The Basics: Why Alliances Underperform and Fail

  

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Getting Alliances Right

The Basics: Why Alliances Underperform and FailTHE ROSTER OF NON-EQUITY ALLIANCE success stories is diverse and eye-catching, and includes Accenture-Cisco, Pfizer-Amgen, Starbucks-Barnes & Noble, and KLM-Northwest Airlines (Exhibit 1). But step back from these bright lights, and the truth is darker. Over the years, there have been many different studies on the success rates of alliances – some by us, many by others. Each asks slightly different questions and has slightly different results. But, on average, the odds of being happy with an alliance are no better than a coin flip, and few are without their headaches.Indeed, at times it seems like corporate alliances are not much easier than a western government striking a successful, stable alliance with the current president of the Philippines.


Exhibit 1: Alliance Success Stories

Exhibit 1: Alliance Success Stories

There are compelling reasons that companies use alliances (Exhibit 2). These include leveraging products or technology, sales and distribution channels, R&D and development capabilities, low-cost manufacturing assets, scale, or capital. Many alliances, when announced, offer the promise to boost a company or business unit. Unfortunately, too many fail outright, or more likely, under-deliver, stagnate, and are relegated to the shelf. 


Exhibit 2: Alliance Rationale

Exhibit 2: Alliance Rationale


WHAT MAKES ALLIANCES SO CHALLENGING?

Alliances suffer from a set of problems that start with poorly defined business objectives, weak launch planning, limited executive support once the deal has been papered, an ill-conceived and minimally resourced governance structure and set of coordinating mechanisms, an inability to adapt the alliance to meet quickly changing customer needs and market conditions, and a general mismatch of time horizons between the alliance partners. These are truly difficult problems to solve. They are inherent to the transaction type. Alliances require more commitment than a simple one-off contractual arrangement, but less commitment than a joint venture or full acquisition. It can be a strange middle ground.

WHAT CAUSES THESE CHALLENGES?

It is rarely easy to drive alignment between companies. Most executives and dealmakers are happy to align on the highest level principles, while conveniently overlooking and leaving to the launch team the more intractable ones. These executives are busy and do not want to get bogged down in detailed debates. It is understandable, but it puts the launch team, which generally has less clout, less context, and has not had the chance to build trust with the partner, in an unenviable position. Alliance partners have a notoriously difficult time creating committees and forums that not only have the right mandate, but also the right people and information flows, to effectively bring the partners’ contributions together in a way that a joint venture or a full merger would. Slow decision making in alliances, also in part a function of an ill-conceived governance structure, limits the alliance’s ability to adapt to quickly changing customer needs or market conditions, particularly in the technology or healthcare industries. Finally, many alliances that bring together R&D, technology, and products with capital or market access tend to suffer from mismatched time horizons. The former companies often need to commercialize something quickly to satisfy their investors or maintain solvency, while the latter often take a longer-term, more conservative view, while optimizing across their portfolio.

The good news is that it does not have to be this way. Many companies have been very successful in using alliances to grow their businesses, including Cisco, Accenture, Amgen, Starbucks, KLM, and Philips to name a few. What makes these companies different is a highly choreographed and patient approach to their alliances. With the U.S. presidential election around the corner, we will see how well the next administration handles the very public debate surrounding the U.S.-Philippine Military Alliance.

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Please look for more on what distinguishes a successful alliance in our series about “Getting Alliances Right” in the coming months.


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