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Return of investmentCan clearly defined alliance performance metrics promote successful strategic partnerships .
Strategic alliances have become widely popular in the present day closely-knit high-tech world. Changes in the global economic scenario have fundamentally altered return of investment the way businesses grow. Earlier, organisations used to grow by buying out smaller companies. But now, strategic partnerships are fostering and nurturing growth for both small and big companies. By entering into a formal collaboration with strategic partners, businesses can quickly acquire the requisite expertise for product enhancement and marketing efficiency. This would otherwise demand consistent effort and great expense.
However, organisations should bear that alliances do not automatically succeed or create value. They need to be carefully handled. Structuring an alliance partnership though seems easy, managing and measuring its success is a shrewd task.
Larraine Segil, associate of relationship management return of investment consulting firm Vantage Partners, says, Although it is not difficult to make a deal, it is difficult to develop performance measures for the alliance success.
Developing metrics to quantity the benefits of a strategic partnership is a tough job. Organisations increasingly employ the balanced scorecard approach to measure the overall success of the alliance partnership, its strategic value, as well as its operational efficiency and financial performance.
Segil asserts that metrics dont have to be quantitative and financially oriented. She warns the alliance-savvy corporates, that, an over dependence on financial metrics could doom the strategic partnerships. This is because, many a times, organisations are forced to maintain an under performing alliance relationship, in order to uphold a competitive position in a new market place.
Managing the alliance success
The information provided by the alliance performance metrics help organisations sustain cordial relationships with their strategic partners. As companies have no control over their alliance partners, performance metrics are one way to make sure the company has some influence on them, says Segil.
Rightly defined metrics could form an essential element of performance appraisal. In a Vantage Partners survey of more than 100 companies, it was established that repeated alliance performance assessment would be the most proficient way to manage return of investment strategic partnerships. Because frequent alliance checks would enable companies to identity performance issues early, before they develop into unresolved conflicts. This would also facilitate efficient management of the overall strategic partnership. The figures in the survey reveal that about 80 percent of the respondents acknowledged strong alliance relationships to have created value, more by 25 percent, when compared to a badly managed alliance partnership.
Getting the metrics right
Constructing alliance performance metrics is a challenge because a strategic partnership embodies the partners shared interests. Therefore, while devising metrics for alliance performance, the partners should leave aside their corporate conventions, and adopt an external focus to foster such relationships.
Toni Hicks of Parson consulting, rightly says, The key is to develop combined measures of success. A partnership agreement should clearly underline the partners mutual expectations and performance measures. This should be done either before entering into a formal agreement or at the time of initial negotiations.
The performance metrics should essentially reflect the purpose of the partnership agreement. Strategic partnerships are usually entered into by organisations, to gain a toehold in new product markets, to resolve research and development issues, to quickly acquire the requisite knowledge and resources needed to comply with regulatory requirements in foreign markets, etc. Therefore, clearly defined partnership goals, enable partners identity the most beneficial performance metrics that would nurture their alliance relationship.
Also, the partnership metrics should consider the time factor. Say, for example, the primary aim of an alliance contract is to achieve rapid penetration into new markets, the metrics should essentially reflect the urgency of that goal. The same applies to time-to-decision making. The partners should jointly agree upon how and when key business decisions are to be made.
Committed to succeed
Strategic partnerships have now become so popular that a large number of organisations are setting up committed alliance management systems. Networking technology giant Cisco Systems Inc., for instance, has established an alliance management unit called Cisco Strategic Alliances.
Steve Steinhilber, vice president, Strategic Alliances, points that as Ciscos annual alliance revenues were growing at an exciting rate of 12 percent, contributing to more than 14 percent of the companys total revenues, it had to create a dedicated alliance management unit.
Cisco bases its alliance performance measures on the overall organisational goals and pays a closer attention to the alliance life cycle. Were not so concerned about actual financials in the first six months of an alliance, says Steinhilber. The company considers partnerships above a year old to be mature alliances. Also, the companys return of investment performance metrics for alliances is focused on augmenting its global marketing skills and top-line revenue growth.
Return on Investment
Ciscos finance department has played a vital role in managing its alliance activities. It worked in collaboration with the alliance management unit in designing a three-year Return on Investment (ROI) model. This
helps the company evaluate its alliance investments and compare them with other opportunities like acquisitions and internal development projects. The model incorporates performance measures for intangible benefits such as competitor defeat, market expansion and building expertise. This kind of ROI model is critical for effective decision-making and resource allocation, says Steinhilber.
The model also includes setting up of threshold limits for return and risk levels and a consistent methodology to measure partnership returns. This enables the company to formulate appropriate comparisons in assessing alliance activities and calculating the potential gains from strategic partnerships.
Size doesnt matter
Alliance managers should however understand that their partner too might be weighing value generated from such strategic partnerships. This also applies when the partnership firm is a small entity. Which means even if the partners might be unequal in size, they should always consider an alliance as one of equals.
Ali Kasikci, managing director of Peninsula Beverly Hills, referring to the companys alliance partner Toyota Motor Corp., says, our partner has the size, but we have the might. Therefore, the alliance partners should ensure that they mutually benefit from such an agreement. There should be no loser in these relationships, or, it would likely go from honeymoon to divorce court very soon, insists Kasikci.
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