BUSINESS DEVELOPMENT AND GROWTH
Building strategic business partnerships
Roughly half of all partnership efforts fail — a scary prospect. Despite this, competitors will not stand by, and neither should you.
The term strategic partnership means different things to different people. We’ll define a strategic partnership as a formal relationship between two or more organizations that has three features:
- It’s intended to create value for the organizations in some way, for example, by raising revenues, lowering costs, or generating new ideas and innovations.
- Work done together is managed by sides to varying degrees. It’s not just one party that rules.
- The risks and rewards of the joint venture are shared in a strategic partnership, not necessarily equally, but sides get something out of it.
For example, a few years ago, IBM and Apple tied the knot with an alliance and started a strategic partnership to combine the corporate services of IBM into Apple’s mobile products and platforms, enabling IBM’s large clients to manage field operations while analyzing data in real-time. This arrangement created value for both IBM and Apple. The companies coordinated their R&D and sales and they each got paid through sales of new products and services.
Partnerships may also involve investments that one organization makes in another or that organizations make together such as alliance agreements, joint R&D agreements, co-marketing agreements, minority investments, or equity joint ventures. Mergers and acquisitions are situations whereby one party rules and owns the full risks and rewards of the deal.
Different types of deals qualify as strategic partnerships, but they all share one common goal: finding ways to grow or develop businesses. Partnerships act as growth levers for companies, and despite complexities, all deals need to be managed smartly. In other words, if it’s worth tying the knot, it’s worth working together to make it pay off.
The three equations of a business combination
As mentioned, strategic partnerships can boost businesses, but they could also be costly if they fail. A majority of business partnerships fail due to a variety of reasons. To beat these odds, a business partnership must follow three fundamental laws of a business combination.
- In the value equation, or 1 + 1 = 3, one plus should equal three, meaning that sides must create more value together than they would separately. There are many ways to create joint value. If sides share resources, it could lead to lower costs or higher sales. If sides lean on what each party does best, they can create new products and services.
A great example of this is the partnership between Disney and Pixar. Today, Disney owns Pixar, but that relationship started as a classic strategic partnership. In the 1990s, Pixar had a top team in computer animation but no knowledge of the movie industry, distribution channels, or customer base, while Disney had the opposite problem, no computer expertise. When the two companies put their heads together, the partnership yielded Toy Story.
- In the management equation, or 1 + 1 = 1, one plus one equals one, meaning that partners must manage their relationships as if they were one single and united entity.
Disney and Pixar followed this law too. Even when they were only partners before their merger, they put their teams together to learn from each other. They set up committees and meetings to make decisions together. Disney had the upper hand in some decisions and Pixar in others, but they made it work.
- In the fair value sharing equation, 1 + 1 = 1.4 + 1.6 / 1.3 + 1.7, one plus one equals 1.4 plus 1.6, or 1.3 plus 1.7, meaning that partners have to divvy up the value created together so that each gets a ‘fair share’. What matters is that partners each get enough of a return to keep working together. If any partner feels short-handed, then that partner may walk away or even sabotage the project.
Disney and Pixar struggled with this law. In the beginning, Disney collected a larger share of the winnings. But as Pixar’s brand and capabilities grew, it was able to renegotiate a deal to get more for itself. Eventually, the sides decided to merge rather than keep haggling over shares.
The soul of a successful partnership: flexibility
The problem with partnerships is that after the sides start working together, unforeseen things will happen. New technologies or competitors may come onto the scene while business goals may change over time. In usual business, when such unforeseen things happen, sides simply adjust their plans; but in a partnership, it takes two to change course. Sides can’t control their partner’s decisions and often, the relationship will become difficult to manage.
For example, in the case of Oracle and Hewlett-Packard, Oracle had been providing big data software that ran on Hewlett-Packard’s computers for quite some time. But then, when Oracle started making computers, Hewlett Packard started making software, making things awry. Eventually, Oracle announced that it would stop supporting Hewlett Packard’s newest computers, and before long, they ended up in court in a multi-billion dollar lawsuit that ended their partnership.
In this lawsuit, Oracle claimed that there was no contract to keep it from doing what it did, and Hewlett Packard claimed that there were, and while there were many contacts between the two giants, they had gaps and were incomplete in technical terms. They didn’t cover everything that might happen in the future, and let’s be honest, in practice, it’s difficult to predict and cover the future in a contract, in detail. If a product or industry is changing fast, certain developments will eventually surprise sides and there will always be gaps. Because of this, the strength of a partnership will depend on how sides deal with the unexpected news that will surely arise.
Good partnerships have built-in systems for sharing information, talking about possible actions, and deciding what to do about unexpected events. Therefore, partnerships need to be flexible, just like a marriage. No one knows in advance what will befall the couple, but they have agreed to work together to face the future. In a business partnership, this means agreeing in advance on how to handle new decisions and dealing with conflicts before they get out of hand. This is the soul of every successful partnership.
Creating a successful business partnership
Steps toward a successful partnership
Partnerships often promise growth and profits but at a cost. To increase the odds of success, we have the Three Laws of Business Combination: partnerships must create new value, sides must work together well, and they must share returns fairly. These abstract and high-level laws can be broken down into 5 practical steps to manage the life cycle of a partnership.
- Determine the need, and clarify what sides want to achieve through the partnership, aiming to identify where the partnership can create new value. Why do sides need a partner in the first place? What are their goals and how does the partnership fit their business strategies?
- Choose partners wisely, setting up the right conditions for the collaboration. What do sides offer? Can sides agree on how to work together?
- Set the terms of the deal. These are the nuts and bolts of the deal shaping the manner sides will work together in the future.
- Manage the partnership over its whole life cycle. This is something that will need to be taken care of across the duration of the partnership.
- Split dividends. This means keeping an eye on the benefits that each organization receives from the partnership.
1. Determine the need: Know why you may need a partner
Clarify why sides need a partner in the first place. Knowing this will set the stage for all other decisions. Some reasons for entering a partnership include:
- Technology swap: another company has access to markets or technologies that the other doesn’t have and that one needs in their business. Starbucks and McDonald’s have partners in foreign markets for this very reason. The local partner has connections and skills in managing local operations. In return, American companies provide branding and technology. This also applies to companies with valuable patents.
- Supply chain partnership: this happens when one business depends critically on the products of another company or supplies critical inputs to another company. In a way, each side specializes in a different part of the industry’s value chain. Tesla’s partnership with Panasonic to build the Gigafactory is an example. Tesla needs electric batteries and Panasonic is good at making them.
- Horizontal partnerships: one may seek a partner to share resources or extend market reach. In this case, they would be tying up with companies that do the same thing, perhaps in a different market segment. Great airline alliances, like Star, OneWorld, and SkyTeam are such examples. In these partnerships, many airlines, each from a different nation, coordinate their schedules to serve global customers better.
The number of partners also matters. In some cases, depending on the complexity of the business, a company may need a whole ecosystem of partners. There are two reasons why a company may need many partners:
- The business has several parts. Each of these might benefit from a different partnership. They may need supplies from different sources or may want to sell into different markets. That is why Star Alliance has almost 30 member airlines each in a different part of the world. Multiple partners are also common on the suppliers’ side of the car manufacturing industry. These manufacturers have partnerships with suppliers for major components, engines, interior furnishings, electronics, and so on.
- To avoid depending too much on one partner. Also known as second sourcing. It gives the buyer more than one source of supply. This strategy can protect a business from supply shortages and can help it get better prices from competing suppliers. However, sometimes sides may insist on an exclusive relationship, buying commitment at the price of creating friction due to the risks of having a small business network.
2. Choosing partners
Before jumping into negotiations, sides should make a list of several partners and assess the pros and cons of each, evaluating alternatives and answering the following questions about all of the potential partners being considered:
- 1+ 1 =3? Or how strongly do one’s capabilities complement those of other potential partners? You can evaluate this question by looking at the technologies, the markets, and the production methods of each partner. Will they add value to what you do? Can you add value to what they do?
- 1+ 1 = 1? Or how well do you think sides can work together? Can they act as one? Or are they likely to have conflicts that will keep them from collaborating? Do the goals of the partners fit each other?
- 1 + 1 = 1.3 + 1.7? Or how will the sides divide the pie? It’s important to face upfront that each must earn enough to make the deal worth it.
In 1999, Renault and Nissan struck a successful strategic partnership. Renault was strong in Europe and Nissan was strong in Japan and North America, and they both needed to expand their scale of production so they could add value to each other. They formed a 50–50 joint venture and each parent company also invested in the other. This structure led to tight collaboration and good returns for each side until today overcoming cultural barriers due to high expected returns.
Good personal relations can indeed help partners work together better but don’t depend on this kind of chemistry to decide and manage a major deal. Granted, every partnership requires sensitive personal effort by sides, but to be successful, sides need to put in serious analytical, legal, and management work — use and consult external sources, dive deep into each other’s books, and evaluate the partner’s true resources and capabilities. Look at the result of Donald Trump and Kim Jong Un’s negotiations; despite flattery, no progress.
3. Setting terms
The terms of a partnership agreement are the nuts and bolts of every partnership. This is where the sides will agree on who will do what, how decisions will be made, and what each side will earn from the joint activities. A good partnership agreement should consider three things:
- The responsibility structure: Who will do what in the deal? For example, what is being bought from each other? Or What markets are addressed together? It’s also just as important to agree on what sides will not do together. Such questions set the boundaries of the deal. The boundaries help sides stay out of each other’s way
- The decision governance structure: How joint decisions will be made? Considering that every partnership agreement will in some sense be incomplete, and as a partnership continues, sides will have to make new decisions about questions that they didn’t originally foresee. How will they talk about these new decisions? Which executives or committees will decide for them? Who will have a say in these decisions, or who might have the final say? Sides will need to agree on these rules but also be flexible.
- The compensation structure: how does each get paid for the joint activities? Usually, there are several compensation schemes. For example, in an equity joint venture, each party gets a share of the profits, or in a merger, one side will get compensated with cash, or in licensing fees or royalties deals, the sides share revenues. Whatever the initial formula, it probably changes in time as one partner grows more than the other, or as the market develops differently than predicted.
4. Partnership management
Signing a deal is only the beginning and now effort needs to be invested into managing the partnership, for the duration of its life cycle.
- Nurture the relationship. This means helping key individuals work together and trust each other, coordinating the processes of the organizations, and helping translate or bridge the gaps. Sides need to watch out for the relationship and the health of the partnership.
- Facilitate joint decisions. Partnership decisions are the heart and soul of collaboration. The contract never lays out everything that needs to happen. So the task here is to fill the gaps and manage new questions that arise over the life cycle of the deal. A good partnership will start life with some rules in place for how they make joint decisions and gradually update and evolve.
- Adjust the deal to changing times. To survive, a good partnership will change what it does to defend against new challenges. And to thrive, a great partnership will change to go after new opportunities. The case of Fuji Xerox shows what I mean. This joint venture started as the Japanese sales arm of Xerox back in the 1960s. But then Fuji Xerox developed strong technical skills and it drew new ideas from its ecosystem in Japan. As a result, Fuji Xerox began to supply Xerox with technology and products and became a more equal partner to the American company. Together, their partners reviewed new opportunities and adjusted their deals to win new business.
By doing these things, partners will keep collaborations healthy and productive, and often, it’s the role of a partnership manager or alliance manager, to help do these things. A partnership manager’s job is critical to the success of the partnership deal. A partnership manager carries some core competencies, including:
- They need to communicate well with a partner as well as internally in their own company.
- They act as advocates for their side but also understand the point of view of the partner.
- They’re good at soothing tensions
- They have exceptional problem-solving competencies
- They need to know the business or the technology involved, inside out
- They have a track record that coworkers and sides respect
- Their core values fit the cultural norms and appetites of the sides
5. Earning the share
For the duration of the partnership, sides must keep an eye on the benefits that their organization receives from the partnership. For the most part, they’ll earn shares by following up on the terms of the partnership agreement. In any situation, they’ll need to keep track of what is owed and make sure they get what they signed up for.
Sometimes, the ultimate benefit of a partnership does not come in the form of payment at all. For example, if sides strike a deal to learn a new technology or develop a brand, benefits will only come from how well they use the opportunities offered by the deal. In this situation, they need to be ready to take full advantage of the opportunities ahead.
In every team sport, the players work together to win. They can’t win on their own and each player has a role, unique strengths, and a position on the field, and each individual's contribution paves the way to success. A strategic partnership between the players, the managers, and the team owners.
In professional sports, these partners work hard at their jobs because they get paid well however each player's pay revolves around their bargaining power. It may seem that when one player earns a lot, others will earn less, but that’s not so because together a team of good players can win championships and bring more dollars for the team, as a whole, raising the income of every individual and stakeholder. What matters in this bargaining process is how much each player can contribute to the team’s winnings.
A partnership is similar; sides will get paid what they deserve according to what they contribute to the deal. If one side doesn’t contribute much, they won’t be able to claim a lot of value. For example, Intel and Microsoft are the heart of the Windows platform, so they capture the most value. The makers of the hardware platform itself, such as Dell or Lenovo are utility players in this team, so they struggle to make money on personal computers.
To succeed in partnerships, sides need to be on a winning team. One that is composed of good players and that is managed well. And if one side can become the most valuable player of the team, then they will demand more share of the profits. That’s just the reality of life on this planet!
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