Benefits and Pitfalls of Partnerships Between Companies

To bring innovations to the market, companies almost always need partnerships. Partnerships can offer scalability, productivity, and open up new markets. However, partnerships are not easy to establish and manage.

The benefits of partnering

Construction companies have always done joint ventures. The reason has been to simply be able to bid for and deliver a project that would be too big for one company at that specific moment. Partnering allows you to become larger than you are and to get work that would otherwise be out of your reach. It also lets you spread the risk in a demanding project among the members.

The second potential benefit is increased productivity. Companies are always looking for ways to increase their productivity. However, it is becoming more and more difficult to make significant productivity improvements within a company.

An average company pays 55 percent of it revenues for goods and services. You have to ways to save in purchases. You can either squeeze your suppliers or you can select a handful of suppliers and build durable relationships with them. There is a lot of evidence that the partnering performs better in the long run. By removing traditional company boundaries between the buyer and the vendor you can become really efficient and competitive. When a supplier can engage directly in the parent company’s processes and share process information transparently, both parties win. Toyota in the auto industry is a good example of that.

A third area of benefits has to do with innovation. Partnering is a great way to bring something completely new to the market. Suppose you identify an urgent customer need that no one has been able to satisfy because of the traditional ways companies do business. Companies can either wait until some intermediary realizes the business potential, creates a concept and asks for bids from suppliers. Alternately, a group of companies could develop a similar concept together and offer the service in a partnership.

I recently ordered roof renovation for our house. A local metal industry company had developed a turn key product where I could with one agreement get the whole package: a free “health check”, design, measurement, removal of the old roofing, installation, and a 20 year guarantee for the new roof coating.

Some other potential benefits from partnering include shorter time to market, reduced inventory and access to new clients or markets.

Depending on the goals and commitment of the partners there are three levels of partnerships: operational, tactical and strategic. You can read about these in my earlier blog post.

How to partner up successfully

Trust is the cornerstone of a partnership. Trust must be earned, so prior collaboration between the partners would be the best starting point.

In addition to the self-evident trust, there are three common elements that are required for a successful partnership.

The first is a compelling but realistic vision of what you can achieve together. This, of course, requires that the partnering companies’ senior management teams are involved in defining and committing to the vision.

The second cornerstone is impact. Both or all the partners must gain business benefits. If a partnership becomes a zero-sum game, it will fail. The effects of the partnership must become visible on the bottom line. Define the business case for the partnership.

The third success factor is open sharing of information, or intimacy. This can be a big change in the way companies have used to work. Before the partnership you could pretend that something was in order, but now you’ll actually have to “come as you are.” Technically you may have to integrate your information system for real time data exchange.

Being in close contact with another company soon shows if the values and cultures of the partners match. I’m not saying that they’ll have to be exactly similar, but if one of the partners is “green” and the other is dumping waste into a nature reserve, that won’t work. Both are building a brand together.

Potential problems in partnerships

I have seen both successful and unsuccessful partnerships. Based on my experience I would say that the most crucial mistakes are the following:

  1. You choose a wrong partner. A friendship, for example, does not guarantee that your companies would make great partners.
  2. You start partnering without previous experience of how your ways of working and cultures match in practice.
  3. You don’t have a clear picture of what it requires to make co-operation successful. As a result, you don’t invest enough in making the partnership really work.
  4. The partnering company’s principals are not 100 % committed to the partnership because they don’t see the business benefits of the relationship.
  5. The employees that have to work together in the companies are not motivated to collaborate.
  6. You don’t have a clear and fair agreement on financial matters. Money is the ultimate destroyer of good partnerships.

You can avoid many of the problems by experimenting with the potential partner before final commitment. Furthermore, identify and potential risks and plan how to deal with them with your partner.