Over the past 10-20 years a new golden rule of business has emerged: you can’t succeed on your own. Rapidly changing technologies and the globalisation of most markets are the two biggest factors that lead CEOs to conclude that they need to work with others and share the effort, investment and risk of developing and pursuing major new opportunities.
Even once bitter rivals can seemingly put their animosity to one side if there is a sufficient prize available. A few years ago, for example, Peugeot, Citroen and Fiat came together to develop their MPV range. Fiat called it the Ullysee, Citroen the C8 and Peugeot the 807, but it was fundamentally the same car.
Using the chart above, the carmakers’ partnership was a growth partnership. By working together, the companies were more cost-effectively able to develop a new product, in line with their strategy, than they could by going it alone.
There are three other types of possible partnership, however.
Where there is both longer-term strategic fit and immediate cost synergies, game-changing partnerships are possible. Many of these partnerships take the form of mergers and acquisitions, but that needn’t necessarily be the case. For example, over the past 20 years P&G and Wal-Mart have been able to accelerate growth and reduce costs for both sides by partnering on supply management, product development and category management.
Back-office partnerships take place when cost synergies exist, but there is not the level of strategic fit. Companies such as Capita, Carillion and IBM are all focused on delivering support activities to corporations, using their specialist skills and scale to release cost and resource.
Of course, not all partnerships deliver what they promise. Either the strategic fit was an illusion, as the executives from Daimler Benz and Chrysler found out after their merger in 1998, or the expected cost synergies failed to materialise, as Sainsbury’s discovered after they made a huge bet in the 1990s on using IT to dramatically lower costs, asked Accenture to make it happen, and then watched in horror as they failed to make any real headway.
These partnerships are distractions, and in the cases of Daimler, Chrysler, Sainsbury’s and Accenture they were distractions that consumed enormous amount of time from the most senior people in the organisation, involved legions of managers and staff, and cost billions of dollars. Distractions end in tears, literally.
If you are looking to enter into a partnership with another business, you must therefore take the following steps:
- Understand the limits of the prize available and understand the nature of the partnership. If it’s about accessing new customers, don’t expect cost reductions, and, equally, if it is about lower cost operations don’t expect to be able to miraculously leap into new markets.
- In your mind, at least, reduce the size of the prize you’ve discussed by half and double the effort and cost to get there. Only if it still looks highly attractive should you think about proceeding.
- Establish clear and unambiguous criteria for success and set in place milestones where either party can back out if performance is below agreed levels. It is inconvenient to clear up a small mess; it is a career-killer to be clearing up major, avoidable catastrophes.
All this means that you must be willing to put the effort up-front with your prospective partner to build trust at different levels in the organisations, and have the difficult conversations about how you will manage the relationship in the months and years ahead.
Partnerships can be a highly effective way to accelerate the growth and performance of your business. But, if they are not managed in focused way, they can also be a great way in bring your company to its knees.
© Stuart Cross 2010. All rights reserved.