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OUTSOURCING

How to Build Business Alliances
 

The basic logic of a strategic alliance is often clear, but managing it can be tough. Here's how to forge partnerships that last.
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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,").

3. Making It Work
New allies often find it difficult to actually work together, not least because of the differences in corporate cultures. The key conflict usually revolves around how decisions are made, says Slowinski, especially with companies of different sizes.

Plan the decision-making process. As early as possible, you and your counterpart should discuss the first major decisions on the horizon and how each company would normally make them -- the key people, the reporting lines and committees that will have to sign off -- and how long the process should take. Determine if each side can live with the decision structures in place. If not, Slowinski suggests, make recommendations to senior management about how to adapt them to allow the alliance to move along efficiently.

Meet all your partners. You can also smooth the process of implementation with an orientation meeting for the rank and file of both parties immediately after the alliance is consummated. Here, the responsible managers introduce the alliance and explain its purpose and how it will work.

Find a champion. Particularly if you are partnering with a big company, in which many priorities compete for scarce resources, a champion can protect the alliance from inertia and indifference and see that it gets the needed people and money. Some companies have formalized the role of the champion, but often the best champions are self-selected -- people who are notably passionate about innovation or the alliance. They can be at any almost level of the corporate hierarchy, but they tend to have the ear of someone upstairs.

Of course, you have no say in who becomes the champion at your counterpart, but you can provide a nudge, says Slowinski. If, in the interactions with your prospective partner, you encounter someone who "has the same sparkle in the eye that you have, you've found yourself a champion," he says. Encourage your counterpart to welcome the interloper to the team. "You can make the comment, 'He or she seems passionate about this -- I can work with that person.' "

How to Share Ideas

Intellectual property, or IP -- whether it's a new technology or customer lists -- plays a complicated role in an alliance. On one hand, it often lies at the center of a joint venture. But most companies are used to keeping secrets secret -- and suddenly, employees are being asked to do otherwise. Here are two ways to avoid IP problems.

Make it clear what you are sharing -- and what you are not. Partnerships can be quickly frustrated when rank-and-file employees aren't sure which intellectual property they can share with the other company. Slowinski recommends convening a private meeting with your employees to go over the ground rules for disclosing intellectual property: what must be shared; what may be shared, depending on the circumstances; and what can never be shared. Also explain how the company will protect its partner's intellectual assets. And it's worth keeping assets that may be shared separate from those that may not -- on a separate server, perhaps.

Plan for the end. Whether business alliances break up over a disagreement or just run their natural course, many eventually end. But once IP is shared, it is often hard to put it back in the bag. The agreement should address this issue in advance. Does the use of your partner's assets end with the venture? That is often the case when one partner licenses a new technology or other IP to another: When the alliance ends, so does the license. But what about client lists? And what happens to the intellectual property you develop jointly? Be certain that your agreement specifies who gets the kids in the event of a divorce.

Put it in Writing

"If you don't have a written agreement, you have no agreement," says Barry Sloane. The document should encompass all the parties' legal obligations. If the allies have to come to other understandings -- over, say, a mission statement -- these should be attached to the contract in an appendix, says Lynch.

Don't jump to conclusions. Beware, writes venture capitalist Guy Kawasaki in The Art of the Start, beginning the negotiation with a draft contract. The document can take on a life of its own and potentially upend the talks.

Anticipate the worst. The contract should completely define the process for when things go wrong -- and be sure, says Sloane, to allow for quick exits. "We think marriages are best when they're shotgun marriages." According to Kawasaki, an escape clause "assures both parties that they won't be trapped in an untenable predicament."

Resources

The Association of Strategic Alliance Professionals (strategic-alliances.org) has a list of consultants and a library of articles, available to members.

The Licensing Executives Society (lesi.org) is an organization of people interested in technology and IP transfer, including company officials who acquire technology from other businesses. The North American chapter (lesusacanada.org) has 5,000 members.

Find Inc.'s articles about joint ventures at www.inc.com/outsourcing+and+joint+ventures.

Last updated: Jun 1, 2010




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