Speed is essential when it comes to entering new markets. So when companies don’t have time to develop the necessary competencies or resources to pursue new opportunities quickly, the solution is to partner with businesses that have complementary capabilities. Finance can contribute to successful alliances beyond traditional compliance and oversight perspectives by cultivating a collaborative mind-set.

In late 1996, executives from the giants of U.S. aerospace — The Boeing Co., McDonnell-Douglas Corp., Rockwell International Corp., General Electric Co. and United Technologies Corp. — traveled to Moscow to witness the test flight of the Tu-144LL supersonic airliner. The plane, built by Russia’s Tupolev Design Bureau, Zhukovsky, in conjunction with these U.S. companies, was intended to be the first in the next generation of supersonic travel. No single company was prepared to commit the enormous resources needed to develop such a fast and large supersonic plane. Only a strategic alliance could come up with sufficient funds without exposing any single company to great risk.

Before the Cold War ended, a commercial alliance between the United States and Russia would have been unthinkable.

But in the era of glasnost, the U.S. military contractors realized that in order to advance the state of aviation, they would have to find partners that had skills and experience they didn’t have.

This remarkable international alliance, described in the book "Smart Alliances: A Practical Guide to Repeatable Success," by John R. Harbison and Peter Pekar Jr. (Jossey-Bass Publishers, 1998), is just one of countless strategic partnerships that are transforming the nature of business today. Alliances with other companies are no longer a strategy reserved for very large companies in a select few industries. They are fast becoming a commonplace way of doing business. To succeed in the age of the alliance, financial executives must understand the forces driving the urge to merge and how this new world of collaboration is changing finance’s role.

The Proliferation of Alliances

Strategic alliances, which can broadly be described as short- or long-term relationships between companies in which the partners tap into and learn from each other’s capabilities, are not new. "Westinghouse Electric and Mitsubishi have been allies for 70 years; Dow Chemical and Corning for 55 years," Harbison writes. What is new is the sheer proliferation of these strategic partnerships. (See The Financial Services Industry Embraces Alliances)

According to research conducted by consulting firm Booz-Allen & Hamilton Inc., more than 20,000 alliances have been formed worldwide in the last two years. In the United States alone, the number of strategic alliances has grown 25 percent annually since 1987, and the United States now accounts for one-third of the world’s alliances. If this isn’t enough to convince you that alliances are a part of the corporate landscape, take a look at AT&T, which has formed more than 400 alliances since 1990, or at Oracle Corp., which has thousands of alliance partners in nearly every facet of its business. Today, alliances have proven to be such a successful business strategy that more than 60 percent of CEOs in the United States approve of them, compared with 20 percent five years ago.

This isn’t a phenomenon reserved for certain exclusive industries, either. Although telecommunications, computer hardware and software, biotechnology, and medical services are the hottest sectors for alliances, growth is also evident in transportation, retailing and financial institutions.

Types of Alliances

There are many types of alliances being formed today. In fact, the term "alliance" can describe a broad range of business relationships ranging from short-term product development projects between companies to long-lasting vendor relationships between suppliers and manufacturers, to broad strategic alliances in which partners benefit from each other’s capabilities. The simple common denominator among all strategic partnerships is that they allow the companies involved to achieve goals they wouldn’t be able to otherwise achieve. (See Adopting the Alliance Mind-Set)

Lee Gregory, consultant with Gunn Partners Inc. in Geneva, Switzerland, says some of the more common alliances are:

  • Traditional joint ventures: Until recently, the joint venture, in which two or more parent companies join forces to create a separate legal entity, has been one of the most common types of alliances. In the traditional joint venture, companies unite to obtain economies of scale and scope.
  • Outsourcing arrangements: These are partnerships in which a company outsources a business process or function (e.g., human resources or information technology) that is not central to its business mission. This allows the company to concentrate on its primary business objectives.
  • Vendor alliances: Closely related to outsourcing arrangements are vendor alliances in which companies partner with vendors by sharing incentives for enhanced service. Ken Hood, manager of oil and gas accounting at Mobil Business Resources Corp. in Dallas, says this is fairly common in the oil industry. "In our heavy-oil operations in California, for example, we have to inject steam into the ground to get the heavy oil to come out," Hood says. "It is very investment intensive. We partner with the vendors who make the down-hole pumps by sharing incentives with them to maintain higher pump-reliability rates. The vendors still get a base fee, but if their performance exceeds certain parameters, they are more profitable because we are able to tap into more oil."
  • Marketing alliances: Marketing alliances bring together companies that market different products or services to the same group of consumers. They can take many forms, including co-packing alliances and cooperative advertising. Under a co-packing alliance, a company licenses the use of its brand name and product formula to companies that have production, packaging and distribution capabilities. Starbucks Corp., for example, licenses its name and the formula for its bottled coffee products to other beverage manufacturers.

Cooperative advertising, on the other hand, involves partnerships among a group of organizations that share an interest in advertising the same product to the same consumers. "The ‘Got Milk’ campaign, for example, brought together a group of dairy farmers who pooled their resources to create the kind of national advertising campaign none of them could do on their own," Gregory says.

In looking at the types of alliances being formed today, the possibilities are endless, and sometimes they arise in the most unexpected places. Former financial enemies KeyCorp and Charles Schwab & Co. Inc., for example, formed a partnership in which Key Bank promotes Schwab’s mutual funds and Schwab does Key’s back-office processing. Nissan sells Volkswagen vehicles in Asia. Hoffman-LaRoche Inc. sells Glaxo Wellcome Inc.’s Zantac, an anti-ulcer drug, in the United States. And Dreamworks and Universal Pictures are working together in an arrangement in which Universal puts up funding, Dreamworks creates films, and Universal retains distribution rights outside of the United States, Canada and South Korea.

The key to success in all these alliances is that the companies involved share similar values, norms and vision, but they possess complementary capabilities.

Driving Forces

What’s behind the phenomenal growth in alliances? The same thing that underlies all other business megatrends — money — both saving it and making it.

According to Melissa Giovagnoli, president of KnowledgeCircles.com, a management consulting firm based in Schaumburg, Ill., alliances used to be formed by companies looking to become larger and dominate a market. By joining forces in a merger or long-term joint venture, companies could become stronger and fend off aggressive moves by competitors. While mergers, acquisitions and joint ventures are still popular types of alliances, more and more companies are looking at more temporary, narrowly focused partnerships.

"Rather than looking at growth by merger and acquisition, organizations are starting to take a look at how innovation and entrepreneurship can help them reduce costs and get to market faster," Giovagnoli says. While traditional alliances were based on the bigger-is-better mentality, she says that today’s alliances are more likely to be based on speed and efficiency.

Robert Gabrielson, president of Strategic Connections Group in LaGrangeville, N.Y., agrees. "It used to be that companies had the time to develop the competencies and resources necessary to allow them to achieve their goals," he says. "Now, the market doesn’t allow the luxury of time. The speed of change is so rapid that the only way companies can pursue new opportunities is by partnering with companies that have capabilities you don’t."

Other forces that have accelerated the demand for alliances include the globalization of markets, the scarcity of resources, the intensification of competition and the fact that technology has blurred industry boundaries.

Just how profitable can alliances be? Very profitable. According to Booz-Allen’s research, companies that engage in strategic alliances clearly outperform those that don’t. Results from the study reveal that:

  • Strategic alliances produced a return on investment 50 percent higher than the average return on investment produced overall. For almost a decade, the top 1,000 companies in the world have earned a return on investment of nearly 17 percent from strategic alliances.
  • The 25 companies most active in alliances achieved a 17.2 percent return on equity — 40 percent more than the average of the Fortune 500. The 25 companies least active in alliances lagged behind the Fortune 500, with an average return on equity of only 10.1 percent.
  • Since the early 1990s, the percentage of revenue that the 1,000 largest companies in the United States have earned from alliances has more than doubled. In 1980, it was less than 2 percent. By 2002, the successful alliance builders expect 35 percent of their revenue to come from alliances.

Finance’s Role

One role of finance has long been to protect the company’s interests in alliances. "Traditionally, finance has taken a compliance, oversight and audit perspective with regard to alliances," Gregory says. "In trying to protect their company’s exposure, they’ve come at alliances from a place of distrust, self-protection and self-interest. But today, if you take that spirit too far, you become a detriment to the success of a strategic alliance." Why? "Because the strategic alliances being formed today are based on a spirit of collaboration, cooperation and mutual interest," he says. For financial executives to contribute to the creation of successful alliances, they must focus on the alliance as an entity in and of itself and craft strategies that contribute to the success of both companies.

This doesn’t mean, however, that finance should disregard its role as financial overseer. "Certainly, most partnerships begin with a common understanding of financial goals,"

Giovagnoli says. To facilitate a deeper and more wide-ranging analysis of the financial issues involved in today’s partnerships, she suggests that financial executives ask these four questions:

  1. How soon do you and your partner expect or need to see some financial results from the alliance?

  2. Is your partner as excited about the potential opportunities for knowledge-sharing the alliance will generate as it is about the financial gain?

  3. How much is your partner willing to invest in terms of dollars, people and resources?

  4. How willing is this company to change its investment in or financial goals for the alliance based on changing circumstances and opportunities?

In addition to answering these questions, finance executives should take the following actions when forming alliances:

  • Benchmark the proposed financial arrangement against those created in other alliances. This helps to ensure that the arrangement is fair and no one feels cheated.

  • Make certain that all provisions of the alliance are documented in writing to avoid any misunderstandings.
  • Set up specific financial-measurement provisions to determine if the alliance is meeting the expected financial objectives.

    Because alliances are becoming so prevalent, the successful financial executive of the future will be one who is skilled at the kind of deal-making required to make alliances succeed, adds Christopher Meyer, partner, Ernst & Young Center for Business Innovation, Cambridge, Mass. "Novel forms of equity investment and incentive will have to become a stock in trade for every CFO," he says. (See For Your Alliance Library)

    In the end, alliances are really just another example of how rapidly business is changing. Do financial executives who have experience with alliances have advice for novices on how to get comfortable in this new environment? "Yes," Hood says. "I suggest you get comfortable as quickly as you can." After all, if defense contractors from the United States and Russia can work together, just about anybody can.