ELEMENT 4: ALLIANCES AND RELATIONSHIPS

ELEMENT 4: ALLIANCES AND RELATIONSHIPS

‘‘Alliance’’ Defined

Several types of alliances exist, each with a specific purpose. The following are three of the more common types:

• Transactional alliances are established for a specific purpose, typically to improve each partic- ipant’s ability to conduct its business. Cross-licensing in the pharmaceutical industry is an example. Open-ended purchase orders for specific products would be another.

• Strategic sourcing involves a longer-term commitment. It is a partnership between buyer and seller that can reduce the cost and friction between supplier and buyer by sharing product development plans, jointly programming production, sharing confidential information, or oth- erwise working together much more closely than do typical suppliers and customers. Wal-Mart and Home Depot are examples of companies with substantial capabilities in strategic sourcing.

• Strategic alliances involve two enterprises pulling together to share resources, funding, or even equity in a new enterprise on a long-term basis. For example, Motorola, Apple, and IBM pooled research programs and made financial commitments to develop a new-generation engine for personal computers—the Power PC.

Strategic Alliances in the Value / Supply Chain

The move toward strategic alliances is very strong because of increased global competition and industry convergence. For example, in banking, insurance, mutual funds, financial planning, and credit cards, industry boundaries are beginning to blur.

Strategic alliances form when one enterprise alone can’t fill the gap in serving the needs of the marketplace. Financial pressures and time constraints have squeezed managers without resources to fill the gaps through internal development. Also, acquisitions have proved expensive and have not always brought the needed capabilities.

An increasing number of global enterprises recognize that strategic alliances can provide growth at a fraction of the cost of going it alone. In addition to sharing risks and investment, a well-structured, well-managed approach to alliance formation can support other goals, such as quality and productivity improvement. Alliances provide a way for organizations to leverage resources. In the future, many organizations will be nothing more than ‘‘boxes of contracts,’’ with substantially all of the traditional value / supply chain components outsourced to business partners in the form of alliances or other strategic relationships.

In addition to the more obvious reasons to focus on a company’s ‘‘core competencies,’’ the new economics of information will dramatically dismantle traditional business structures and processes. New business structures will reform based on the separate economics of information and physical products. Over the next few years, many relationships throughout the business world will change. The dismantling and reformulation of traditional business structures will include value chains, supply chains, and business models. This will result from the separation of the economics of information from the economics of physical products. In addition, the explosion of networks and content standards will allow informational value chains to separate from the physical chain. This will create enormous opportunities to use information innovatively and create new knowledge for competitive advantage. As value chains deconstruct to create new market opportunities, more and more alliances and new relationships will be formed to maximize opportunities and fill the gaps that will exist in traditional business processes.

Performance Management

While the promise of alliances is very bright, managing a myriad of different and sometimes very complex relationships will be a significant challenge for most enterprises. Improper guidelines, poor communications between the enterprise and its partners (suppliers, customers, manufacturers, out- sourcers, etc.), and unrealistic expectations can lay the groundwork for failure.

The significant shift from hierarchies to alliance networks will require a high level of competency in IT and relationship management. The enterprise and its partners must develop relationships at multiple levels throughout the organization to gain the trust and understanding required for long-term success. That includes making senior managers of the network well acquainted with one another.

Although multiple relationships are beneficial, consistent communication must take place between the partners at various levels within the respective organizations. Partners can receive confusing and conflicting direction from multiple sources within the enterprise. All parties must be connected to a database that tracks commitments and instructions made for their respective staffs.

To achieve success in these complex relationships, enterprises and their partners should speak a common business language. All parties will need to coordinate standards (such as software and network protocols) and business process elements (such as procurement, production, logistics, and customer service). In addition, all parties should participate in joint budgeting in order to understand the key cost drivers inherent in the network’s infrastructure.

It is critical for the parties in the network to have access to detailed cost and performance infor- mation associated with each partner’s respective services. Alliances typically are described by agree- ments that represent long-term relationships in which unforeseen opportunities, technologies, and business conditions will need to be addressed. The agreements should be flexible in order to accom- modate changes in technologies and technology costs. Without careful planning and management, the network can get out of control, producing disastrous results.

The needs of all parties should be addressed in the contractual agreements. These contracts may be inexpensive to enter but extremely expensive to exit. Contracts should define intermediate con- sequences—generally penalties—for poor behavior and performance, with termination of the contract only as a last resort. Additional payments should be provided to reward superior performance that provides a measurable benefit.

Measurement becomes a major issue in managing alliance relationships. If performance cannot be measured effectively on a real-time basis, failure will likely occur. Service-level agreements must be defined in detail and allow for the addition of service levels that reflect changing business re- quirements and service levels. Partners should agree to measure and benchmark their cost structures against others on a regular basis for performance goal-setting and ongoing performance evaluation.

Effective day-to-day management of a complex network of relationships begins with planning. Management on both sides of an alliance must be committed to the communication and flexibility required for the relationship to shape and reshape itself as needs and opportunities arise. Well- designed management structures and processes enhance the probability of success for all parties.