A significant revolution is taking place in business today. Organizations are increasingly global in perspective, innovative in technology, open in architecture and lean in operations. As companies continue to improve their internal capabilities, they are discovering that their performance is only as good as the weakest link in the supply chain—usually the link between suppliers and customers. No matter how you optimize, your capability can be hamstrung by your weakest link: a system that is not in your control.
Organizations are dependent on others to achieve perfect delivery—the right product, with the right quality, in the right quantity, at the right place and at the right time. To achieve these five “rights,” you need to understand the customer-supplier relationship that guarantees perfect performance.
That’s where alliances come in. Alliances are not new, but they are experiencing resurgence due to businesses’ realization that they must cooperate to achieve the perfect delivery, the best new product or the most competitive market position. There is a shift from adversarial customer-supplier relationships to alliances that redefine the way business gets done.
What Is an Alliance?
An alliance is a mutually beneficial partnership where both sides strive to achieve a common goal. Alliances are based on commitment, trust and fair play—where partners work for win-win, not win-lose, situations. Traditional buy-sell relationships are adversarial, and you’re probably in one if you think or act in a win-lose manner.
To understand the power of an alliance, compare how they differ from traditional relationships. Seven differences stand out:
- Cost: Alliances understand the sources of cost and then eliminate them. Traditional relationships push costs onto others. This is the outcome of classical win-lose negotiating—the “zero-sum game.”
- Value: Alliances focus on the ultimate customer, and partners add value that customers pay for. Traditional relationships view value as a cost, where there is a perceived tradeoff. Low-cost bids usually win, resulting in process and product problems.
- Productivity: Alliances understand failures, bottlenecks and variability. They optimize systems to achieve flow at the customer’s demand. By partnering with a critical few suppliers, alliances reduce variability—the source of flow problems. Traditional relationships increase variability by introducing more suppliers into the mix.
- Information: Alliances practice open communications and encourage transparency throughout the supply chain. They understand that knowledge shared is more powerful than knowledge protected. Traditional relationships use information as a weapon in win-lose negotiations.
- Resources: Alliance partners invest resources to design and operate the partnership. They engage people, since human resources make the process work. They provide resources to improvement initiatives jointly—including people, time and money—to ensure the alliance meets its potential. Traditional relationships view people, time and money as resources to protect on their own side and extract from the other.
- Relations: Alliance partners structure the relationship with operating principles that survive the people assignments. Traditional relationships are personality-dependent systems that reflect the agendas of the people in the system.
- Risks and Rewards: Alliance partners share risks and rewards. The traditionalist assigns the risks and keeps the rewards.
The Effects of Traditional Relationships
In traditional thinking, the more suppliers you engage, the more competition you foster. And, after all, competition is good for business, right? By bidding suppliers against one another, then saddling the lowest-price “winner” with onerous terms, traditional buyers damage the network.
Consider a bid that wins based on price, resulting in a low profit that restricts business reinvestment by the supplier. The buyer doesn’t care—he won the lowest price. He provides no resources for improvement, and passes risks and costs along to the supplier. The supplier, in turn, becomes less viable and more desperate.
Meanwhile, the buyer begins to experience problems in quality, reliability and service. He doesn’t realize that his buying actions elevated the total cost of his ultimate product (stock outs, quality, returns, etc.), making him vulnerable in the market. Neither buyer nor seller wins.
This is not a criticism of low-cost suppliers. Indeed, successful low-cost suppliers are superb at taking out cost while delivering more value, usually through alliance principles, lean processes and Six Sigma.
Types of Alliances
Alliances can be internal or external, buy-sell or strategic, and competitive or non-competitive. They can vary in their degree of complexity and the degree of commitment.
Internal alliances are the way businesses should work. Internal alliances occur when companies think in terms of value streams that deliver customer requirements, rather than acting in functional silos. Many functions and the people who lead them forget that the real customer is the person who buys their product or service. Internal posturing takes the place of delivering value. Misguided reward systems encourage wrong behaviors, and functions fight turf wars that customers care nothing about.
The real bane of most organizations is not the competitors on the outside, but the enemy within. The internal alliance is the first step for external alliances, which differ in their degree of strategic focus and competitive involvement.
A buy-sell alliance is the simplest form of external alliance, in which a customer and supplier agree to some degree of vertical integration to ensure a higher probability of achieving the five “rights.” This alliance limits the number of supplier partners to reduce variability, lower costs and increase volume for the supplier. It provides opportunities for the partners to resource improvement initiatives jointly. It improves communications, making production, inventory and product movement transparent to both parties. It opens dialogue between people, building relationships and solving problems. It shares risks and rewards commensurate with each party’s investment in the deal. It establishes a win-win atmosphere between the partner firms.
To be a strategic alliance, both partners need to benefit strategically from the relationship. Typically, companies entering strategic alliances are seeking a technology, product or service that they could not achieve alone. They unite to pursue a common goal—around technology development, for example—but remain independent after forming the alliance.
Partners in strategic alliances may come together for a while and then separate after their goal is accomplished, or they may stay together as long as their mutual strategies are enhanced. One example is the proliferation of alliances among cell phone and PDA makers, resulting in smart phones that integrate mobile technology with PDAs. In one such alliance, Motorola purchased a minority position in Palm, and the two companies jointly developed new products to compete with other combination phones. Other PDA-phone alliances have been built around license agreements only.
Competitive strategic alliances exist between a customer and two or more competing suppliers, or when two competitors work together to produce a new product or service that they can market separately or competitively, often in different geographic areas or markets. These alliances enhance the strategies and competitive positions of the partners and frequently share proprietary knowledge, technology and skills. Usually, the competitors remain independent through the relationship and participate only on alliance activities.
Competitive alliances tend to be much more difficult to design and implement, usually due to intellectual property concerns. These alliances, more than any other, require diligent work up front to ensure that positions and property are protected, and that safeguards are in place from the beginning.
Alliance Key Principles
Seven key principles guide alliance development and startup:
- Planning: Make sure there is a compelling business case. Many companies seek alliances in a drive to reduce costs. In their zeal, they relinquish control over core competencies. Over time, they sacrifice capabilities, a tradeoff with unintended consequences.
- Involvement: Get key executives from both parties involved in working out the details before you leap into an alliance. Develop the relationships among leaders in both organizations.
- Communication: Open communications between same-position and same-level people from both companies. Build a climate of trust.
- Education: Don’t assume that people understand alliances. It is more likely that they do not. Educate the partner organizations.
- Strong relationships: The best customers get the best service. Be the best customer. Define what that means to your partner, and deliver it.
- Sharing risks and rewards: Remember that an alliance is not about keeping the rewards and assigning the risks. Agree on what’s important, and stick with it.
- Metrics: What gets measured gets done. Measure the product, the process and the relationship.
When All the Parts Work
When you hear horror stories—and there are plenty—you wonder why you’d ever form an alliance. Here’s an example of a pipeline company and three suppliers who forged a competitive strategic alliance:
The pipeline company had more than 50 environmental engineering suppliers. As the pipeline expanded geographically, and as environmental demands increased, local contractors were hired. Soon enough, there were so many contractors to manage that the pipeline engineers’ work shifted from engineering to contract awards, project management and dispute resolution.
Everyone agreed that an alliance with one environmental engineering firm would reduce costs, simplify contract administration and put the engineers back into engineering roles. The environmental engineering director built the financial and practical cases for an alliance, and garnered support among the leaders of engineering, purchasing, contract administration and legal. This ensured that there was no internal resistance to the alliance.
As the vetting process for alliance partners progressed, it became clear that no single supplier could deliver all the services required. In the end, three firms were selected and asked to join a competitive strategic alliance.
The pipeline leaders set financial, technical and relationship objectives for the alliance. As for the strategic connection, the pipeline needed to reduce costs and ensure environmentally safe operations. But for an alliance to be truly strategic, the partners would need to see a strategic fit as well.
Each firm offered at least one unique technology. The alliance was strategic for the participants for several reasons. It gave one partner access to technical assignments in air quality for which it had no capability, giving it the chance to build a new competency.
For all of the partners, the alliance provided the opportunity to eliminate bid and proposal costs, as they no longer had to compete to earn the work. Everyone benefited from the lower cost position, and all three partners used the process as a competitive advantage.
Finally, the alliance brought natural competitors together to serve one client. The competitors cooperated to solve environmental issues, staffing projects with the best talent from all three firms and completing projects with no change orders at lower costs.
The alliance helped save $1.5 million in the first year, lowered corporate expenses by $350,000, achieved a 25 percent reduction in engineering consulting rates and eliminated change orders, all while improving environmental compliance and simplifying business tasks.
The Role of the CLO
The CLO can take several roles in the design and operation of alliances. Most organizations have knowledge and performance gaps to overcome to implement and operate an alliance. The leadership teams from both alliance partners need to jointly plan and design the intent and the objectives. Both of these requirements require the CLO’s education and facilitation skills. The CLO can be the catalyst who initiates and shepherds the process that brings the alliance to life.
After startup, the CLO is responsible for ensuring that appropriate alliance knowledge is built at all levels of the organization. The alliance also provides a built-in benchmarking opportunity to learn about the partner company’s business systems and methods. Take the initiative to connect with the CLO at the partner company and get the process started.
Alliances have power, but only if the participating companies identify and manage the risks and rewards.
Ken Somers, senior vice president of Human Capital Associates, helps leaders improve organizational performance by implementing effective strategic planning, business alliances and LeanSixSigma to achieve better, faster and lower-cost performance solutions. He can be reached at firstname.lastname@example.org.