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Creating and Managing International
Alliance Relationships

by Blaise J. Arena

 
   
 
   

Introduction

Many US companies already market their products or services internationally. However, today's competitive global business environment demands that all companies, large and small, new and old, give consideration to the strategic option of expanding their markets to other nations. This option can hold the potential for increased competitiveness and step-change increases in revenue and therefore cannot be ignored.

Those companies that have a well-established international presence are able to use their in-house resources, developed from many years of experience, to generate revenue from international markets. However, other, often smaller and more recently formed companies may lack this history and experience. As important, they may also lack resources such as international branch offices, ex-patriot personnel or in-house experts with an understanding of markets and business practices in specific countries.

One approach to filling this gap is to form an alliance relationship with a "partner" company that already has an established presence in a market region outside the US. The alliance partner might be another US company with an international presence or, more likely, it will be a non-US company with a command of its own local markets and business. A successful alliance relationship can leverage available resources to meet the demands of moving into international markets. Achieving success and avoiding some common pitfalls can only come through careful management attention not only in the formation phase of the alliance, but also during the entire life of the relationship.

What do we mean by an alliance? For the purpose of this discussion an alliance is any working relationship between two (or more) organizations developed to achieve mutually beneficial objectives. These organizations need not only be typical businesses, they might also be non-profit organizations, universities and so forth. Obviously there can be a broad spectrum of relationships of this type. They may range from an informal "handshake" understanding to a formal legal partnership. This discussion will present general principles that apply to creating and managing any alliance relationship, with emphasis on the international alliance. That is, one between a United States-based company and one based outside the US.

Benefits of the International Alliance Approach

Forming an international alliance with another company allows you to leverage your own resources and capabilities to achieve strategic business objectives that might otherwise be beyond your company's reach. No organization has unlimited resources. Gaps in capabilities or resources may become apparent as new strategies are embraced as a means of achieving your company's growth objectives. Forming an alliance relationship is one way of filling these gaps. Of course this must work both ways. The partner company must be able to fill their own gaps through the alliance relationship as well.

Some examples of gaps that might be filled via an international alliance:

  • Technology-based companies, no matter how formidable, may still benefit from certain unique technical capabilities that may be available from an alliance partner. An alliance of this type can be the basis for joint research and development projects.

  • Your company's intellectual property (IP) might be enhanced by combining it with complementary IP belonging to an alliance partner. This can result in a strengthened competitive position for both partners.

  • Your sales and marketing resources may be limited in numbers or expertise in some geographic regions. An international alliance partner can provide additional resources to relieve these limitations.

  • An international alliance partner can offer expertise in evaluating local markets outside the US for your products or services. This can be an important contribution since the alliance partner will presumably have an in-depth understanding of its own markets.

  • It is generally necessary to have a local "presence" in order to gain the trust of your potential customers by demonstrating that you are committed to, and capable of, serving their market. But, establishing this presence can be an expensive and lengthy proposition. The international alliance partner can serve as an initial alternative to opening and staffing your own foreign office. The alliance partner should already have a well-established network of contacts and extensive experience with local business practices, government regulations and cultural customs.

Beyond these specific resource gap-filling benefits, an international alliance relationship can have other, less tangible, benefits for your company. As your staff engages in the process of developing the international alliance relationship they will gain experience in thinking about your business in international terms; new skills and insights will be acquired. In effect, if managed properly, the process can be a broadening professional development experience for your staff. Never the less, using your own in-house accounting approach, you must estimate if the anticipated benefits of the alliance are likely to outweigh the costs, both real and intangible.

Determine if There is a Good "Fit" Between Partners

Before moving forward with an alliance it is important to evaluate the "fit" between your organization and that of your prospective partner. Only if the objectives, resources and capabilities are complementary can you hope to achieve a productive alliance. However, "complementary" does not mean identical. There must be synergy between the organizations. Specifically, you must determine if you can fill some of your organization's capability gaps, such as those described above, by forming an alliance.

Identifying Relevant Capabilities: This determination can only be achieved by a thorough evaluation of the capabilities of the prospective partner. Much of this should be done during in-depth, confidential review discussions where each party describes the nature of their business, capabilities, growth strategy and objectives. A standard confidentiality agreement should be in place before serious discussions begin. In addition, you can learn more through examination of annual reports, product and services offerings and so forth. When an international partner is involved it may be difficult for practical reasons to have numerous in-depth discussions. Other methods may be employed to supplement the process. For example:

  • The Internet can be a valuable source of independent information from websites, business news items, etc.

  • The US Commercial Service, USCS (an arm of the US Dept of Commerce), has a commercial officer in every US Embassy around the world. Any US company can request an International Company Profile for a modest fee. This provides useful background and verification on the company of interest by giving information on products, markets, ownership and reputation.

  • Talk with existing customers of the partner company.

Staff Resources: There must be sufficient staff resources, on both sides, to build and maintain a new alliance relationship. This is a key point. More than any other single factor, inadequate human resources, either in type or quantity, can doom an alliance to fail. The alliance, especially in its developing stages, must be supported within both organizations by staff who can be committed with a significant portion of their time over the long term. Frequent personnel changes on the alliance team will result in a lack of continuity that can be disruptive to the relationship. Another common mistake is underestimating staff requirements and simply "piling on" alliance-related duties over existing responsibilities. This approach will lead to burn out and failure. Both partners must take a hard look at this issue and agree on staff requirements for meeting mutual objectives. Partners must assure each other that adequate staffing will be committed to the alliance effort.

Time Expectations: We have mentioned that there must be commitment by both sides "over the long term". But, what do we mean by this? Six months, a year, 5 years or more? Time expectations can vary greatly between organizations depending on their objectives and organizational style. A small nimble company can quickly become impatient with a large, plodding organization. It must be established during this evaluation phase that the time horizon for the alliance relationship is consistent with the expectations of each party.

Personal Relationships: The evaluation of "fit" should also include some assessment of the likelihood of forming productive interpersonal relationships. In the case of an international alliance this can be especially important since there will be cultural bridges that both sides will need to cross. Ultimately, there needs to be an intangible "chemistry" and willingness to embrace cultural differences among the key players of both organizations so that a spirit of trust, cooperation and progress can develop.

The Alliance Agreement

Any alliance should be based, in part, on some sort of written agreement. There is a wide spectrum of agreements to be considered ranging from a simple Memorandum of Understanding (MOU), which is really nothing more than a written handshake, to a formal detailed legal contract, and every gradation in between. The judgment of how to proceed in this area should be guided by the level of financial and human resources you intend to invest in the alliance. For example, if only modest initial internal resources are to be invested and your trust in the alliance partner is strong, you might opt toward the MOU-end of the spectrum. On the other hand, if substantial investment of capital or internal resources are to be made and there is no current working relationship with the alliance partner, then a more formal and detailed contract may be in order.

There are practical pros and cons to each approach:

MOU: The advantage of an MOU is that it can usually be negotiated and signed in a relatively short time, say within a month or so if both parties are motivated and the nature of the alliance is not complex. This allows the alliance work to get underway quickly. Often this is crucial in situations where the opportunity for mutual benefit is immediate. However, the disadvantage of the MOU approach is that it is general in nature and does not attempt to anticipate every eventuality. There is an underlying assumption that as the alliance develops, a more detailed formal agreement may be required later.

Formal contract: The advantage of the formal contract is that it provides a detailed description of all aspects of the alliance relationship. Thus both parties are, or should be, clear on mutual expectations. This can be valuable assuming that both parties are really able to anticipate the requirements of the alliance. The disadvantage is that negotiating a detailed contract can take quite a long time to complete and consume valuable internal resources. Often many months or years are spent in finalizing the document, by which time many key elements of the agreement may have changed significantly.

Aside from whatever legal weight the agreement may carry, there is an additional and potentially greater value in the process of negotiating the agreement. That is, there is value in the discussion itself in that it should lead to a clear, mutual understanding of the ground rules, expectations and objectives of the alliance. The discussion should identify any disconnects in operating styles or intentions. Does your partner really view you as a true partner or merely as a "vendor" ? Achieving an acceptable level of clarity may be a special challenge when forming an international alliance. Cultural or language gaps will need to be bridged by both sides. Making the bridging effort early on will put the relationship on a solid footing.

In addition, the teams on both sides should become "invested" in the success of the venture as they discuss and "buy in" to the terms of the agreement. If negotiations are pursued on a good-faith basis a foundation of trust is formed. You will learn a lot about your alliance partner during the agreement discussion. Ultimately, it is only mutual trust and integrity that will compel each partner to fulfill the obligations of the agreement.

The written agreement should address the following issues in either a general or detailed way, depending on which approach is chosen for the agreement:

  • Definition of alliance scope
    • Business, geographic or technical areas of cooperation, as well as those that are specifically outside the scope of the alliance.

  • Objectives and anticipated benefits of the alliance
    • Specific projects
    • Milestones and measures

  • Roles and responsibilities
    • Identification of the alliance manager for each side
    • Identification of key team members

  • Channels of communication and meeting schedules

  • Sharing or bearing of costs

  • Sharing of revenues; payment of commission fees, etc.

  • Ownership of intellectual property that might be created as a result of the alliance
    • Procedure for addressing patenting decisions and costs

  • Joint marketing or publishing activities

  • Procedure for resolving conflicts

  • Termination
    • The agreement should have a specific lifetime. Options can be identified for a next phase - expansion, continuation or termination.
    • In addition, each party needs an outright termination option. That is, a "safety exit" in case of non-performance by either party.

It is important to realize that no amount of discussion can anticipate every issue that may arise during the life of the alliance. Both parties must be prepared to refine, or re-negotiate the agreement as the alliance proceeds. The agreement often becomes a "living" document. In fact, for some situations it may be appropriate to negotiate only an early stage, limited lifetime agreement, in order to allow the work of the alliance to begin on an interim basis. A more detailed, long-term agreement can be negotiated later.

Developing a Sound Working Relationship

Ultimately, the written alliance agreement is worth only as much as the integrity and spirit of cooperation both alliance partners are willing to invest. A flawed written agreement can always be modified. However, a seriously flawed working relationship will doom the alliance to failure. There are no outcome guarantees when you begin any new relationship. To some extent, a venture into the unknown is always required. However, once the agreement discussion is completed, there are other things you can do to build and maintain a solid working foundation and thereby increase the likelihood of success.

Alliance teams: Each party to the alliance must choose their respective core team members who will be responsible for achieving the objectives of the alliance. Nothing is more crucial than the choice of team members, especially those on the "start-up" teams. All team members must have a genuine commitment to the alliance's vision; there can be no "going through the motions". In addition, there must be enthusiasm for embracing the special challenges of creating an international alliance. The teams must be composed of individuals with a willingness and ability to bridge culture and communication gaps. They must be responsive to the views and needs of the alliance partner.

Choose team members who are in a position to commit a substantial portion of their time to the alliance effort over a significant period. Generally speaking, this will mean 25 to 100% of their time for a minimum of two years. Of course each alliance has its own unique requirements and constraints, but all have one thing in common: continuity is crucial. Few things are more disruptive to a new alliance than frequent changes in key team personnel. After you have represented your team as "the best we have", pulling someone off for another project sends a very negative signal to your partner.

Define the roles of each team member. Make it clear to all members of both teams who are to be accountable for what. The role of the team leader is particularly important since he or she will need to drive and coordinate all project activities and communications over the long term. All team members must be prepared to "sell" the benefits of the alliance within their organizations.

Commitment: All those involved in the alliance must be committed to a long-term effort. And, this commitment must withstand the inevitable ups and downs in the alliance relationship. What "long term" means will depend on the objectives of your particular alliance. But certainly, commitments on the order of at least a year and often much longer are necessary to meet most expectations.

For example, alliances formed to exploit existing synergistic capabilities might be expected to yield results in a relatively short period, say in a year or so. On the other hand, when the alliance is formed to develop new capabilities, as might be the case in a joint R&D effort, a commitment of many years may be required. In any case, patience is in order. And this patience may be severely tested while waiting for positive results or during periods of disappointing results.

Attitude: We defined an alliance to be any working relationship between two (or more) organizations developed to achieve mutually beneficial objectives. A productive alliance working relationship must grow from an attitude of mutual understanding, respect and cooperation. Any other approach will lead to disharmony and failure. Over the life of the alliance there will be inevitable setbacks and disappointments; weaknesses on both sides will be exposed. When this occurs there is a real danger that the relationship will deteriorate into one of an adversarial nature. Once an adversarial attitude sets in, progress will suffer greatly. Executives and alliance managers must set a positive tone from the beginning and be prepared to discourage adversarial behavior.

Communication

A sound alliance working relationship also demands effective communication. There is no alternative. The international alliance is usually especially challenging, as there are inherent communications obstacles resulting from language barriers and geographic separation, and hence infrequent meetings. The fundamental nature of communication to the success of any relationship makes attention to this issue critical. The first step is for all team members to recognize the importance of effective communication and be vigilant for problems. Next you must identify any special challenges.

For example, if there are language barriers, how severe are they ? How can you overcome or minimize them? Fortunately the language of international business is English so US companies have an advantage here. Never the less, even though most (but not all) non-US business people will speak English to some extent, there can still be significant gaps that can lead to confusion. This can even be true when your partner appears to have a good command of English. Often subtle nuances of our language can be missed and then important points misunderstood. Many books are available that discuss the challenges and solutions to dealing with cross-cultural communications. However, here are a few basic tips based on experience:

  • If there is anyone on your staff who speaks the language of the alliance partner you may wish to include them on the team. However, this person should not serve as an interpreter as such, since this will stifle group discussion by relegating everyone else to the sidelines. Instead, he or she can identify communication gaps during discussion and make clarifying comments. Barring this, even someone who may not speak the language but who has had extensive experience in dealing with people from the alliance partner country can be very helpful.

  • Hold face-to-face review meetings as often as possible and practical. This will be difficult for international alliances since the time and expense required for international travel may allow only a small number of meetings per year. There are alternatives for meetings such as tele- or videoconferencing and Email exchanges, and these should certainly be used on a supplemental basis. However, nothing can substitute for regular face-to-face meetings - there is a direct relation between regular, productive meetings and progress.

  • But, don't hold meetings under jet lag conditions. Schedule meetings so that international travelers have time to recuperate before discussions begin. This is an especially key point in the early negotiation phase of an alliance. Many mistakes are made and confusion can ensue when people begin important discussions immediately after stepping off of a flight into a big time zone shift. People often overestimate their ability to perform under jet lag conditions.

  • Whenever possible spend time with your partner team in social settings such as lunches, dinners, etc. You may also entertain you visitor with outings to sporting events, golf or tours to interesting sites in your city. Time spent this way demonstrates your genuine interest in forming not just a business relationship, but a personal one as well. A sound personal relationship can help carry the alliance through the difficult times that will inevitably arise during its life. The alliance must be founded, in part, on personal relationships.

  • Meeting management and organization is always important for efficiently pursuing any endeavor in the workplace. In alliance settings and most especially international alliances, meeting management is another critical requirement for maintaining a good working relationship. In effect, this is another communication issue. Again, a great deal of information already exists that provides guidelines for effective meeting management. Steady progress toward objectives can be facilitated by steadfastly adhering to best practices. It is a key role of the alliance manager to relentlessly adhere to these. Often this is an unpopular and thankless job; make sure the alliance manger is appropriately encouraged and rewarded for driving the effort.

Conclusion

Forming a strategic alliance with an organization outside the US can be an effective method of reaching international business objectives that would otherwise be difficult or impossible to achieve. However, any alliance relationship presents special challenges in management and maintenance throughout its life. Therefore, it is crucial that the basis for the alliance be carefully evaluated to ensure that both parties will benefit and that each clearly understands their respective expectations and obligations. With proper attention, organization and management, the international alliance can be a productive business strategy and a broadening experience for your staff.


     
   
     
   

The Author

 

Blaise J. Arena is an independent business development consultant based in Chicago. He has strong experience in creating and managing strategic alliances for business development and R&D projects and has worked with companies in India, Europe, South America, the Mid-East and the US. Mr. Arena also has expertise in intellectual property management and is the author of the recent article "Creating a Culture of Invention" (Managing Intellectual Property magazine, April '04.) He is a member of the Institute of Management Consultants www.imc-chicagoland.org and can be reached at blaisearena@yahoo.com .

     
   
     
   
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Copyright 2004 by Blaise J. Arena. All rights reserved.

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