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The Power of Partnerships
In a world where competitors can come from around the corner or around the globe, it is increasingly difficult for firms to operate in isolation and establish and maintain a valuable competitive advantage. Typically, a firm can do a few things really well but to be exceptional at something valuable a single firm often needs to combine its skills and competencies with those of others to be truly competitive over time.
As we move toward a more interconnected society, competitive advantage depends not only on what you can do, but also who you work with. From the largest multinational corporations such as GE and Microsoft to the smallest owner managed entity, partnerships have become a critical element of business strategy.
Although partnering is important for all firms, it is generally not well understood and managers and entrepreneurs make many errors when seeking out partners and entering into business partnerships.
In this article I will seek to highlight a few of the most important aspects of business partnerships by discussing the what, who and how of partnering for business success:
- What is a business partnership?
- Who should one partner with?
- How should one manage a business partnership?
1. What is a business partnership?
While business partnerships are defined in many different ways (eg. strategic alliance, joint venture, associative relationship etc) ultimately all these names and definitions boil down to the same thing: A partnership is two or more entities working together in a structured way to achieve a desired outcome.
Within this definition, a number of things may vary: (1) the nature of the entities working together may differ; (2) the structuring of the relationship may not be the same; and (3) the desired outcome may vary. Each of these variations within the definition of partnership is discussed below.
1. Nature of the entities working together. It is very common for two or more businesses to work together in a partnership called a ‘Business2Business’ or ‘B2B’ partnership. Well-known business partnerships in South Africa include partnerships between Standard Bank and MTN to provide cell phone banking services or Discovery partnering with Virgin Active to bundle gym membership as part of their vitality package.
But partnering is not limited to business level arrangements. It is also common and relevant for businesses to form partnerships with individuals called ‘Business2Person’ or ‘B2P’ partnerships. For example, I have personally partnered with Entrepreneur Magazine over the past five years to produce insightful content and to deliver educational seminars to entrepreneurs in South Africa.
Partnerships don‘t necessarily need to involve businesses; they can be two or more individuals coming together to form a business (Person2Person or P2P partnerships). For example, Rob Stokes and Justin Spratt combined their creative and business skills to grow Quirk Marketing while Yossi Hasson and David Jacobson joined their personal business and technical skills in the creation of IT company, Synaq.
2. Structuring of partnerships. For many years it was believed that partnerships could be placed somewhere on a single continuum ranging from highly contractual (ie. everything defined upfront in writing) to highly relational (ie. a partnership based almost entirely on personal trust).
Recent research suggests that these two dimensions actually exist independently of each other. Therefore, it is possible to have partnerships that are either low on both the contractual and relational elements, high on one or low on the other, or high on both the contractual and relational elements (see Figure 1 on page 58).
The best performing partnerships are the ones that are high on both the contractual and relational dimensions. In other words, the most productive partnerships tend to be those where the parties engaging with one another implicitly trust each other but still take the time to contractually define the relationship upfront.
Pure relational mechanisms tend to be more important than pure contractual mechanisms in governing long-term partnerships; therefore partnerships that are founded on a basis of relational trust with little contracting tend to outperform those that are founded on the basis of contractual mechanisms with limited relational mechanisms.
If neither relational nor contractual mechanisms are in place when creating a partnership, then the partnership is likely to be doomed.
3. Desired outcomes. Business partnerships are established for many different reasons. I find it useful to describe the desired outcomes of a partnership in terms of one of four categories: new products, new markets, an integrated offering or financial returns. New product partnerships (also called R&D partnerships) focus on innovation.
They mostly entail the coming together of people and organisations with different knowledge and skills sets to create something new and different — the creation of a new product or the advancement of a technology.
New market partnerships are orientated around one or both of the entities in the partnership entering a new market. Many times such partnerships are formed because one partner has a foothold in a market and the other partner wishes to get their product or service into that market.
They therefore link up so that one partner can leverage the other partner’s customer base and local knowledge.
The third type of partnership is orientated around an integrated offering. Two or more entities come together to deliver a joint product or service offering. The final type of partnership is focused primarily on financial returns. This is usually when one partner provides another partner with capital in the hope that their investment will generate good financial returns over time.
2. Who should you partner with?
One of the most critical and important decisions in forming a business partnership is the selection of partners. Many partnership headaches can be avoided if one selects wisely when getting into a partnership. Research suggests that many firms pay relatively little attention to partner selection and then try to control partners with a myriad of different contractual arrangements in the course of the partnership.
Those firms that focus more intensely on selecting the right partner are not obliged to enforce contractual arrangements and end up with much better partnership outcomes. So one key element to good partnering is partnership selection.
There are a number of elements that underly effective partner selection, the most important of which are discussed below.
Values. One of the most critical things to look for when selecting a person or organisation to work with is values alignment. Values are things that you and your organisation hold most dear, the things that you would be unwilling to change even when under pressure.
People and firms can value many different things. Some values have a moral underpinning eg. honesty, integrity. Other values focus on how people are treated eg. respect, customer service, while other values may focus on how things get done eg. innovation, punctuality, or creativity. When looking for other entities with which to partner, it is useful to assess the extent to which your values are aligned.
If your values are way out of line with a potential partner, then it is probably not worth moving forward. If your values are marginally out of alignment, it is important to recognise that, to discuss it in detail upfront and to make provision for it in the written partnership contract. If your values are strongly in alignment, then it becomes easier to make decisions and move forward as the partnership develops.
Trust. No matter how many clauses you write into a partnership agreement and how many lawyers you involve in establishing a partnership, it still largely hinges on trust. If you cannot trust your partners everything else about the partnership becomes very difficult.
No matter how attractive all other elements of the deal are, ask yourself: “do I trust these people?” If you cannot answer with an emphatic yes then spend some more time getting to know them before you enter into a business partnership and only move forward when you feel confident that you can trust them.
Complementarities. One of the key aspects of finding appropriate partners is to look for people and businesses with complementary skills and assets. It is not always useful to seek other entities that are good at the same things as you. It is much more valuable to first understand why you wish to enter into a business partnership — is it for new products, new markets, an integrated offering or financial reasons?
Then determine what you lack in terms of achieving your objectives. At an individual level, if you are a strong business person, you may be looking for a partner who is strong technically. The famous examples include Steve Jobs, the business mind, teaming up with Steve Wozniak, the engineering expert, to create Apple Computers.
If you are a creative genius you may realise that you need to partner with someone who is strong on organisation and operations.
That was the case when Howard Schultz created Starbucks. He had the vision and charisma, but he needed someone to channel and organise his energy appropriately so he teamed up with Orin Smith in the coffee retailer’s early days.
At a business level it is just as important to look for complementarities in other businesses. It is important to know what you’re good at, what you are not good at, and what you need to be really competitive in your industry.
Map the industry ecosystem. A useful exercise in seeking partners is to map out the ecosystem of the industry in which you operate and to find partners that help you become more powerful and more productive within that ecosystem (see the sidebar on mapping your industry ecosystem).
As a small firm, you may have an innovative new product but need a partner to help you get that product to customers. If you have been in business for a while you may have developed a strong sales force and could partner with an overseas organisation looking to bring a complementary product into your existing market.
Whether you are an individual partnering with another individual to start or grow a business or a business partnering with another business to increase your competitive advantage, the key is to find other parties that do things that you cannot do so that when you combine your competencies you get something unique and valuable.
Dual benefit. If a partnership is to work over the long term, it is critical to ensure that all the parties participating in the partnership are benefitting.
This may seem obvious but I am surprised at how many people and organisations enter into a partnership without being clear on the benefits for themselves or their partners. It is important to make this explicit early on in the partnership’s negotiations because it aids the transparency, communication and goal setting.
If the parties entering a partnership can be open and honest about why they are pursuing the partnership and what they stand to gain, the partnership can be developed on the right foundation. If you or your prospective partners are cagey and obscure about why you are going into partnership, you should rethink your strategy and motives.
3. How should you manage a business partnership?
As you enter into a business partnership with another organisation or individual, there are a few things that you can do to significantly enhance the likelihood that the partnership will bear fruit. The advice for succeeding in a business partnership is not very different from the advice for succeeding in marriage.
The two types of relationships are actually very similar; therefore, if you consider some of the elements of a successful marriage, they will serve as a guide for successfully managing a successful business partnership.
Establish ground rules. Unless you are explicit about how you expect things to be done in a partnership, both parties will end up making a lot of assumptions. Assumptions are dangerous and destructive in a partnership, especially when things are not going as hoped.
An open and honest conversation, early in the partnering process, about each party’s expectation of the partnership can save a great deal of frustration, tension and confusion down the line. (See page 57 on items that should be covered in setting up the ground rules of a business partnership.)
Communicate. Always keep the lines of communication open in a partnership. This means asking questions and clarifying with your business partner when you don’t understand, and always making sure that both partners are on the same page.
A number of surveys and research studies suggest that lack of communication is the single biggest downfall of partnerships. To overcome the risk of communication breakdown try the following three things: (1) find a means of communication that is comfortable and easy for both parties — this may include phone, email, face-to-face meetings, Skype; (2) set up a regular time to communicate, even if you have nothing specific to talk about. Regularly connecting with business partners will radically increase the chance of partnership success; (3) follow up all communications with an email or document that clarifies and records the essence of what was discussed and lays out action points and deadline dates.
Give more than you take. The final important philosophical point in effectively managing business partnerships is to always seek a way to give more than you receive in your dealings and interactions with business partners.
If all partners approach a partnership with this philosophy then things just seem to work. If you constantly feel like you are contributing to the partnership, then you will remain interested and committed, which will make your partners more inclined to contribute.
A very successful CEO told one of my MBA classes the other day, “Giving is not an afterthought to success, it is the foundation.” This could not be truer for business partnerships. Unless all parties perceive that they are contributing to the partnership it is unlikely to succeed, and the giving begins with you.
Any person wishing to be successful in business, whether they are leading a large corporation or operating as an independent consultant, needs to confront the challenge, the joy, the frustration and the positive synergy that can come from entering into business partnerships. The essence and value of partnering goes back many years but it is more relevant in business today than it has ever been.