Alliances: Getting Non-Equity Collaboration Right
PARTNERSHIPS 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, NewsCorp, 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.
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.
This article introduces alliances in more detail, describes their benefits and risks, and shares our lessons-learned on effective alliance transaction structuring – including processes and key deal terms.
Alliances defined. We define a non-equity alliance as a relationship between two or more companies, aimed at achieving a common objective by coordinating efforts, while each party retains its organizational independence and no new equity entity or corporation is created. Alliances bind
supplier contracts, license agreements, distributorships, or sales agency agreements, but not as closely as forming a new jointly-owned company with consolidated assets, such as a joint venture (Exhibit 1).
The contracts underlying alliances typically spell out:
There are some key differences compared to equity JVs, though, that are not all intuitive:
Alliance structure and purpose. There are many types of alliances, across the value chain (Exhibit 2). Some target a single part of the value chain (for example, to research and develop a new technology that each partner will be able to use in its own business), but others may be formed with an eye towards collaboration across the entire value chain.
Each industry has its own unique terminology for alliances. The aerospace and defense industry talks about “teaming arrangements” to jointly bid on and deliver work. Pharmaceutical companies talk about “co-development” and “co-promotion” alliances. High-tech companies speak about “go-to-market” alliances when referring to sales and marketing partnerships. Regardless of what term is used to describe them, most alliances reflect one or more of the following purposes:
Shape industry standards by forming standards-setting consortia like the Healthcare Information Technology Standards Panel, which sets interoperability standards for electronic health records systems in
Jointly conduct or fund research and development by forming R&D alliances like the NaturALL Bottle Alliance, in which Danone, Nestle, and Origin Materials are collaborating to drive commercial-scale development of technology to manufacture water bottles from sustainable biomass feedstocks, which they plan to make available to the entire food and beverage industry.
Commercialize new products or technologies by forming alliances to jointly perform any remaining development work and successfully bring new products to market, as Bristol Myers Squibb and Pfizer did when announcing a worldwide collaboration to develop and commercialize Eliquis, a new anti-coagulant blockbuster expected to generate $4BN in 2017 sales for the companies.
Improve supplier effectiveness thru collaboration by forming risk-sharing alliances with suppliers, trading long-term contracts for agreement that the supplier will help drive and fund component research and will share in the overall profit – or loss – of the broader product, as Airbus did for the A350 with suppliers like GKN, Rolls-Royce, and Spirit Aerosystems.
Bid on large, complex contracts form joint bidding groups to raise the odds of success given complementary capabilities and skills, like the teaming arrangement between Boeing and Embraer to jointly pursue sales and support of Embraer’s new KC-390 tanker/transport.
Reduce costs via joint purchasing and standardization by forming collaborative purchasing alliances and spares pools, like the East Java Supply Chain forum amongst oil and gas drillers offshore of Indonesia that performs joint procurement for common products and maintains a shared inventory for critical spares.
Distribute and or sell products or services by forming various alliances to jointly market or cross-sell products and services across various geographies and segments. Virtually every consumer goods and industrial company relies on distribution, retail or service partners to reach specific geographies or to access specific channels.
Create solutions for customers by layering in products or services from partners with a core offering. An example here is the use of Value-Added Resellers to provide software, integration, and services in the electronics segment.
Some industries default to certain kinds of alliances precisely because they are common in the industry and thus well-understood (Exhibit 3). For example, the pharmaceutical industry has used co-promotion (or increasingly, reverse co-promotion) alliances since the 1980s to drive sales in new geographies, while the aerospace and defense industry has a well-grooved process for companies to jointly bid on and deliver government contracts via teaming agreements.
Most, if not all, of the benefits sought in an alliance also drive joint venture activity. This makes it strange that so many partnership discussions jump immediately to a joint venture. While an alliance often lacks the full synergy benefits of a highly integrated consolidation joint venture, it also introduces significantly less risk and complexity – sometimes leading to higher value creation overall.
We believe companies should generally consider JVs and non-equity alliance options alike before deciding on one or the other. Consider the example of a regional industrial systems manufacturer seeking a partnership to gain access to sales channels in new geographies. Its preferred partner was a global company that sold a variety of similar products, giving it global channel access but also making it a competitor. Given the complexity of the situation, when the regional company was considering how to partner, rather than locking in on an alliance or a JV, it weighed a series of each (Exhibit 4).
On the one hand, they felt an alliance preserved fundamental ownership of the IP, and made it easier to terminate the relationship quickly if sales lagged – a real risk, given that the preferred partner was also a competitor. On the other hand, a joint venture offered tangible equity to help the partner feel ownership of the product and accountability for driving sales – but risked an eventual buyout, given the preferred partner’s greater financial resources and market relationships. It was also possible to choose a hybrid option, starting first with an alliance and then evolving to an equity JV once each partner gained comfort.
Alliance end game: As is true for JVs, it is important to think through the likely endgames of an alliance. Of course, most alliances merit termination if they are not on track to achieve objectives. But termination may also be the right outcome after....
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