Alliance Management: A Blueprint for Success; Companies seeking to reach more markets and offer customers more choices are building alliances -- in growing numbers worldwide.

• Author: Ertel, Danny
• Position: Cover Story

Companies around the world are expected to do more with less: to offer more choices, reach more markets and provide better solutions and experiences to their customers, be they enterprises or consumers. At the same time, companies need to ruthlessly focus on what they do best, and be disciplined and efficient in their use of capital.

Responding to this challenge, a growing number of companies are seeking appropriate partners and building alliances. Among the top 1,000 U.S. companies, the percentage of revenue resulting from alliances -- currently about 20 percent -- is expected to rise to over 30 percent by 2004. In Europe, the reliance on alliances is even more significant.

What exactly are the successful alliances doing? How is an alliance different from the various kinds of licensing, outsourcing, joint ventures, partnerships and other business arrangements that have been around too long to be considered a "new way of doing business?" And is there a "blueprint," as such, to learn from and to replicate or construct successful alliances?

Every business school professor has his or her own terminology and way of categorizing business arrangements. Some look to the degree of risk-sharing between the companies, or to the kind of governance arrangements they have put in place. Others define them by their objectives, or by their complexity. Legally speaking, a "partnership" is an organization with clear implications for taxation and liability purposes, whereas an "alliance" has no such implications. But non-lawyers will often use partnership to mean a close relationship between two companies, without meaning to make a statement about their legal structure.

The reality is that managers will make their own choices on what to call any given business arrangement, often based on criteria that have to do with organizational politics, public relations or personal aspirations. As the director of strategic alliances at a large computer manufacturer noted, "We have 452 documents that say 'strategic alliance' at the top of the page; but we have two alliances that are really strategic."

However one formally defines alliances, there is a pragmatic perspective: an alliance is any business arrangement in which the success of one partner is tied to the success of both. Anything else is an arms-length contractual arrangement, and one that has the potential to become zero-sum: If my success can come directly at your expense, then when times are tough I (or others in my organization will be tempted to pursue that outcome.

One significantly under-appreciated implication of this view of alliances is that what really sets them apart from other business arrangements is the importance of the relationship between the partners. Thus, the concepts of alliances and partnerships are used here interchangeably; due to the nature of the relationship of each partner to the other, there simply is no distinction.

Risky Business

Research and experience suggest that partnering can be very rewarding. Studies by John Harbison and Peter Pekar Jr., co-authors of Smart Alliances: A Practical Guide to Repeatable Success, show that companies that are successful at partnering achieve a 50 percent higher return on investments (ROI) on their alliances than the average ROI among the top 2,000 companies in the world.

And results from a recent study published in the Sloan Management Review show that following the announcement of a new alliance, companies with a dedicated alliance function achieve four times the market value improvement than peers do. It stands to reason that if you can tap new markets, deploy new technologies and access knowledge and structural assets -- without having to own those resources -- an organization can do more, be faster and...