Corporate alliances have come a long way since the early era of collaboration, when companies came together to simply fill a gap in their business strategies while keeping a vigilant watch on partners to guard sensitive company information.
According to Deloitte Research, the number of corporate alliances is growing by as much as 25 percent each year and now accounts for nearly a third of many companies’ revenues and value. Part of the reason for alliance growth may be that few companies are currently in a position to afford acquisitions.
“There’s an appropriate time for an acquisition but there are many more opportunities to do an alliance,” says Mike Leonetti, executive director, healthcare partnerships, at Boehringer Ingelheim, a pharmaceutical company based in Ingelheim, Germany. “Acquisition is dependent upon fiscal times, how much capital’s available, where financing can come from, how strong the company’s balance sheet is — there’s just a lot that goes into acquisition strategy. But if you can align with another company and create business objectives, you can just about guarantee that there’s not going to be as deep a cultural and financial cost.”
Meanwhile, some companies have the best of both worlds. Hewlett-Packard Co. announced in May that it would acquire EDS, whose multipartner Agility Alliance won a best practices award this year from the Association of Strategic Alliance Professionals (ASAP), a global professional association dedicated to the formation and practice of strategic alliances. The deal, valued at $13.9 billion, is scheduled to close before the end of the year. It will enable HP to ramp up its technology services and potentially be in a stronger position to compete on some of IBM’s turf. The transaction will significantly strengthen the Agility Alliance, according to an EDS spokesperson; EDS will benefit from additional hardware and software and other resources provided by HP.
While few companies can clinch $13.9 billion deals, you don’t have to be a tech powerhouse to form strategic alliances. Many midsize businesses in various industry sectors are moving toward deep collaborations in pursuit of growth and have equal prospects for success — because what separates alliance success from alliance failure is how companies strategize and manage their partnerships.
According to Deloitte, a whopping 60 to 70 percent of alliances fail, so implementing best practices is critical.
Building an alliance with multiple partners involves complexities that challenge world-class organizations. EDS’s Agility Alliance, a coalition of market-leading technology and business service providers — Cisco, EMC, Microsoft, Oracle, SAP, Sun, and Xerox — won the ASAP award for alliance best practices largely because of its ability to effectively manage the complexity of a multipartner endeavor, says Leonetti, who is chairman of ASAP.
Collectively, EDS and its partners collaborate to design, build, and run a services platform and develop technology-based services for companies in a variety of industry sectors as well as governments. The alliance requires deep collaborative engineering by EDS and its partners.
HP says that it plans to establish a new business group that will be headquartered in Plano, Texas — EDS’s home — upon completion of its acquisition of the company later this year.
Greg Robins, EDS’s director of global alliances, points toward executive commitment as the key best practice for the success of the Agility Alliance. “Each of our agility alliances has an executive sponsor on our site who sits on the staff of our CEO, which relays commitment at the very top,” he says. “We have an executive steering committee that meets to make sure that the overall program is aligned and stays in line with the corporate strategy. The alliances are aligned under corporate principles, and we map what we’re doing to impact those principles. We focus on profitability, operational excellence, financial discipline around free cash flow, reducing costs, exceeding financial expectations, and ensuring positive ROI — as well as personal responsibility, teamwork, and passion on the job.”
EDS has achieved alliance best practices in measuring and monitoring success, according to Robins:
“With each partner, we have a joint business plan that talks about what we want, what they want, and what initiatives need to be driven. At the end of the business plan, these fold into a giant scorecard that we monitor throughout the year. We also have an online dashboard to measure and monitor the impact of sales, of win rates.
“We track the segments that we’re winning together and watch to see where the trends are going, sometimes on a daily or weekly basis depending on the activity, but at least on a quarterly basis. We review all of these metrics, the scorecard, and the business plan in a quarterly business review with executive sponsors on both sides as well as the alliance directors and some of the key stakeholders. And we do a quarterly multilateral collaboration meeting of the global leaders from each of the agility alliance partners and each of the global alliance directors from EDS.”
Excellence in building trust and managing competitive concerns is also evident. “There are competitive overlaps between a lot of the partners, which we’ve got to be able to manage. So in the process of running a smooth alliance, we set up parameters on where we’re partnering together and in what industry segments so that we don’t have a lot of overlap when it comes to pursuing deals,” Robins says.
Deloitte’s research emphasizes how important the trust-building aspect of alliance management can be. The risk of opportunistic behavior among participants in a network alliance can be a serious threat to alliance stability. It’s not uncommon for a single alliance partner to participate in a network just to accrue specific knowledge or information without contributing to the overall goal of the partnership, according to Deloitte consultants.
Deloitte recommends building social capital by cultivating deep ties between alliance players, which EDS does very effectively. “”We do a lot with our alliance partners around community engagements,” says Robins, “including Habitat for Humanity, the Susan G. Komen Race for the Cure, and the Byron Nelson Golf Championship.” These activities map directly to EDS’s principle of alignment between corporate and alliance goals and its ultimate theme: personal responsibility. According to Robins, building teamwork and passion on the job is a best practice that helped EDS win this year’s ASAP award.
Cisco Systems, based in San Jose, Cal., and multinational Fujitsu received this year’s ASAP award in the category of individual alliance excellence.
The alliance focuses on delivering value through comprehensive customer-focused IT, communications, and networking solutions for the global marketplace, allowing customers to better manage risk, lower costs, and accelerate growth.
“The judges were especially impressed with the multicultural aspect of the alliance,” says Leonetti.
“Most companies we’ve partnered with are U.S.-based, and the Japanese culture is, of course, very different,” says Gary Borad, Cisco’s Fujitsu Alliance manager. “But Fujitsu is more than Japanese. They have a huge business in Germany and in London and that makes this really complicated.”
The Cisco and Fujitsu teams consist of people who are bilingual and understand the cultural differences. Many of the Fujitsu alliance team members worked and/or were educated in the U.S. Many of the U.S. team members worked, lived, or grew up in Japan.
Managing such a complex, multicultural alliance required a carefully developed management structure, starting at the top. “Executive sponsorship is fundamental,” says Borad. “We have four executive sponsors here at Cisco and a similar set of sponsors at Fujitsu. Our CEO meets with their CEO at least once a year, and the sponsors meet in person every six months.”
“We consider ourselves a global alliance that’s regionally led. Alliance team members within the different regions collaborate day to day. We’ve managed the alliance by breaking it into bite-size chunks: There are regional teams on both sides in areas including development, quality, services, and sales. Each of these teams operates independently. Because they have ownership, they can be light on their feet. Then all of the leaders from all of the teams get together on a quarterly basis to talk about progress.”
The alliance demonstrates how best practices in measuring alliance progress pay off. “We set measures jointly, which is a key element of the alliance’s success,” notes Borad. “Revenue is a small piece of how we measure the success of the relationship. We also measure progress by customer acquisition, keeping costs down, and developing new solutions for customers.”
Finance plays an ongoing role in establishing and monitoring the alliance, which enables the partnership to seize new business opportunities. “We’ve been doing a lot of other things with Fujitsu, and as we embark on them we have to analyze the value of the opportunity each time. Even though we have a strategic alliance, this doesn’t mean that we jump into new deals. Our CFO and finance team are incredibly important in analyzing benefits, tradeoffs, and what the return on investment looks like. Without that work, we wouldn’t be making the best business decisions,” Borad observes.
The alliance with Fujitsu enables Cisco to increase revenue and improve quality for customers by leveraging both technology and Fujitsu’s customer relationships around the world. “We’re executing as planned in our growth areas, and so is Fujitsu,” says Borad. “They have better customer knowledge in Japan than we have and they also have a lot of competitors. They have brought us awareness around quality and green technology that helps us to accelerate in areas where we might not have been able to do so as fast without them.”
According to Fujitsu president Hiroaki Kurokawa, by partnering with Cisco and folding its high-end equipment into Fujitsu’s product line, the company will be able to address a greater range of customer needs. Takahasi, Fujitsu’s business unit in the alliance, was awarded recognition for growing faster and contributing more to the bottom line than any other business unit, largely due to the Cisco alliance.
While the EDS and Cisco–Fujitsu alliances offer a look at mature collaborations, partnerships with shorter histories embrace proven best practices from the get-go.
Pharmaceutical giants AstraZeneca International and Bristol-Meyers Squibb entered into an alliance about a year and a half ago to develop and commercialize two compounds for the treatment of Type 2 diabetes, both of which were discovered by Bristol-Meyers Squibb. The two companies will share costs and profits 50-50.
“Delivering the actual product must come first, not each individual company,” says Denise Goode, executive transaction director, strategic planning and business, at London-based AstraZeneca. “It was critical that the two project teams share a joint vision to deliver a better solution to diabetes patients than either one of our companies could do alone.”
Clarifying and documenting that vision at the beginning of the collaboration was essential, according to Goode. “This shared vision required a clear mutual understanding of the potential of the products and their risks, as well as agreement about how much money both partners would put behind the products so that we both will live up to the overall philosophy of the alliance — which is to deliver superior products to diabetes patients. We believe that the cost and profit-sharing arrangement that we have set up assures the alignment of strategy, investment, and activity on both sides in order to optimize the two products for the long term.”
Best practices themes in this alliance surrounding structure (both operational and governance-related), choosing the right partner, getting buy-in at the top of both companies, monitoring and measuring performance, addressing cultural issues, and involving finance parallel those of Cisco–Fujitsu and EDS.
“Identifying the right alliance partner to meet strategic needs is really critical, and striking an optimum deal that fairly rewards both parties for the investment risks they take and the results they contribute is key to the collaboration,” notes Goode. “It’s not going to go well if one party feels cheated in any way by the other. Every negotiation requires some compromise. I think that we’ve got the balance right.”
Goode says that the similar cultures of the two companies work to the advantage of the alliance. “As large pharma companies, we both have a shared culture built around established processes. Being of equivalent size and complexity to BMS makes it easier in some ways for us to work with them than if we were to collaborate with a smaller company, say a biotech. We’re looking really for transparency, enabling a joint understanding of our respective diversity. The success of the whole thing is based on both companies sharing an ambition to support joint governance and to streamline each company’s own internal governance whenever appropriate in order to optimize efficient and effective functioning. We’ve both had to compromise on our normal internal workings because the alliance comes first.”
AstraZeneca’s CFO was heavily involved in the alliance’s setup, but now most finance input has been delegated largely to the teams, according to Goode. “Finance has been involved in all parts of setting up the partnership, from our initial strategy through screening this as a viable business opportunity, deal terms structuring, and now in terms of playing an active part in running and managing the alliance. There are about ten AstraZeneca finance people involved in the collaboration day to day, all of them having some kind of interaction with their BMS counterpart, some on nearly a daily basis.
“We set up as part of our governance a joint finance committee that meets regularly to oversee financial procedures and provide steering on budget management. We have financial representation on regional operating and other joint committees, and we operate joint budget management through these people. In fact, on certain task forces we’ve agreed to have only one finance person representing both AstraZeneca and BMS. This is a sign that it’s a very close alliance instead of just being ‘us’ and ‘them.’”
Alliances clearly have come a long way from the gap-filling deals of their infancy and, as more companies make alliances a key part of their business strategies in the future, consultants predict unusual collaborations that wouldn’t have been imagined a decade ago.
It looks like the future is now. This year, ASAP introduced a new alliance category — alliances for corporate social responsibility — in which multinational firms team up with international organizations and national governments. The awards were given to Eli Lilly and Company and Roche. Lilly won for its multidrug-resistant tuberculosis partnership, a global public–private alliance that is working to save lives by preventing and treating the disease; Roche was recognized for its Tamiflu alliance program that has responded proactively to the emergence of the potential threat of a global Avian flu pandemic.
Both the Lilly and Roche programs work extensively with the World Health Organization, national governments, and nongovernmental organizations (NGOs) in public–private collaborations to address global public health threats.
No matter what types of entities form an alliance, mutual adaptation and flexibility are key. “Not everything can be written down in a document ahead of time,” says Goode. “An alliance of this type involves sharing and compromise on both sides. If you’re not comfortable relinquishing some of the decision-making in an alliance, you need to rethink the whole thing.”
• Choose the right partner(s). Most strategic alliances fail, so selecting the right partner is fundamental for alliance success. Consider up front a potential partner’s reputation, track record, strengths and weaknesses, strategy, and goals. Have they been participants in successful alliances in the past or involved in a string of failures?
• Recognize and respect cultural differences. Alliances involving partners from different countries carry intrinsic challenges that best practice companies are well equipped to address. The Cisco–Fujitsu global alliance, for example, is a multicultural alliance represented by employees on both sides of the collaboration who have international work/life experience. But differences in corporate cultures are equally important, even among U.S. companies. Differences in sales cycles, overlap with partners, different marketing strategies, and differences in financial reporting and budgeting can be major cultural challenges for alliance partners.
• Obtain buy-in from senior executives. Alliance support at the top of the organization is essential to ensure that sufficient corporate resources will be available throughout the life of the alliance. Best practices companies align their partnerships with corporate strategy and stay in line with corporate strategy for the duration — which requires CEO buy-in from the beginning.
• Carefully structure the governance framework. Governance is where the rubber meets the road for finance executives — and the greater the number of alliance partners, the more important setting up the right governance structure becomes. Designing, managing, and monitoring the financial terms of the collaboration and their implications requires CFO scrutiny. Deloitte research advises that formal structures that are equity-based can have a positive effect on stabilizing network partnerships, resulting in more positive interaction among alliance partners. Shared equity alliances, says Deloitte, help to align the interests of the partner firms. But, their researchers say, informal structures can be a powerful pathway to alliance success and work best where high levels of trust are in evidence between the partner firms.
• Develop and revisit joint metrics. Measurements, of course, differ from alliance to alliance based on their purposes and goals, but regardless of the chosen metrics, developing them jointly is a best practice that has worked well for the Cisco–Fujitsu global alliance. “We set measures jointly, which is a key element of the alliance’s success,” says Gary Borad, alliance manager on the Cisco side. “Revenue is a small piece of how we measure the success of the relationship. We also measure progress by customer acquisition, keeping costs down, and developing new solutions for customers.” And, consultants say, performance metrics should change as alliances evolve.
• Monitor performance regularly and communicate progress to stakeholders. Alliance complexity will largely dictate the frequency of meetings at various levels from project teams up to executive steering committees and CEOs. Best practices companies say that personal contact with stakeholders at each level is the glue that keeps alliances running smoothly, whether it be via on-site meetings, video teleconferences, or telephone calls. Greg Robins, director of global alliances for EDS, whose alliance with nine technology partners represents extreme complexity, says that at least once or twice a year the alliance involves CEO-to-CEO contact.
• Be flexible, build trust. Best practices companies understand the importance of mutual adaptation and flexibility in alliances. As is the case in marriage, you sometimes must be willing to relinquish control, which helps to build trust. Deloitte researchers believe that developing trust between partners can offset the risks of opportunism, reduce operational costs, and help to foster the creation of a successful alliance strategy.