Nick Palmer
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PDF Help While the Internet frenzy has certainly cooled, many executives continue to evaluate strategic partnerships with online businesses, including opportunities that came knocking unsolicited, and those they sought out on their own. Given the new dot-com realities, how should executives approach forming alliances with online businesses—whether corporate venture, emerging enterprise or fledgling startup? Know the Internet Company Sensitivities First, potential partners should recognize that Internet companies differ from traditional companies in two important respects: - Cost sensitivity. Most Internet companies cannot invest much money or executive attention toward building corporate alliance resources. Too many other priorities compete for investment dollars and for people's time.
- Time sensitivity. Internet companies must build corporate alliance resources sooner, rather than later. Alliance growth comes quickly, and the cost of failure is too high to risk not having certain corporate resources in place before problems arise.
Move Past Internet-Speak Second, potential partners should be disciplined in their approach and rigorous in their communications. In Internet-speak "fast" is often only a euphemism for "frenetic." "Undisciplined" becomes "creative." The "untried" is known as "innovative" and "the rules have changed" replaces "just trust me." As this new market segment evolves, it must adopt a more standardized, less idiosyncratic approach to alliances to avoid the disappointments of the past. Despite the hype, the real Internet successes are typically built up over time. A standardized approach relies on discipline, which is the prerequisite for rapid and successful growth in an alliance, especially during the first 12 to 18 months. Further, with each successful alliance, a disciplined company can become better able to transfer skills and knowledge from one partnership to the next. Know What you Want Finally, establish clear, achievable goals for the alliance. Know what you want out of the alliance and know how to tell when you get it. Alliance managers often find it difficult to set specific alliance goals, even when dealing with mature companies. With dot-coms, the challenges are even greater. The time and cost pressures placed on Internet companies create additional demands to reach measurable results as quickly as possible. A successful outcome is more probable when partners have defined goals with hard metrics and simple, achievable milestones. The Top Four Questions to Ask To discover what factors contributed to both success and failure in dot-com alliances, we interviewed executives at 13 companies (11 Internet companies and two established firms with many Internet partners) as well as 20 leading venture capitalists with insight into young Internet companies. We found that alliances with Internet companies rarely do as well as hoped, and often perform less well than the general corporate population. The experiences of the executives and venture capitalists we spoke to suggest that three common mistakes undermine many alliances: lack of a useful alliance strategy, sub-optimal initial partnerships and inadequate corporate alliance resources. With these common mistakes in mind, if you are considering an alliance with an Internet-based business, here are four questions to ask them—and yourself—about their approach to alliances that will help you better assess the odds of success. 1. Do they have a winning business model?
Any successful alliance depends on having a good corporate strategy behind it. Given the extent to which many Internet companies depend on alliances for capital and business capability, the leadership team should have considered alliances in detail while constructing an overall business model. Find out how—or if—management addressed these issues. Role of alliances. Did they define the unique capabilities they need to succeed? Did they consider the primary options for obtaining other essential capabilities, whether to build, buy or borrow them? Alliance groupings. Treating every alliance as a unique relationship consumes too much management attention. Fully standardized management, on the other hand, ignores the different roles alliances play. Smart companies group alliances to facilitate forming and managing them. Timing and priority. Many Internet business models call for 20 to 50 alliances clustered into two to five alliance groupings. No startup, however, can build such an extensive portfolio from a standing start. Successful companies take a phased approach, often divided into a launch phase, which focuses on a few alliances to help drive the business to measurable success, followed by a growth phase, which focuses on alliances to fill capability gaps, broaden market scope, address operating deficiencies and open the way to innovation. The growth phase often lags the launch phase by 12 to 24 months. 2. How do they manage launch phase alliances?
Two aspects of managing the relationship—performance tracking and staffing—can spell the difference between success and failure. Performance tracking does not come naturally to startups. Understandably eager to prove themselves, startup businesses tend to take on too much work and to define expectations loosely. Companies must develop and manage specific but comprehensive performance measures. Staffing is another key to managing the relationship. Alliances perform best when the companies define clear roles for individuals. In traditional alliances, this usually starts with appointing an alliance manager to oversee day-to-day operations and an alliance champion to monitor results and set strategic direction. But this division rarely makes sense in a launch alliance. It places too much responsibility with the alliance manager and distances the alliance from top management. 3. Do they have capabilities for growth phase alliances? During their first 12 to 18 months, Internet startups should be building corporate resources (such as guidelines, processes and tools) to manage a growing portfolio of alliances. In this case, Internet startups do not differ much from traditional companies. The alliance resources they will need depend on how many alliances they envision and the importance of alliances to the business model. Instead of building the full complement of standard corporate alliance resources, startups should concentrate on a few resources. Therefore, as you consider an alliance with a startup, see if the company has: - A dedicated alliance executive. Hired early, an alliance executive can provide a strong voice for alliances when the company is still developing its initial business model. Bringing substantial
alliance experience, this executive can usually build other corporate alliance resources quickly.
- Corporate alliance guidelines. Internet startups will benefit even from simple rules for what managers should and should not do in alliances. Guidelines are inexpensive, especially when developed by an experienced alliance executive, and can shape how the company approaches alliances from the start. Guidelines might include allying only with
companies that use proven technologies and considering only launch partners that bring multiple advantages.
4. Do they have well-defined processes for deal-making and integration?
Internet startups should have defined and documented approaches to performing common tasks in the opening phases of an alliance. Deal-making processes include assessing capability gaps, screening partners, structuring contracts and negotiating. Integration processes focus on creating shared strategic intent, defining governance protocols and detailing
performance scorecards. These processes need not be perfect. Even a rudimentary sketch can help companies avoid mistakes, speed decisions, reduce workload and, of course, pinpoint gaps in alliance thinking.
Alliances with Internet companies can be a powerful engine of growth and innovation. Before forming an alliance with a dot-com company, however, be sure to find out how they plan to avoid the potholes others have hit before. Nick Palmer, associate partner responsible for alliance formation and governance offerings, is based in Boston, Massachusetts, U.S. For more information, please contact us.  To Top
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