At some stage in a business’ existence it will probably be approached by other organisations with the suggestion of forming a strategic alliance or some other variation of partnership or reseller arrangement.
In such cases the third party usually make assertions (valid or otherwise) that their own products and services are complimentary to those offered by your business. Therefore they might suggest that as well as the prospect of earning significant amounts of income from the new arrangement, your business as a whole might become more attractive because of the increased array of items which you would then offer your customers.
The person responsible for assessing such proposals must therefore navigate through the various requests and respond effectively to the question of whether to engage in any strategic alliances at all and if so, which of the available partnership might work.
Business Considerations When Forming Alliances and Strategic Partnerships
There are a number of business considerations an entity might weigh before reaching a decision of whether to form an alliance or strategic partnership. Some of these are:
The nature of the products or services being offered by the third party. A claim that a large number of your business’ customers would be interested in the offerings of the third party would require some degree of verification and analysis.
In many cases general business sense would provide an indication of any apparent business fit the alliance or strategic partnership would offer. Reference to the business’ mission statement and strategic objectives can offer a good benchmark as to whether this opportunity in fact contradicts or to some extent aligns with the designated direction of the business.
Do competitors sell the same products and services either in-house or through a similar strategic partnership arrangement? If there appears to be no significant take up, although not conclusive, it might suggest that the complimentary products argument might not have been presented in an objective fashion.
How prominent are the items displayed in their advertising? Items which generate good income for businesses (relative to the other products it sells) are usually given prominent placing on a company’s website and other customer driven media.
The credibility of the company offering the products and services is important in the evaluation decision. Many factors can be brought together to arrive at an assessment as to whether the third party and by association, offerings are credible.
These might include the age of the company, its reputation in its field of expertise, its financial status, its infrastructure and its ability to provide support to your business and customers should the arrangement be taken up.
Financial Considerations When Forming Alliances and Strategic Partnerships
Any business which is approached to form an alliance or strategic partnership would need to strongly consider the financial implications of moving forward and formalising such an agreement.
The amounts needed for setup costs, whether they will be shared or borne solely by one party, the amount and timing of revenues from the venture, who will receive the income and how will it be split are some obvious considerations.
Other indirect costs might include staff training, administration of sales receipts and website and any stationery changes.
The estimated bottom line figure in the profit and loss account for this venture would need to be such that it justifies all monetary costs associated with the project and compensates for any negative intangible factors such as human stress or potential loss of perceived business focus.
Contract and Agreement Terms
Irrespective of whether the products and services are compatible and the financial agreements seem promising, these might become less appealing in the face of inappropriate or unacceptable contract and agreement terms.
Elements which might fall within this category include:
- The length of the agreement. A six month renewable contract might be more favourable than an initial three year deal with penalties for early termination. In situations where the income from the arrangement fails to live up to expectations, a shorter agreement would be more favourable.
- Clawbacks. Depending on the timing of receipts associated with each sale, the section which deals with non payment or termination by the customer would need to be both fair and reasonable. The financial benefits of the strategic alliance could change dramatically if amounts received were to be suddenly subject to clawbacks many months after the initial sale had taken place.
- Ownership and treatment of customer data. One prominent concern among many businesses is that in creating alliances and strategic partnerships they essential share a valued and confidential business resource; namely customer names and contact details. The specific uses, storage and sharing of this material would have to be defined and some mechanism for enforcement and compensation determined in the event of a breach.
- Termination terms and notice periods. A factor often overlooked at the contract’s inception is the terms by which each party can terminate the arrangement.
Whatever the length of notice period specified, it should usually be identical for both parties. A position whereby the third party can withdraw their services to your business by giving a months notice, whereas you have to give a six months proclamation would not seem balanced.
Notice periods to terminate should be reasonable and bear some representation of the efforts and work made to setup the facilities and lead times involved in cancelling them.