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Eight Principles For Managing Strategic Alliances

A high percentage of external relationships end in failure. Learn the management principles these two industry executives have used to navigate the increasingly complex business relationships.
The last six months have been brutal. With competition increasing--technology companies have become more aggressive in their pursuit of customers and funding--many are relying more on external relationships to achieve their strategic objectives. Using partners to enhance market position can be rewarding, but it can just as easily waste valuable time, effort, and money, and end in a fruitless pursuit.

Executives must be creative, strategic, pragmatic, and aggressive in forming alliances. They must also remain cautious and pay attention to detail when framing and executing against the partnership objectives. Nearly two-thirds of all alliances experience severe problems and most problems are found within companies with less alliance experience. If you overlook basic management principles during the initial courtship, the alliance will suffer.

So, how can you structure the relationship? What management activities help ensure maximum benefit while minimizing risk? Why do some alliances succeed and others fail? How can enterprises learn from the mistakes of others to ensure their own success? We'll present a number of principles, developed from our practical experience that can help you navigate these increasingly complex business relationships.

Create an Alliance Strategy That Meets Organizational Objectives and Needs
First, understand your company's objectives in a potential relationship. What does your company need that a partnership might fulfill? Is a partnership the only way or the best way to meet these needs?

Understand your company's capabilities and what you can commit and contribute to a partner relationship. Honestly assess the strengths and weaknesses your company brings to the table, and then define action steps that can be easily measured. Then, make sure all levels of management support the initiative.

Above all, focus on bringing value to the customer. Place your emphasis on identifying future market or product differentiators. Focus your efforts on forward-thinking ideas that capitalize on core organizational strengths and objectives.

Establish and Follow Alliance Processes
Successful partnerships often create a formal alliance management process that incorporates some form of alliance integration, management, negotiation, and assessment. Self-assessment and partner assessment is critical, and needs to be built into the overall process. You'll learn many lessons along the way, and it's important to capture them, to improve future alliance management efforts.

Start by establishing a set of incentives and penalties tied to alliance activities. They'll help align your organizational thinking. Next, define required roles for both your employees as well as partner participants. Be sure to adequately describe the associated responsibilities, to ensure that all gaps are filled.

Then, develop a thorough business plan with adequate operational details required to support the alliance efforts at your company. When possible, create dedicated relationship management teams and make sure you put the right people in these roles. Look for employees with strategic vision and good operational and interpersonal traits. Make sure they can accept change, are persuasive, and adapt quickly to new situations.

"Partnering organizations succeed when they establish clear expectations and well-defined measurement processes," says Rauline Ochs, vice president of Worldwide Partners at BEA Systems. "By addressing joint expectations early and often, partners can minimize any surprises down the road that may adversely undermine the relationship. The relationship must be centered on understanding and meeting the needs of both organizations."

Finally, make sure this investment in resources is adequately funded. These investments take time. Pulling the plug on alliance programs midstream will not only damage future external relationships, but will send the wrong message to your employees.

Perform Due Diligence
Choosing the wrong partner can cause future problems when something goes wrong. Inexperienced firms often fail to pay attention to detailed partner analysis processes, instead focusing more on short-term objectives or opportunistic partner selection. Take the time to understand your partner, and recognize that a proper evaluation is not a one-hour meeting; it's an ongoing analytical process.

Start with identifying the potential partner's strategic behaviors and objectives; then bridge the gap to your own behaviors and objectives. Confirm compatible operational processes between organizations, and spend the time to really understand your partner's culture. Uncover and evaluate your partner's successes and failures with other relationships. Recognize your partner's objectives, incentives, motivations, capabilities, and level of commitment to the relationship.

"Partner due diligence is absolutely essential with the pace of the technology industry today," says Julius Lukacs, Group Manager, e-Marketplace Platform Providers for Sun Microsystems. "To remain competitive, you must strive to balance due diligence with not missing market opportunities. Significant advantage can be gained if your competitors notice only slight hesitations in your strategy execution." Sun maintains dozens of relationships with consulting firms and independent software vendors, including a newly signed alliance with supply-chain market leader, i2 Technologies.

Go beyond the press releases and hype found in marketing materials and Web sites. Ask around. Talk to your partner's partners and customers. Consider working on pilot projects or "teaming agreements" initially, to test the relationship's viability. You might want to hire a former employee of your potential partner.

Be skeptical. Be prudent. Above all, despite internal or external pressures, avoid rushing into any relationship without the necessary due diligence.

Create Flexible Teaming Agreements
Bringing two organizations together is a complicated process with many components. Take the time to create a detailed, explicit understanding of mutual objectives, expectations, and measurement processes. This will reduce misunderstandings that will inevitably occur along the way.

Define and document:

  • Resources that each partner will contribute to the alliance. Examples may include particular technologies, clients, key employees, money, or sales and marketing resources
  • The relationship's goals, associated measurement processes, and the frequency with which you will use those measurements to evaluate progress
  • Contingency plans and exit strategies for each party.

According to Lorna Bender, VP of global alliances at Bowstreet, "The overriding element of a strong partnership lies in mutual respect for each companies' organization. This includes strong executive commitment to one another, trust in each other's capabilities, and the willingness to work together closely on multiple fronts, including: co-selling activities, joint marketing activities, and development of joint solutions." As Bender points out, a foundation of mutual respect and understanding of each other's goals is critical.

Try to remain flexible by developing terms and conditions that anticipate change. Pay attention to intellectual issues up front, particularly when joint products are being developed.

Finally, address marketing and promotional processes as part of the overall plan and document how they will be funded and measured.

Create Measurement Processes
To adequately measure partnership success, you need a measurement framework to generate a realistic progress report. The measurement criteria can be whatever your companies deem most important, but you must have a process in place that measures the relationship.

Create performance metrics and communication processes that can be used to benchmark the alliance. Set specific, measurable goals--both short term and long term--based on multiple criteria, such as new customers, increased market share, new products, faster time to market, increased quality, or increased customer satisfaction.

Then, create a baseline for the chosen metrics to track progress. Don't focus exclusively on revenue or profitability, as they are more of a long-term benchmark. Revenue and profits are important, but you should build on other areas, such as new product development and new customers. The revenue will follow.

Make sure you obtain internal commitments for the metrics' review processes and their frequency. Monitor the relationship at all levels within the company: executive, sales, management, and engineering. Where possible, spread accountability between internal divisions. The entire company will be impacted by the relationship, so involve them in the process.

"It all begins with a clear understanding of exactly what you can do for your partner, and what your partner can do for you," says Robert Timpson, general manager of developer relations for IBM. "Agreeing on precise objectives and milestones, on both sides, with names and dates assigned, is key to avoiding gaps between expectations and reality." IBM maintains over 55 relationships with leading independent software vendors (including Siebel, SAP, i2, Ariba, PeopleSoft, Vignette, and J.D. Edwards) that collectively generate over $1 billion annually for IBM and its partners.

Finally, establish an "early warning" network to detect changes that may signal an unexpected end to the relationship. Budget cutbacks, layoffs, unusually high turnover, delayed or cancelled projects, and lost customers are warning signs to heed.

Drive Toward Joint Profitability
Ultimately, a main goal of any partnership arrangement should be to generate profitable incremental business for both parties. This can only happen if you plan the outcome and then work diligently to execute the plan, making adjustments along the way when necessary.

Start by identifying the appropriate structure to support economic benefit to all parties, based on the partnership's objectives. A joint venture covering specific projects for a set time frame may be better suited for product development, while a longer term, more general co-mingling of resources may help address a new market or region with an existing service offering.

Next, follow your defined partnership processes and focus on incremental success. Measure progress periodically and revise plans appropriately. And, while public relations are an important element to promoting your alliance successes, make sure they are preceded with solid sales performance and successes.

Finally, make sure behaviors are properly motivated and institute compensation incentives aligned to drive partnership sales and other activities.

Create a Culture of Alliance Knowledge Sharing
Successful companies define processes to disseminate best-practice knowledge and experience internally. Popular approaches include electronic knowledge-management systems, educational seminars, and periodic networking functions with alliance teams.

Whatever the method, these approaches are not "either-or" events. Successful companies recognize the importance of knowledge sharing and understand that learning doesn't always happen naturally. Your goal should be to make alliances part of the culture of the company. Without training and knowledge-sharing processes, managers will not understand or internalize alliance processes, increasing the chance of failure.

Never underestimate the importance of relationship building at all levels in the company. Explicitly define these relationship-building activities into your business plan but be cognizant of intellectual property and proprietary information. Document the lessons learned during the alliance building process and develop a method for disseminating this information to all levels in the company. Many good ideas come from employees in the field; establish a process to capture and distribute these ideas.

Encourage sales and development teams to work together with customers. Nothing beats the synergy formed when relationships are built at a "grassroots level."

Finally, create partnership training relevant to your particular situation or company. Generic training will be of little value to your employees. Training content must be relevant to the participating companies, specific industries, or target markets.

Understand When to Terminate the Relationship
At some point, your organization may decide it has achieved the alliance objectives and needs to end the relationship. While that is a natural consequence of partnerships, quite often alliance managers and executives fail to recognize when to do so.

Consider your exit strategies before you enter the partnership. Establish a variety of exit options that will not destroy the relationship. Treat the exit as a normal business process, and manage it appropriately. Treat your partner with respect, as you never know what the future holds, but don't forget the customer impact of the relationship ending.

Be aware of the internal and external impact of a relationship change. Develop a plan to communicate the impact to your organization, customers, investors, and other stakeholders. Above all, act swiftly to terminate the partnership if it's deteriorating.

Many companies waste considerable time and resources attempting to resuscitate an unrecoverable relationship. Treat the exit as a positive event for all parties. Focus on the objectives you met together, on developing a new strategy for your company, or other positive aspects of the change.

Based on our experience, we strongly suggest that companies adopt a disciplined approach to managing strategic alliances. Too many times, companies anxious to keep up with competitors will jump into relationships with little advanced planning or process definition. Often, these "partnerships" become a series of ad hoc actions with no specific goal, growing more and more fragmented until the relationship ends in ruin with both sides wondering what went wrong. Successful alliances can help managers bridge critical organizational gaps and increase their company's chances of success if they're executed correctly. With the proper support, focus, process, measurement techniques, and a mutual understanding of goals and objectives, alliances can enhance a company's ability to become a dominant player in its market, which benefits the partners, customers, and shareholders.

Mark Herrmann can be reached via E-mail at [email protected]. Matthew Estes can be reached at [email protected].

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