THE BATTLE FOR THE SPOILS.
I magine this: You've joined forces with another CEO, who you've known and trusted for years, to create a marketing alliance. The chemistry is good-the venture not only helping you to reach a broader market, but also producing ancillary benefits. People from both companies have pitched in to enhance the software used to track customers, and they've come up with a faster process for getting products ready for shipment. All looks promising, and the two partners are working together closely to plan for the future.
But then, the chemistry changes. Your alliance partner is acquired by Company X. The trusted CEO is gone. The relationship unwinds. And before long, some of the innovations produced by the alliance, as well as some of the former partner's executives with whom you've shared confidential plans for the future, show up in the European division of Company X--a unit that competes directly with your firm. What's to be done? Frankly, not much. Your options are limited. Essentially, you can call out the lawyers and devote a lot of energy to an uphill legal fight, or you can bite the bullet and move on-and get ready to explain lagging overseas results to investors.
That kind of scenario may have relevance for more and more executives at high-tech companies, simply because alliances have become a common way of life in the industry--a fundamental ingredient of the business, like microchips and software code. "With the speed of business, people realize they have to move faster," says Gregory Jones, CEO of uBid.com, an online auction marketplace. "In order to continue to outpace the competition, you have got to get together with other companies--you can't build it on your own anymore.
For executives struggling in that environment, the upside of alliances is readily apparent. By working together, companies can reach new markets, gain access to skills, and speed up distribution. But in the search for such competitive gains, experts say, CEOs should not be blind to a critical problem that can arise when two companies join forces--the unintentional sharing of intellectual capital that can be exploited by partners and, ultimately, competitors.
An alliance is a "less-than-arm'slength relationship," points out Warnock Davies, an alliance consultant and author of the recently published Partner Risk: Managing the Downside of Strategic Alliances. In partnering, he explains, companies need to share a great deal of information, and that means they run the risk of having partners take advantage of company secrets. Often, he says, companies may be sharing more than they realize--not just information that is "related directly to the immediate transaction, product, or project but also information related to their strategic plans and objectives."
In an alliance, Davies says, "both partners are in a position to develop an intimate knowledge of the attitudes, priorities, values, and strategic and tactical methods used by the other partner...Many executives are completely unaware of how much of that soft data they have given away. But it can be infinitely more important than the information about a particular product or service. And you can't put that genie back in the bottle."
CEOs need to think about "a whole class of intangible assets," agrees John Pittenger, president of Koch Ventures, the investment arm of Koch Industries that focuses on high-tech companies. For example, he says, "the joint venture is now servicing a customer. Who owns that customer relationship? Or how about supply chains that you set up? You could make a list of any number of intangibles that have the same challenge."
In reality, there is no surefire way to keep innovations and ideas safe, short of avoiding alliances altogether. But there are some guidelines that CEOs can keep in mind as they court and cooperate with other companies:
* Pick the right partner. "Our starting point is usually, how is this [alliance] going to create value and how aligned are our interests?" says Andrew Stem, CEO of Usinternetworking, an e-commerce and ERP application service provider. He explains that his company looks for partners that have goals that are truly complementary to USinternetworking's and that don't have an interest in operating in USinternetworking's part of the value chain. Such companies, he says, are far less likely to have an incentive or opportunity to exploit any privileged information they come across. "There are plenty of people who have wanted to partner with us, whose real interest in the end was to control the value that we add. And we have generally not wanted to partner with them, even where there was an advantage to us.
Davies agrees, saying that one of the best ways to protect information is to make sure that the executives involved on both sides of the partnership have a "plus-sum mindset"--one that sees the alliance as a way to expand the pie for everyone, rather than as the traditional game in which one party benefits at the expense of the other. "If an alliance has a truly plus-sum structure, then even if a partner gains information, they won't use it against you because they believe that they would just be using it against themselves." In other words, if the incentives and reward-sharing structure are right, it would simply be contrary to the partner's own interests to take advantage of any inside information.
* Start thinking about intellectual property early. In formulating agreements, one company has to explore what the other has to offer--and that's a common point of vulnerability, says Brad Peterson, a partner specializing in IT transactions and alliances at the Mayer Brown & Platt law firm in Chicago. When companies bring their respective engineers or other experts together in early discussions, "often the secrets will just jump right over the fence during those meetings," he says. "So it's a good idea to sign a non-disclosure agreement on Day One, before you do anything." Non-use provisions should also be in place, he says. The non-disclosure protects against having secrets revealed, while the non-use means that the partner itself will not use the secrets.
Peterson suggests signing no-hire agreements right off the bat, as well: "Most alliance negotiations will not result in an alliance, but they will result in an understanding of what value can be created," he says. "Once someone has understood that, they could probably hire the right people to create that value. So having a no-hire clause for some period can be valuable."
* Wrap ideas in a black box. "We generally advise [clients] to bundle what they bring to the table," says Nick Palmer, an associate partner who works in alliance strategy and management at Accenture (formerly Andersen Consulting). That is, rather than provide details about technologies and processes, companies can combine such specifics into an integrated "business capability" to offer to partners. For example, explains Palmer, a company might say, "I take care of identifying and pre-qualifying customers--but I am not going to show you the software that I use that tests the creditworthiness of a customer. The basic concept is to create a black box that you can operate that's very friendly to the partner so that they can get the value from it. But they don't go walking around inside of it getting access to everything."
* Be open about intellectual capital concerns from the start. During discussions with potential partners, look at the details of the business case for the alliance and the mechanics of how it will work--and then ask, "What information do they need to do that?" says Palmer. "Do they need detailed customer lists, for example, with credit history and prior purchasing history? Or do they need something at a more aggregated level? By being clear about that and being honest with your partner, and saying that you don't care to share this or that, you can get into a dialogue about where the [information-sharing] boundaries should be most appropriately placed."
Those early discussions can also provide a lot of insight into what to expect down the road, adds uBid.com's Gregory Jones. "Going into a deal, you learn a lot about your partner when you talk about those issues," he says. If a company's management doesn't want to deal with such questions openly, "you have to be cognizant that that's how it's going to be in the whole relationship."
* Communicate with the front line. People who work in the alliance may not be aware of what information they should and shouldn't share--and guidance from above on that score can be helpful. "It's a matter of bringing it into the light of day and talking about it, as opposed to assuming that people know what to do, says Accenture's Palmer. One of his clients has been putting "anyone who touches the partner" through mandatory alliance training. "They talk quite clearly about what you need to do to be effective and how to structure governance in the alliance so that you are exchanging the right information but not giving away things that you shouldn't be giving away.
* Keep track of emerging intellectual capital. As an alliance progresses, it may produce new, unforeseen intellectual capital in the form of product improvements, redesigned processes, innovative uses of technology, etc. These incremental improvements may be valuable, and alliance partners should make sure they both know what is being developed. "You've got to put in some regular process, where maybe once a quarter you sit down and say, "OK, what are some of the breakthroughs that we've made, and are they patentable?" says William Samuels, CEO of ACTV, a provider of software-based solutions for interactive TV and the synchronization of Internet content with TV radio, and other traditional programming.
That's easy to do with big innovations, he says, but smaller ideas are easy to miss without "a process to make sure that those improvements don't fall on the floor... So, periodically sit down with the joint-venture people and say, 'Tell me about some of the neat stuff you are doing.'"
* Plan the endgame. Too often, says uBid.com's Jones, "people overlook the de-coupling aspect of an alliance. They're excited in the beginning, so they don't spend enough time on thinking about what happens if this thing has to fall apart." Generally, experts say, CEOs should assume that alliances will indeed need to be unwound as markets, technologies, and business goals change. And that means that partners should agree, up front, how to divide any intellectual property that has come out of the alliance.
Because it's hard to say beforehand just what valuable innovations will be produced by an alliance, executives should worry less about determining what to divide up in an unraveling relationship, and more about how to divide it up. "I think that's complex enough to where it almost has to be more of a process than an outcome," says Koch Venture's John Pittenger. For example, he says, partners might agree that when the alliance is dissolved, they will take turns picking items that they will own. "That's not dissimilar to the resolution of an estate, wherein property is divided in some sort of sequential way-where the family will divvy up personal effects." The point, he says, is that "if there's no process in place, all you do is argue over rules instead of outcomes. If there is a process, you are simply arguing over outcomes."
In determining exit strategies, don't forget the people dimension, Pittenger adds. "Who goes where at the end of a venture should also be thought through in advance.... Where the really key people in the enterprise end up is important, because those people have the accumulated experience of that joint venture."
Finally, experts say, it's important that CEOs strike a balance in trying to protect important information in an alliance. The natural impulse is, of course, to lock up valuable secrets-- but closing the door too tightly will only lead to other problems. "Some companies are so reluctant to partner that they don't give enough access, and the alliance never gets off the ground because there is never any real cooperation," says Accenture's Nick Palmer.
Pittenger agrees, and warns CEOs to keep an eye out for the "overzealous lawyer or corporate-development guy." If the alliance is to thrive, partners have to leave room for the exchange of ideas needed for innovation and growth-and avoid having too many contractual controls and restrictions. "If you put too much in [writing] it becomes an annoyance to the guys who actually have to do the work," Pittenger says. In the end, he adds, CEOs should make sure that "the legal documents are there to cover the downside--but not to limit the upside."
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|Title Annotation:||keys to successful alliances|
|Publication:||Chief Executive (U.S.)|
|Date:||Jan 1, 2001|
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