Alliances Proliferate Yet Sixty-One Percent Fail or Underperform Says Andersen Consulting Study; Landmark Study Reveals Five Destructive Myths of Alliance Management.

NEW YORK--(BUSINESS WIRE)--Sept. 27, 1999--

While corporate alliances have exploded in value and number, a staggering 61 percent of alliances have failed or are plagued by under-performance, according to a landmark study by management and technology consulting firm Andersen Consulting.

According to the study findings, eight out of every 10 executives believe alliances will be a prime vehicle for corporate growth, and that the global value of alliances could reach $40 trillion by the year 2004. Yet, more than half of these alliances will under-perform, primarily because companies follow five basic myths of collaboration.

"The emerging eEconomy is irrevocably changing the underlying economics of business," said Charles Kalmbach, partner with Andersen Consulting and co-author of the study. "In the new global economy where rapid response to marketplace changes is imperative -- alliances are becoming a competitive necessity. According to our survey, in the past three years an average large company with more than two billion in revenue formed 138 alliances in the United States, 121 in Europe and 92 in Asia. But the majority of alliances have failed to deliver on their promise. Understanding the true nature of alliances and setting appropriate expectations is crucial to future success."

The 18-month study by Andersen Consulting, Dispelling the Myths of Alliances: The new realities of successful alliance management, is exhaustive. It is based on written responses from 323 senior executives to a cross-industry questionnaire on trends, patterns and success rates of alliances; interviews with more than 400 senior executives to isolate problems and solutions; roundtable discussions with executives from five different industries to test and refine hypotheses; and collaboration with Professor Tarun Khanna, Harvard Business School and Bharat Anand, Yale School of Management to devise a measurement that alliance announcements have on company share prices.

The survey findings indicate that only 39 percent of alliances met or exceeded corporate expectations. Moreover, an analysis of 2,000 alliances formed over a four-year period indicates that a substantial portion have had a negative impact on share price--they actually diminished shareholder value. In short, the problems of alliances seem to be increasing just as fast, if not faster, than the number and types of alliances themselves.

The fundamental alliance myths identified by the study fall into different stages of the alliance process - strategy and design, integration, governance, internal capabilities and performance measures. The future success of alliances depends on dispelling five myths historically associated with corporate collaborations and developing a new set of alliance-management practices based on hard-core reality.

The first myth is that alliances are like marriage. Indeed, like marriages they have traditionally been exclusive bilateral relationships, built on trust and patience, dependent on strong and constant communication. Also, like marriages, alliances tend to succeed when partners have underlying similarities in culture and values as well as complimentary differences in skill sets. However, the marriage parallels do not emphasize the true nature of the most successful alliances.

In reality, alliances are more like diplomacy, neither inherently altruistic nor based on emotional attachments to the concept of union. Instead, in commerce as in diplomacy, alliances are pragmatic pairings that fulfill their members' interests by providing the scale, skills or positioning to better defend territory, turn back competitors or advance into the unknown. And, unlike marriage, it is the dynamics of self-interest that give alliances a number of important but unmatrimonial attributes including; multiple partners, collaboration with competitors and often very short life-spans.

The second myth is that integration for mergers and alliances is the same. The failure to effectively combine the assets of separate, merged companies is the number one cause of failure for mergers and acquisitions. Speed is rewarded in the merger integration process, in which fast decision making dictates the elimination of redundant resources as the market expects to see real gains within a year. On the other hand, alliance integration is about bargaining power.

In reality, findings of the Andersen Consulting research indicate, 90 percent of alliances are what can be termed "continuous integration" models, requiring resource contributions from the corporate partners throughout the life of the venture. Rather than focus on speed, most successful efforts to integrate alliances need to concentrate on understanding the impact a company's own contribution can have on its potential bargaining power within the alliance. It is prolonged and intermittent.

The third myth is that one governance model fits all alliances. Governance is the oversight process that provides for efficient and informed interchange between two or more allied firms, and accountability to those who run the alliance. The Andersen Consulting study found that governance is a major source of alliance under-performance. Most industries have developed a single, standard model of governance. But not all alliances are alike.

In reality, corporate portfolios are increasingly filled with alliances that differ dramatically in terms of goals, duration, resource contributions and value. The governance system should be conducted through various levels of decision makers that might include CEO summits, boards of directors, steering committees, operating committees, alliance managers and various project committees. The best governance system includes four practices: 1) vary the governance style, tailor it to the alliance; 2) clearly assign rights and responsibilities; 3) monitor and support information flows; and 4) create clear, telling performance measures.

The fourth myth is that alliance expertise should reside within a small, elite corps of dealmakers. Many firms have developed a cadre of super-specialists who understand the intricacies of alliance negotiations, contracts and valuations. However, this approach is showing signs of wear and the Andersen Consulting study indicates that managing a portfolio of up to 30 alliances can exceed the skills and capabilities of even the most elite teams.

The reality of success in an increasingly alliance-filled world is that companies need to capture and delegate skills to a broader network of managers, using new tools, communications systems and a deeper pool of talent to invest more staff with the power to succeed.

The fifth myth is that alliance performance is impossible to measure. Two assumptions--that alliances succeed on the power of intangibles such as trust, culture and communications, and that each alliance is unique--while correct--have led executives to conclude that alliance performance is hard to measure and impossible to benchmark.

In reality, alliances are hard to measure for a variety of reasons, but they can and must be measured because performance is a critical tool for managing any enterprise. Solutions include a balanced scorecard that includes a company's share price, a selection of factors that serve as red flags for critical problems, and performance incentives for alliance managers. In addition, build a "dollar defense" -- a stable source of financial value that allows the alliance to pursue strategic benefits; and account for surplus value that often goes unrecognized. You cannot manage what you cannot measure. Difficult as it may be, it is not possible to have consistent success in alliance without overcoming these issues.

"As competition for global markets heats up, so will the demand for faster, more effective solutions," said Charles Roussel, partner with Andersen Consulting and co-author of the study. "If corporate leaders expect alliances to contribute to winning strategies, they must apply the same rigor to managing them as they would a high-profile project."

Andersen Consulting is an $8.3 billion global management and technology consulting organization whose mission is to help its clients create their future. The organization works with clients from a wide range of industries. Andersen Consulting has more than 65,000 people in 46 countries. Its home page address is http://www.ac.com.