Topics covered in this Partner of Choice (POC) article:
- Background - Why is POC important?
- Emergence - Where has it come from?
- Progression - Where is it going?
- Status - How does your company match up?
- Commercial Benefits - What return can you expect?
- References - Who has contributed to this article?
Average Reading Time - 12 minutes
Further articles, templates and tools regarding this topic are available in the Alliance Best Practice Database at www.alliancebestpractice.com
Alliances are exploding in volume and value. The average company in a group of 90 multinationals based in the United States, Europe, and Asia formed 117 strategic alliances over the last three years. IBM alone formed more than 500. These companies expect alliances to increase from an average 16 percent of their total market value to 25 percent in the next five years.
Few CFOs spend as much time steering alliances as other management vehicles, yet major management consultancies suggest that more CFOs should. Alliances are zipping past acquisitions as a primary growth strategy. They range from so-called "Barney alliances" - the "I love you, you love me" variety that generated buzz but little value during the dot-com era; to best-in-class partnerships, which enable companies to increase market share, boost revenue and gain access to new markets.
"The ROI for alliances is at least 50 percent higher than the average ROI for a company's total business," reports Peter Pekár Jr., Ph.D., national director of corporate alliances for investment banking firm Houlihan Lokey Howard & Zukin in Los Angeles and co-author of "Smart Alliances: A Practical Guide to Repeatable Success" (Jossey - Bass, 1998). "Among Fortune 500 companies, overall business ROI was a little less than 11 percent about 18 months ago, coming into the downturn. ROI from alliances among the Fortune 500 during that time was almost 17 percent."
But most alliances fail to survive long enough to reap those returns. Those that succeed are developed and executed through a disciplined process woven into the companies' day-to-day operations, and finance organizations play a pivotal role in those activities. They help convert alliances from fuzzy ideas to powerful and efficient engines of growth.
Emergence of ‘Partner of Choice’ Phrase
As alliances proliferate, a handful of companies have emerged as "partners of choice," reputedly the best partner in an industry or business sector. These premier alliance-builders also tend to reward shareholders with superior returns. Pfizer, BP Amoco, Cisco, IBM, Microsoft, Eli Lilly and Intel, are all frequently cited as partners of choice, they boast a five-year total return to shareholders which is 1.5 times that of competitors. While obviously not due to alliance success alone, the pattern persists across industries, preferred partners are superior performers.
Organisations that are drawn to Partner of Choice Programmes have consistently identified common triggering conditions:
- 20% (or more) of their revenue or profits are expected to come from alliances or joint ventures
- 20% (or more) of the value they create for their customers will come from alliances (either supplier alliances, technology development alliances, marketing alliances, or service delivery alliances), or
- Multiple alliances (or a networked enterprise) is becoming a fundamental part of their business delivery structure
- Alliances are increasingly essential to the growth and future competitive advantage of their company
Given the growing economic and strategic impact of alliances, and alliance reputations, it is surprising that fewer than 10 percent of companies have assessed the effect of their alliance brand on the opportunity, quality and success of the alliances they create.
Most companies do not assess their alliance brands because they:
- Overrate their abilities: an unrealistic 50 of 100 companies assessed by Alliance Best Practice Ltd (ABP) consider themselves the partner of choice in their industry and feel no need to delve deeper.
- Lack a way to assess reputation
- May not historically have considered alliances as important as they are today.
Recent global research reveals that a strong alliance reputation confers significant benefits throughout the four phases of the alliance process: 1) partner identification, 2) deal making, 3) integration and 4) alliance management.
Companies with leading alliance reputations are the first port of call for companies seeking partners. They are approached earlier and offered higher-quality deals. They often negotiate better deal terms and close deals faster, as would-be partners will tolerate greater uncertainty knowing that a particular partner has a track record of success. Potential partners may even be willing to make greater concessions to get the deal done knowing that their chances of success are greater.
A standout alliance brand increases trust and willingness to make unilateral commitments, which speeds integration. A stellar reputation also increases the odds of success because allying companies devote top people to the alliance's ongoing management.
There is anecdotal evidence that the value of a good reputation can be enormous. Pfizer's exceptional reputation supposedly persuaded Warner-Lambert to partner in the Lipitor deal. This marketing alliance is considered to be worth more than U.S. $1 billion in annual sales for Pfizer. Starbuck's enthusiasm for PepsiCo’s adeptness at interdependent alliances (founded on PepsiCo’s successful canned iced tea joint venture with Unilever) blossomed into an alliance for ready-to-drink coffees expected to become a billion-dollar business.
The value of a leading alliance brand increases commensurately when:
- Alliances are the basis for competitive advantage.
- Rivalry for alliance partners is high, particularly with winner-take-all exclusivity, such as joint ventures, exclusive licenses and sole-sourcing agreements.
Partner of Choice Progression
A partner of choice programme will develop in most organisations through the following stages: -
Stage I: Opportunistic:
- Alliances may or may not be strategic
- Single champion with a vision and each alliance is a “Stand Alone” venture
- Alliances are not part of the corporation’s “Standard Operating Procedure”
- Alliances are not tightly connected to some other major strategic effort in the company, and not as a fully acceptable growth form -- the “least desirable choice”
Stage II: Systematic:
- Separate corporate efforts in supply, production, marketing/sales, and international initiatives resulting in alliances (but these efforts are not tightly linked as part of value chain reengineering)
- Strategic view toward the alliances, and alliances are seen as a viable growth alternative, (albeit maybe a less desirable one in some people’s eyes)
- Efforts begin to adopt “best practices” in alliance formation and management around the company to create a corporate wide architecture and become the “partner of choice.”
- Systematic reengineering of the value chain
- Alliances are seen as a means to a larger competitive advantage
- Close integration of supply, production, marketing, sales, service, information, international initiatives, breakthrough generation, etc.
- Wide-scale use of full range of alliance capability building means to leverage competitive advantage
Stage III. Endemic:
- Alliances are viewed as strategically imperative by the organisation
- Alliances are 'the way we do business around here'
- Partnering is a corporate competence
- Internal and external collaboration are seen a s a key strength in senior executives and the skillset is actively encouraged and trained
- Endemic organisations tend to be 'agile' that is - able to enter and exit collaborative relationships easily and quickly. This grants them considerable competitive advantage
Partner of Choice status
A powerful alliance reputation is important when a company's business model emphasizes alliances and when speed counts; deals close sooner and partners integrate resources more quickly, perhaps getting an alliance up and running months faster than a competitor would. Alliance reputation can be a proxy for detailed information when potential partners are unfamiliar with each others businesses. Brand is a critical gauge, too, of how a partner will react when operating in a highly uncertain environment.
Partner of choice status derives from four principal sources that vary in potential value, level of investment, payback time horizon and sustainability.
- Corporate Assets - Powerful alliance brands are built on unique corporate assets. But as a focus for improving alliance reputation swiftly, corporate assets are impractical because their development almost always requires huge investments and long-term strategic commitment.
- Alliance Track Record - Would-be allies seek partners with a history of multiple, successful alliances, not an ideal starting point for enhancing brand. Building preeminent alliance portfolios took Hewlett-Packard and Intel the better part of the 1990s, while Corning took decades (Dow-Corning, Owens-Corning).
- Alliance Management Skills - Although deal making captures the headlines, a solid record in alliance management becomes, de facto, a source of reputation. To the extent that alliances are making companies "collections of affiliated assets," strong alliance management skills represent strong corporate assets.
- Alliance Brand Promotion - Small investments in communicating positive alliance performance to shareholders, suppliers, customers and industry gatherings can have a large impact on alliance brand relatively quickly. SmithKline Beecham, for example, probably coined "partner of choice" in its 1994 brochure that profiled its attributes as an alliance partner.
Of the four sources of alliance reputation, a good place to start is with alliance management skills, since a company can take specific action.
Partners of choice consistently demonstrate excellence in three areas of alliance management.
- Speed - Alliances can provide quick access to resources that otherwise take years to build alone. Speed may be enhanced by positioning the alliance outside the standard corporate organization, freeing it from internal politics; and by settling alliance details well before deal close, so the crucial integration phase goes smoothly and sails into the management phase.
- Performance Discipline - ABP research indicates that only half of all alliances have formal performance measures in place, and of those that do, they are rarely yielding high-quality metrics. Partners of choice instead apply the principles of the balanced scorecard to their alliances. They agree on measures of sustained success and pay special attention to two or three that become focal points for alliance stakeholders.
- Partner Focus - Partners of choice create value for their alliance partners beyond the alliance agreement and without incurring substantial costs. They share management advice, market intelligence, and customer feedback. They tout their partners unique contributions to Wall Street and other market makers. They create visibility and leads for alliance partners through introductions to a vibrant, often exclusive, community of other operating units and other alliance partners.
Finally there are tangible commercial benefits to be gained from successful partner of choice programmes:
- In 2008 Alpha company identified Alliances as one of the top 4 priorities in the company. It had 462 Alliances across the spectrum of business in areas such as R&D, Business Development, Strategic Supply Management, Manufacturing and Marketing & Sales.
- After putting in a Partner of Choice Programme the company’s stock rose 600% between 2008 and 2014. Alliances were worth $20 billion in Market Capitalization (1/3 total value) of the company during that time. ‘Co-opetition’ was a massive competitive edge for the company. During the 4 years the organisation grew to be the most sought after partner in its sector, allowing it to charge favourable rates for alliance deals and allowing it to choose the best of the best suppliers.
- In 2011 an international retailer best known for clothing and food products, but also operating considerable businesses in financial services, homeware and other general services. Faced the problem that they couldn't insource IT and were unwilling to outsource IT. What was required was an approach that allowed the company to take advantage of leading edge thinking from suppliers whilst not losing control of a critical business driver.
- The company instigated a partner of choice approach with the following results: -
- Project delivery times improved by 230% (from 23 weeks average to 10 weeks)
- Project costs for the introduction of new ICT projects reduced by 131% (from £193, 556 average to £148,222)
- Client costs before project start reduced by 133% (from £125,000 to £94,222)
- Client time per project reduced by 185% (from 26 weeks to 14 weeks)
- Partner supplier time reduced by 112% (from 9 weeks to 8 weeks average)
Grateful thanks go to the following contributors to this article:
- William Gordon is an Accenture partner in the Strategy & Business Architecture, Products - Pharmaceuticals & Medical Products Practice, he is based in London, U.K.
- Bud Moeller is an Accenture partner in the Human Performance, Communications & High Tech – Communications practice, he is based in San Francisco, California, U.S.
- Nick Palmer is the Founder and Managing Partner of Alliance Edge Consulting, he is based in Boston, Massachusetts, U.S
- Robert Porter Lynch is the Founder and Managing Partner of the Warren Company, he is based in Naples, Florida, US.
- Peter Pekár Jr., Ph.D., was the national director of corporate alliances for investment banking firm Houlihan Lokey Howard & Zukin in Los Angeles and co-author of "Smart Alliances: A Practical Guide to Repeatable Success" (Jossey - Bass, 1998).
 Companies other than Alliance Best Practice Ltd conducting identified research projects initiated within the last 20 years include: Accenture, CGCP, The Warren Company and Alliance Vista Corporation. Grateful thanks go to their insightful research that has accelerated our understanding of this key concept.
Further information regarding the concept and application of POC can be found in the Alliance Best Practice Database at www.alliancebestpractice.com