Alliances

The basic logic of the strategic alliance -- a joint venture between two companies -- is often irresistible: It's difficult to break into new markets, and a partnership can bring instant access to new customers. "If I move into a market myself, it could take years," says Gene Slowinski, director of strategic alliance research at the Rutgers Graduate School of Management and a partner at Alliance Management Group of Gladstone, New Jersey. "If I do it with a partner, it could take months."

A partnership doesn't have to be about bridging markets, of course; it can also supply capital or access to technology or manufacturing processes. Then there's the halo effect. "Doing an alliance deal with a major player clearly adds credibility to a smaller organization," says Barry Sloane, CEO of Newtek Business Services, a provider of back-office and financial services, "even if it doesn't have a bottom-line effect."

Whatever the underlying purpose, creating successful alliances can be challenging. Too often, companies enter into business with the wrong partner or for the wrong reasons, and they end up regretting the decision. Even when an alliance looks great on paper, cultural differences between the parties or mismatched expectations can undermine the arrangement. The following pages will introduce you to strategies for establishing a successful alliance.

Profitable Partnering

1. Selecting a Partner
Any company that has something you need -- clients, technology, capabilities -- is a potential partner, provided you have something it needs as well. (For an alliance to succeed, both companies must benefit from it.) But recognize that alliances rarely come without costs. At the very least, they require an investment of time that you or your key people could be spending on profitable endeavors. So it pays to be very selective about whom you team up with.

Don't settle for more of the status quo. A business alliance needs to be unusually profitable -- any new business generated by the alliance should beat your current margins in order to justify the effort, says Slowinski. "Otherwise, you should just continue to do what you were doing." The halo effect is a plus but rarely justifies the time and expense of forming and nurturing such a relationship.

Think long term. An alliance isn't simply a one-off transaction. "A deal is tactical, while a true alliance is a strategic relationship that considers how the parties will evolve over three to five years," says Robert Porter Lynch, CEO of the Warren Company, a Naples, Florida -- based consultancy. Try to project whether your would-be partner will still be a net benefit at that point.

Investigate reputation. Yes, this is a business relationship, but it's the people behind the business who will make the arrangement work -- or not. "In alliances, as in marriages, there is no recovery from selecting the wrong spouse," Slowinski warns. "You can bring your company to its knees using alliances." Research whether the prospective partner deals honestly with associates, employees, and customers. Your counterpart should do the same: A prospective partner ought to be as careful as you are, or you should wonder about its commitment to the relationship.

2. Cutting a Deal
In many respects, the most important moment of the alliance dance is the first, when you and an executive from your prospective partner (usually the head of the company or key business unit) sit down to discuss the opportunity at hand. This is your chance both to lay the foundation for a productive relationship and to uncover potential hazards. "The goal is to establish early on whether this is worth your time," says Matthew Sagal, also a partner at Alliance Management Group. "You're trying to avoid a long, drawn-out process that ends in failure."

Draw the big picture. Lynch says executives should first assess whether their strategies over the next three to five years are aligned. Otherwise, Lynch says, "no contract will ever hold them together." They should also draft a brief set of operating principles to guide the day-to-day work.

Establish subjects and a timetable for the talks. You and your counterpart should next set an agenda for formal negotiations and agree broadly on the elements of a potential partnership. These should include the scope of the partnership; goals, roles, and obligations for each side; milestones and other operating details; rules for intellectual property (which can often be a sticking point -- see "How to Share Ideas,"); and financial arrangements. At the same time, outline a rough schedule for these negotiations to follow.

Make sure everybody buys in. A key manager who is not on board for planning the alliance can sink it when the time comes for implementation. When it comes time to negotiate, says Slowinski, "if it's just the lawyer and business-development guy sitting across from you, that's a huge warning sign." To prevent that, establish the negotiating teams in advance, and make sure they include a representative from every relevant department -- marketing, procurement, research and development, and the like. The managers who will have day-to-day responsibility for executing the partnership should lead the talks, says Sagal. Of course, after several weeks, say, the executives should review the progress to see if an agreement is feasible. Having a lawyer at negotiations will make it easier to incorporate the business intent into the contract language (see "Put It in Writing,").