Alliances: Getting Non-Equity Collaboration Right

   

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GettyImages-505649964_Squared_v2.jpgPARTNERSHIPS HAVE COME of age in the last 20 years, becoming a central tool for corporate strategy and competitive advantage across industries and geographies. Companies as diverse as Amazon, GlaxoSmithKline, Google, IBM, Microsoft, News Corp, Philips, Siemens, Shell, Starbucks, and Uber all routinely see partnerships accounting for 20-50% of their corporate value – whether measured in terms of revenues, assets, income, or market capitalization. Meanwhile, the proliferation of partnerships continues unabated; almost 50% of CEOs surveyed in 2016 expected to enter into a new partnership within the next 12 months.

The vast majority of these collaborations are structured as non-equity alliances – i.e., purely contractual agreements where no new equity structure or separate joint venture company is created.


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In fast-moving industries like software, electronics, financial services, pharmaceuticals, and retail, non-equity alliances are the dominant form of partnership. These industries thrive on purely contractual relationships that offer a quick way to access capabilities and markets without the time, rigidity, and other issues associated with creating a separate company with a counterparty. Indeed, single non-equity alliances are often being structured as part of broader alliance ecosystems, where firms are assembling complementary and sometimes overlapping partnerships to introduce entirely new business models. We are also seeing the continued drive of pharmaceutical, high-tech, retail, and other firms to “standardize” their approach to partnerships as part of their R&D, manufacturing, and/or and marketing strategies. At the same time, companies are enabling their alliances through various electronic collaboration tools and systems. Despite some new trends, a number of classic issues still arise when developing and structuring non-equity alliances. These include: Ensuring alignment on objectives, making sure that an alliance is the right structure, getting partners to commit the resources, coordinating interactions between the partners, getting partners aligned via mutually beneficial (though rarely equitable) economic outcomes, managing the partnership or ecosystem, and planning for the future if things succeed – or fail.

GETTING ALLIANCES RIGHT

Even when companies have great alliance ideas, many alliances do not succeed. Analysis by Water Street Partners and others indicates success rates of non-equity alliances to be between 30%-60%, with “partial” success – i.e. meeting some but not all targets – somewhat north of 50% on average. While there is no silver bullet to success, our experience has identified a set of keys to excellence across the alliance deal-making process (Exhibit 1).


Exhibit 1: Excellence in the Alliance Deal-Making Process

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Alliances typically run into problems when the partners lack a coherent and explainable strategy for the partnership, or when partners are financially weak or otherwise culturally or ethically incompatible. 

Assuming those two hurdles are cleared, the next challenge is choosing the right structure. Most deal teams kick off this process already thinking the right path is an alliance, a JV, or something else, making it an opportune moment to challenge preconceived notions by considering alternatives.

Keeping an open mind going into deal negotiations is also helpful because the line between a JV and an alliance is often fluid in practice, once you get into structuring. For example, the airline industry often uses “anti-trust immunity” joint ventures to collaboratively set prices and schedules and fully integrate and share economics on key routes – yet these joint ventures lack separate equity entities, even on paper. Or take the case of the North American Coffee Partnership, a Starbucks-Pepsi JV to bottle and sell ready-to-drink coffee in the U.S. This JV has essentially no direct employees, and all work is done inside the parent companies on behalf of the JV – which sounds very similar to the typical highly integrated pharmaceutical co-promotion alliance, except for the existence on paper of a jointly owned entity between Starbucks and Pepsico.

With that in mind – what does it take to negotiate and structure an effective alliance?

1. Align on goals early during negotiations. Make sure that all sides share the same goals – on expenses, on market share aspirations, on what success looks like, etc. – and are willing to commit on paper. Define explicit expectations of what each side will provide in pursuit of those goals so that partners do not shift resources away. And consider reinforcing that point by making sure the partners are incented directly (e.g., there is a clear path to generating profit for performing alliance work), and seeing if all sides would agree on the concept of performance bonuses and penalties to secure commitment.

For example, in a high-tech industrial sales alliance between an IP holder and a global firm, ... Click below to download the complete article.


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