Partnership and alliance formation in business

¶ … Partnership or Alliance

At a recent conference, Acxiom Corporation Company Leader Charles D. Morgan said that constantly changing technology and the growing global landscape means successful companies must select the right partners and alliances to help achieve a true customer-centric enterprise.

In today's global marketplace, partnerships are becoming a major strategic move for many businesses. This paper discusses the elements of an effective partnership or business alliance in an effort to lay out the best business practices for forming one.

The pace of innovation today is too fast for any one company (especially technology company) to be all things to all customers. Last year alone, for example, the U.S. patent office awarded more than 16,000 patents to the top ten global high-tech companies for their innovations. Even a brief look at the industry's history reveals a graveyard of once successful companies that failed to adapt fast enough to industry changes. Despite its long record of success, IBM suffered a near-death experience in the early 90s. New leadership and a new strategy were instrumental in engineering IBM's turnaround, and so was the power of its alliances with more than 90,000 business partners.

Partnerships and Alliances

The term "partnership" is best defined as "collaborative activities among interested parties based on a mutual recognition of respective strengths and weaknesses for agreed-upon objectives developed through effective and timely communication." A "partnership" begins when groups with common objectives agree to undertake activities that build on one another's strengths, and help overcome weaknesses, for the purposes of implementing predetermined objectives that have been agreed upon by the groups involved.

Overcoming weaknesses may involve a sharing of expertise, knowledge or experience by one or more parties. The objectives are usually developed through a process of communication that is acceptable to all parties involved.

A business alliance is the highest form of contracting with another company. The alliance typically lasts for a significant period of time, usually from two to five years, with options for renewal. The alliance is a "joining together" of the two, in a business sense, where both companies work together to bring mutual gains and benefits to both organizations.

For successful alliances, it is very important that both parties involved agree and commit to a set of common elements of the partnership.

Key Elements of a Successful Partnership Design

Some of the key elements of successful partnerships and alliances include:

dedicated team -- Many partnerships are formed among organizations, but succeed because of individuals.

Strong leadership -- A successful partnership usually has a strong leader who orchestrates the partnership projects and goals with vision, energy, and enthusiasm.

Employee involvement -- The people directly affected by a partnership goal are usually the ones most willing and able to work for it.

A strong action plan -- Common agendas, joint decision-making, and mutual benefit constitute a partnership; money facilitates the projects.

Excellent support -- Senior-level support enables a partnership to operate easily within the rest of the organization and displays the organizations commitment to other partners and to the public.

Shared goals and responsibilities -- Groups must be willing to share responsibility and should enter partnerships with the intention of being an active part of the process.

Reasons for Failure

In many industries, alliances and partnerships suffer a high mortality rate for many reasons. These types of deals are often laid low by irreconcilable differences, which may not become apparent until the deal has been sealed. However, through careful planning, e-business partners can detect possible problems early in the game.

According to Tom Yamada, Business Development Director for Office.com, a major business-to-business portal for small business, a partnership should not be entered into without solid research and evaluation. Rather, the relationship should be formalized with rights and responsibilities clearly detailed so that each participant will understand its role in the partnership and act on it appropriately.

Companies doing business on the Internet regularly form partnerships and alliances to extend the reach of their services, to complement their services, or to add to their business model," Yamada says. "When these partnerships fail it's usually because expectations are not properly established from the start, there's a lack of communications and regular milestone meetings, or one partner changes its focus or goes out of business.

Amicable divorce is also fairly common, with both parties mutually agreeing to terminate when the partnership fails to achieve the desired results."

Responsibilities and goals must be worked out before long the project is launched, Yamada adds. There should also be guidelines established for any and all contingencies related to the partnership. What will be done, for example, if one party opts out of the relationship, fails to deliver on its responsibilities, or does so in an unacceptable manner? What procedures will be followed once the relationship is terminated?

Recently, many Internet alliances have been challenged by a downswing in the economy.

According to Whit Andrews, Research Director for Gartner, Inc., a business technology and analysis consulting firm home-based in Stamford Connecticut, e-commerce projects are in some ways more difficult to manage than traditional business partnerships.

E-business is no easier, and perhaps even more troublesome than most corporate initiatives," Andrews says. "An e-business may be no more adapt at partnerships than any other type of enterprise, but it will have to cope with problems endemic to electronic commerce. One frequent area of trouble is volatility. This was one the principal causes behind the.com mass-extinction on Wall Street. When you had two e-businesses in partnership your volatility was squared. When you had three it was cubed."

For instance, if a company starts a website, and then later decides to evaluate its effectiveness, the company may find that it never really agreed on a working definition of "effective." Did the term refer to sales, traffic, qualified leads, or international lesson learning? Meanwhile a company may have joined another in an e-commerce partnership but since it never established distinct goals, the purpose of the alliance, and each participant's role in it, may be unclear. One party may be focused solely on sales, while the other is focused on accumulating sales leads. Thus, the two may wind up working at cross-purposes.

Recently we saw this happen with a company called Pandefic," says Andrews. "A software vendor, Pandefic entered into an arrangement with retailers to aid them in selling their products online. About a year into Pandefic's corporate history, the company realized it was giving software to retailers who also had real world sales. People would shop the website, then come into the store and buy the products the old fashioned way. This was great for the retailer but bad for Pandefic, who was unable to capture the value it had provided the retailer. Because the two parties had divergent goals, the partnership was problematic, and eventually dissolved."

Business alliances come in two types. The first is short-term and opportunistic; the second long-term and strategic. The main reason for the failure of most strategic partnerships is because a market change turns a partner into a competitor. The longer this type of relationship lasts the more likely it is to break up because the marketplace is always changing.

Short-term partnerships often form between technology-focused or fast-paced entrepreneurially-oriented companies. In many cases, cultural differences make it difficult for the two teams to make peace with the arrangement, or cope with the changes it brings to their daily routines.

Cultural differences are only one of the things that kill short-term alliances," says Burns. "Accountability is another. Who owns the success of the alliance, and its failure, should it come to that? If accountability is not driven through the organization, and very clear charters are not set, then the alliance stands a good chance of falling apart. One way around such problems is to set the partnership up as though it were another division of the company. Review the partnership on a regular basis to determine whether it's doing what it was designed to do. Set up accountability on both sides, so that people will wake up each morning cognizant of the fact that their livelihood is tied to the success of the alliance. It'll all be worth it in the long run."

Creating a Successful Design successful partnership between two groups is one in which the expectations of each participant are met. Expectation setting starts with a clear definition of objectives, roles and responsibilities. With a clear and concise definition, expectations are more likely to be attained and the partnership has a greater chance of success.

The objectives of a partnership generally relate to the achievement of some strategic or operational improvement by a company and some contribution to or association with that improvement. These improvements relate to the development or implementation of some new or relatively untested solution and, as such, involve a potential reward.

In an effective partnership, risks are shared by the involvement of one or more of the participants. How this risk sharing will be achieved is a crucial element of the partnership agreement.

A statement of the roles and responsibilities of the partners should ideally outline the obligations of each participant to the partnership. It should include the anticipated level of support that may be defined in terms of effort, funding, knowledge transfer and risk, and benefit sharing.

A successful partnership is planned -- the participants establish a fundamental understanding of how they will work together, proceed to live up to their obligations consistent with the understanding, and share the incremental benefits that result from the their collective effort.

According to Chao, King and Everson, one company reaping the riches of superior external development is Cisco Systems, where deal making is central to innovation and growth.

According to Carless: "A strategic alliance is a relationship that has the potential to contribute significantly and in multiple ways to the bottom lines of participating companies, as well as their customers. Such partnerships are a cornerstone of Cisco System's growth strategy. More than 10% of the company's revenues in FY02 (more than $2 billion) derive from Cisco's strategic alliance relationships."

Cisco completed 45 deals between 1993 and 1999 and has plans for more than 20 deals in 2000. As a core element of its deal-making machine, the company developed and rigorously maintains a map of technologies and leading players. Similar to the framework and process described in the accompanying article, Cisco's map specifies where the next deals should be made and provides the foundation for world-class execution. The results have been impressive: Cisco reached $100 billion in market capitalization in only 12 years -- the fastest ever.

According to Cisco, the most important aspect of designing a partnership plan is choosing the best partner. "We look at how Cisco and a potential partner would fit together," says Steve Steinhilber, Cisco's vice president of Strategic Alliances. "First, both companies must be able to enjoy short-term and long-term wins from the relationship. That's the potential of the alliance. But executive and operating resource commitment is the litmus test for whether or not the partnership will succeed. Without these, partnerships often fall apart."Cisco's ability to innovate by pulling the M&A and alliance lever may serve as a useful model for executives seeking to jump-start growth.

Elements of successful partnership include:

- Trust, but verify.

- Perform a stakeholder analysis, involve consumers, understand that community buy-in is critical.

- Respect cultural differences.

- Communicate not only within the partnership, but with all stakeholders.

- Negotiate a contractual agreement that includes arbitration mechanisms.

- Invest in training - capacity building and skill transfer are key.

- Engage in periodic reviews - problem solving requires flexibility as the environment changes.

Relationships are the glue that holds businesses together. Every organization depends on the quality of relationships with its staff, customers, business partners and others. Companies have worked with others to create and supply their products and services but the past decade has seen a trend to expand partnerships. This trend is expected to continue in the future, making partnerships an important part of the strategy of many companies.

Effective partnerships are strategic in nature - they are expected to deliver a specific need of importance to both companies. Therefore, it is important that measurement tracks the issue of importance to the strategic goals of the partnership. The main purpose of measurement is to improve performance. Even the best measurement systems are flawed if they are not directly linked to processes for continuous improvement. While management involvement is important, the real engine of continuous improvement is the people responsible for the work. If people are to be involved in continuous improvement, they must have access to the correct information.