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March 20, 2013
How to Form Healthy Business Partnerships
Whether you’re running a complex project, would like to enter into new markets, or need investment as a start-up, you need a partner. Reliable studies have proven that more than 70% of all strategic alliances and joint ventures either end up in conflict or do not meet their objectives. Over the last 25 years I have formed and managed almost 100 alliances or joint ventures. Some succeeded, some failed. Here are a few key lessons that can help you to avoid mistakes that might cost a lot of money.

Make sure that your partner increases customer perceived value. According to PIMS (Profit Impact for Marketing Strategies), customer perceived value means the “right” quality — defined as the product-, service-, and image-related attributes that count throughout the product use cycle — at the right “price,” and always from the clients’ point of view. To put it simply: If you meet your customer buying criteria at the highest degree imaginable at the right price, you generate a high customer perceived value. Customer perceived value is the single most important criterion driving your market share and overall profitability. Many companies have not understood this key principle yet and often invest in areas that do not add any value for their clients.

If companies aren't aware of this fact, they tend to choose the wrong partners. Always check the position of your prospective partner in terms of customer perceived value. Ask potential clients, third parties, or even competitors how your partners perform in the market. If you choose a strategic or joint venture partner who delivers poor customer perceived value, you run the risk of having to invest first in your partner in order to reposition the venture formed by both of you. How do you measure customer perceived value? 1) Visit 1–3 clients, 2) ask them about their key buying criteria and those factors’ importance to them (allocate weights), 3) ask them about how well you meet these criteria, and 4) decide on where you should invest or divest so as to increase value.

Create a high degree of economical or technical interdependence. I have seen many companies entering into new markets and choosing partners with the wrong belief that those partners should only open the door to prospective clients. Such partnerships are doomed to failure. If local partners do not add any complementary skills, capabilities, or investments, they will just focus on the financial benefits. As soon as you get in trouble, they will leave you alone and can even do a lot of harm to your reputation since they often have strong bonds with authorities and clients.

Allocate a fair share of risks. A few years ago we were assigned a multi-billion-dollar project in a market we did not know very well. The client forced us to shape a joint venture with a specific local partner who had neither the technical capabilities nor the financial means. However, the partner insisted on assuming the commercial lead while we were allocated the overall technical responsibility. First, we did not care because we just saw all the opportunities. After a couple of months we ran into substantial technical problems. Everybody blamed us for this and we were suddenly expected, as the major leader, to assume the overall responsibility. Due to a poor contract, we ended up in a huge conflict that cost us more than 10 million dollars in the end. Even if the opportunities seem to be vast, you should never rush into a partnership and should discuss all the risks and measures to mitigate them.

Perform a risk assessment of your partnership. A risk assessment is much more than a due diligence. Once we entered into a joint venture with a large organization. They seemed to be financially stable, but we forgot to assess the risk of their involvement in other projects. Since they were operating in difficult markets, they suddenly ran into significant problems that drove them nearly to bankruptcy. As a consequence, we were forced to pour money into their company so as to save our partnership. When running a risk assessment, you should carefully check the following critical issues:
  • Degree of expertise and competency of both parties
  • Financial situation
  • Legal situation
  • Commercial situation: availability of resources, management style, processes, corporate strategy, visions, values, mission
  • Risks partners are exposed to in other businesses
  • Does joint and several liability make sense?
  • Insurance issues
  • Your partner should have at least a basic understanding of your business and/or industry
Collaborative-driven leadership style. Forming of a partnership almost always means a clash of different cultures. A perfect partnership requires a high degree of collaborative leadership from both parties. Leaders of both parties should be authentic, open, honest, and strong in verbal communication so as to build mutual trust. Furthermore, it is recommended that you establish a clear process for the information flow between people and for conflict settlement. Make sure that you choose people with a high degree of self-confidence and a thick skin at the very beginning of a partnership so as to build a sound basis for collaboration.
Define a joint goal. In the best case, partners in a joint venture should pursue the same goal. However, it lies in human nature that each partner also hopes to achieve some personal goals or benefit even individually from the partnership. Here are some points you should address at a very early stage of your partnership.
  • Are costs/benefits clear to all parties?
  • Are overall risks and barriers clear?
  • Do both parties really fight for the “higher” cause?
  • Are hidden expectations clearly met and spoken about?
  • Is the achievement of individual goals guaranteed?
  • Define a joint target that motivates both parties
Keep some key success factors in mind during the operation of your partnership. New challenges can happen all the time and you should be prepared very well to cope with them:
  • Allocate clear roles and responsibilities (co-leadership of joint ventures is highly questionable and rarely works)
  • Establish a clear understanding of the joint goal
  • Celebrate quick wins and results so as to constantly motivate people
  • Joint mission and vision: Ignite a “joint fire” for a “higher cause” (= joint objective)
  • Build all your “hidden expectations” into the contract
  • Manage the new entity (joint venture or alliance) like a separate entity (leadership, control, performance monitoring, joint risk mitigation plan)
  • Align the values of the different cultures
  • Establish a common understanding for goal setting (technique)
  • Eliminate or balance power distance
  • Outline a plan for how you should establish trust

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Andreas Dudàs. Swiss, visionary entrepreneur, mentor, motivational speaker, and expert on authentic leadership. More than 20 years experience in top executive positions in over 25 countries. Founder of the BE SHiRO Group in Switzerland and India, dedicated to empower individuals and organizations to achieve greatness through authenticity. Author of “Do you dare to be yourself? Developing power in life and leadership through authenticity." Learn more about Andreas at www.andreasdudas.com/book.
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