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Making Your Business Partnerships Work

“Without knowing other lords' minds, one cannot secure allies ...  [W]e must ... affect alliances with our neighbor states, so that relationships are intimate and there is mutual good will …”
    —Sun Tzu

“… two can be as bad as one, it's the loneliest number since the number one…”
—Harry Nilsson

Not much has changed in 2,300 years.  Success still requires us to form alliances, and miscommunication and poor planning still dooms many of them to failure.  In fact, the problems may be worse today, as the pace of modern business puts additional pressure on our chances for success.  Traditionally, business partnerships—particularly important ones—developed over years of building trust.  In Japan, where alliances are a central business tenet, the slowness of the courtship is notorious.  In contrast, American companies often build alliances over the course of months or even weeks, as two businesses chase potential synergies.  A few meetings, some (perhaps even many) spreadsheets, and a quick letter of intent are followed by the “usual documents.” 

Correctly implemented, alliances can fuel growth, reduce capital needs, improve efficiency, convert fixed costs to variable costs, and transform your business.  Alliances can significantly reduce development time and costs by using the intellectual property and expertise of other organizations.  They allow you to leverage the areas in which you excel and to mitigate your weaknesses.  

However, the interests of the parties in an alliance are never fully aligned.  The power of the potential synergy from combining key assets of the partners often mirrors the consequences of failure.  While alliances between participants from different industries or cultures offer great opportunity, the potential for miscommunication rises exponentially. To endure, alliances must be able to adapt to changing conditions. 

There is no magic to successful alliances, just hard work, careful attention and common sense:

1. Recognize your alliances.  Recognizing your alliances is the first step to maximizing your chances for success.  Because “alliance” and “joint venture” don’t have precise legal definitions, doing so is not always as easy as it sounds.  Alliances can take many legal forms: from carefully crafted relationships involving corporations, partnerships and limited liability companies, to informal relationships centered on a license agreement or supply con¬tract.  Indeed, there may not even be a formal agreement.  An alliance is an ongoing relationship of mutual depen¬dence, usually identified by the length of the relationship, its depth, its importance and how easily it could be replaced.  

2. Know what you need--and why.  Sometimes the vision of success is so seductive that it sweeps aside careful analysis.  Companies feel the need to do something—maybe anything—so as not to "miss the boat."  But the boat is probably not leaving that quickly, and in any case, nothing costs more than getting on the wrong boat.  You can only develop your business plan, evaluate the potential alliance and negotiate the critical issues if you have a clear vision of what you need and the risks you can and cannot accept.  If you don’t know or can’t articulate your positions, you can’t even begin a real negotiation, much less navigate the inevitable tradeoffs.  Worse yet, you may find yourself in an alliance which stifles, rather than fosters, your goals.

3. Understand your partner's goals.  Focus on the goals and aspirations of your partner.  With an alliance, you must not only achieve your goals; you also need your partner to get what it wants. If it doesn’t succeed, your alliance will ultimately fail.  Understanding your partner can also help you structure the alliance.  Look for matters that seem relatively small to you but have a major impact on your partner.  Keep focused on the long term; more than in many other situations, grabbing short term advantages can be costly.

4. Understand the implications.  Early on, before drafting documents or announcing the alliance, take the time to work through the mechanics of your alliance.  A quick letter of intent may seem like a great boost to your stock price, but it can be devastating (particularly for a smaller company that appears rejected) if later withdrawn.  Before proceeding, consider all aspects of the alliance, not just a few main points.  Determine not only what should happen if all goes well, but how to handle the undesired and the unanticipated.  Your framework needs to strike a balance between entrepreneurial optimism and sober experience, and between protection from potential risks and fostering core goals.

5. Document your alliance carefully.  Your business plan should determine the form and terms of the alliance documentation, not the other way around.  Unlike contracts for isolated transactions, the complexity and fluidity of alliances makes it hard to capture precisely each party’s obligations and expectations, and the use of   forms often means documents that poorly adapted to your business plan.  Only creative teamwork between you and your lawyer, grounded in the context of the alliance, can document a structure with the right balance of flexibility and predictability, which reflects what you plan today but allows the alliance to adapt to the inevitable changes over time. 

6. Build communication and trust.  The complexity of the relations in most alliances makes their informal aspects especially critical.  The written documents usually only crystallize a limited—and sometimes not the most important—aspects of the relationship.  (Indeed, if you can clearly define a relationship, it’s probably not really an alliance.)  As a result, at some point you will likely want—or even need—your partner to modify the terms of your contracts, no matter how carefully crafted. To know that your partner won’t take advantage of that need, build a foundation of trust and mutual accommodation. 

7. Bridge the communication gap.  Although differences often motivate alliances, they can just as easily tear them apart.  Every company, every industry and every country has its own culture and language; we all work from often unspoken assumptions about our business, legal and regulatory reality.  Especially in international alliances, differences in culture–indeed, in the very meaning of words—can mean that even the most carefully negotiated "agreement" actually rests on mutual miscommunication.  When you assume that your partner’s reality is the same as yours, differences can assert themselves in unfortunate ways.  The secret of real estate may be "location, location, location," for alliances, it’s "communication, communication, communication." 

8. Support your champion.  Your alliance will generally have one or more "champions" who advocate it within your partner.  Their failure, demotion or disenchantment can severely impact your alliance, as it may no longer compete successfully with conflicting priorities for resources and personnel.  Identify your champion(s), and,  In a diplomatic way, assist in communicating the advantages of your alliance.  At the same time, build relationships with other contacts within your partner to avoid tying your fate to a single person (but do so carefully so you don’t offend your champion).   You should also identify the adversaries to your alliance and try to neutralize them.

9. Remember that the deal is just the beginning, not the end.  In building an alliance—like a marriage—the hardest work often follows your initial agreement.  No alliance ever works out exactly as originally envisioned: the issues of today may or may not be the issues of tomorrow, but the solutions of today probably won't all be the solutions of tomorrow.  Don’t just put away the "final" documents; calendar periodic formal reviews with your team to adjust your documents as the reality changes. 

Most of these points are common sense, but it is surprising how often they are ignored in the press of business. Properly managed, alliances are critical to your success; taken for granted, they can easily be a recipe for disaster. 

About the Author(s)

Theodore E. Guth is a partner at the law firm of Manatt, Phelps & Phillips, LLP, and the chair of Manatt Business Select, an innovative client-centered approach providing practical business legal services with a transparent cost structure. For more information, visit: http://www.manattbusinessselect.com/