Making judgment calls at alliance margins

Increasing shareholder value doesn't always mean buying or selling assets—at least not for most small and medium-sized companies. In today's economy, networked businesses flourish by borrowing assets through strategic alliances. Alliances may not have the adrenaline rush of M&As but they deliver the goods—when they're done right.

By Charles J. Roussel
Andersen Consulting

Only four or five years ago, the rules seemed pretty clear. If your core business was saddled with lackluster growth, you went about increasing share price by doing a deal. You might acquire higher-growth assets, or shed underperforming ones. If you gave the market a good enough story about why these transactions made sense, stock price rose.

But mergers and acquisitions are a blood sport. Market caps rise and fall with company reputations. Deals that seemed sure bets are frequently swamped by sluggish implementation, cultural squabbles, or regulatory commissions. Stakeholders, unfortunately, are seldom sympathetic. They continue to expect—sometimes loudly—more customers, more products to market faster. To comply, the company does another deal and another and another, but never quite manages to integrate the whole or realize promised gains.

Today, only a handful of Fortune 50 companies can play the serial acquisition game, and these companies no longer dominate. Start-ups and spin-offs and the swelling ranks of mid-sized companies define the competition in most markets. Yet because most lack deep cash reserves and deep management talent, few can grow through acquisition. Some, in fact, are just one earnings report away from crisis.

As a result, strategic alliances have gained a new appeal. They create value without forcing companies to assume debt or dilute shareholder equity in ways that cripple future growth. But they have a dark side too.

Alliances are hard to do well. In fact, they're unnatural acts for most companies. You don't get everything you want and, yes, it's true, personal chemistry has a lot to do with whether an alliance succeeds or fails. Yet, for most small and mid-size companies, alliances are critical additions to the strategic arsenal.

Since our earliest days, we've worked with many of the world's most alliance-intensive companies. We've also formed hundreds of our own partnerships, and like everyone else we've earned a few scars in the process. Here's what we've learned.

The best partners don't think about alliances as a series of ad hoc, reactive steps (choosing a partner, negotiating terms, sending out a press release, etc.). Alliance building is a continuous process, not a series of transactions. Learning to manage these deals as they transition from one phase to the next makes all the difference.

Alliance masters:

• Focus on strategic outcomes, to build their reputation (and shareholder value).
  
• Experiment, as a way of coping with an uncertain, global, "e-oriented" economy.
  
• Try to predict how an alliance will perform and measure the results.
  
• Teach themselves discipline. They document, publicize, and repeat what works.
  
• Make sure investors understand that alliance building is a key part of a coherent strategy for winning in the market.

Getting there takes time. While it's not rocket science, mastering the science of alliances does call for acute sensitivity to the ebb and flow of the alliance as it evolves— that is, knowing exactly what needs to be done, how quickly, and by whom.

Someone once said that life is only interesting at the margins. With alliances, it's during the transitions that things get really interesting—when the executive who first championed the relationship is replaced by someone else, for example, or when payments mandated by the contract come due. At these junctures, an alliance hangs in the balance. And that's when the most skilled alliance managers show their stuff, and turn potential breakdowns into breakthroughs.

Five critical transition points define the alliance lifecycle:

1. Picking the right partner. Companies almost never reject a proposal because they suspect they're a bad cultural fit with a potential partner, and this invariably causes problems later. While it's tempting to settle for the first pretty face, it's wiser to shop around at little. Alliances depend on strategic alignment and a collaborative culture, a culture that depends on partners who will mesh at a personal, social, and organizational level.

2. Negotiating the deal. A good deal is one where you "win" and the other guy loses, right? We've all been to the school of "win-win" but exactly what does that mean? Should you avoid the tough issues and just get the deal signed, or bargain hard and establish your power base? Should the people responsible for operating the alliance set up the deal, or is it smarter to use a special team of negotiators?

3. Defining decision-making routines. Fuzzy management guidelines lead to friction and failure. People who "do" the deal rarely discuss the details of how it's supposed to work—like defining the way operating decisions will be made—before signing the agreement. When problems arise, it's already too late. By anticipating the issues most likely to come up, and discussing how each party would prefer to respond, alliances can avoid decision gridlock from the outset.

4. Resolving the first crisis. Every alliance eventually experiences a crisis, and how it gets resolved defines the subsequent relationship. Handled well, a crisis can galvanize two teams into one. Handled poorly, it can create deep rifts that may require personnel changes to fix. Simulation and contingency planning can help prepare for the inevitable.

5. Exiting the relationship. Knowing when and how to end a relationship—even one that benefited both partners—is the hallmark of a world-class dealmaker. Exit strategies need to address many issues: separating assets, transitioning resources, untangling legal agreements, communicating with customers and shareholders, and more.

Alliances are often made out to be financial follies or cynical PR plays. That's far from the truth. Companies like Cisco, Pfizer, and BP Amoco demonstrate that you can generate excess shareholder value through business combinations. They treat alliance building with the respect it deserves: as a core capability of the company that must continuously evolve. By doing so, they substantially improve the likelihood that the next alliance will go better, with fewer surprises and a greater certainty of return.

Next time: Take a closer look at the first critical event in the life of an alliance: picking—and keeping—the right partner. What are the best indicators of what a potential partner will be like to work with? How can cultural differences be managed during the alliance?

About the author: Charles J. Roussel is a partner with Andersen Consulting based on Boston. He can be reached at charles.j. roussel@ac.com.