An Introduction to Strategic Alliance Management by The Rhythm of Business

An Introduction to Strategic Alliance Management Volume 10 in White Paper Series

CollaborativeBusiness Janice Twombly and Jeffrey Shuman May 2010 Published in Effective Executive Volume XIII, No. 08, pp.20-27, August 2010

An Introduction to Strategic Alliance Management

Strategic Alliance Management is a philosophy – a way of thinking – enabled by a set of policies, processes, and tools. It is also a profession and a corporate function, requiring a defined vision and mission, structure, goals, and metrics

An Introduction to Strategic Alliance Management

Introduction

The message is clear. In industry after industry, the economic imperative is to establish and grow the alliances needed to create the business value that drives strategic and financial outcomes

Alliances have long been a part of company strategy. They are prominent in most industries to gain access to markets, expertise and technology, and to share risks and costs. Partnering is central to the strategies of many well-known technology companies, including Cisco, IBM, and Microsoft. The global airline alliances have provided companies in that industry with opportunities to leverage each others’ resources and better serve customers. Energy companies partner to access and operate natural resource fields. Consumer goods companies ally to seek new sources of product. Within biopharmaceuticals, alliances have become an essential strategic tool as the cost and risk of developing new medicines has increased. Over the past two decades, studies of strategic alliances have shown an increasing: ► Percentage of revenues from collaborative relationships and

alliances ► Percentage of new products sourced from outside the company ► Utilization of entire business process outsourcing

In many industries, alliances account for more than half of revenues and new products. The message is clear. In industry after industry, the economic imperative is to establish and grow the alliances needed to create the business value that drives strategic and financial outcomes. By nature, alliances are complex. As a result, despite their promise, many alliances aren’t successful. Studies conducted by McKinsey and others have shown that fewer than 50% of alliances achieve their objectives. To remedy this situation, scholars, consultants, and industry practitioners have developed a body of knowledge to guide partnering organizations in making the management of alliances a repeatable and consistent process. In doing so, the success rate has improved. Moreover, the processes, practices, and tools of alliance management have come to be recognized as a unique professional management discipline.

An Introduction to Strategic Alliance Management

The Discipline of Alliance Management Alliance management is a way of thinking enabled by a set of policies, processes, and tools that have been effective in addressing the unique challenges of managing an alliance. It is also a profession and a corporate function, requiring a defined vision, structure, goals, ways of working, and metrics. Members of Alliance Management Groups are typically referred to as Alliance Managers. Their responsibility is to drive professional management of alliances and other collaborations in a consistent manner, to ensure their effective governance, protect their company’s assets, and maximize long-term value for their company, its partners and customers.

Alliance Managers must be part mentor, part coach, part diplomat, part strategist, and part entrepreneur

Alliance Managers focus on the “collaborative” work of the alliance. This involves bridging the partnering organizations and uniting independent functions within each partner to ensure activities are coordinated, information flows, decisions are made, and resources are leveraged to achieve the goals of the alliance more efficiently and effectively than could be achieved by each partner acting alone. The “technical” work of the alliance – carrying out the development and commercial purposes of the alliance – is conducted by individuals responsible for those functions. Together, they allow each partner to realize its strategic intent in entering into the alliance. Alliance Managers act as choreographers or orchestrators of the alliance and are responsible for: 1. Maintaining continuity of intentions, motivations and relationships – Throughout the alliance lifecycle, Alliance Managers must build relationships with key personnel from all partners as well as within their own company and ensure that those relationships are appropriately developed and maintained. 2. Coaching and guiding stakeholders in effective collaboration – Alliance Managers must be part mentor, part coach, part diplomat, part strategist, and part entrepreneur to enable the success of alliances. Enabling others to collaborate effectively increases the likelihood that intended outcomes and value will be achieved. 3. Maintaining a single, comprehensive view of the relationship – A key role of Alliance Managers is to ensure that alliance committees and line functions understand the interdependencies among them and that the flow of communication is adequate to ensure informed decision making.

An Introduction to Strategic Alliance Management 4. Ensuring internal alignment and readiness before engaging partners – Alliance Managers ensure that governance committee members and working teams have reached agreement on their company’s view of what is in the best interest of the alliance prior to engaging with the partner. Alignment also implies agreement on how to handle new information that arises during discussions with partners, as well as how to handle conflict within teams. 5. Facilitating communication and decision making – Alliance Managers are often brokers and bridges; ensuring that conversations are candid, transparency is sufficient, and decisions are made. Unless one is in the thick of an alliance, it is hard to appreciate the amount of time and effort this most essential business activity takes. 6. Pre-empting issues, facilitating conflict resolution, and managing escalation – Alliance Managers must be engaged enough in the day-to-day operations of the alliance that they can see potential issues and work to head them off and help resolve conflict. If conflict cannot be resolved among the individuals who have the conflict, then Alliance Managers escalate resolution of the conflict through the channels described by the alliance agreement. 7. Monitoring milestones and metrics – Alliance Managers ensure that measurement occurs as necessary, is reported as agreed, and is of sufficient quality and relevance to aid decision making. They also ensure that milestone deadlines are factored into planning. 8. Supporting alliance teams in operational and financial negotiations – Alliances require thousands of little negotiations. Alliance Managers ensure that working team members can successfully engage in these negotiations, potentially leading them when they become more substantial. 9. Managing governance structures and processes – Alliance governance is so important, it is one of three work streams involved in providing direct support to alliances. 10. Understanding partners’ interests and how that relates to their company’s interests – Alliance Managers must understand what matters to partners and help internal stakeholders (working team members) incorporate that understanding into their decision making and actions to better achieve their company’s interests.

An Introduction to Strategic Alliance Management

The Alliance Management Group Alliance Management Groups generally define their mission in three parts (See Figure 1 – Alliance Management Mission): 1. Realizing the strategic intent of alliances 2. Developing the collaborative ability of the organization 3. Continuously improving the management of alliances

Strategic Intent Stakeholder Alignment Value Creation Governance

This distinction between strategic intent and common goals is not

Collaborative

trivial and overlooking

Ability

Alliance Management Excellence

it may lead to challenges in achieving the unifying purpose of an alliance

Figure 1 – Alliance Management Mission Realizing Strategic Intent It is important to distinguish the unifying purpose (the strategic intent) that brings partners together in an alliance with the oft-stated view that partners need to be “aligned strategically” or have “common goals.” This is simply not true. For example, in biopharmaceuticals, an alliance often occurs between a smaller company that has a focus on discovering and/or developing compounds to a certain stage and a larger company that has the capabilities to develop a commercial strategy, guide the compound through registration trials, gain marketing authorization, and take it to market on an appropriate scale. These two organizations have very different strategies. Their organizational goals are quite different. What they share is a desire to achieve certain common goals (the strategic intent of the alliance) that provide value each uses for achieving their individual objectives. This distinction between strategic intent and common goals is not trivial and overlooking it may lead to challenges in achieving the unifying purpose of an alliance. Each party enters into an alliance to help it

An Introduction to Strategic Alliance Management accomplish what it is trying to do. The implication of this reality is that alliance team members must appreciate that their partner, their company, and their colleagues all have reasons in addition to achieving the alliance’s unifying purpose that make participating in the alliance a worthwhile endeavor. Take away this individually defined value and an essential part of the rationale for the alliance is lost. For example, assume the strategic intent of an alliance is to develop and commercialize an innovative product in a new technology of strategic importance to a company. The head of that product area may see this as an opportunity to build up his or her department and as long as that occurs, he or she is happy to collaborate. If head count is frozen and working on the alliance is seen as “additional work,” there may not be as great a level of collaboration.

Alliances are the melding of at least two entities’ processes, policies, capabilities, people and other resources to achieve a specific purpose or purposes and provide benefit for all concerned

Alliance management processes (which are often documented in an Alliance Management Guidebook) typically emphasize three core responsibilities which focus on achieving the strategic intent of individual alliances: 1. Alliance governance 2. Alignment of internal stakeholders 3. Maximizing value for all partners in the alliance Alliance governance A core responsibility of alliance management is the governance of alliances. Alliances meld at least two entities’ processes, policies, capabilities, people and other resources to achieve a specific purpose or purposes and provide benefit for all concerned. The governance system of any alliance has the task of organizing these resources and managing their activities to achieve the alliance’s purpose. As can be seen in Figure 2 – Alliance Context, working towards achieving the intent of the alliance and creating value for each partner implies managing certain strategic challenges. How these manifest themselves is extremely contextual. Common challenges that must be managed include: ► Prioritization of the endeavor within each partner ► Competency and continuity of staffing ► Ongoing level of investment

To determine how to manage these challenges and the activities that lead to achieving the purpose of collaborating, the three key questions that must be asked and answered are: ► What should we do together? ► What should we do individually? ► What is the appropriate governance?

An Introduction to Strategic Alliance Management Strategic Intent

G IVE & GET

Strategic Challenges Strategic Questions What should we do together? What should we do individually? What is the appropriate governance? Figure 2 – Alliance Context For any action to be done together, a joint way of working must be devised and implemented. One of the most common sources of difficulties in maximizing the value of alliances occurs when the two parties can’t come to agreement on how they will operate. Problems come about when budgeting is done at different times of the year, authority for different types of decisions rests at different levels in the organization, or Standard Operating Procedures (SOPs) for such things as quality assurance are different. Alliance Managers work with their counterparts from the partner company(ies) to develop and implement how this joint work is to be accomplished, satisfying the requirements of each, but without wasting resources by duplicating work. For work to be done individually, decisions must be made as to which partner takes the lead on certain work. Usually the partner with the greater capability and capacity leads the work. Decisions must then be made as to how that partner will inform the other(s) and the extent of their individual authority. This requires a reasonable level of trust between the parties, as well as a careful delineation of responsibilities. Without it, duplicate work or second guessing occurs and the primary purpose of the alliance – to leverage each other’s resources – is undermined. With knowledge of how the work of the alliance is to be shared, the governance system is designed and implemented. The governance system is how the alliance manages its joint work. Governance has both structural and behavioral components to it. Some of the structural components, such as the governance committees, may be part of the

An Introduction to Strategic Alliance Management alliance agreement. As the alliance moves through its lifecycle, the design of the governance may have to change to reflect needs at a particular point in the lifecycle. For example, if significant changes are made in how work is shared in an on-going alliance (i.e., responsibility for billing and collection or distribution changes) the governance system may need to change. Thus it is important that any governance framework established by contract be flexible enough to adapt as needed. Alignment of internal stakeholders

Collaboration is a strategic way of working to achieve desired outcomes. It involves coordinating activities, communicating information and building an environment of trust and transparency to better leverage the resources of the partners in pursuit of their objectives. In order for one company to collaborate effectively with another, it has to be aligned internally so that it can speak with “one voice” to the partner. Anything else is confusing at best and potentially damaging. To illustrate, suppose a partner is looking to reduce the number of people engaged in a project, resulting in the likelihood the project could stall. The initial response may be, “Don’t reduce headcount, it will hurt the project.” Then someone else tells the partner the project won’t get hurt if resources are withdrawn. Clearly, the partner will want to proceed based on the more favorable comment. The lack of a single aligned message to the partner means that either the more favorable statement will have to be retracted (undermining the authority of the individual who said it) or the project is put in jeopardy because resources are reduced. The preceding illustration demonstrates that before two companies can collaborate effectively, they must collaborate well within their respective companies. Thus an essential responsibility of alliance management is to ensure that internal stakeholders are appropriately coordinated, necessary information is properly communicated, and there is the requisite trust and transparency. Even small organizations have functional silos. These functional silos have their own objectives and goals to meet, which can cause issues of prioritization and resource allocation, despite best intentions of achieving corporate objectives. Additionally, professional people differ in what they perceive to be the most effective path towards a goal. Anyone with alliance management responsibility must bridge these silos and bring people together in a common understanding of how the unifying purpose of the alliance will be achieved. Gaining alignment is easier when everyone sees how it is in his/her own best interest to go about an activity in a certain way. This usually means individuals must understand how engaging in requested behavior positively influences achieving his/her goals and performance targets. If they don’t have a similar perspective, then education, diplomacy, and negotiation may be required to develop a common understanding.

An Introduction to Strategic Alliance Management

It is not uncommon for Alliance Managers to spend 70% of their time working with internal colleagues

People with alliance management responsibility spend much of their time building a common understanding and consensus among internal stakeholders. It is not uncommon for Alliance Managers to spend 70% of their time working with internal colleagues. This essential process is often invisible because it happens in small increments, one conversation at a time. The challenge of having these conversations is exacerbated by geographic distance and time zone differences. It often requires difficult and frank discussions with people senior to the Alliance Manager, challenging traditional hierarchies, lines of authority, and traditional ways of working. When geography and time get in the way of face-to-face conversations, Alliance Managers must work exceptionally hard to build relationships with others whom they must educate, persuade, and cajole. It is not an exaggeration to think of alliance managers as needing to exercise a similar level of influence without authority as senior diplomats negotiating international treaties. Maximizing value The value of an alliance is multi-faceted. Value is more than the financial exchange that is defined in the alliance agreement. It also includes access to the capabilities, expertise, and market reach of the partner one can only access within the context of a trusting, mutually beneficial relationship. The role of alliance management is to ensure that value as originally envisioned is realized and that opportunities to gain additional value are identified and pursued. There are three primary ways in which alliance management maximizes value: 1. Monitoring contractual requirements to ensure all revenue opportunities are realized 2. Identifying and managing inherent risks 3. Evaluating, measuring, analyzing results and making necessary changes to alliance operations Monitoring contractual requirements Alliance Managers must be fully versed in all aspects of the contract. The contract determines the financial commitments of each partner and the events that trigger those commitments, as well as how they are calculated. Often there is some ambiguity inherent in the timing and calculation of financial obligations. For example, the definition of development costs to be shared or how those costs are allocated across different products may leave room for interpretation. Identifying and managing risks An Alliance Managerâ&#x20AC;&#x2122;s responsibility is to have a comprehensive view of alliance activities and to have a good understanding of the partnerâ&#x20AC;&#x2122;s

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An Introduction to Strategic Alliance Management business. In addition, an Alliance Manager must be aware of the implications of events outside the alliance on the alliance. For example, many companies are quite active in partnering with (or acquiring) other companies. What happens when your partner announces a new relationship with a competitor? In addition to risks caused by external events, alliance management processes exist to minimize the management risks inherent within any particular alliance. Some of these risks come about because of the nature of the partner, for example, the risk of a small company partner with tenuous funding not being able to meet its commitments. Identifying and managing risks is embodied in all of the specific alliance management processes. Analysing results and making improvements Using assessment tools to evaluate and analyze alliances is a proven approach to making them more effective. Alliance management practices include a number of scorecards, assessments, and other analysis tools to guide Alliance Managers in improving how alliances operate. The evaluation process takes place both internally and with partners on individual alliances. It also looks across alliances to identify trends, ways to leverage good practices, and looks for company-wide issues; as well as ensuring that the alliance portfolio is sufficiently balanced to make the best use of resources and achieve the intended strategic outcomes. Because alliances are highly contextual and no two are the same, the process of analysis and improvement is an essential component of maximizing the value of both individual alliances and the overall portfolio. Believing in the adage “If it can’t be measured, it can’t be managed,” The Rhythm of Business has invested considerable resource over the past decade in building a suite of metrics and measurement approaches for evaluating the effectiveness of individual alliances (VitalSigns™), analyzing alliance portfolios (Look Up, Look Down™), and collaborative ability (Collaborating to Win™). Collaborative Ability In most companies, the Alliance Management Group is quite small relative to the number of alliances and other collaborations the company has. Yet, the Alliance Management Group is responsible for the consistent management of alliances throughout a company. In order to accomplish this, the Alliance Management Group must ensure that when required, functional managers are able to access and utilize the tools of alliance management, understand the core concepts, processes, and practices and appropriately apply them to the specific alliance. In addition, alliances require coordinating activities, communicating relevant information, building trust, and accessing and leveraging resources with those outside of the company, including some who may compete with the

An Introduction to Strategic Alliance Management Company in other endeavours. Thus, the Alliance Management Group is also responsible for ensuring that company personnel know how to work successfully in that complex environment. Such support is provided through peer-to-peer conversations and leading the planning for alliance governance meetings, as well as facilitating other alliance activities. This contextual support is important and is often augmented through: 1.

2. 3.

A library of alliance management tools that are accessible to functional managers who also have alliance management responsibility An ongoing program of information and communication to continue to grow the company’s ability to succeed in alliances Formal training developed in conjunction with an organization’s training and development professionals

Alliance Management Excellence The purpose of creating a company-wide approach to alliance management is to provide a consistent, systematic way of managing the collaborations that are essential to business strategy. Documenting and applying its guidance, processes, and tools provides the means to learn what works well and what needs to be improved. As has been described previously with respect to specific alliances, the Alliance Management Group has the responsibility for ensuring that such learning explicitly occurs and is implemented. In addition to what is learned within the conduct of alliances, members of the Alliance Management Group partake of professional development opportunities, sharing their learning with other company personnel, as appropriate, and incorporating it into the management practices when relevant. Alliance management is a relatively new management discipline and the practice of it continuously evolves. The primary source of leading practices is the Association of Strategic Alliance Professionals (ASAP). It is the only global professional membership association that serves alliance management practitioners. ASAP provides knowledge and resources, education and professional development, and a community for networking to alliance professionals at every stage of business collaboration – from partnership formation to alliance management after a deal is signed all the way through to the dissolution of a relationship.

An Introduction to Strategic Alliance Management

Differentiating Alliance Management Alliance management responsibilities may appear to overlap with both business development and project management. In reality they have different, yet complementary foci, with business development responsible for the deal, project management responsible for the project, and alliance management responsible for the alliance. (See Figure 3 â&#x20AC;&#x201C; Comparing the Disciplines)

Figure 3 â&#x20AC;&#x201C; Comparing the Disciplines In some instances, a single individual has the requisite skills to perform both business development and alliance management, or project management and alliance management. However, the measures of success are not the same. In practice this generally means that the emphasis is on the discipline where the individual is the most comfortable, or that he or she enjoys the most. This can often result in neither being performed particularly well.

ÂŠ 2010 The Rhythm of Business, Inc.

An Introduction to Strategic Alliance Management

The Positive Impact of Professional Alliance Management The benefits of professional alliance management can be seen in three primary outcomes: ► Improved financial outcomes ► Improved alliance operating effectiveness ► Improved risk mitigation

The following provides some specific examples of ways in which alliance management groups create these outcomes. Financial ► Monitor

company and partner performance and identify shortcomings. If the shortcoming is due to the partner, consider and possibly negotiate compensation. If one’s own company is the cause, develop and implement risk mitigation strategy ► Secure cost sharing agreements for significant unanticipated expenses ► Highlight when assumptions underlying the financial terms have changed and lead the evaluation and negotiation of restructuring or termination discussions and ensure the appropriate operational plan is in place within each partner Operating Effectiveness ► Orchestrate

► ► ► ►

alliance kick-off meetings, ensuring committee members have a common understanding of the Collaboration Agreement; establish guiding principles for the operation and management of the Collaboration (including operating norms); communicate near term milestones and critical path activities; build relationships among alliance team members Provide input on governance structures and operations to business development colleagues Gain partner participation in alliance effectiveness measurement and improvement process Obtain needed resources for the alliance Create joint processes that address the concerns of each partner and serve the interests of the alliance

An Introduction to Strategic Alliance Management Risk Mitigation ► Lead the internal analysis of a partner’s proposal to change rights

or scope ► Ensure partners are compliant with laws and regulations for which

the Company could be held responsible ► Guide alliance team members in following and applying pre-

Managing more than a handful of alliances requires a consistent alliance management methodology that can be shaped as needed

determined governance ► Monitor the use of intellectual property within the alliance and

protect its pedigree ► Identify competitive issues relative to the alliance that emerge

Increasingly, companies are developing collaboration-dependent strategies, with alliances as key drivers of growth. It therefore becomes necessary for companies to be good at collaborating and managing alliances. Managing more than a handful of alliances requires a consistent alliance management methodology that can be shaped as needed. There must be global principles that can be applied as the potential value and management complexity of each alliance requires; along with specific criteria that determine how every alliance is individually managed, regardless of where it sits in the product pipeline and lifecycle, or the nature of the partner. Alliances are a way of conducting business that cuts across functions and affiliates, as well as engaging with a partner. Like any business, alliances need a professional manager to achieve its objectives.

An Introduction to Strategic Alliance Management

About The Rhythm of Business The Rhythm of Business specializes in collaborative businessâ&#x20AC;&#x201D;the organizations, business models, management and ways of working to innovate and grow through collaboration. For more than 25 years, principals of the firm have built collaborative business models, developed and operated alliances and supplier networks, and consulted within both corporate and civic sectors on building and using collaborative relationships to achieve strategic and financial objectives. Engagements include designing and implementing an alliance management capability, evaluating individual alliances and the alliance portfolio, intervening in troubled situations and working with good collaborations to become great collaborations. Through comprehensive management frameworks, skill development, and measurement and analysis tools, we enable individuals and organizations to innovate and grow through collaboration. Co-founders Jeffrey Shuman, PhD and Janice Twombly have coauthored numerous books, articles, and white papers and regularly speak at a variety of venues around the world on the ongoing transformation of organization structures to collaborative networks. They hold the Certified Strategic Alliance Professional (CSAP) designation conferred by the Association of Strategic Alliance Professionals. Their methodologies inform Shumanâ&#x20AC;&#x2122;s popular MBA courses on Managing Collaborative Relationships and Entrepreneurial Thinking at Bentley University where he is professor of management.

The Rhythm of Business, Inc. 313 Washington Street Newton, MA 02458 USA +1 617.965.4777 info@rhythmofbusiness.com www.rhythmofbusiness.com

ÂŠ 2010 The Rhythm of Business, Inc.