Alliances Between Small and Larger Companies Can Mean Risky Business

    Jan 24, 2019

    One of the fastest, least capital-intensive ways for small-to-midsized companies to grow is to connect with a larger, more powerful partner or brand. But these alliances are not without risk: experts estimate their failure rate to be as high as 60%. A new report from the Conference Board examines how midmarket companies can go about finding a “big brother” they can trust.

    Why Alliances Can Be Beneficial

    Despite the risks, an alliance with a larger company is one of the only ways that some smaller and midsized companies can accelerate growth without huge capital outlays. Normally, growth takes patience and a very long time. After all, brands are not created overnight. But with help from a powerful partner, a smaller company can raise its visibility, develop a new technology or product, gain access to broader marketing channels, and tap into sources of new customers. It can also ride the coattails of a strong brand.

    “Since the sharp falloff in alliance creation after the dot-com bust in 2001, companies have learned much about how to design and manage these partnerships more effectively,” says Howard Muson, author of the report. “Alliances are making a strong comeback, and companies have more realistic expectations about what they can achieve.”

    Reducing the Risks

    Making an alliance work takes tremendous effort and commitment and the risks are not to be underestimated. What if the larger company is not so well intentioned and walks away with the smaller company’s secrets? Sometimes the larger company develops other priorities and allows the partnership to fall apart.

    The Conference Board examined a few small and midsize companies that appear to have gotten over the hurdles to see how they benefit from alliances and collaborate with their partners.

    • Before bringing in the lawyers to draw up contracts, get the partnering teams together in a room to talk about philosophy and goals. Robert Spekman, professor at the University of Virginia’s Darden School and author of Alliance Competence says,“I don’t care how good the deal is. If your partner doesn’t share the same vision, the same set of morals and ethical standards, walk away.”
    • Look for clues that the larger partner takes you seriously and truly wants to help foster your growth as well as its own. You need assurances that your company will be listened to and have a voice in major decisions.
    • Be diligenct about the potential partner’s behavior in past alliances, that is, whether he has kept his promises and maintained the trust of his partners.

    Although many innovative smaller companies fear that a bigger company may steal its proprietary technology or processes, a bigger risk is that they will take too long to do the deal or won’t achieve their objectives because the more process-heavy partner can’t move fast enough, says McKinsey’s Ernst. He suggests a few ways to reduce the risk when small companies partner with big companies:

    • Talk to at least three companies and create an “auction” for the product or technology that you want assistance in commercializing. Without a firm auction date, big companies may take their time coming to the table.
       
    • Ask for estimates on how long it takes the company, on average, to make key decisions, such as hiring a new plant manager or launching a new product.
       
    • Find out what marketing and R&D resources the company plans to assign to the alliance. Ask, for example, “Whom are you going to assign to work on this project?” Then write their names into the contract.
       
    • The smaller company should estimate how much time the CEO will have to devote to the alliance. Because the smaller company may be staking its future on it, the CEO often takes charge of the alliance. Lost time for small to midsize companies means fewer sales. Will the returns justify this diversion of the leader’s attention? If so, the CEO should have a backup team in place to run the company while he or she is keeping the alliance on track.

    Source: Brotherly Alliances, Engines of Growth, Executive Action No. 237, The Conference Board.

    For a copy of the report: courter@conference-board.org