Finding a partner you can trust

2007

As Cisco's CEO, John Chambers, once observed, a merger of equals never works. But even when small-to-midsize companies try to connect with a larger partner or brand, the failure rate for these alliances is as high as six out of 10.

So how do mid-market companies looking for a fast way to grow go about finding a "big brother" they can trust? Because as a report from The Conference Board points out, for all the risks, help from a powerful partner can means that a smaller company can raise its visibility, develop a new technology or product, gain access to broader marketing channels, tap into sources of new customers, or ride the coattails of a strong brand.

"Since the sharp falloff in alliance creation after the dot-com bust in 2001, companies have learned much about how to design and manage these partnerships more effectively," says Howard Muson, author of the report.

"Alliances are making a strong comeback, and companies have more realistic expectations about what they can achieve."

Normally, growth takes patience and a very long time, he points out. And brands are not created overnight. So an alliance with a larger company is one of the only ways that some smaller and midsize companies have to accelerate growth without huge capital outlays.

Yet making an alliance work takes tremendous effort and commitment. And the risks are not to be underestimated. What if the larger company is not so well-intentioned, and walks away with the smaller company's secrets? Sometimes the larger company develops other priorities and allows the partnership to fall apart.

"The deals being done now tend to be better thought out – with the caveat that there are still tremendous challenges around governance," says David Ernst, leader of global alliances for McKinsey & Company in Washington D.C

All of which makes the choice of a potential partner a particularly critical decision. According to Robert Spekman, professor at the University of Virginia's Darden Business School, and author of the book "Alliance Competence", before bringing in the lawyers, to draw up contracts, the two teams need to get together in a room to talk about philosophy and goals.

"I don't care how good the deal is. If your partner doesn't share the same vision, the same set of morals and ethical standards, walk away," he says.

Similarly, the smaller partner needs to be sure that the larger partner will take them seriously and truly wants to help foster the growth of both parties.

"You need assurances your company will be listened to and have a voice in major decisions," Spekman adds.

It's also prudent to do due diligence about the potential partner's behavior in past alliances – have they kept their promises and maintained the trust of their partners - or have things ended in tears?

McKinsey's David Ernst points out that while many innovative smaller companies fear that a bigger company may steal its proprietary technology or processes, a bigger risk is that they will take too long to do the deal or won't achieve their objectives because the more process-heavy partner often can't move fast enough.

To reduce the risk when small companies partner with big companies, he suggests talking to at least three companies and create an "auction" for the product or technology that you want assistance in commercializing.

Without a firm auction date, he says, big companies may take their time coming to the table.

Likewise, ask for estimates on how long it takes the company, on average, to make key decisions, such as hiring a new plant manager or launching a new product.

Find out what marketing and R&D resources the company plans to assign to the alliance. Ask, for example, "whom are you going to assign to work on this project?" and write their names into the contract.

Finally, he warns that the smaller company should estimate how much of the CEO's time will be consumed by an alliance. Because the smaller company may be staking its future on it, the CEO often takes charge of the alliance.

But will the returns justify this diversion of the leader's attention? If so, the CEO should have a backup team in place to run the company while he or she is keeping the alliance on track.

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