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The vanishing partner: Sometimes a carefully forged alliance lands you with a dead weight instead of a win-win. Smart companies know how to contend with -- and guard against -- their partners disappearing. (Strategy).

When Ted Briscoe set out to launch broadcasting solutions company GlobalStreams in June 2000, he was counting heavily on a licensing partnership with Play Industries. As Briscoe envisioned it, Play Industries' technology would enable GlobalStreams to offer its client companies quality, economical Internet broadcasting capability. But it was not to be. "A few months into our business," says CEO Briscoe, "we realized that the company we were really depending on for product development and manufacturing was close to bankruptcy."

Sound familiar? Partners who falter -- or worse, fail -- are an indelible part of the dot-bomb landscape. Gone are the days when fledgling firms lightheartedly rushed to sign deals and issue press releases linking their brands and future prospects. In fact, these days any company with serious partnership experience has seen one or more of its allies either flounder or disappear outright. "It happens," shrugs Joe Ticer, CEO of BioNetrix Systems. "And we hate for it to happen, because at the end of the day we end up scrambling to pick up the ball."

An information security solutions provider, BioNetrix employs advanced authentication technologies such as smart cards and biometrics supplied by its various partners, which include Check Point Software Technologies, Computer Associates, Entrust Technologies, Netegrity and Securant Technologies, in its Authentication Suite product.

"We had one big customer that made a choice of a particular fingerprint verification vendor, and that vendor went out of business," Ticer recalls. "So we had to bring in two more options and put them into the already defined architecture and enrollment scheme -- basically switch horses midstream."

Because Vienna, Va.-based BioNetrix structures its partnerships strictly as joint referral or resale agreements, and doesn't take tile of its partner firms' inventory, the company was able to skirt the hurdle with minimal additional investment -- and look like a hero in the process. Yet when a partner falters while a customized system is under design, BioNetrix steps up to the plate to rectify the situation.

"We dislike that scenario," says Ticer. "But it's good news/bad news, in that we get a chance to put our best foot forward and demonstrate that when you put our stuff in the middle, you can switch relatively painlessly from one technology to another if a bad situation occurs."

Flexibility and a creative approach to problem-solving also helped St. Louis-based GlobalStreams salvage its relationship-gone-sour. "We had built in scenarios where failure to meet certain criteria would trigger certain rights to us," says Briscoe of the protective clauses in its contractual arrangement with Play Industries. "Building materials would be released from escrow so we could start building product ourselves and we would have access to certain intellectual property."

Less clear, however, was what would happen if Play Industries shut down altogether. That situation called for drastic measures, "Instead of taking that as a huge blow to our firm, we found a way to buy the company," says Briscoe, a partnership veteran who served as president and COO of Ask Jeeves before launching GlobalStreams. The February 2001 purchase of Play Industries was a big step for GlobalStreams, which, at the time, was still in the early rounds of fund-raising. But the move netted the company "innovative technology, engineering know-how, patents and an engineering team that had been together for several years," says Briscoe. "We're still working with the same people and, for the most part, in the same way we originally talked about. The difference is we now own all the assets of the company.

While a few CEOs manage to steer partner-related setbacks toward happy outcomes, for most such situations end badly. At best they fade away, leaving the sour taste of promises unfulfilled; at worst they lead to more dire consequences -- lawsuits over intellectual property rights or the domino effect of one company's failure putting another in peril. "With the dot-coin bust, whether a company will be able to deliver or may go under has become a serious concern," says Joe Weller, managing director of NextLevel Venture Partners, a VC firm in Tysons Coiner, Va., that often counsels its portfolio companies on deal-making. "It happens both with partnership relationships and with buyers that are relying on smaller companies to supply them with a product or technology."

Opportunity and Risk

Yet at the same time, strong partnerships remain integral to growth. "Relationships and partnerships are probably the most critical aspects of success because in this competitive environment you cannot succeed alone," says William Monahan, CEO of Imation, a $1.2 billion maker of removable data storage and color image management solutions. "You cannot do all things for all people, particularly in the high-tech market. So there's a high premium on managing relationships that allow you to evolve the business in a faster fashion."

While that may sound like a "damned if you do, damned if you don't" scenario, partnership veterans note that what it really means is that processes must be approached with caution and managed carefully. "Any program where there is more than one company involved carries more opportunity and more risk," asserts Monahan, whose Oakdale, Minn.-based firm has technology and development alliances with both such established firms as Minolta and Xerox and emerging players like Seagate and DataPlay. "Opportunity and risk go hand in hand, so with any relationship you have to evaluate your risk and reward equation."

The more rigorously potential partnerships are vetted early on, the less likely they are to falter, says Heller. "You should do due diligence on your partner," he asserts. "There should be an opening of the books in terms of technology and the management team, and it should be approached in the same way you would evaluate a company that you were thinking about investing in."

When considering strategic partnerships involving other early-stage firms, Heller recommends going even further -- checking the references of the partner company's management team, having an attorney look into any legal implications and talking to some of the firm's customers. "The financial side of it depends on the type of structure you're developing and the partner," he says. "If it's simply an arrangement where you are referring each other to potential customers, you don't need to worry about the financial wherewithal of your partner. But if it's an OEM relationship and your partner will be paying you a percentage, then you want to spend more time making sure the company is credible and has capital behind it."

Some CEOs find that a long courtship can help ensure that both companies are solid and that the commitment is genuine. "The deals I've been involved with that worked best are the ones that had a long lead time, where there were baby steps taken first and you really got to know one another, as opposed to a whirlwind romance," says Briscoe. "You will always have people on their best behavior when you're trying to do a deal, but one way to probe into it is to go deep and wide. The CEOs on either end should spend quality time together, and then other people within the organization should get to know one another."

Even then, no deal is guaranteed to work, which means that no matter how good things look from the outset, agreements should be structured so that the relationship can be changed -- or severed -- if the relationship deteriorates. While deals vary greatly, most partnership veterans advise a structure with milestones in place that each partner must reach. Miss a milestone, and the consequences can range from simply sacrificing an exclusivity arrangement to activating a buyout provision that enables one company to purchase the other.

"You have to have a solid agreement up front so you have contingencies and opportunities to correct whatever issue would come up, particularly where intellectual property is concerned," says Monahan. "And, if it is an impasse that cannot be solved, there should be a smooth, professional, businesslike way to dissolve the partnership and protect the rights of both parties."

Clarity Is Critical

Despite numerous headlines about failed joint ventures in recent years, many firms neglect this crucial step. "Often people structure deals with no exit clauses. Very often the relative needs of the two partners change but you can't change the relationship, which becomes problematic," says Kumar Mahadeva, CEO of Cognizant Technology Solutions, a Teaneck, N.J.-based IT services provider. "It's very important, particularly with equity partnerships or partnerships in which you are jointly developing a product, to be very clear on who owns what and who gets the rights to buy out whom."

A deal between Cognizant and Erisco Managed Care Technologies, for example, included a performance measure that required Erisco to introduce Cognizant's technology to a specific number of its health-care industry clients over a designated period of time. If the goal was not met, Cognizant could withdraw from some of the exclusivity conditions in the contract.

Often, CEOs shunt this essential step by the wayside in their deal-closing zeal, or lose sight of the original goal. "It's very tempting in the final stages of negotiation to start incrementally making changes to help the deal go through, but often, if you really look at those last-minute changes, you find that they will fundamentally change the shape of what you started out doing," Briscoe warns.

Equally shortsighted are companies that vet the partners, carefully forge a partnership contract that covers every nuance, then step back and expect the partnership to flourish.

"A lot of people think when the deal is done the partnership will work, but that's when the work really starts," says Mahadeva, who points out that keeping a close watch on the partnership's progress can strengthen the relationship and help preempt major glitches. "We try to work with our partners on multiple levels, to keep our technologists close to their technologists and our field people close to their field people. The more actively you manage the relationship, the more successful the partnerships are."

Many firms designate a relationship manager responsible for overseeing the partnership on a day-to-day basis -- and insist that their partner companies do the same. "It's a very critical role," says Monahan. "That person becomes the catalyst for driving progress and ensuring that the two companies stay in sync."

At Imation, relationship directors oversee the company's partnerships and

pull Monahan or other key executives into the process at the first sign of trouble. Large OEM partnerships rate both a relationship manager and an executive sponsor from each company who can be tapped should conflicts arise.

"At one point we ran into a misunderstanding about a contract, which was gathering momentum and could have eliminated the business," recalls Monahan. "The relationship manager called in the two executive sponsors, both of whom had the clout to do something about it, and they were able to resolve the issue within 24 hours."

All three elements -- evaluation of the partnership and the potential partner, a contract carefully constructed to cover all contingencies, and point people on both sides -- are essential for ultimate success, says Monahan.

"You have to go in with your eyes wide open," he says. "If you have doubts about key aspects, you have to make a decision to pass on the opportunity or to work out a different relationship with that company, maybe buying the technology or the rights to the technology. What you don't want to do is go in and invest heavily if the wherewithal to succeed is not there."

Contact

BioNetrix Systems Corp. www.bionetrix.com

Cognizant Technology Solutions www.cts-corp.com

GlobalStreams www.globalstreams.com

Imation www.imation.com

Jennifer Pellet. ("The Leadership Handoff" and "The Partner Vanishes")

A former executive editor of Chief Executive, Jennifer Pellet is a New York City-based freelance writer who contributes to Entrepreneur and Fodor's Travel Guides, among other publications. She's working out her post-dot-bomb angst by training for a green belt in karate.
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Author:Pellet, Jennifer
Publication:Chief Executive (U.S.)
Article Type:Company Profile
Geographic Code:1USA
Date:Mar 1, 2002
Words:1972
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