Alliance Management: A Blueprint for Success; Companies seeking to reach more markets and offer customers more choices are building alliances -- in growing numbers worldwide. (Cover Story).

Companies around the world are expected to do more with less: to offer more choices, reach more markets and provide better solutions and experiences to their customers, be they enterprises or consumers. At the same time, companies need to ruthlessly focus on what they do best, and be disciplined and efficient in their use of capital.

Responding to this challenge, a growing number of companies are seeking appropriate partners and building alliances. Among the top 1,000 U.S. companies, the percentage of revenue resulting from alliances -- currently about 20 percent -- is expected to rise to over 30 percent by 2004. In Europe, the reliance on alliances is even more significant.

What exactly are the successful alliances doing? How is an alliance different from the various kinds of licensing, outsourcing, joint ventures, partnerships and other business arrangements that have been around too long to be considered a "new way of doing business?" And is there a "blueprint," as such, to learn from and to replicate or construct successful alliances?

Every business school professor has his or her own terminology and way of categorizing business arrangements. Some look to the degree of risk-sharing between the companies, or to the kind of governance arrangements they have put in place. Others define them by their objectives, or by their complexity. Legally speaking, a "partnership" is an organization with clear implications for taxation and liability purposes, whereas an "alliance" has no such implications. But non-lawyers will often use partnership to mean a close relationship between two companies, without meaning to make a statement about their legal structure.

The reality is that managers will make their own choices on what to call any given business arrangement, often based on criteria that have to do with organizational politics, public relations or personal aspirations. As the director of strategic alliances at a large computer manufacturer noted, "We have 452 documents that say 'strategic alliance' at the top of the page; but we have two alliances that are really strategic."

However one formally defines alliances, there is a pragmatic perspective: an alliance is any business arrangement in which the success of one partner is tied to the success of both. Anything else is an arms-length contractual arrangement, and one that has the potential to become zero-sum: If my success can come directly at your expense, then when times are tough I (or others in my organization will be tempted to pursue that outcome.

One significantly under-appreciated implication of this view of alliances is that what really sets them apart from other business arrangements is the importance of the relationship between the partners. Thus, the concepts of alliances and partnerships are used here interchangeably; due to the nature of the relationship of each partner to the other, there simply is no distinction.

Risky Business

Research and experience suggest that partnering can be very rewarding. Studies by John Harbison and Peter Pekar Jr., co-authors of Smart Alliances: A Practical Guide to Repeatable Success, show that companies that are successful at partnering achieve a 50 percent higher return on investments (ROI) on their alliances than the average ROI among the top 2,000 companies in the world.

And results from a recent study published in the Sloan Management Review show that following the announcement of a new alliance, companies with a dedicated alliance function achieve four times the market value improvement than peers do. It stands to reason that if you can tap new markets, deploy new technologies and access knowledge and structural assets -- without having to own those resources -- an organization can do more, be faster and be more agile.

Douglas Braunstein, head of mergers and acquisitions at J.P. Morgan Chase & Co., notes, "If the driving business logic is about achieving greater scale or about integrating a new capability into your business, a merger or an acquisition is probably the right path. It also ultimately gives you more control over your fate. On the other hand, when you are looking to bring together very different capabilities, learn from a partner and retain more flexibility, an alliance makes a lot of sense.

But alliances are also risky undertakings, with documented failure rates as high as 60-70 percent. Managing such relationships poses a number of challenges that keep companies from realizing the value and achieving their business objectives that initially led them to pursue the alliances. By far, the leading cause of alliance failure is an inability to manage differences and make the relationship's "soft stuff" work: trust, commitment, chemistry and culture.

Blythe McGarvie, chief financial officer of the BIG Group, observes, "Alliance failure can take many forms. It's not only about disbanding the initiative or one partner buying out the other. In my book, an alliance also fails when it doesn't produce any more value than the same arrangement would have under an ordinary arms-length deal. To me that means you never really built the relationship that would have enabled the alliance to do more, better, faster.

"Partner of Choice"

A growing number of companies have concluded that if they are going to rely on alliances for as much as 20-30 percent of their revenues, and if they are going to make significant investments in business initiatives they do not wholly control, they need to become more successful at managing the relationships. Hard-earned lessons have taught them what a strong alliance relationship enables, and the implications of a poor alliance relationship.

Indeed, the phrase "partner of choice" is heard more and more in industries, such as pharmaceuticals and information technology, where the risks associated with research and development and the costs of global product launches have become so huge that companies carry out such activities through partnerships as a matter of course. Becoming known as a desirable company with which to partner -- a partner of choice -- has become a competitive edge, and companies are learning it's insufficient and downright reckless to rely entirely on the skill of individual alliance managers. Successful organizations focus on how to make relationship management into a corporate capability. Their efforts fall into three categories.

1. Develop a partnering frame of mind. Just as some individuals seem easier to work with to get things done and solve problems, so too, there are companies that do a particularly good job of embedding strong relationship values in their culture. It's not so much that the company is seen as "nice," but more that it has recognized the importance of working in partnership with others to accomplish its objectives. John Chambers, the CEO of Cisco Systems Inc., speaks of the "Internet Ecosystem" and the importance of alliances built around "interwoven dependencies and relationships."

Sir John Browne, group chief executive at BP plc is known for stressing the importance of long-term relationships built on "mutual advantage." One part of embedding that commitment in the culture is to articulate the business reason for managing relationships effectively, and to promulgate business policies, measures of success and leadership communication strategies designed to explicitly call out the importance of creating mutual advantage so that others will trust BP and prefer to do business with them.

2. Relationship management process and tools. Good relationship management has to be a part of how the company does business. A remarkable number of organizations that have well-defined processes for activities -- such as sourcing and procurement, manufacturing and quality assurance, sales and service -- leave the management of relationships to chance, It's reminiscent of a well-known cartoon showing a complex and detailed process drawn on a blackboard, with all the inputs leading into a single box, from which comes the desired outcome. The label on that box: "A miracle happens here."

In general, managing relationships is hard work, and to do it well requires continually learning about what is working and what isn't. Each individual putting together a partnership or seeking to make one work should have the ability to learn from those who've had successes. Some companies have made significant investments in learning about relationship management best practices, capturing their own experiences and applying that knowledge through a set of processes, tools and templates.

"At H-P, we work hard to learn from others, inside and outside our company, to go beyond simply amassing libraries of information, to help individual alliance managers actually effectively execute best practices" says Joe Kittel, HewlettPackard Co.'s operations strategic alliances manager. "H-P has developed manuals and training courses and is continuously looking for better tools and methodologies to help us manage critical relationships. For example, we participated in the beta program for Partnersmith [TM] I'm excited about its potential to provide increased effectiveness to the challenging and complex task of alliance management."

3. Enable collaboration, early and often. To ensure good execution, companies are going further, After all, knowing what best practices are helps only if you can actually put them into action. Training programs now routinely include not only negotiation skills, but techniques for managing strategic relationships and dealing with "difficult conversations." Companies are also providing relationship managers with sophisticated IT-enabled tools to facilitate collaborative problem solving, gain internal alignment about their relationship management strategies and even conduct periodic "health checks" on alliances.

The Discipline of Process

One of the more interesting findings of a recent Vantage Partners LLC study on alliance management is that while many companies are building some alliance relationship management capabilities and getting tremendous benefit out of doing so, the overwhelming majority of them feel that they had failed to institutionalize their capabilities. A great deal of the study participants noted, "We see a huge amount of inconsistency from alliance to alliance." And, "I think some of our people have these capabilities, but the organization does not."

Leaving to chance the implementation of capabilities that are critical to realizing the potential value of alliances is irresponsible. Becoming a partner of choice and consistently realizing value from alliances requires a way to develop accountability for managing "the soft stuff' that is so often neglected.

Building institutional relationship management capability is not about going off in tbe woods and playing trust games. While such exercises can be useful when individuals in the two organizations need informal time to get to know one another better, such activities tend to be insufficient for helping organizations negotiate deals in ways that create mutual value and build a strong working relationship; or build alignment across business units about the reasons for entering into an alliance, the choice of partner or the scope of the relationship; or help take the temperature of the relationship and assess its ability to deal with upcoming changes or differences in perspectives.

Organizations do need to put in place processes that are cognizant of the different phases relationships go through -- from exploration and negotiation, to implementation, ongoing management and adjustment and, eventually, termination -- and of the different challenges each phase poses, both internally and externally. They should deploy tools across their alliances that help partners plan the relationship, measure and monitor its health and work together to make the necessary adjustments. Also, they should equip personnel with the necessary skills to solve problems together, collaboratively and creatively, and with the needed resources to learn from their partners and each other about what works and what doesn't work.

Building effective relationship management capability requires more than just providing individuals with some kind of "collaboration" software. As the Internet has made it easier to communicate with others and share documents, a great number of products are described as "collaboration tools," positioned as what an organization needs to manage its relationships with customers, suppliers and partners. Some of these products and features are indeed being put to profitable use. Shared access to the latest version of a document saves time and reduces mistakes, and online forums for exploring issues and experiences improve learning and the sense of connection.

But experience shows that collaboration features alone do not collaboration make; shared workspaces and chat rooms alone do not prepare individuals for the challenges of managing complex partnerships. They fail to provide real guidance and support about how to collaborate or the tools required for the kind of effective consultation and joint problem-solving required for true collaboration.

Successful relationship management requires visible organizational commitments to a collaborative mindset. It takes business processes designed to seek mutual gain; and it takes skills and experience with joint problem-solving approaches. A set of tools designed to enable true collaboration would need to offer users access to best practices about managing relationships and to highly operational advice about how to implement those best practices, as required. Such tools must be designed to help implement best practices for the typical challenges that a relationship manager faces -- from building internal alignment, to negotiating change, to managing conflict externally.

Is Your Organization "Alliance Ready"?

Think about your portfolio of alliances, as well as potential ones under consideration. How much of the business case for the partnership depends on effective relationship management? Does success depend on creative problem-solving? Mutual trust? Good two-way communication? If so, consider what steps the two companies are taking to protect their investment in the partnership.

Even if you are alliance ready, how ready are your counterparts to be good partners? How do you initiate such a conversation? How do you help each other be a better partner?

The checklist should prove valuable for encouraging organizations to enhance their capability to manage alliance relationships. For each of the items listed below, complex processes or sophisticated tools are not needed. What is needed is knowledge about how the organization gets these done and how well they are being done. Anything less can hardly be called relationships or making alliances a part of an organization's strategy.

Danny Ertel is a founding partner of Vantage Partners LLC, a Boston-based consulting firm focused on helping clients negotiate, build and manage their most strategic relationships.

Causes of Alliance Failure

Companies That Have Participated in > 20 Alliances


Poor or Damaged Relationships
 Between Firms                       64%
Poor Strategy and Business Planning  30%
Bad Legal and Financial Terms and
 Conditions                           6%

Results from a recent three-year study interviewing over 150 experienced
alliance managers across a broad set of industries confirm "an inability
of partners to work effectively" as the most important cause of alliance
failure.

Source: Vantage Partners, LLC

Note: Table made from pie chart

RELEATED ARTICLE: 10 Key Alliance Management Capabilities

1 Building and maintaining internal alignment

2 Evaluating and considering relationship fit with potential partners

3 Building a strong working relationship while negotiating an optimal deal

4 Establishing common ground rules for working together

5 Having dedicated alliance managers

6 Having collaborative skills in alliance employees

7 Having a collaborative corporate mindset

8 Managing multiple relationships with the same partner

9 Auditing alliance relationships

10 Managing changes that affect alliances

The Relationship Makes A Difference

Strong Alliance Relationship

* Each partner feels it can rely on the other to deliver on its commitments (and therefore can plan and make investments on the basis of those commitments).

* Each partner understands the key interests of the other (and therefore can anticipate its concerns and take to into account when making choices).

* Each partner listens to the other (and therefore learns what it did not know, while letting the other feel heard and taken into account).

* Each partner respects the other's strengths and differences and can engage in genuine consultation and collaboration.

* Both partners share a commitment and a method for solving problems, working constructively and thinking outside the box.

Poor Alliance Relationship

* Lack of trust slows down decisions and investments, and requires extensive contingency planning.

* Lack of real understanding leaves each side guessing about the other's intentions and reacting to unexpected actions.

* Lack of good two-way communication breeds inefficiency and resentment.

* Lack of real respect for the other's capabilities leads each side to attempt to control the relationship and push through its own preferred solutions to problems.

* Lack of effective ways to solve problems together limits creativity and undermines execution.