Partnering In Business

“The greatest change in corporate culture – and the way business is being conducted – may be is the accelerated growth of  relationships based on partnership.” – Peter F. Drucker

Success in life and business does not come by toiling away alone. One way or other successes are the results of joint efforts of more than one person or entity though it may be possible that one of them reaps most of the rewards.

The importance of these joint efforts is more apparent in case of a business firm as it consists of a number of individuals. However, there are other types of joint-efforts that play significant roles in the success and growth of a business. Businesses could also form alliances with other businesses, which allow them to build capabilities and advantages that they could not have built alone.

Today forming such alliances has become critical for all businesses. To paraphrase Peter Drucker, today’s businesses grow through alliances – all kinds of alliances including joint ventures, customer partnerships etc.

However, forming successful partnership is easier said than done. Many companies have formed partnerships that have very little to show. Remember IBM and Apple strategic-alliance formed in early 1990! They hoped to take on Wintel world of Microsoft and Intel. It petered out after eight years with nothing to show for. On the other hand many cable companies including Cox Communications have successful partnership arrangements with a variety of small businesses that lay cable for it or cable-connect its customers or provide other types of customer services.

Forming successful partnership requires skills, patience and foresight. Partnerships have the potential to generate profits for you but they could also be very costly if not built properly or with right partner. So what are the important aspects of partnership? What are its critical success factors and failure factors?

Business Partnership Or Alliance

Few companies have everything that they need. You may have few things but lack others like money, customers, or product. The brighter side is this that no matter what you need, there is someone who has it and you can have it if you form a partnership or alliance with that someone.

In a business partnership two or more companies come together to exchange resources, share risks & opportunities and divide the rewards and profits of their joint enterprise. Partnerships could take a number of forms. It could be an “Arm’s Length Contracts” or it could be for a merger or acquisition. It could be open-ended – incomplete – agreements or it could be shared control.

Partnership could be formed between different types of entities. It could be a strong relationship with a customer or with a supplier. Partnerships could be even formed with competitors. It could be to develop products, to market products or to service customers.

There are a number of business collaborative arrangements that go by a variety of names – Strategic Alliances, Joint Ventures, Strategic Partnerships, Business Partners and Alliances, Partnering Agreements, Business Coalitions. The most common types of partnership agreements are:

  • Marketing Agreements
  • Distribution Agreement
  • Manufacturing or Development or Production Agreements
  • Outsourcing Agreements
  • Technology or Product License Agreements
  • R&D Agreements
  • Non-competition Agreements
  • Value Added Reseller or re-marketer

Why Form Partnerships?

Few decades back if you had asked top business managers why they pursue joint ventures or alliances the answer would have been to share risks. Businesses were forming partnerships to share costs of risky (and not so risky) endeavors. Today the same question does not elicit a straightforward answer.

Risk sharing is only one of the reasons for forming partnerships today though they do help companies hedge between competing technologies and reduce cost of operations. Other important reasons include gaining access to complementary resources, influencing industry standards and beating rivals to market.

Partnerships or alliances are a way to manage incompleteness. Businesses form partnerships to address challenges facing them or to overcome resource constraints. In most cases these fall into five categories: Capital, Technology & Expertise, Products, Production, and Marketing & Distribution.

Partnerships are the quickest way to grow. They allow partners to rapidly seize new opportunities, respond quickly to change, increase market share, gain access to new markets, shore up internal weaknesses and gain new skills or competencies. They speed up the growth of not only the startup but also of the well-established firms.

Startups are usually strapped for resources. They could form partnerships to overcome initial resource constraints. The partnerships and alliances could help them meet their needs for key resources such as customers, additional capital, distribution channels, facilities etc. Well-established firms form partnerships to improve or add to their capabilities. Through partnerships they could get more customers, new products, better products, new distribution channels, additional facilities etc.

How To Go About Forming A Business Partnership?

Few years back Dataquest did a survey of over 450 partnerships to find out the factors that influence the success or failure of a partnership. The five top rated responses for factors for success and failures were:

Success Factors Failure Factors
  1. Partner selection
  2. Senior Management Commitment
  3. Clear Understanding of Roles
  4. Partner Communication
  5. Clear Definition Of Objectives
  1. Overly Optimistic
  2. Poor Communications
  3. Lack of Shared Beliefs
  4. Slow Results or Payback
  5. Lack of Financial Commitment

There are two phases of partnership. Partnership Design and Partnership Management. Both play a significant part in the success of a partnership or alliance.

Design and due-diligence lay down the foundation for the partnership. Most partnerships fail because of poor design. The most important thing is that the business strategies should drive the partnership decisions.

The second important aspect is that emphasis should be placed on growing relationship and not on “doing the deals”. The third important aspect is to organize internally so as to support the partnership externally.

The partnership design activities include: selecting the partner, defining roles, defining objectives, developing plan of action, resource planning and milestone planning.

A great number of partnerships fail because of poor execution and management. The significant factors that fall in the partnership management domain include: Senior management commitment, communication, management of expectations, management of relationships & ties and day-to-day control & supervision.

Selecting A Partner

Partner selection has the most impact on the success of any partnership. There are four areas that companies should consider while looking for a partner. They are: Complementary Capabilities, conflicts of interest, compatible goals and strategic intent.

In order to acquire complementary capabilities through partnerships one should evaluate the potential partners on product offerings, target market segment, technology & expertise, capital commitment, distribution channels and customer network.

While resolving the conflicts of interest the potential partners should be evaluated on overlapping geographic markets, competing sources of production, technology conflicts, standards conflicts and distribution channel conflicts.

On the compatible goals dimensions the potential partner should be evaluated on the market access, product proliferation, local knowledge, technology, profitability and cash generation.

On the strategic intent dimension the potential partners should be evaluated on their values, beliefs, culture, competition and business strategies.

Why Partnership Fails

Just as it is important to know how to go about forming a partnership so is important to know why partnerships fail. There are four major reasons why partnerships fail

Partnering With Wrong Partner
  • Incompatible corporate cultures
  • Partnering with potential competitors
  • Incompatible products, markets, technology
  • Significant size differences
Wrong Partnership Structure
  • Ceding control of your core strategic value
  • Ceding control of core functions
  • Inequitable sharing of resources and profits
  • Lack of synergy
  • Ignoring foreclosure of other opportunities
  • Cutting too good a deal – not a win-win situation
Wrong Reasons To Form Partnership
  • Defensive partnering
  • To hide internal problems
  • Unnecessary reliance on partner
  • Trapping yourself in awkward positions – making commitments and
    creating expectation within your company and with partner
Failure to Plan and Keep Eye on the Ball
  • Increase uncertainties and unknowns
  • Negotiating from Ivory tower – in isolation
  • Misplaced haste
  • Ignoring details
  • Lack of an exit strategy – unable to protect interest

Partnerships are very critical for any business. They are equivalent of best friends for the business. Today, more than ever, they are playing vital role in the success. Fortune Magazine called the 1990s “the Decade of the Strategic Alliance.” And it is still continuing. A major reason for that is speed with which the technological and innovative changes are hitting most industries.

There is a direct relationship between the rate and scope of change within an industry and the amount of corporate partnering that occurs in that industry. Hence it is no coincidence that partnering is becoming the weapon of choice for today’s successful companies whether that is a startup or an established company.

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