Over the past decade or so, we have come to recognize the advantages of forming strategic alliances in order to achieve important business objectives. For example to:
- Reach new markets through other channels
- Achieve greater economies of scale through shared resources
- Deliver more of a client’s needs through alliances with other providers, where the partners’ products or services complement one another
- More effectively compete against other providers
Although a potential strategic alliance may appear to make good business sense, its ultimate success will depend on several intangible conditions that must exist in order for the alliance to achieve the outcomes sought by each partner.
Recently, I was asked to assist an IT consulting firm overcome some marketing challenges it was facing. After assessing the situation, it became clear that identifying and forming a strategic alliance could benefit both my client and the right strategic partner – “right” being the operative word.
Here’s the background:
Client: IT Consulting Firm
$4M in revenues, develops logistics, point of sale and other applications for clients in the retail, food services, warehouse and shipping industries.
Due to its relative size, and unrecognized brand, the bulk of its engagements were as a sub-contractor to larger IT consultancies, which in turn were primary contractors to large accounts (end-users). This arrangement was not favorable for the sub (my client) for several reasons, including:
- The primary contractor was in a position to control the sub-contractor’s bill rates while passing on these costs to the client at significantly higher rates.
- Payments to the sub from the primary contractor were typically processed 30 or more days after it had been paid by the end-user, thereby sapping the sub’s limited operating capital and increasing its cost of borrowed funds.
- The primary contractor controlled all direct communications with the end user thereby depriving the sub of opportunities to build its brand recognition with the end user through direct communications.
- Designed an alliance model for use with another IT firm of comparable size and with complimentary IT skills/strengths. It was launched exclusively for doing business as a primary contractor with large end-users. The alliance’s more robust project management capability and complimentary IT services accommodated the needs of large end users, and was marketed as such.
- Developed strategic partner selection criteria and the alliance structure, and facilitated negotiations with that strategic partner.
- Eliminated primary contractor’s “mark-up”, increasing my client’s margin by $108K/yr
- Improved collections by 30 days through billing the end user directly, which:
- Freed up $300,000 of their accounts receivable line, which then became available to support additional business
- Reduced interest expense on borrowed funds by $18,000/yr
- Established direct access to the end-user which:
- Increased awareness of the alliance partners’ brand
- Made timely and efficient communications with the client possible
- Positioned the alliance as a strategic planning partner to the client
- Created opportunities for the firm to deliver more value to the client in additional technical areas
Why this Strategic Alliance Worked
Undoubtedly, the alliance succeeded in large part because the owners of the partner companies were compatible and trusted one another. But the following were critical to their success:
The alliance partners:
- Had complementary strengths
- Had sustainable business models
- Were of comparable financial strength
- Shared values and vision
- Had similar leadership models
- Each nurtured a culture of innovation
- Each had a history of exemplary customer services
There are many examples of strategic alliances that appear very likely to succeed based the first 3 bullets points above, but struggle to be effective, or more often than not fail because they do not align on the last four intangible assets.
Jim Stoynoff, President Synthesis Solutions, jstoynoff@Synthesis.Biz
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