by: Grow VC Group
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This is a guest post by Dr. Veli-Matti Lahti, who has done research on the value and strategies of partnering and also been responsible for the partnering in multi-national companies.

Partnering is a strategic action most companies from one-man company to largest multinationals are using as part of their overall strategy. The main partnering trend has started in the US during the mid-seventies and has spread from there all over the world during the past forty years. Partnering can be anything from outsourcing a single function such as office cleaning or accounting to another company, to making a multimillion dollar investment into a joint venture with one or more other corporations.

Reasons for the partnering actions can usually be divided in three different reasons based on the immediate focus the partnering is aimed at improving.

  1. The first one is that companies try to get a sustainable competitive advantage by joining forces with one or more companies.
  2. Another one is for companies to get better financial results through combining part of the operations or actions, and
  3. The last one is purely to get more innovations or more innovative as an organization by looking for (normally small) firms with groundbreaking ideas.

There are also some companies, one good example is a leading elevator company Kone, which are using partnering process as finding targets for M&A activities. In this process the companies actively look for partners, start to work with them and continue it for few years and then when the partner’s operative functions are properly integrated into the company’s operations and it has proved to be worthy, it is acquired by the company.

Using partnering as a way to find acquisition targets is a good indication that partnering is not, or at least, should not be a one-time effort. This is so specifically for larger companies because partnering is not an event which happens and then the company is in Shangri La, but a process which needs to be learned and mastered to get the most benefits out of it. The same way as in acquisitions, also in partnering there are high costs involved and high probability that one or both sides will end up in worse situation than it was before the partnering.

The benefits from partnering are coming on two fronts:

  1. The actual operations of the company are producing results, and
  2. The markets are recognizing the benefits the partnering is bringing to the operations and are rewarding that in the valuation of the company share price.

The first one can be thought to be self-evident but it seems to be quite difficult for many companies. As mentioned above, partnering is a skill which needs to be practiced and done over and over again so that the company is able to execute the partnering process in a manner that it brings as much benefits as possible from the partnering. Naturally, both (or all companies in case of multi-party partnering) sides in the partnering needs to adjust the partnering to fit its needs whatever the needs are. And as both companies are having their own individual needs, one skill is to first find a right partner to bring the needed benefits in a way that the other side agrees and also sees the partnering bringing the benefits it needs.

There are cases where one side (and also cases where both sides) of partnering are not getting the benefits they were hoping for and end up worse because of the partnering. This can be due to many reasons for example:

  1. when the partnering activities bring more benefits to the other side due to undesired “information leakage” from one company to the other and the other party can use it to gain additional benefits, or
  2. One party cannot utilize the activities or information gaining from the partnering, or simply
  3. The partnering is not what the company actually needs.

Because the partnering is a skill game, any company needs to plan properly and practice by doing it with as many companies as is needed to get positive returns. One vital point here is to have a professional partnering organization which is responsible for planning the partnering activities, finding, evaluating and selecting the partner candidates, managing the partnership (this does not mean running or executing the activities which were fixed in the partnering agreement, but the overall management), and when the time is right, end the partnership. This organization needs to establish the processes and practices of partnering as well as continuously document and propagate the best practices. And when a company is setting up its partnering organization, it needs to understand that what might be best practice in one company does not necessarily work in another company.

Even though it is the execution which is bringing the real value from partnering, it is usually also expected that the investors see and understand the value gained from partnering activities. Most companies are informing stakeholders and specifically investors of partnering activities and hope that the markets are valuing the news positively. According to my research on publicly listed companies in Nasdaq OMX Helsinki exchange from all partnering activities between 2006 and 2010 there are huge differences in how the communication is done and what is the reaction of the markets. If the communication is not done properly, e.g. the company does not use right channel in communications or if the information is poorly presented, the company value can go down with several percentage points. Whereas, if the communication to markets is done well, the positive reaction can increase the company value almost up to ten percentage points immediately after the news have been announced.

As discussed above, partnering is almost compulsory to all companies in present day competitive environment and it should be done as one of the core processes of the company. If the partnering is not a well working and continuous process there could be numerous things which are ruining good intentions of partnering and value it was expected to bring. As in all activities, continuous practicing and experts in one’s own organization is the best way to get it right.

 

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This entry was posted on Friday, June 10th, 2016 at 9:00 am and is filed under Business Updates. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.