Putting “Strategy” into your Strategic AlliancesBy Nina Kaufman, Esq.
“Colin” desperately wanted to expand his computer consulting business. But rushing headlong into a deal with Themis Consulting nearly wiped him out. Themis, a larger company, performed similar services to Colin. Colin had clients and prospects in Boston that Themis coveted. So the two agreed to “merge”: Colin moved to Boston (on his own dime) to develop that market, which he would share with Themis; Themis would provide the presence and the “back end” help for Colin’s clientele in New York. Six months later: the Boston venture proved unprofitable and Themis’s impersonal service alienated Colin’s clients. Faced with a soured relationship and rebuilding his business, Colin whined, “Everyone else brags about their strategic alliances. Where did mine go wrong?”
Entrepreneurs are flocking to the “strategic alliance” bandwagon. But few comprehend what a strategic alliance really is, much less how to navigate their way through one successfully. A successful strategic alliance must have a sound foundation underpinning each of its four key considerations: form, function, finance, and fights.
The different forms of business relationships — from simple referral relationship to actual merger – vary in their levels of interdependence and obligation to their partners. It is crucial to know (which Colin did not) where you fit along the spectrum.
In a referral relationship, neither side has any ongoing business obligation to the other, nor do the companies become interdependent. Picture an accountant and a lawyer: they are in different industries, and the clients of each can benefit from the services the other provides. A referral relationship is simply the open-ended desire to get and give client leads.
A strategic alliance brings the two sides closer contractually, like a preferred trading partner arrangement. Consider a marketing strategy firm that wants to attract a Fortune 1000 clientele. A strategic alliance with a graphic design company could give the strategist access to greater capabilities – by developing the print materials for the product branding campaign it recommends, for example – than it would ordinarily have “in-house.” Like a referral relationship, the companies remain financially and structurally independent. However, they will use the other on a regular basis (sometimes exclusively) for particular kinds of projects or work.
Along the continuum is the joint venture, where two companies will form a single, separate entity for a specific purpose or discrete project. A property developer may join with a construction company to develop a particular parcel of real estate. Or, look at Walt Disney Pictures and Pixar Animation Studios, which combined forces to produce “The Incredibles” in 2004. Joint venturers may also have an equity interest in the project, rather than simply earning a fee (as in a strategic alliance).
At the end of the spectrum is a merger, where two separate companies combine all their resources to result in one company. Unlike Colin’s “merger” where his company remained somewhat intact, unraveling a merger involves selling off the assets of the whole enterprise. Rather, Colin and Themis’s relationship was more like a joint venture or strategic alliance, depending on the extent to which they commingled their finances.
Once the parties agree on the strategic alliance as the best form for reaching their goals, they need to clarify their respective functions. Who will do what? What are the deadlines? How will each be accountable to the other if it does not perform as expected? To what extent are they obligated to work together? Is this relationship exclusive? These questions are essential to understanding whether the alliance is really in your best interest. Colin was vague about the expectations in opening the Boston office; Themis misunderstood the levels of service that Colin’s customers expected. Also, as Colin and Themis were, to some extent, direct competitors, an alliance relationship of any kind may not have served them well.
Especially with strategic alliances, it’s essential to “follow the money.” Not only does the relationship need to make financial sense, but also the financial flow needs to be tracked. First, the parties need to plan out the relationship so that it will be profitable. Many entrepreneurs don’t explore this issue. They may under price themselves to win over the strategic alliance partner (or the ultimate business), and as a result, become contractually hitched to a sinkhole. Second, the parties should document how and when payments will be made from the client to the alliance and from the alliance to its partners. They should also establish what costs and expenses each would bear either jointly or separately. Colin bore the brunt of the costs from the Boston office, and did not factor this into his profit margin . . . which burned a huge hole in his pocket (book).
A strategic alliance requires strategies both for resolving disputes within the alliance relationship and for exiting the alliance itself. Eternal optimists, entrepreneurs tend to focus on how things will work instead of “what if they don’t.” “Fights,” disagreements, differences of opinion range from the more mundane (“how do we handle the client pitch?”) to the more profound (“is this really a workable relationship?”). For example, how will the alliance partners handle work in progress – and the receipt of post-breakup payments — if one of them leaves? How will they protect intellectual property, trade secrets, client lists, or other confidential information that might have been created or exposed during the relationship? Should they permit the solicitation of the other’s clients? And if disagreements become intractable, how (court or ADR?) and where (geographically) will they be resolved? Thinking this through in advance could have prevented the souring of Colin’s relationship with Themis.
Strategic alliances are all the rage. But like all other business relationships, and as Colin learned the hard way, they require careful forethought to make sure they are the right fit. And the input of accounting and legal advisors won’t hurt either. So before you become bamboozled by the jargon, make sure that there is a viable strategy behind every strategic alliance you create.