Alliances and joint ventures

Before entering into partnerships, make sure you ask the right questions.

Nick Palmer, PPM Analytics, Westford, Mass.

Oil and gas companies invest in a wide range of alliances and joint ventures. Partnerships are important in new technology development, operations, and go-to-market approach. They range from small collaborations to multi-billion dollar E&P JVs.

How are alliances serving your company? Studies suggest that most alliances either fail or underperform significantly. Underperformance is often masked and ignored. Yet executives who take a systematic approach to alliances are more successful, reaping far greater value.

This article presents 12 questions for your management team. They provide perspective on your alliances. They focus energy to capitalize on alliances as a competitive weapon.

Let's begin with a pre-question: Does your company have an "Alliance Strategy"? If so, you also have a problem. Alliances and JVs are tools, while a strategy guides overall direction and priorities. A company should have a robust "Business Strategy" that capitalizes on alliances as appropriate. An "Alliance Strategy" risks pursuing alliances for their own sake, poorly connected to strategy. Leading executives treat alliances as "means," not "ends."

Our questions address three critical areas: Strategic Leverage, Governance, and Partnership Attractiveness. The first will help you consider the role of alliances. The second evaluates at how you manage them. And the third looks at the companies with which you collaborate.

ALLIANCES, JVS FOR STRATEGIC ADVANTAGE

Q1: Does your business strategy articulate a clear role for alliances and JVs?

If not, you are likely missing the best opportunities. You cannot rely on serendipity. As your company matures in alliances, success requires a systematic approach. Most companies' build-buy-borrow decisions (build capability internally versus acquire versus ally) are neither systematic nor repeatable. This is risky. And costly. Leading companies rigorously define the role of alliances. This increases confidence in decisions, and supports accountability.

Q2: What fraction of your corporate value comes from alliances and JVs?

Top performers clearly detail the sources of value and future potential of their alliances. Quantitatively. They understand the value-creation levers, and manage to maximize that value. They discuss value levers with alliance partners, setting expectations and clarifying governance.

Q3: Is the role of alliances in your operating model clear?

There are countless structures and forms for alliances. Successful companies sharply limit the types of alliances they pursue. They choose these alliance types to complement their operating model. The short list of types simplifies planning and negotiation, and helps launch alliances quickly. It supports consistent management and common understanding.

Q4: What unique assets and capabilities does your company bring to its alliances?

If you answered "size" or "money and capital," be concerned. Money is fungible. Cash can be replaced. Your leadership team should clearly articulate the specific assets and capabilities that differentiate you. Companies bringing "me-too" value strike poor deals from a weak bargaining position. Compare your firm to competitors and others with similar assets and capabilities. Stifle grade inflation of your strengths. It blinds you to lurking threats.

GOVERN ALLIANCES AND JVS EFFECTIVELY

Q5: Who has global oversight of your alliance portfolio?

If alliances are important, a senior executive must be accountable to support, monitor, and cultivate the portfolio. Without high-level leadership, alliances lose direction and commitment. Partners become frustrated at slow decision making. Alliance staff doubts the importance of their effort, and turns to issues more aligned with their perceived self-interest.

When the alliance portfolio constitutes a large fraction of corporate value, someone senior must lead. Alliance portfolio management invariably forces hard tradeoffs especially between alliances and internal projects. These issues are intractable at lower levels.

Q6: Is there clearly defined governance between your alliances and JVs, and your core business?

Most debilitating conflicts in alliances arise not between the partner companies, but between people working in the alliance and others in their own parent company. Successful companies understand this and do not "make it up on the fly." An overly "attentive" parent is as debilitating as too little oversight. Good governance protects those working in the alliance, committing them fully to alliance success. Alliance participants cannot make complicated tradeoffs daily. They must dive in fully to their roles. To do this, they must feel supported. Nelson Sims, now retired as executive director of alliance management at Eli Lilly & Company noted, "In a 50-50 situation, I want my alliance managers to feel comfortable making the call for our alliance partners."

Q7: By what criteria do you assign personnel to alliances and JVs?

Winners define a clear competency model for alliance staff. It includes technical and market skills core to the specific alliance. It also includes a proven ability to succeed in an ambiguous, challenging alliance environment. The behavioral skills needed for collaboration rarely correlate with technical skills. Roles on an alliance are not "awards" for technical expertise or involvement in deal making. Top companies combine careful selection, training, and career management to develop alliance stars.

Q8: How often do you "course correct" alliances and JVs?

Alliances involve multiple firms in dynamic markets. Initial contracts, agreements and understandings, no matter how clear, must adapt. This "synchronization" process is an ongoing challenge. The best companies systematically revisit agreements with partner executives to maintain synchronization. Mid-course corrections are built on strategic and market reviews, regular surveys of alliance personnel, and other concrete data.

ATTRACT SUPERIOR ALLIANCE AND JV PARTNERS

Q9: Is your company an alliance and JV "partner of choice"?

Few executives ask this explicitly. Fewer are open to the answer. Yet in every industry preferred partners lock-up the best collaborations on the most favorable terms. They know how to create value through alliances – for their firms and for their partners. Top performers actually maintain scorecards for their alliance partners. They manage to those scorecards to ensure all parties benefit. You can learn much from current and past partners. Industry groups and publications sponsor partnership preference studies. This information can focus efforts to improve alliance performance.

Q10: How often do you say "No!" to a potential alliance?

If never or rarely, you are either not selective enough or an industry follower. You pick up second-tier opportunities while your competitors seize the best. Like with M&A, executives often become enamored of a particular collaboration, losing objectivity. A systematic evaluation approach is crucial. Great performers have clearly defined criteria, using quantitative analysis overseen by an objective group like the controller's office. Likewise be aware of how often your company receives a "No!" And why. Post-mortem assessment yields actionable insight. It can refine strategy and tactics, prevent groupthink and foster decisions.

Q11: What fraction of your alliances and JVs were conceived and initiated by your company?

Are you the pursuer or the pursued? Why? Neither is necessarily right, but you should understand the patterns. Companies trying to reshape their competitive ecosystems are often pursuers. They are building new operating models. Companies with very strong asset, intellectual property and market positions often find themselves pursued. Study the dynamics of your competitors' partnerships, too. Their patterns reveal much about their strategy and intentions. They provide insights to changes in industry behavior and structure.

Q12: How much does your company invest in building and maintaining its alliance and JV capability, and promoting its image as a partner?

Typically a company's alliances consume far more resources than its M&A activity. Often they are far more significant – financially and managerially – than even the largest outsourcing deals. Yet managerial accounting systems rarely track alliance-related costs and time accurately. Most companies commit a bare minimum of time to alliance management. As the company forms alliances, people are calved off to manage and operate them. Shoestring resource commitments are made for basic operations, treating the alliance like an internal project. It is not. Alliances have unique management needs. They smart, committed management. Consider two areas for alliance investment – alliance management and alliance capability building.

First, each individual alliance requires "overhead" – there is a cost to managing the partnership. Sometimes a single alliance manager might oversee several small collaborations. Larger alliances require dedicated staff with well-defined roles. Second, a company needs an alliance-management capability consistent with the number and types of alliances it pursues. There is no one-size-fits-all model. This capability can range from an alliance office with dedicated staff to a "Center of Excellence." Many companies have full-time alliance professionals.

One thing is certain: for most big companies alliances are NOT a "natural act." Large companies like to maintain "control." Excessive control can destroy value. Alliance success requires people trained and supported in collaboration. Smart alliance-management investment allows a company to capitalize fully on its opportunities.

Alliances and joint ventures create huge opportunities. Their use and scope has increased dramatically, yet consistent success remains elusive. Driving value from alliances and JVs requires commitment and focus, and sensitivity to the unique aspects of these "tools."

Honest answers to our 12 questions will give senior executives insight and direction. This Q&A dialog can create an opportunity to paint a more objective picture. It is the basis for dramatic increases in alliance and JV success, and value creation.

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