What are the benefits of strategic alliances in tough times?

* Immediate impact for short term, low investment projects to leverage resources of all partners (e.g. joint R&D, distribution, and licensing)
* Expansion of your human resources without increasing overhead by using the installed base, extended workforce, or globally distributed team of another company
* Suppliers and customers leveraging your products and services: cut your costs by removing duplication of service capabilities – let your supplier take on more turnkey activities so you can
keep core competencies in house (EX.: P&G)

You’ll learn how to demonstrate to senior management how mission critical alliances are as part of your company’s long and short term strategy, for top line growth and bottom line cost cutting, as well as how alliances fit into Enterprise Risk Management (ERM), a board level issue.

Strategic Alliances covers the new trend of multi-party innovation alliances for joint R&D and go-to-market product development.

For More Information Visit http://www.irc.caltech.edu/p-105-strategic-alliances.aspx

1. Intelligent Business Alliances, Random House Times Books, 1996 by Larraine Segil – Chapter Two dedicated to Compatibility Analyses and Methodologies.

Companies that manage complex supply relationships as though they were partnerships reap mutual benefits instead of harmful competition for both parties. Here are the fundamentals of how you can get started, too.

Managing supplier relationships effectively will generate real value for purchasers and suppliers alike. The idea is not that the parties like each other, but rather that well managed relationships increase benefit to all concerned. In its recent study “Negotiating and Managing Key Supplier Relationships,” the consulting firm Vantage Partners found that when supply relationships are managed in a proactive, systematic way, using repeatable processes and tools, all parties can derive quantitative and qualitative benefits with increased mutual gain. This is in sharp contrast to the normal buyer/supplier relationship, which is based on price negotiations and pressure to reduce costs — an approach that often short-changes value when suppliers fight hard to get the contract and then perform with low quality or delays, at times even pushing one of the parties into financial hardship.

Many organizations now have groups that are charged with the job of corporate sourcing and procurement. Their mandate is to create additional value and drive competitive advantage by ensuring effective management of the company’s supplier relationships. Does this mean that the role of the sourcing and procurement group is to call all their suppliers and ask for a 10 percent cut across the board? While some automobile manufacturers have done that, the result has been that the top-tier suppliers pressurized the next tier of suppliers, many of which went out of business as a result.

Other companies have chosen an alternate route. They have begun to realize that more collaborative, systematically managed relationships with suppliers can drive increased innovation, improved productivity and reduced administrative costs. The dilemma that many of these internal corporate groups face, however, is that they possess little experience in managing complex, interdependent business relationships. With little knowledge of industry best practices and a lack of direct experience, these groups face the challenge of finding proven methods to add to their existing skill sets so that they can effectively manage supplier relationships.

Even those corporate sourcing and procurement groups that already have deep expertise in managing key supplier relationships typically need to address the reality that their company as a whole lacks comparable experience, knowledge and skill. This means that many people in multiple groups and divisions will touch and interact with the supplier base without the tools, skills and knowledge to do so in a relationship-focused (rather than price-focused) way. Sadly, few corporate sourcing groups have the resources or span of control to ensure the effective management of supplier relationships across the organization. To do this would require transferring skills and tools to a much broader set of individuals within the organization who have significant interactions with suppliers. And, unless the organization buys into the idea of relationship management with suppliers being of added value, that is not going to happen.

There are different management tools available for all parties that enable the creation of more value in supplier relationships. Often, using the approach of market segmentation and relationship-tiering based on differing value and strategic impacts can establish management expectations and supplier performance, which in turn, enable more effective outcomes. This may mean, in some cases, creating a highly integrated relationship with a supplier, while in another, managing a commodity supplier electronically and at arms length. Each of these different approaches to relationship management has a role to play across the chain of suppliers, which support the activities of companies in a complex economic environment in which cost saving is paramount.

When suppliers and customers manage their relationships by looking at sources of value — strategic, operational, financial and relationship — the conversation changes. Suppliers can then position themselves strategically as those who bring knowledge and expertise, business process innovation, and new strategic business ideas; operationally as increasing cycle time and diminishing product defect rates; financially with goals of reducing operating costs and making purchasers more profitable if possible; and with relationship goals that enable surfacing and resolving conflicts early through joint problem solving.

For example, one aerospace company was in a dilemma. Its normal way of doing business was to negotiate fixed-price contracts, which assumed that they could make more products at a lower cost than they had ever done before. The CEO commented on his company’s progression from having a price-focused to a relationship-focused outlook: “To gain market share, we signed these onerous fixed-price contracts. Therefore, we went to our suppliers. In the old days, we would have beaten them up, threatened not to renew our contracts, and generally said that they had to solve the problem we created for ourselves. Having changed to a partnering mentality, we went in a very different direction.”

The CEO said that his company explained the situation it had created, and then asked its suppliers if they had any ideas. “They said our parts were unnecessarily complicated, and with a few simple changes, we would both save more than 25 percent. It saved our bacon,” he commented. The irony, he explained: “They said they’d been trying to talk to us about this idea for three years, but kept getting told that we weren’t interested in hearing from them how to run our business.”

This is not an atypical example. All too often suppliers have a very clear vision of what it would take to improve the logistics that surround the product or services that they provide. In addition, just as often, entrenched management considers the supplier group as an unavoidable bureaucracy rather than a valued partner.

By contrast, Kansas City, Mo.-based Butler Manufacturing Co. delivers its construction services for multiple-site customers on a collaborative supplier basis. The company serves many Fortune 500 companies including retailers, manufacturers and distributors. These alliances work for Butler and for its customers. Butler looks at the entire enterprise, the whole construction project or program, and the customer’s needs from building concept to move-in and start-up. It shares information and value all along the value chain, and everyone benefits.

This 100-year-old market leader has the most loyal customers who return repeatedly to their partner, Butler Manufacturing, to help them roll out huge chains of stores and warehouses. This process delivers benefits over the alternative of consistently relying on the lowest-cost material supplier. Butler Manufacturing said it has found that managing its customer/supplier activities with relationship management capabilities can leverage benefits, which in traditional supply relationships seem unimaginable.

The Opportunity Cost of Changing Suppliers

When looking at the value of a supplier, you must also look at the opportunity cost of not working with that supplier. Two elements should make up the evaluation of the opportunity cost of changing a supplier relationship: the strategic value of the supplier relationship for that buyer and the replacement cost of finding and training a new supplier to do business with the organization.

Strategic and replacement questions could include whether or not the parts those suppliers sell your company highly customized to your particular business. Has the supplier already learned much of the knowledge that they need to understand your business and serve you competently? How easy would it be to replace them in the marketplace? Your answers to these questions will enable you to categorize the suppliers into to four different types of relationships:

Commodity relationship: Suppliers that are easy to replace, do not need time or training to come up to speed and are less integrated relationships.

Custom relationship: These are suppliers that are difficult to replace because they have to tool their plants or train their people to specifically be of value to your company.

Collaborative relationship: This group contains suppliers that are strategically important, but not that difficult to replace.

Strategic supplier relationship: These are suppliers requiring the most relationship management attention and resources because they have critical importance to your company in a number of ways. They are the most strategically important and costly-to-replace relationships.

Changing the Way Things are Done

In “Negotiating and Managing Key Supplier Relationships,” Vantage Partners did research on the benefits of managing supplier relationships with the application of relationship management processes and metrics, and the results were supportive of this approach. For example, almost 80 percent of respondents said that strong working relationships with suppliers generated 25 percent or more quantitative value. Procurement professionals also stated that they could improve their company’s bottom line by a savings of $43 million annually through the application of strategic relationship management tools and processes to key supplier relationships.

The study proved that sourcing and procurement executives are seeing the real benefits of the time and resources invested in relationship management. Supply chain management can be so strategic that the innovation developed by the relationship could affect an entire industry.

Consider the integration of a major consumer products company with its major customer, a mega-chain of retailers. In this classic supplier/customer integration example, the retailer gave its supplier, the consumer products company, access to its supplier management processes and asked for help. The consumer products company spent huge resources and time analyzing and designing a supplier management system that integrates customer purchases and store inventory management to its manufacturing, ordering and shipping processes. In this way, they created a nearly seamless system that allows integration between their customer and themselves, two separate entities. This has worked so well that the retailer asked its supplier to help it integrate this new approach as a supply-chain management system for other suppliers. That retailer now has one of the most intimate and detailed supplier management systems, which leaves little room for inefficiency and contributes to its cost savings and overall customer promise.

Contrast a major automobile manufacturer’s relationship with its tier-one suppliers. In the past, this manufacturer had approached its suppliers with a Japanese Keiretsu mentality, presenting its suppliers with issues and concerns, and asking for collaboration, customization, integration and a long-term relationship. In short, the manufacturer said to its suppliers, “Work with us to save us all money,” which is the approach of mutual gain that we have seen to be so successful in negotiations.

Unfortunately, in later years, this same manufacturer demanded across-the-board price cuts from its suppliers, creating some untenable situations that have resulted in some suppliers going out of business, and in other situations, ineffective actions and performance from existing and unhappy suppliers.

Taking the approach that says, “If you win, I lose, so that every inch I yield to you is an inch I must give up,” represents a zero-sum game. However, when customers and suppliers approach their negotiation from the point of view of, “Along as I am better off, even if you are much better off than I am, we are both still winning,” there is joint gain, rather than win-lose.

Managing complex supply relationships as if they were partnerships creates a collaboration that can transmute supplier concerns and margin issues to the more collaborative discussions of customer constraints and investment issues. When a company can see the supplier relationship as a partnership, this ultimately positions both parties as joint investors in human and knowledge capital for value. Together the possibility then exists for mutual benefit, rather than an unbalanced, untrusting and competitive relationship. Managing a supplier relationship as if it were collaboration rather than a “bid” gives way to quality enhancement, rather than suppliers who resentfully cut corners trying to squeeze profit out of a reluctant customer. It requires a strategy, a commitment from senior management, transparency of costs and margins, and longer-term contracts.

It’s an unfortunate fact that 70 percent of alliances fail, yet, ‘going it
alone’ doesn’t make financial sense. Forging successful partnerships is critical
for giving companies a strategic advantage, and the way to ensure they work is
expressed in one word: METRICS.

Do you remember Professional Cleaning Network (PCN)? Probably not. At one time,
PCN was the largest U.S. independent carpet and upholstery cleaning company.
Just eight months after it was acquired by Textrol Acquisition Trust, it was
bankrupt.
Now, consider the pending break-up of the Toys "R" Us Inc./Amazon Inc. alliance.
Heralded as the perfect marriage in the golden dot-com era, both companies have
filed suit to end their 10-year marketing marriage, and Amazon is seeking to
have Toysrus.com pay in excess of $750 million for expected lost revenue, among
other issues. Separately, as reported in the October 25 issue of The Wall Street
Journal, Toys "R" Us is actively seeking a buyer.
Conversely, consider the Hewlett-Packard Co.-Compaq Computer Corp. merger. Given
the myriad challenges and stumbling blocks, there were big questions as to
whether the merger would even take place. It’s now being labeled "a success,"
with HP and Compaq having become – through the merging process – a competitor
far more formidable than either company could have become alone. CEO Carly
Fiorina says HP expects earnings per share to grow by 20 percent for fiscal 2004
and for the next couple of years, and that the company is innovating at the
fastest rate in its 60-year history.
Consider, too, Starbucks Corp. Starbucks has gone way beyond its coffee shops –
once a single source of serving its marketplace. Board a United Airlines flight,
and sit back and enjoy a cup of Starbucks coffee. Walk down the aisle of a
grocery store, and grab a bag of Starbucks coffee. Starbucks has made a big
effort towards partnering with its customers, vendors and distributors, and
having those partner with one another; its growth has undeniably been fueled by
its alliances.
Why have Starbucks’ and HP’s partnerships succeeded when those of PCN/Textrol
Acquisition Trust and Toys "R" Us/Amazon failed?
The answer can be found in one word: metrics.
Once seen primarily as a way to cut costs, alliances now play a strategic role
in increasing revenue, fueling growth and improving efficiency. Because today’s
attractive rates of internal growth are hard to sustain, fluctuating share
prices make acquisition valuations a challenge. In this environment, "going it
alone" does not make sense financially. Strategic alliances are giving companies
a competitive advantage.
Yet, despite their prevalence and importance, most alliances are doomed to fail.
It is a widely accepted fact that the majority (70 percent) of alliances either
fail outright, fall captive to shifting priorities or achieve only initial
goals, and 55 percent fall apart within three years after they are formed.
The leadership of best-practice companies, such as HP and Starbucks, put their
alliances on the right track by applying metrics throughout the life of the
alliance. Be it alliances, mergers, acquisitions, outsourcing contracts or joint
ventures, the goal is to create value, and they know that the only way to ensure
the relationship is creating value is by applying metrics throughout the life of
the alliance – from development through implementation and integration.
These companies understand that financial metrics are but a small portion of the
value that can be developed or lost in a relationship. Unlike transactional
business arrangements between companies, strategic alliances are open-ended,
intimate, long-term, risky and unpredictable. They involve the union of
organizations with different cultures, values, histories, interests and methods
of operating.
In its 2001 study, Managing Alliance
Relationships: A Cross-Industry Study of How to Build and Manage Successful
Alliances, Vantage Partners found that alliances most often fail – not
because of poor strategy and development or business mismanagement – but because
partner companies are unable to work together effectively and are, therefore,
unable to achieve their joint goals.
For this reason, it is imperative that CFOs go beyond negotiating the financial
aspects of the deal and "letting it run," so to speak. They need to set up
metrics for fostering communication, decision-making, problem-solving and
conflict resolution and for evaluating the performance of the relationship over
time. Alliance metrics are divided into two groups: "development" and
"implementation" metrics.

Alliance Development Metrics
Alliance development metrics are most commonly seen even before the alliance is
launched. Remnants of the success factors seen in the development stage will be
seen again during the implementation metrics – all the way from the start-up of
the alliance to its declining stages.
Financial executives certainly know that creating the alliance is the fun part –
where the adrenaline pumps and accolades are given for deal-making. It’s also
the time when future potential of the alliance is plotted, discussed and dreamed
about. Alliances are created for a variety of purposes: to gain a presence in
new markets and product spaces, solve research and development issues or acquire
knowledge and resources more quickly. No matter the purpose, clearly articulated
goals help the partners identify the most useful alliance performance metrics.
Among the key alliance development metrics for partners to address are:

Conceptualization.
This refers to conceptualizing the alliance, creating a vision for it and
determining the potential of what can be accomplished together. For example, a
supplier had been approached by a retailer of huge proportions. In the early
stages of the discussions, the supplier was focused on the potential for growth
in the alliance. It quantified the potential sales, talked a lot about margins,
deliverables and purchase commitments from the buyer.
However, the fundamental vision of the alliance for each party was very
different. The supplier saw the relationship as strategic and long-term, with
real concessions on price on its part, including the need to develop a
customized private-label product for the customer. The buyer saw the
relationship as much more tactical, basically just a purchase agreement enabling
the customer to be competitive in the market as the low-cost provider of
products to consumers. The vision of the relationship for each party was so
divergent that, had this become part of the threshold discussions, each would
have recognized that the alliance would face serious challenges.
Could the issue of incompatible visions be solved? Of course – by discussing the
metrics that were important to each party. The time for discussion, however, was
not at the end of the negotiation process but at the beginning. Why waste
everyone’s time if the margin reductions required by the supplier were not
balanced with the longer term relationship and commitment of trust,
follow-through and relationship-building that would be necessary to sustain such
a relationship?
In this case, the vision discussion would have been able to red-flag an area of
potentially irreconcilable differences, put them on the table for discussion,
and, perhaps, open the door to a different, more mutual type of relationship.

Strategy Alignment. This
means understanding corporate vision and goals. Taking the same illustration
regarding vision as a metric, one of the problems in the development stage of
the partnering process for these companies was that there was little to no
discussion of strategy.
The entire discussion needs to move from the supplier, pricing and volume arena
to the vision and strategic discussion of "How can we both reach the long- and
short-term strategic goals that we have decided, corporately, are part of our
company’s position and future in the market?"
Cisco Systems Inc., the San Jose, Calif.-based networking technology giant,
bases its alliance performance measures on its overall corporate goals, and it
pays close attention to the alliance life cycle. Steve Steinhilber, Cisco’s vice
president, strategic alliances, says Cisco is not as concerned about actual
financials in the first six months of an alliance. So, in the early phases of a
relationship, the company might measure gains in its workforce’s expertise or
the degree of integration that the partners have achieved.
Cisco’s finance department and CFO play a key role in alliance activities –
especially when it comes to metrics that can be used for effective
decision-making and resource allocation. Steinhilber notes that finance helped
develop a three-year return-on-investment (ROI) model that enables the company
to evaluate its alliance investments and compare them with other opportunities,
such as acquisitions and internal development projects. The model incorporates
measures of intangible benefits, including displacement of competitors, expanded
market coverage and acquisition of expertise in vertical markets that are a
priority to Cisco.
The CFO’s contribution made certain that the model included appropriate
threshold returns and risk levels, and established a consistent methodology for
measuring alliance returns. Without a doubt, this model is working. Cisco’s
alliance revenues are growing 12 percent annually and account for more than 14
percent of the company’s total revenues.

Strategic Fit/Corporate Values.
There is no way to overstate the importance of these criteria. Whether the
company is public, private, for- profit or not, its value system is literally
the DNA of the company – its learned and inherited behavior; therefore, it
changes with great difficulty, often only after major trauma and rarely
willingly.
To start looking into the strategic fit of the partner and alliance with similar
corporate DNA, consider the following questions:
o Would the results of the alliance be true to your values?
o Would the potential partner have the same value system?
o How could your company design a reward system for a partner that would be
consistent with your goals?
o How would you establish that the partner truly understands its intent in this
area so that you will not find yourself in a relationship with a partner focused
on different goals?
Each one of the concerns above can become a metric, stated overtly and set up as
part of the evaluation criteria for partners who could be approached or might
approach you. Each could be given quantifiable values so that a numerical
average of partner preference or eligibility could be reached in the early
stages of evaluation.

Pre-launch Development.
The purpose of pre-launch development metrics is to help organize and select the
items that are considered important enough to become part of the measures to
track at this stage of the relationship. While the character and specific nature
of the proposed alliance will determine the nature of this list, suggested items
include:
o Communications protocol: external and internal;
o Reporting and governance: accountability and responsibility;
o Stakeholder changes: to whom is the alliance important now, compared to those
who might have been interested at the relationship’s inception;
o Soft and hard metrics: soft are cultural fit and learning; hard are revenues
generated or research projects in process.
The importance of evaluating soft metrics cannot be over-emphasized. Vantage
Partners’ research into over 235 companies has shown that 75 percent of those
surveyed felt that alliance failure was caused by incompatibility of corporate
culture or personality. The research also found that the business justification
for an alliance is inversely proportional to cultural compatibility. Thus, as
the business justification decreases in importance over time, the cultural
incompatibilities increase in importance. These considerations intersect at
about the three-year time frame – exactly when 55 percent of all alliances fall
apart.
It’s clear that assessing the cultural fit with potential partners has directly
impacted the success of Starbucks’ alliances. CEO Orin Smith says, "When we have
partnered with those we didn’t check out carefully enough, we have made
mistakes. Obviously, nothing is foolproof, but we [spend] an inordinate amount
of time with our potential partners – we get to know their families, their
communities, their business associates – and do very careful due diligence on
all that they have done, before we take the step of agreeing to partner." And,
since Starbucks gets multiple partnering requests every day, he notes, " this is
not a simple process."

Strategic Fit. There
should be significant overlap that occurs between planning the organization’s
overall strategy and planning a strategic alliance. Research has shown that
organizations that think about their alliances in a strategic context (while
considering or reviewing their strategic plans) tend to be far more successful
than those who do not.
In Managing Alliance Relationships, Vantage Partners asked: "Was alignment with
the strategic plan a contributing factor to the success of your alliance? To
what extent (very important, quite important, not important)?" The responses
indicated that alignment with the strategic plan was one of the key success
factors for alliances (very important). The reasons for this are fairly
transparent; the more strategic and integrated into the strategic thinking and
planning of the organization, the more likely it is that the alliance will have
appropriate resources in terms of both human and capital resources.
Often not considered is the fact that strategic fit is a moving target.
Perfectly appropriate partners may become inadequate as a result of internal
changes, external market pressures or the different strategic directions that
either or both partners may take. For this reason, the questions used to assess
strategic fit must be a set of considerations that are visited continually and
updated as conditions require.

Selection.. A fundamental
element of the selection process that is often overlooked is a stakeholder
analysis of all those who will be touched or affected by the alliance as it is
implemented. This is a key issue because: 1) a potential partner may compete
with an existing partner and 2) another division of the company may partner with
a competitor of your selected candidate; that could cause interdivisional
conflict.
Then there is the internal nature of stakeholder analysis, which is to dig out
political landmines that exist in most companies – where people feel their turf
has been invaded or their jobs threatened. This happens often when technology
companies have a professional service component that they offer their customers
and they partner with systems integrators who are all about professional
services.
The key issue is to find out who and where within their own organizations will
there be overlap, how that can be mitigated by making the pie larger for all
parties concerned and whether this anticipated conflict can be headed off at the
pass.

Negotiation. Negotiation
is an essential element of relationship creation and management – ensuring
internal alignment among the various interests of internal stakeholders, as well
as external deal-making and partner development. The negotiation infrastructure
is a process that ensures that parties’ interests are uncovered and
implementation is, as a result, more effective.
The negotiation team should include representatives from corporate divisions,
such as those from legal and finance. Sometimes a person is added to the team
who is considered to be good at negotiating, but who is then removed before
implementation. This is not a good idea because negotiating skills are most
effective when they do not reside in a single individual but rather are seen as
a competency that is critical across an entire organization.
Important to remember is that the modus operandi of the negotiating team (and
the taste that it leaves in everyone’s mouth post-negotiation) will affect the
mood and expectations around the implementation of the relationship. Thus, it is
critical to see negotiation as a part of the continuum of relationship
development, not as a separate activity for those who then have no
responsibility or involvement with the continuing relationship.
A better approach would be for the entire negotiating and implementation team
(including those brought in from the various corporate divisions) to have
negotiation training so that they can view the continuum of relationship
development as part of their mutual responsibilities.
Also important is to measure how the alliance fits within the larger portfolio
of alliances in your organization or division, because that adds perspective to
the present alliance. Seeing a particular alliance as part of a portfolio will
lead to the understanding that some are long- or short-term, some are more
strategic than others, some fill product or technology gaps and others are for
market gaps. This perspective will also give alliance teams, who may be working
on different relationships, a reason to communicate, to share best practices and
to learn collectively from both success and failure.

Alliance Implementation Metrics
This is the process that addresses what happens when the alliance has to start
delivering results. It is important to remember that the nature of these metrics
will change over the life cycle of the alliance.
Among the metrics at this point in the process:

Operationalization. These
metrics relate to the multitude of activities that put flesh around the skeleton
of the alliance. It’s also the moment of hand-off from those who developed and
negotiated the alliance to those who must implement it. Steps to consider during
this stage include:
o Creating the team that is responsible for implementation. The selection must
include not just staff people, but those who have accountability for the
alliance as well as who are responsible for its implementation. The transition
team must contribute to the functional planning, as well as to the financial,
operational, technological and communication protocols and activities that will
make the alliance work. These activities cannot be done in a vacuum, but
socialized with those in the organization who will be affected or touched by the
alliance.
o Ensuring continuity through socialization. This means transferring the
alliance into the culture of the organization. It is part of the buy-in process
– started in the development metrics but continued into the implementation
process. It means a clear statement of what the goals are of the alliance,
communicated with an understanding of potential concerns and contributions of
the audience.
Now is the time to approach the stakeholders (identified in the stakeholder
analysis in the implementation metrics phase) with the information they need to
understand the impact the alliance will have on them and their role in it. It’s
also time to make sure that no roadblocks are put up to prevent alliance
implementation.
o Strategic alignment check. This is part of the hand-off process and a good way
to anticipate any problems that may come up later regarding the provision of
resources to the alliance. As time may have passed since the idea was developed,
it may no longer be as important to each of the partners as it once was. To
determine if it is, answer the following questions:
1. Do you have the same executive sponsor in place, or do you need to find a new
one? Has the executive sponsor changed for your partner?
2. Is this alliance still in line with the strategic intent and fit of the
companies?
3. Have the partner’s attention and focus moved elsewhere?
4. What’s the impact on allocating resources for this relationship?
5. Are the resources coming from the business unit? Or from corporate
headquarters? If so, whose budget is it coming out of? If there are partial
contributions, where and when are they being made?
6. What is the reporting structure? Is it clear to the alliance team? Is it
clear who is reporting to whom and is there a difference between accountability
and responsibility?
7. What is the communication protocol for the alliance?

Change in Mutuality. This
means that are you measuring the benefit in the alliance to your partner (as
well as to yourself). This measurement is critical because reduction in the
benefit to either partner will be a leading indicator of alliance failure. If
you are not measuring it, you will not see this until the failure process is
already in place. When you make mutuality a metric, you give yourself and your
partner the best opportunity to discover problems before they dissolve trust and
create conflict.
To do this, set a quantitative baseline for the issue of mutuality. Then,
measure the level of agreement at the relationship inception by noting the
significant terms of the agreement at varying times during the implementation
process and the percentage of fulfillment responsibility for each term.

Portfolio Management of
Alliances. Seeing your alliance as part of a portfolio will lead to the
understanding that some are long- or short- term, some are more strategic than
others, some fill product or technology gaps and others are for market gaps.
This perspective will also give alliance teams, who may be working on different
relationships, a reason to communicate, share best practices and to learn
collectively from success and failure. Basically, it is a way to realize that
even though the alliance may or may not be reaching or exceeding its goals, it
is part of a portfolio, and that even alliance competency sometimes cannot save
an alliance that is failing.
IBM places great emphasis on the management and implementation of an alliance,
and any alliance has to have a strategic fit with the overall IBM strategy. In
order to make this assessment, the alliance team puts in additional measurements
enabling it to constantly review the program and resolve nonaligned issues.
This is probably one of the most important and critical metrics that has led to
IBM’s success in this area. As such, it asks three key questions that help it
assess the fit (both current and future) of potential partners within the
overall portfolio of alliances:
1.) How do you know if you have the right partners? 2.) How do you keep the
partnering portfolio fresh and timely? 3.) What is the right positioning of the
partners for both the present and the future?

Restructure. Restructuring
an alliance is not that different from restructuring an organization – changes
need to be made in order to improve efficiency, costs or growth. The process for
restructuring an alliance will depend largely on whether continuing with
particular partners is seen as the right thing to do – strategic or tactical,
economically viable or pre-emptive – in that it cannot afford to be terminated
because the partners know too much about each other’s business or, in some
cases, one partner has become so knowledgeable about the other’s business that
it could effectively compete with the other.
Restructuring metrics can include:
* Return on labor hours worked. In a
world of globalization where companies can provide outsourced labor that is
highly skilled and competent at a fraction of the cost, it is becoming important
to evaluate alliances that are labor-intensive, such as research, development,
manufacturing and more, from the point of view of return on labor hours worked.
This also becomes a basis for one of many arguments for or against outsourcing
the activity.
* Return on marketing opportunity cost.
The cost of doing the relationship. The alliance ties up resources for other
activities, so the return received must at least equal the market opportunity
cost, and should exceed it.
* Return on intellectual property invested.
Whatever intellectual property is invested into this relationship should have
given at least the same return that would have been received had it been
invested elsewhere.
While you may determine that some alliances need to be restructured, re-launched
or even re-negotiated (for these, the same metrics for the initial launch and
negotiation can be used, but with more insight), others may need to be
terminated. Once again, the CFO can – and should – play a pivotal role, using
metrics to create an exit strategy.
Without specific measurements in place, partners are limited in their ability to
point to a breach in the relationship if one arises. And if termination is
premature and not according to the expectations of the parties, it can be a
painful process, as in the divestiture or break-up of an acquisition.

Strategic alliances have become an increasingly important component of an
organization’s overall growth strategy because they enable the company to
achieve a variety of goals that would otherwise require years of effort and
considerable expense. At the same time, savvy organizations are realizing that
alliances do not automatically succeed or create value. Creating the alliance is
the easy part; managing it and measuring its success is much more challenging.
For this reason, a growing number of CFOs are taking a proactive role in
developing appropriate metrics to quantify the financial performance of the
alliance, as well as its strategic value, operational effectiveness and overall
quality of the relationship.
This last measurement is critical because metrics should not be totally
quantitative and financially oriented. In fact, an over-reliance on financial
metrics is shortsighted – perhaps positioning the alliance more for failure than
for success.

Alliance Development Metrics
Conceptualization
Strategy Alignment
Development
Strategic Fit
Planning
Selection
Structuring
Negotiation
Team Selection test

Alliance Implementation Metrics
Operationalization
Implementation
Remediation
Restructuring
Re-evaluation
Re-launch
Termination

Many supply relationships would generate far more value if they were managed like alliances. A supply alliance that looks costly in the first stages of development may create great returns in the last stage of development. However if the relationship is seen purely as a supply process, there is little chance of it maturing into a life-stage where the maximum financial benefit is realized for all concerned.
Many supply alliances are all expense in the initial stage – hiring people to do research and investigation, putting in capital to support the infrastructure of pilots, hiring, training and testing, initial launch of the program then re-mediating and re-launching it again as new learning is achieved. It may be some time until the highest margin, lowest cost results are seen and only then can they be incorporated into the entire relationship. It may be in the mature level of the alliance lifecycle that real value is generated, so if attention is not paid throughout the early cycles of development, launch and learning, the return on that investment may be compromised. For example, the supply relationship could be expanded to include an online component and this may well be in the middle stage of the alliance lifecycle. Looking at supply relationships as if they were alliances with lifecycles that require different resources at each stage and even different teams of managers will ensure that the relationship has the chance of reaching its fullest potential.

Toys “R” Us created an on line activity for the sales of their products – the development process of the fulfillment of buying and selling and shipping toys on line. Yet their in-store sales and the effective way they had of buying, selling, serving their customer continued to be their core competency. Finally they realized that the online segment of their business was not working the way they wanted it to. In fact it was diluting their brand value. An alliance looked like the solution to the problem. They found the company that fulfilled on line orders better than anyone else – Amazon.com. They began discussion and planning the integration of facilities and the two brands, with space on the Amazon real estate, virtual real estate, and piloted the program before rolling it out in full. This on line alliance has been highly successful – and is an example of understanding the various stages of the alliance. From the development stage through implementation stages and now as the Toys “R” Us and Amazon alliance begins to grow and reach its potential, the alliance is changing as the market is becoming more comfortable with the joint marketing, supply and outsourcing relationship. Making it transparent was the goal and it is working. Now Amazon not only markets and sells the goods, but they share revenues as well as payment for the turnkey operation of the fulfillment process. It has been so successful that Amazon is now repeating the approach and is moving into the apparel business.

Supply chain management is rarely thought of as a strategic alliance. Yet the characteristics of an alliance will generate more integrated relationships, which could leverage benefits for all concerned. Consider the integration of Proctor and Gamble with their major customer Wal-Mart, the classic supplier/customer integration story that shows the cost savings and loyalty that integrated alliance approaches can generate. Or think about Starbucks and their integrated relationships with their partners Safeway and Albertsons. And contrast the DaimlerChrysler relationship with their Tier One suppliers now compared to the Chrysler Keiretsu of the past. Were the Chrysler costs lower before when they opened their kimono to their suppliers and said, “work with us to save us all money”? Or are they better off now that they are driving cost savings into the structures of their suppliers? Certainly, Tier Ones are pushing the cost issues to Tier Two suppliers. But the reality is that Tier Three suppliers are going out of business.

Managing these complex relationships like an alliance would have created a collaborative working together that would have opened the systems of supplier concerns and margin issues, to the customer constraints and investment issues. Together the possibility would exist for mutual benefit, rather than an unbalanced, untrusting and competitive relationship. Managing a supplier relationship as if it were collaboration rather than a bid gives way to outsourcing and quality enhancement, rather than suppliers who resentfully cut corners trying to squeeze profit out of a reluctant customer. It can be done – it requires a strategy, a commitment from senior management, transparency of costs and margins and longer-term contracts.

I have seen it work. Take Butler Manufacturing Company Kansas City, Missouri in their delivery of construction services for multiple-site customers on a collaborative supplier basis. Examples include Toys R Us Wal-Mart FedEx Ground, and many more retailers, manufacturers and distributors. It works-for Butler and for the customer. Butler looks at the entire enterprise, the whole construction project or program, and the customer’s needs from building concept to move-in and start-up. And they share information and value all along the value chain. Everyone benefits. This 100-year-old market leader has the most loyal of customers who come back again and again, rolling out huge chains of stores and warehouses, returning always to Butler Manufacturing Company, the company that partners with them. This process has been proven to deliver unmistakable benefits over the alternative of consistently relying on the lowest cost material supplier. Managing a supply relationship like an alliance can leverage benefits that in traditional supply relationships seem unimaginable.

THERE IS NO SUCH THING AS A “MERGER OF EQUALS”

Many of the top merger deals call for the top executives of both companies to share power — signaling a trend of “mergers of equals.” In traditional acquisitions, it is believed that one company wins and another company loses. As such, with most mergers, the issue of who will lead the new company is relatively clear: the CEO of the company that is doing the acquiring or initiating the merger assumes the top spot. But, in a merger of equals in which everybody wins, who assumes the top spot? Is there really such as thing as a “merger of equals?” Can Co-CEOs work?

Gerald Levin, CEO of Time Warner doesn’t think so. Says Levin, “I don’t believe in co-CEOs. I don’t believe it works.” And, I agree. As the deal between AOL and Time Warner was being announced, executives on stage were assuring everyone that this would be a merger of equals, a careful blending of two companies, two cultures. But make no mistake: America Online is the acquirer. The trading symbol for the new company, tellingly, is AOL.

The only time that having co-CEOs can be effective is if there is a clear understanding that one is going to leave — and soon. The issue with co-CEOs is that there will be many decisions that have to be made in the integration process that will require less compromise and more dominance. For instance, one set of processes will predominate over another; or, the information systems that are unable to be integrated will be outsourced — and when that happens it becomes clear that this is not a merger, but an acquisition. Even when a company is trying to be fair and equitable there will come a moment in time when this becomes clear. Where there are two powerful and territorial CEOs it is obvious that each will be looking after the best interests of their people and it will be very difficult to see the best interests of the whole. That requires a sea change in attitude.

In addition there will be some issues around the fact of whether the acquisition is a portfolio type where the acquiring company will leave the other alone — or whether it will be the fully-integrated type where heads will roll and territoriality will raise many conflicts. It is in the latter case that the co-CEO position has the least potential for success and in the former where it actually could work.

Why do fifty-five percent of alliances fall apart three years after conception? How can the potential for alliance success be increased?

To answer these questions you must first explore the reasons that an alliance might fail:

* Incompatibility of corporate culture or personality;
* Clash of managerial personality;
* Differing project personalities – the project is of varying levels of priority to each alliance partner.

Research into over 200 companies has shown that 75% of companies surveyed felt that alliance failure was caused by incompatibility of corporate culture or personality; 63% reported that the failure was a result of incompatible managerial personalities; 58% attributed failure to project personality or priority differentials.

Through my research, I have also found that the business justification — business reasons, value proposition, strategic business fit – for an alliance is inversely proportional to compatibility of corporate and managerial personality. In other words, as the business justification decreases in importance over time, the cultural incompatibilities increase in importance. These considerations intersect at about the three year time frame — exactly when 55 percent of all alliances fall apart.

The Mindshift Approach

Until now, many alliance relationships have suffered because they have not had a clear and effective tool for analyzing and planning. The Mindshift Approach – a methodology that prompts you to look at critical areas and helps you anticipate the behaviors that may cause alliance communication and trust to break down — can help enhance the likelihood of alliance success. The Mindshift approach enables managers to anticipate and manage different corporate and managerial personalities by recognizing the life-cycle stages of an organization, group, division or product. The Approach is also fundamental to resolving inter-divisional warfare. Few large organizations are in one life-cycle stage — most have divisions in various stages which contributes to inter-divisional strife because of limited understanding of how the life-cycle stages of each group affect personality and behavior.

After you become familiar with the Mindshift approach, you may examine your alliance partners, both internal and external, and — as I have discovered through my research — deduce that cultural incompatibility is the real reason that you or your alliances are failing. Knowing where you and your organization are in this cycle will enable you to be more effective internally as you manage and derive strength from disparate personalities and life-cycle stages. It will also increase your chances for the creation and management of intelligent and effective external business alliances.

The process of life-cycle development is non-linear. Some organizations start and stop in one stage, never progressing further. Others double back from one life-cycle stage to another, or have differing stages in various divisions. As the company life-cycle stages change, a manager undergoes stress as he or she must adjust to new rules of behavior. A talented leader will recognize the personality differences in his or her managers as well as the demands required by the life-cycle stages of the organization and create opportunities for success regardless of these pressures.

The Mindshift evaluation should be used continually to modify expectations and change communication styles to fit different corporate and managerial personalities and to improve internal and external alliance effectiveness. The approach is a first step toward finding the answers you need to make your alliances into long-term successes.

Corporate and Managerial Personalities

The stages of the organizational life cycle are characterized by personality changes. By the same token, there are various managerial personality types, each of which fits into specific types of organizations with a varying degree of success. The key is to understand the corporate and managerial personalities so that when compatibility of alliance partners and teams is considered, strategies will be designed to take into account the different behavioral and cultural preferences in order to communicate in the language of the receiver of information and align expectations accordingly.

Stage 1: The Startup Stage – Adventurer Managers

Startup companies, where revenues and activities are just beginning, generally attract Adventurer managers. These managers are the ultimate risk-takers who combine that quality with an absolute and unshakable belief in their vision. This can often reach the level of obsession which is sometimes unrealistic. The Adventurer’s sense of urgency will compel venture capitalists to invest seed capital in his idea, and will entice others to back his hopes and fund his grand designs. While his wonderful self confidence should be recognized, attention must also be given to his lack of patience with the management process — often expressed as an unwillingness to delegate, monitor, allow for errors and correct a subordinate’s actions — and his unilateral decision-making style.

Stage 2: The Hockeystick Stage – Warrior Managers

The next stage of corporate growth is the Hockeystick stage — a period of increasing revenue which on a graph of time versus revenues looks like a Hockeystick as it rises in accelerated growth. This is when the Warrior manager is in charge. He will be a charismatic leader, directing, controlling and inspiring those who work for him, most of whom mirror his energy and commitment. He is aggressive and unrelenting in his focus. Many Warrior managers do not sustain their initial success when the company’s growth wanes and the Warrior’s directive, sometimes combative style is now seen as abrasive and begins to backfire. The Warrior is often ousted from the very company whose growth he helped to fuel unless he complements his capabilities with other managers who fit the next life cycle stage.

Stage 3: The Professional Stage – Hunter Managers

The Hunter manager fits squarely into the company as it moves through its professional stage of becoming more systematic, collaborative and proactive. Revenues are still growing but not as aggressively as in the Hockeystick stage. Often the Warrior manager is made chairman of the board or moves out of the company as the Hunter comes in and installs systems, processes and a team approach. Some Warriors grow into Hunters; others function well with their Hunter counterparts.

Stage 4: Mature and Consolidating Stage – Farmer Managers

The next corporate life-cycle stage is Mature and Consolidating where the revenue growth is slowing and the Farmer manager holds sway. He is seasoned, with the patience to sow seeds and wait for them to mature, but sometimes becomes complacent. Complacency could be a sign that he will not be risking his reputation if the decision fails. He is clearly an “Old Boy Network” member and verifies his decisions first with his internal circle before going forward.

Stage 5: The Declining Stage – Politician Managers

The Declining company is run by Politician managers. Their most regrettable quality is to take a perfectly good business opportunity and kill it through self-protective activities, delaying tactics, political game playing and fear of action. Politician managers will detail a project to death, and ultimately will destroy the company. This manager is totally risk-averse, covering his or her rear and encouraging memo writing to such a degree that paperwork is a protection against reality. While the Hunter is unlikely to want Politicians in his organization, the Farmer is far more likely to tolerate the Politician manager. After all, he is but one step away from that stage himself.

Stage 6: The Sustaining Stage – Visionary Managers

The Visionary manager inspires hope and empowerment through his results-oriented, assertive, and confident demeanor. A classic example of a Visionary manager is George Fisher of Eastman Kodak. The Visionary manager enters a Declining company with a breath of promise to transform it into a Sustaining one. The challenge is to take a company that is highly formalized, structured, and generally matrix-style, and to streamline it to become more effective and flexible. The Visionary manager has some of the characteristics of the Adventurer, such as inspiration and intense drive, but is more experienced and measured in style. The Visionary manager has generally been a professional Hunter manager for a substantial period of his or her business life and is familiar with the Politician types too — he can spot them a mile off and will isolate or terminate them in large numbers.

Where the Visionary differs greatly from the Adventurer and Warrior is in his ability to build and empower teams while still taking risks and bringing about systematic change. Adventurers are generally inconsistent in their efforts to delegate decision-making and Warriors are often impatient with team building processes. The Visionary manager is usually accompanied by a SWOT team — a small group of leaders who may have been with the Visionary in former turnarounds or helped the Visionary to succeed in past activities. They will help improve the serious morale problems that often exist in the company that the Visionary enters.

Project Personalities

Aside from corporate personality and managerial personality, there is also project personality, which is the priority each alliance partner places on a project. Levels of priority include:

“Bet the Farm” – integral to the future survival and strategic positioning of the organization, a project that will have excellent resources allocated both in time, human, and financial capital.

“Market Extending” – a middle of the road project which is important at inception but unless it becomes a “Bet the Farm” project, will see management time and attention wane.

“Experimental” – important to some within the organization and is well defined in time and resources. All other projects are less important and fall under the radar.

The classification only has impact when your project is on a different priority than your partner’s. Knowing this means that your behavior must change. If your project is “Bet the Farm” and is defined differently by your partner, you will be doing most of the work. In turn, expectations should be aligned accordingly.

Applying the Mindshift Methodology

The purpose of applying the Mindshift method is to understand how rapidly your company will respond to changes in the environment, a business downturn, or competitive forces. It also helps you get a better understanding of how the culture and relationship fit will work with your company, your managers, and the project in contrast to theirs. To gather the necessary information, look at the following areas in questions to learn more about your partner’s life-cycle stages, its corporate personality, and the Project Personality Type of the alliance.

1. Discover the stage of the life cycle that your unit, division, group, or organization is in. This is accomplished by relating revenues or units of growth to time.

2. Determine the organization’s corporate personality. Identify the personality characteristics that best fit your group, unit, division, or company. If they belong to various stages of the life cycles, try to determine which personality type accommodates most of your company’s characteristics.

3. Look at your personal managerial characteristics to see how you fit within the stages of corporate cycles of change. Again, you may find that a blend of qualities from more than one personality type best describes you. Try to identify the single managerial type most fully descriptive of you.

4. Examine the project personality characteristics. Determine the level of importance to each partner of the existing or proposed alliance.

5. Use the diagnostic tools to analyze your actual or prospective partner as you have analyzed your own company and managers.

6. Finally, develop strategies based on observed personality differences that will allow you and your partner to communicate. This may mean adjusting or creating new management structures by changing the form of the alliance to realign goals, modifying project priorities, or realistically reformulating the project’s expectations.

Corporate alliances can be improved if compatibility of corporate, managerial and project personalities are anticipated and managed. Knowing how to use the corporate life cycle stages to do this is paramount to improving alliance success, and is fundamental to resolving inter-divisional warfare. As an investor, it is critical to examine the personality fit of the alliance partners of the investment opportunity, their longevity, the managers in charge and the relativity of the project being undertaken. By doing so, you might deduce that cultural incompatibility will cause you to (1) qualify your investment, attaching to it performance milestones or (2) withhold it altogether.

The Mindshift approach is a powerful means to examine corporate compatibility and to estimate the potential of success for high risk investments.

Did you eat any fresh corn on the cob last weekend? Or cool down with a Frappacino? Sneezing from allergies this summer? Maybe you considered packing up the kids or grandkids and making a summer visit to one of The Walt Disney Co.’s properties worldwide?

Then, knowingly or not, you have benefited from a successful strategic alliance. Despite Bill Robinson’s comments in an earlier column (see: Why Strategic Alliances Don’t Work), trust has little to do with creating a profitable alliance. Companies have proven that they can forge successful partnerships with those they don’t trust and with which they compete.

How? By following through on a disciplined approach:

1. Select The Proper Partners For The Intended Goals
An alliance between Seattle-based Starbucks (nasdaq: SBUX – news – people ) and Purchase, N.Y.-based Pepsico (nyse: PEP – news – people ) created the popular coffee-flavored drink, Frappacino. The relationship moved Starbucks into the bottled-beverage market while PepsiCo gained an innovative product with a well-branded partner. Each met their strategic and operational goals. A perfect match.

2. Share The Right Information
You don’t have to trust your partner in order to share information with them. You just have to decide what not to share. An alliance could involve intricate interweaving of intellectual property from different research and development labs owned by multiple partners. Many pharmaceutical companies have marketing alliances. Eli Lilly (nyse: LLY – news – people ) and Takeda Chemical Industries of Osaka, Japan, have joined together to develop a drug for the treatment of type-2 diabetes. Philadelphia-based GlaxoSmithKline (nyse: GSK – news – people ) and Elbion of Radebeul, Germany, have recently announced an alliance–the results of which will clear up your stuffy sinuses. Companies have proven that they can have successful alliances with those they don’t trust and with whom they compete. The real issue is follow-through. Did their partner do what they said they would? If so, even without trust, the alliance can succeed. Kraft’s (nyse: KFT – news – people ) Maxwell House brand and Starbucks–direct competitors–created an alliance for Starbucks to place its coffee into supermarkets. Starbucks benefited from Maxwell House’s extensive network of shelf space in major chains nationwide, while Maxwell House profited from customer desire for Starbucks-branded coffee.

3. Negotiate A Deal That Includes Risk And Benefit Analysis (Not Necessarily Equal) For All Sides.
Some companies have changed strategies to focus on alliances as key revenue generators. Currently 30% of IBM’s (nyse: IBM – news – people ) $86 billion in revenue comes from a wide variety of alliances. IBM is able to succeed on this scope because they have a process, structure, approach, metrics and a strategic commitment to make alliances work from the highest levels in the company. IBM changed strategies a few years ago and embraced alliances, seeing them as the best way to offer their customers the most valuable and appropriate solutions to their needs–not just the IBM-created option. In some instances, they decided to partner rather than compete with certain independent software vendors. IBM’s alliance with San Mateo, Calif.-based Siebel (nasdaq: SEBL – news – people ) to jointly develop, market and sell integrated e-business solutions included also Siebel’s choice of IBM’s DB2 Universal Database as the company’s primary development platform and the decision to port Siebel’s e-business applications to the AS/400e server platform. The latter is significant because IBM has more than 200,000 loyal customers using AS/400e technology. This global strategic alliance has been extended to midmarket companies and continues to grow as opportunities for new markets and products evolve.

4. Come To A Realistic Agreement On The Time To Market And Corporate Expectations
Computer maker Hewlwett-Packard’s ) alliance with The Walt Disney Co. (nyse: DIS – news – people ) has shown great results as HP provides major IT solutions and innovation to Disney’s varied divisions with co-branding as a critical part of the relationship. This alliance was well negotiated and structured, with a clear understanding of what each partner had to contribute and could expect to derive from the relationship and how that would change over time. Both partners are complex organizations and integrating their alliance goals only happened due to solid planning and manageable expectations regarding implementation. Disney’s marketing calendar is a key element of every Disney partnership. The success factor in any alliance–and especially one with a mega-branded company–is coordinating brand exposure, joint marketing and customer experience. HP, like every other Disney partner (Kodak (nyse: EK – news – people ), McDonalds (nyse: MCD – news – people ), Coca-Cola (nyse: KO – news – people ), etc.) paid particular attention to understanding the time-to-market issues and how they fit Disney’s plans, as well as the management of both partner’s expectations as to what results could be expected when.

5. Mutual, Flexible Commitment On What’s Appropriate To Change, Measure And Share Within Each Partner’s Culture
Many fresh fruits, corn and vegetables as well as their processing are the results of alliances. Pioneer Hybrid International, the Des Moines, Iowa, division of Dupont (nyse: DD – news – people ), creates and implements agricultural research and development alliances that have contributed substantially to the world’s food resources and our general well-being. This means often partnering with small companies, individual scientists and academics–where results of experiments don’t always appear right on time and flexibility is needed to reshape the investigation–probing for other outcomes requiring customized solutions. This kind of alliance management is not easy for a large organization. But Pioneer has an average employee tenure of 20 years and their culture supports loyalty, persistence, flexibility and customization.

These qualities work well in resolving joint research alliances. Lesser-known entrepreneurial companies like Irwindale, Calif.-based Ready Pac Produce packages salads for your convenience with technology developed in a strategic alliance with Scaline, a French company. Egos had to be put aside to manage through the cultural, language and personal differences in this alliance. My research into over 200 companies at Caltech, where I teach executive education in alliances, found that cultural incompatibility (whether differing company size, corporate culture, management personalities or national cultural differences) caused alliance failure more often than the business or financial considerations. Both Pioneer and Ready Pac used flexibility, open-mindedness and a keen sense of the cultural issues to make the relationship bear fruit.