ALLIANCES VS PARTNERSHIPS - AN IT INDUSTRY CONTEXT
Introduction
While both Alliances &
Partnerships serve strategic business objectives of companies, however many
confuse the terms Alliances & Partnerships to be same/similar and interchangeably
use them in an incorrect manner. Especially in the context of IT industry, wherein
in most cases both are looked at through the narrow prism of Go to Market (GTM)
strategy & planning, and not through a broader lens of being strategic
growth drivers.
This blog is an attempt to
explore what are alliances & partnerships, their differences, which one
works better than the other & in what contexts, etc.
Definitions
As per Investopedia, “a strategic alliance is an
arrangement between two companies to undertake a mutually beneficial project
while each retains its independence”, whereas “a partnership is a
formal arrangement by two or more parties to manage and operate a business and
share its profits”.
Differences
Let’s look at some key points that makes Alliances & Partnerships
different from each other:
1)
Alliances are more oriented for organic growth, while partnerships tend to
lean more towards inorganic growth. Partnership agreements in many cases also
include clauses for Exit or Merger & Acquisitions (M&A) options amongst
the parties.
2)
An Alliance can be an informal arrangement, but a partnership tends to
be more formal with binding clauses.
3)
An Alliance agreement is less complex / formal and less binding on the
participating companies compared to a Partnership agreement, which is more
complex and structured including taxation implications for the partners.
4)
In case of Alliances the participating companies retain their
independence, contrary to Partnerships where the companies pool in resources to
create and operate a separate business entity.
5)
In case of Alliances, the benefits gained by the companies will define
the longevity of its tenure, with Alliance agreements having termination and annual/bi-annual
renewal clauses. Partnerships however are more like Joint Ventures (JVs) and
hence have a longer-term perspective.
6)
In case of sharing business benefits, alliances are more about sharing
revenues whereas partnerships entail sharing of both revenues and profits.
Usage & Benefits in IT Industry Context
In case of IT industry, below are some contexts when a company can look
at strategic alliances and when for a partnership:
A.
When a company
plans to expand into a new market / geography expansion
a.
E.g., an Indian IT services firm wanting to expand to say, Canada /
Australia market, by working out a strategic alliance with a local Canadian /
Australian IT service provider.
b.
The operational model tends to be with the local firm fronting / priming
the contracts with the local customer(s) for the overseas firm’s offerings, and
the overseas firm providing the actual / lion’s share of the customer
contracted services / support from the back-end.
c.
The revenue / profit sharing mechanism is mostly pre-discussed and
pre-agreed at a customer-specific or contract-specific basis, while there may
be a basic framework of revenue sharing guidelines covered in the alliance
agreement in some cases.
d.
This model works best during the initial / exploratory phase of an
overseas firm’s geo expansion / new market entry plans, during which period the
overseas firm learns more about the new market & customer types therein,
business & regulatory requirements, critical success factors for a
long-term presence in that particular market and in what model (setting up its
own subsidiary organically / through a local M&A, or signing a longer-term
partnership / JV agreement with the same local firm, etc).
e.
So, net-net, for
new market entry / geo expansion context, strategic alliance model works better
in the initial phase with a shorter-term outlook, while partnership model works
better for a longer-term perspective.
B.
When a company
plans to create a new offering or enhance its existing service offerings
a.
E.g., an IT services company like Accenture/TCS/Wipro/Infosys/Atos/Netlabs
Global, etc. signing into a strategic alliance program with a product/platform
company like Microsoft/IBM/Oracle/AWS/Google/Automation Anywhere/UiPath, etc..
b.
The operational model being the IT services company creating say an ERP
service offering using SAP/Oracle platform or say creating a Cloud service
offering using AWS/Microsoft/Google platform or say a RPA/Automation service
offering using Automation Anywhere/UiPath, and priming the contract with
customers.
c.
The revenue sharing model is simple with the IT service provider
retaining the services-related revenues, while transferring the
license/subscription related revenues to the platform providers, minus the pre-agreed
margins/commissions on license revenue.
d.
While
strategic alliance is the de facto model used by product / platform companies
for the services companies’ ecosystem, there can also be contexts when a
partnership model between them works better.
e.
An example scenario can be when both the platform and service provider
companies decide to pool in their resources to create a niche offering
targeting say a specific industry vertical, they set up a partnership model and
create a new legal entity. E.g., say a service provider with a deep domain
expertise in the Oil & Gas sector partnering with an ERP platform provider
to create a new industry-specific version / module for the Oil & Gas
industry that can provide an edge over other ERP competitors.
C.
Context of a
Very Large Customer Acquisition / Mining
a.
An IT services company with its own offerings can / have a particular
amount of wallet share in a very large enterprise account. However, if it works
out a strategic alliance with another IT services company with supplemental
offerings, then their combined / expanded offer set can eke out a larger share
of the wallet / customer’s IT spend pie, sometimes even at the cost of another
incumbent player thereby enabling them to empty the field!
b.
However, a partnership approach will work better for the two same
aforesaid companies when the context is expanded beyond just one large customer
to a set of similar such large customers in the same industry or across
geographies. When the stakes are high, higher are the commitment and resource
asks, and partnership model has already been discussed and defined earlier in
this blog as appropriate for such cases.
D.
When a company
plans to raise funding from investors / having IPO plans / in M&A cases
a.
A strategic alliance story will not add as much bang for the buck
vis-à-vis a partnership story, as partnership(s) carry more heft as they directly
add to the asset base of the company in terms of its valuation.
b.
In such cases, partnerships clearly prevail over alliances.
E.
Context of a
company’s Growth model
a.
In case of a company’s organic growth, both strategic alliance and
partnership routes can work.
b.
However, for a company’s inorganic growth, partnership model suits
better. E.g., in cases of M&A, a company’s partnership with another company
say through a JV, lends itself more amenable as a model to grow inorganically
by acquiring the JV partner’s stake or the JV itself acquiring a 3rd
company.
c.
Further, even in cases of exit / reverse M&A, partnership model is
applicable with strategic alliance model having no locus standi there.
F.
Context of
Scale and a company’s Evolution stage
a.
When a company is small in scale or in its formative years (including start-ups),
it works best for it to ride on and leverage strategic alliances to generate
business growth and build its brand.
b.
However, once it reaches a critical mass of revenues / growth, it may
want to explore other avenues of growth like setting up subsidiaries in other
geographies or going in for partnerships to scale further.
Having said the above, there may
be many more scenarios / contexts to evaluate applicability of alliances vis-a-vis
partnerships. Each such context will merit / define which model works better
for a company’s interest.
In IT industry context, both Alliances
& Partnerships are key cogs in the Sales & Marketing wheel. Both models
/ routes are strategic and important for a company’s growth, and needs voice /
representation in corporate boardrooms / company’s executive leadership
positions.
A Blog Series on
Partnerships & Alliances
Dated: July
18, 2022
Author: Subham Sarkar (https://www.linkedin.com/in/subham-sarkar-519b7114/)
Disclaimer: The contents of this blog are based on the personal opinions and experiential learnings of the author.
Comments
Post a Comment