Center for Management of Emerging Companies

Emerging Companies in Developing Markets Teaming Up in Strategic Alliances

Our last post focused on a recent article that appeared in The Economist relating to a Boston Consulting Group report on the “rising stars of the developing world” relating to the extraordinarily rapid progress that firms from emerging countries have made in challenging traditional industry leaders from the West.  One particularly interesting aspect of the report was the decision of these challengers from developing countries to rely on strategic alliances with other emerging-market firms rather than multinational companies headquartered in the West.  As noted in the article, these partnerships allow the participants “to share knowledge, penetrate new markets and spread the risk of especially hair-curling investments.”  The financial rewards can be huge since partnering in emerging markets today means tapping into the dynamic growth of countries such as Brazil, China and India.  Assuming that the alliances are effective, more and more firms will soon be able to negotiate and collaborate with large Western countries from what the article described as “a position of strength”.

Others have studied the use and impact of strategic alliances in developing markets including alliances between local partners.  An article on “The Changing Face of Strategic Alliances in Latin America” written in 2002 and appearing in Strategy + Business noted many of the large multinational companies in Latin America grew through cross-border alliances and acquisitions with local firms to increase market share, gain access to synergistic assets and other resources and create a portfolio of products and markets that will be perceived as having “value” to foreign investors who might then be willing to provide new capital.  Alliance activities among emerging markets firms also allows them to build a company that is seen a regional leader and thus achieve greater leverage when dealing with larger multinationals from the industrialized world.  Finally, companies in emerging countries that are involved in alliances with partners in several other countries are perceived as less “risky” by investors who are otherwise concerned about having all of their “eggs’ in a single country basket that could be tipped over without warning by currency issues or political instability.

Antitrust Compliance Programs

It is essential for companies of all sizes to develop some sort of formal program and procedures relating to antitrust law compliance.  This report describes the benefits of establishing such a program and provides you with a useful checklist of the issues that you will need to consider during the course of day-to-day activities.

Strategic Alliances: Governance & Dispute Resolution Mechanisms

Strategic alliances, being creatures of contract as opposed to formal legal entities with their prescribed rules and requirements with respect to governance and termination, provide significant potential for opportunism and risks that one or both of the parties may appropriate the fruits of the pooling of resources and use them in ways that avoid the requirement to share profits among the parties.  This report examines how alliance partners can contain opportunism through careful drafting of governance and dispute resolution procedures.

A Simple Strategic Alliance Agreement

Firms that manufacture and sell complimentary, rather than competitive, products and services may wish to join forces to promote each of their products to prospective customers and thus look to increase sales for both products.  The parties are not "distributors" for one another.  What they do is make sure that when they are selling they are mindful of opportunities to mention the other products.  If there is any interest the "lead" will be passed to the sales team of the other party.  Of course, the parties can initiate more elaborate collaborative efforts if they wish; however, it is best to start small with a simple strategic alliance agreement.   Key issues for such an agreement include designating a contact person on each side to coordinate efforts and making sure that the confidential information and customer lists of both parties are protected.

Acquisitions by Purchasing a Controlling (But Less than 100%) Interest

While most acquisitions take the form of a merger or stock/asset purchase that results in the buyer-acquiring full control over the equity interests and/or assets associated with the target business it is also possible to break into a new business area by purchasing a controlling (but less than 100%) interest in the target.  For example, if the target is owned by a single shareholder who also operates the business the transaction may be structured to permit the buyer-acquirer to purchase a sufficient number of shares (e.g., 70%) to give it a controlling voting interest over management of the affairs of the target while allowing the selling shareholder to retain a minority interest and continuing serving as a key executive of the target.  The former sole shareholder’s minority interest serves as a performance incentive since he or she retains the right to share in future increases in the value of the business.  Incentives for other executives and key employees can be created by both parties to this agreement by adopting a stock option or other form of bonus performance plan.

The first step in such a transaction should be a letter of intent that addresses key terms and conditions to closing including price and payment terms, post-closing management of the target, due diligence, negotiation and completion of definitive agreements, consents and approvals, escrow requirements and procedures, retention of key employees, approval of acquirer’s financing for the transaction and other issues.  Perhaps the most important section of the letter of intent is a detailed listing of the specific conditions precedent to the closing of the proposed acquisition.  Among the matters that should normally be covered from the perspective of the buyer-acquirer are the following:

• The satisfactory completion of a due diligence investigation and acquisition audit by the buyer-acquirer showing that the assets of target and any actual or contingent liabilities against those assets, and the prospective business operations by the buyer-acquirer of the target’s business are substantially the same as currently understood by buyer-acquirer as of the date of the letter of intent.
• A satisfactory determination that the acquisition and prospective business operations by the buyer-acquirer of the target’s business will comply with all applicable laws and regulations, including antitrust and competition laws.
• Completion of all required approvals and consents from both parties and other interested stakeholders including governmental entities, utility providers, railways, material vendors, lenders, landlords and customers.
• The absence of material litigation or adverse change with respect to the transaction and the ordinary business activities of the target.
• The buyer-acquirer must be able to enter into satisfactory employment agreements with specified key employees of the target.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (Fall 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

Tips for Successful Joint Product Development with Customers

In my last post I began discussing the advantages and disadvantages that should be considered by manufacturers when they contemplate a joint development arrangement with one of their customers.  Assuming some sort of joint development project with a customer makes sense here are some simple suggestions for making sure that the project has the greatest likelihood of success:

1. The manufacturer should be prepared, and eager, to open up its day-to-day operational activities to the customer and provide the customer with an opportunity to carefully scrutinize and evaluate the way in which the manufacturer approaches each key issue in the development process.  For example, the manufacturer should show the customer each of the steps that are taken in order to ensure an adequate level of quality control during the manufacturing process in order to build trust with the customer and provide the customer with a chance to suggest improvements.
2. Both parties should come up with ways to assist the manufacturer in gaining a better understanding of the challenges that the customer faces when attempting to market and sell its finished products, including the products that are being jointly developed.  Representatives of the manufacturer might accompany the customer on visits to end users of the customer’s products.  In fact, this sort of due diligence is best done well before the specific goals and objectives of the joint development project have been established since the knowledge gained might lead to unexpected and highly innovative ideas about what might be done by the manufacturer.
3. The level of integration and collaboration between the parties (i.e., just how “joint” the development process will be) must be aligned with the risk, complexity and expense of the chosen project.  Challenging joint development projects that are focused on developing new products and technology, as opposed to creating features that amount to relatively minor enhancements and improvements to something that has already been conceived, must be supported by frequent interaction and communication with customer representatives including ongoing feedback that ensures that the manufacturer remains on the right track and that the customer will be satisfied with its investment.
4. A real serious attempt should be made to develop two-way communication between the manufacturer and the customer that encourages and facilities the continuous exchange of ideas between the parties even when there is no current project underway.  For example, if the manufacturer learns of an idea that it thinks might interest the customer the manufacturer should share the thoughts with the customer even if the communication has not been solicited.  While the customer may not be interested in the specific idea it may lead to something different that eventually becomes a solid concept for formal joint development planning.
5. Intellectual property rights that will be used in and/or created by the joint development project should be identified in advance and clear rules should be established for allocation ownership and usage rights for such intellectual property.  The manufacturer should be mindful of the risks associated with sharing its proprietary technologies that serve as the foundation for its core competencies.
6. Each side of the relationship—manufacturer and customer—should actively build and maintain a team of dedicated and enthusiastic scientists, engineers and marketers that remain committed to joint development activities for as long as the parties are willing and able to formally collaborate.  Many joint development agreements include an undertaking to establish a new project review committee with representatives from both sides that will be periodically to vet and approve new development projects and discuss the overall progress of the relationship.  Whenever a project is underway both parties should be required to appoint project managers, engineers and other skilled professionals who will be allowed to invest the necessary time and effort outside of their other responsibilities to ensure that the project is successful.  The team members from each side should regularly visit with their colleagues at the other party.  For example, representatives from the manufacturer should visit the customer to learn more about how products under development will be used and/or marketed by the customer.  In turn, customer representatives should go to the manufacturer’s facilities to conduct tests on new products while they are a “work-in-progress” so that the manufacturer can receive timely and thorough feedback on product quality and performance.

The content in this post has been adapted from material that will appear in Joint Ventures and Strategic Alliances (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

Working with Customers on Joint Development Projects

Manufacturers engaged in intense competition with other firms for customer business are well advised to look for ways to become true development partners with their prospects as opposed to simply being just one of several potential vendors.  Rather than approaching customers with a standardized sales pitch to buy generic products and services manufacturers should seriously consider opening with a serious and sincere proposal to collaborate directly with the customer to create new products and services that are unique and specifically suited to that customer’s requirements and sales and marketing objectives.  If there is interest the parties can move forward with a joint research and product development project that involves the contribution of ideas, feedback and financial and technical resources from the customer to support the manufacturer’s efforts to create new products and technologies in which both parties will have an ownership interest of some sort at the end of the initial collaboration. 

Working with customers on joint development projects can be advantageous for several reasons.  First, assuming that the customer is willing to contribute toward some of the costs of developing new products and technologies a manufacturer can use these types of relationships to maintain and even enhance core competencies in the research and development function without diverting budgeted funds from other functions or attempting to obtain new capital that might dilute ownership stakes and management control.  Second, the manufacturer will be given a valuable opportunity to learn about how the customer operates and the way in which customer views its relationships with vendors and the needs of its own customers.  This type of information has value beyond the specific customer relationship since it provides the manufacturer with greater insight into the overall business environment in which it is operating.  Third, while the manufacturer’s main challenge is demonstrating its expertise in product development to the customer the relationship should also be a platform for the manufacturer to showcase its skills in other operational areas such as logistics and marketing with an eye toward the possibility of an expanded alliance at some point in the future.  Finally, if the customer is willing and required to invest significant time and other resources in the development phase there is likely to be a much higher level of commitment from the customer to make the finished product commercially successful and this will hopefully translate into a stronger long-term revenue stream for the manufacturer.

There are, however, corresponding risks and disadvantages that also need to be considered by manufacturers before joining forces with a customer.  For example, smaller manufacturers need to safeguard their core technology and bargain for reasonable rights to use and exploit intellectual property that is created during the joint development relationship.  If care is not taken in this area a larger customer will simply appropriate whatever technical know-how is available from the manufacturer and let the relationship lapse.  The manufacturer should also be sure that the customer is able and willing to fulfill commitments made by the customer to support the development work.  If promised funding does not appear or the customer withdraws personnel and other resources during the project the chances of success diminish and the burden on the manufacturer will suddenly increase.  Another challenge for the manufacturer is making sure that its functional resources, including personnel and equipment, are strong enough to withstand the scrutiny that will come from attempting to work closely with a customer and give the customer open access to the day-to-day operational activities.  If the customer uncovers weaknesses in important areas, such as quality control, it may abandon the project and remove the manufacturer from its vendor list even for generic items.

In my next post I’ll try and provide some simple suggestions for increasing the chances of successfully completing joint development projects with customers.

The content in this post has been adapted from material that will appear in Joint Ventures and Strategic Alliances (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

Evaluating Strategic and Operational Compatibility of Alliance Partners

In order for a strategic business relationship, or “SBR,” to be successful the parties must be able to work together effectively at both the strategic and operational levels.  Certainly the parties must establish the overall strategic goals and objectives for the arrangement and these should be clearly translated into objective measures of performance, budgets and milestones.  However, it is equally important for the parties to invest the time and resources necessary to ensure completion of the day-to-day operational activities that will lead to attainment of the strategic goals and objectives.  The documentation for a comprehensive SBR generally provides for the establishment and maintenance of formal oversight procedures, such as a joint steering or management committee, to ensure that the SBR remains on track with respect to the pursuit and achievement of the major economic and technical objectives.  While this can be an important tool in making sure that collaboration issues among the representatives of each party are identified and resolved the parties should consider taking additional steps to make sure that day-to-day activities and interactions between managers and employees involved in the SBR proceed smoothly. 

It is now commonplace for companies to provide managers who will be involved in alliances with additional training on relationship building and discussing and resolving disputes.  However, it is also recommended that the parties explicitly create, disseminate and enforce guidelines, or “behavioral protocols,” that everyone involved in the SBR--executives, managers and employees—should follow when engaging in alliance-related activities and interacting with colleagues from their partner.  Examples of rules that might be formulated include the following:

1. Information regarding internal changes relating to business plans and organizational structure will be shared on a timely basis so that the parties can jointly consider the impact, if any, of those changes on the SBR.
2. Meetings and other discussions regarding problems and challenges that have arisen relating to the SBR will focus on generating solutions rather than simply raising problems and exchanging complaints and assertions of blame.
3. When representatives of the parties at lower levels are unable to resolve an issue on their own they will escalate the matter jointly within their organizations and collaborate on the preparation of background information to executives from both partners so that each side is fully informed and recognizes that resolving the issue is in the best interests of everyone.
4. Each party should undertake to pass on information regarding any complaints that they may hear from within their organization regarding the SBR so that the managers involved in the SBR can discuss the best way for both parties to work together to formulate a response to a complaint if such a response is warranted to ensure that the partners continue to enjoy the support of their internal constituencies.
5. Individual and group relationships between representatives of each party will be continuously nurtured through scheduled exchanges of information and opinions including regular weekly conference calls to keep in touch even when there are no specific important issues that need to be discussed or resolved.

These guidelines are rarely part of the formal documentation for the SBR; however, they should be set out in a written record and managers from each of the parties should be assigned responsibility for making sure that they are being followed.  If all proceeds well the guidelines will become the basis for a specific “alliance culture” that is built on collaboration and communication.  Once this unique culture is in place both parties should work hard to ensure that new personnel joining the activities of the SBR are properly indoctrinated.  Inevitably the composition of the teams from both sides will change over the course of the SBR as new projects are identified or additional opportunities present themselves.  When new persons join the team it is important to take the time to explain to them the overall purpose of the SBR, the progress that has been made, how their skills are expected to fit into the operational activities, and how the parties have elected to interact with one another.

The content in this post has been adapted from material that will appear in Corporate Counsel’s Guide to Strategic Alliances (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

Launching a Strategic Alliance

While the parties to a strategic business relationship, or “SBR,” should not abandon the customary practice of preparing a business plan for the alliance and carefully negotiating and drafting contract provisions and other formal management procedures, they must also understand and appreciate that plans, contracts and rules are generally of limited or almost no value when the inevitable disagreements crop up once the SBR is under way.  At that point the problem almost certainly lies in a lack of trust between the participants and an inability to communicate.  As a result, the dispute resolution procedures in the SBR documentation are rendered essentially ineffective, the relationship stalls, and the parties begin to look for other options to achieve the goals that they were originally seeking when the choice was made to entering into the SBR in the first place.

Disagreements and unforeseen events and problems cannot be avoided; however, the parties can do a better job of preparing for choppy waters by taking the time to learn more about one another before the hard work of launching and operating the SBR begins.  A business plan and the contract documentation bring the participants together “on paper” but they do not provide the tools necessary for their managers and employees to immediately and continuously collaborate as if they were employed by the same company.   In order to realistically aspire to the level of collaboration that is required for a successful SBR everyone involved must have sufficient and truthful information about the following:

1. What is the organizational structure of the alliance partner?
2. How are decisions made within the alliance partner regarding the allocation of capital, personnel and other resources?
3. How is information collected and disseminated within the alliance partner’s organization?
4. Which business units within the alliance partner’s organization will be closely involved in the delivery of resources that will be needed for the alliance relationship to be successful?
5. What are the regular reporting channels for the senior managers of the alliance partner who will be overseeing the partner’s activities in relation to the alliance?
6. What are the dominant cultural values and norms within the alliance partner?

There are no “right” or “wrong” answers to the questions listed above and parties should not sit in judgment of the way the other partner operates or the values that influence the behaviors of individuals representing the other partner.  In fact, one of the main reasons for considering a SBR is to have access to and gain leverage from different ways that the partner conducts its business.  For example, a relatively conservative company may seek an alliance with a partner known for having an entrepreneurial culture in order to accelerate development of new technologies and products.  The primary objective is to lay a foundation for greater mutual understanding.

Obviously this type of information is typically not shared in detail during the time that the parties spend on negotiating and finalizing the documentation for the SBR and the business plan that is usually prepared for a SBR tends to focus on quantitative areas such as markets and technical specifications and tactical issues in sales and marketing.  In order for the parties to begin learning how they will actually work together, it is recommended that plans be made earlier on for a “launch period” that would begin soon after the formal documents are signed and before the parties get too heavily involved in specific projects and activities.  The focal point of the interaction during the launch period should be a series of meetings between the key representatives of the parties, which should be hosted by both parties, to explore in detail the challenges that are likely to occur during the SBR due to differences between the parties and to attempt to develop specific guidelines and procedures for managing the potentially harmful effects of those differences on the progress of the SBR.  The goal of these meetings, which typically occur over a period of four to six weeks, is for the parties to work together to define the type of relationship that they want and jointly create the tools that they need for the SBR to play out in the way they anticipate. 

These meetings are also a good time to review when and how important decisions regarding the conduct of the SBR will be made.  Identifying key decision points should be occurring hand-in-hand with the discussion and refinement of the business plan for the alliance and the formal process for making decisions should have already been outlined in general in the SBR documentation.  In some cases one of the parties will be given the contractual authority to make a specific decision; however, it is still important to have a dialogue on what criteria will be used to make the decision and how much input the other party will be allowed to have with respect to providing information and offering opinions.  If representatives of a party must obtain approval from others within their organization the parties need to understand how that approval process is likely to work in practice.  For example, if approval must be obtained from a formal review committee information must be provided regarding the timing of committee meetings and the composition of the committee.  Insight should also be obtained regarding the cultural norms that generally govern decision making within each party—are decisions made based on hierarchy or is it necessary to seek and obtain a consensus.  Knowing how each party makes decisions, and planning in advance for managing how key decisions will be made, should reduce uncertainty and frustration and increase the chances that decisions will be made on a timely basis and that the parties will receive sufficient information regarding those decisions to execute them effectively.

The content in this post has been adapted from material that will appear in Corporate Counsel’s Guide to Strategic Alliances (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

Basic Elements of an Outsourcing Agreement

As companies continue to turn more frequently to outsourcing solutions for back office processing services it is important executives and senior managers to have a basic understanding of the key elements of an outsourcing agreement.  While every deal is different there are some guiding principles that can be applied in most instances.

First, while the parties obviously contemplate a long-term relationship with significant investments on both sides it is wise to provide for a “pilot period” during which the parties can evaluate how the services are being provided and whether they can establish procedures and protocols that will allow them to achieve the goals and objectives for the contract.  One of the key planning tools for the contract is the preparation and acceptance of an implementation plan and schedule that will be appended to the contact as an exhibit.  The plan and schedule should include acceptance tests that would need to be completed before the services can begin.  The pilot period would commence on the “implementation completion date,” which is the date that the acceptance tests are completed.  The parties should schedule a full-scale review of service provision to be completed on or before the end of the pilot period.  Assuming that the arrangement continues beyond the pilot period the agreement should specify the initial term of the contract and procedures for renewal and extension.  In that regard it is very important for the client to insist on “termination assistance” that ensures that the services will continue to be available for a reasonable period following a decision to terminate in order to allow the client to make arrangements for a new vendor or performance of the outsourced services on its own.

Obviously one of the most important parts of the contract is the description of the services to be provided to the client by the vendor and the parties should prepared a detailed schedule of services that includes objective measures of the anticipated “service levels” as well as an overview of possible incidental services that are not specifically described yet are likely to be required in order for the goals and objectives of the contract to be achieved.  The description of services should be accompanied by a schedule of fees and appropriate details regarding the manner in which the vendor intends to provide the personnel necessary to achieve the mutually agreed service levels.  The parties should be prepared to discuss any changes in the level of services due to increased or decreased demand by the client and/or changes in applicable laws and regulations.  The vendor should be prepared to provide the requisite training for its personnel and render reports to the client regarding the level and quality of services provided under the agreement. Among other things the reports should cover employee work hours and absenteeism and the volume and quality of work performed by vendor employees based on mutually agreed performance metrics.  Weekly and quarterly business reviews should also be conducted.  Finally, a procedure should be established for reviewing possible requests by the client to the vendor for new services during the term of the contact including preparation and review of a written proposal for new services that include an analysis of the additional resources that the vendor would need to devote to the relationship.

Other key issues that need to be covered in this type of agreement include communication procedures, including designation of relationship managers by both parties; identification of key vendor personnel who will be dedicated to performance of the activities contemplated under the agreement; allocation of ownership and usage rights with respect to any intellectual property that may be created or exchanged during the relationship; force majeure procedures; billing and payment procedures; representations and warranties; dispute resolution procedures; events of default and termination procedures; notice procedures; and governing law.

The content in this post has been adapted from material that will appear in Going Global: A Guide to Building an International Business (April 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.