Strategic Partnering

by Harold A. Meyer, III

Win win

Strategic partnering is a technique for teaming up with one or more companies which have complementary resources to achieve a mutual business objective. Strategic partnering is done by some of the biggest national and international corporations, yet is very useful for smaller entities as well. Strategic partnering can be very helpful for inventor organizations which may have valuable and negotiable intellectual property but may lack capital, R&D facilities, manufacturing and distribution capabilities. Without these vital resources and means to put a product on the shelf, the value of intellectual property is greatly diminished. Whereas straight licensing of intellectual property may involve simply signing over or assigning patent rights, strategic partnering usually includes direct involvement of the innovating company in the venture, and may have definite advantages over licensing.

Top entrepreneurs have remarked that sheer happenstance of geography or other factors often plays a key role in the establishment of alliances. Often companies that at first glance might appear to be the logical partner will turn a cold shoulder to new products. Licensing technology to "the logical manufacturer" may not be an option and often fails due to corporate ego, timid salaried company underlings and other reasons. Probably the biggest reason is due to fear of undercutting existing product lines. But what these staid company men don't realize is that if they do not innovate, someone else will, and they will eventually lose more market share by not staying fresh.

Bottom Up v Top Down product development

Rather than upgrading with the available technology, some corporations often try to force the customers to buy what they (the corporations) want them to buy, a recipe for disaster. This dictatorship to the customers may be a fact for a while, as in the former Soviet Union where that was a period of little choice for consumers, or in the early years at the Ford Motor Company when all you could get was a black colored car--but consider what happens to top down implementation. It never works. The Soviet Union collapsed not through war, but because nobody had toilet paper. Russia now has a growing, albeit spastic, free market--and cars come in every color of the rainbow from a wide variety of manufacturers.

Despite massive failures like "New" Coca-Cola, top down dictatorship to customers is a perennial favorite. IBM, for example, delayed its entrance into MANY key emerging computer markets such as the PC and the mini computer for fear of hurting its cash cow mainframe business. Of course, this ultimately cost IBM dearly and they lost BIG money to competitors with market driven motivation. Using strategic partnering techniques, blinders, obstacles and commitments to old technologies can be reduced. In a strategic partnership, a partner or joint licensee is much less likely or able to "shelf' a product by licensing (and then mothballing or burying) promising new technology for fear of undermining existing product lines. Commitment and reality is forced on the team by the partner with 20/20 vision and no conflicts of interest. Of course, a firm agreement helps to assure that each partner lives up to their end of the deal.

With the disadvantage of large corporate egos and protectionist attitudes at some of the biggest companies, it may be wiser to seek out companies a few rungs down the market share ladder and ask them if they'd like to take a shot at the #1 market position. It may make more sense to court an aggressive, adaptable and up-and-coming company that is looking to make a mark, rather than the stodgy and indifferent standard bearer.

Executive access

Keep in mind at all times that the single most important factor for successful strategic partnering is unquestionably: EXECUTIVE ACCESS. These people make the decision. If it comes from an underling there may be ego problems in getting it approved. Also, employees further down the corporate food chain frequently have very little incentives themselves to recommend a deal for approval, and may even have large DISincentives to undertake vital risk. They are frequently more concerned with their pay raise, coffee break, office romance and especially, with NOT making a mistake. If you try to do a deal with a lower manager, you will inevitably witness a dysfunctional situation of excuses why the product doesn't fit with the company's objectives. The plain fact is that at the level of management approached, ANY transaction is turned down. So go where you are wanted. Top executives or owners are generally much more concerned with bringing together necessary new partnerships and with putting out essential new products services.

The stick works better than the carrot

If one can convince a company that the technology fits with theirs, large companies like Westinghouse have spent and will spend up to hundreds of millions of dollars (or more) to participate in new ventures. In these strategic partnerships, the largest single benefit may be to drastically shorten the product development cycle. Strategic partners often offer the expertise to shorten the learning curve. Business professors counsel their students on the importance of being "first" in a market--be first, be first, be first--or risk losing the race. The quicker you get to market, the more market share you can get and the easier it is to stay ahead. A potential loss of market share is more persuasive to most companies than a new opportunity.

Clear understandings

Strategic partners often have the necessary capital, credibility, distribution, infrastructure, marketing, public relations and R&D facilities. Certain steps and actions maximize efficiency and return. Again, it cannot be overemphasized: seek out the top executive decision makers. This can be done as easily as with a "cold" letter. Take control ofthe situation and have your lawyers write the first draft of any agreement, mutual understanding or letter ofintent Make sure to carefully list each participant's responsibilities, as simple to do as making to written columns, one headed, "IBM's Responsibilities" and the other entitled "Microsoft's Responsibilities." Up front payments typically only account for 5-20% ofthe deal, so realistic milestones for payment and reasoned exit strategies should be outlined.

A thorough and detailed written agreement made with the assistance of competent corporate counsel is essential. Of course, the best agreement is the one that's forgotten about because it never needs to be enforced, but real world demands almost always cause revisions and amendments. The more contingencies and situations initially addressed, the less problems that will crop up later. Some issues that are important to consider include: non-warranties of technology, indemnifications, non-soliciting and non-hiring of employees, potential conflicts ofinterest, patent royalties from cross licensing and non-compete covenants restricting the partnership as the exclusive vehicle for the individual parties to conduct their business. These are but a few of the many issues which need to be formally addressed for the proper functioning of a successful strategic alliance.

The green stuff

With the right product, a good partner and a thorough agreement, strategic partnering can offer unmatched market penetration--and-- can make money for the participants.

(This article originally appeared in Inventors' Digest magazine Sept./ Oct. 1996)

©7/1996 by the author

Harold A. Meyer, III, 33, is Chairman of The Hook Appropriate Technology, a performance based licensing, marketing and new product development company. Meyer is also President of the non-profit group, THE INNOVATORS Guild of Danbury, CT. He can be reached at: The Hook Appropriate Technology, 52 Bank Street, Suite A, New Milford, CT, 06776-2706 USA. VOICE: 800-HOOK-VOX, EMAIL: info@thehooktek.com, WEB: www.thehooktek.com

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