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Business partnerships fail frequently. According to alliance consultant Peter Simoons, the alliance failure rate statistics are all over the map — ranging from 20 percent to 80 percent. After conducting four studies of alliance success, the 2012 ASAP State of Alliance Management study reported an average alliance failure rate of 47 percent in 2012.
Why do so many alliances fail? In my book,The Technology Leaders, I found many reasons:
- Incompatible cultures
- Imprecise or differing alliance goals and performance metrics
- Differing level of commitment to the partnership
- Failure create value for customers and employees
- Unclear division of activities — such as product design, purchasing, manufacturing, and sales — between the partners
- Failure to agree on how to share investments, revenues, and operating costs
While there are many things leaders can do to boost the odds of success for a business partnership, I found that the single most important key to a successful partnership is that both companies need each others’ strengths to capture a significant growth opportunity.
How so? In the 1990s, as demand for network equipment was soaring at over 40 percent a year, Cisco Systems acquired some 60 startups a year. Cisco saw that its customers were spending money on the startups’ products, rather than the ones Cisco was selling. Meanwhile, the startup lacked Cisco’s industry-leading sales force. When Cisco acquired one of those startups, the product’s revenues quickly soared into the billions.
Here are five things business leaders ought to do to capture such partnership benefits.
Let’s say you decide that a partnership with a leading company, such as Apple, would be the answer to your growth problems. How do you get from that vision to a successful partnership?
Add to your team an analyst who is not emotionally swayed by your vision and excels at gathering and evaluating evidence to reach a fact-based conclusion.
That person can keep you from wasting time on a potential partnership with a company that does not share your values or your business goals. To avoid that fate, before even approaching Apple about a partnership, you should charge that analyst with answering questions such as:
- What are your company’s values and are they compatible with those of the potential partner?
- What are the concrete, measurable goals you have for the partnership and does the potential partner share these goals?
Unless the answers to both questions are yes, you should keep searching for partners. Don’t try to push the analyst to find data that makes the answers what you want to hear.
2. Identify the growth opportunity you want to capture.
If your potential partner passes the first test, you should see whether you can find agreement on the growth opportunity you want to capture.
Consider the partnership between Ulta Beauty and Kylie Jenner’s Kylie Cosmetics. In 2018, the two companies paired up which sent Ulta’s stock soaring, according to Forbes.
Both companies saw a growth opportunity. For Ulta, it was Kylie’s popularity — she had more than 110 million young followers on Instagram — which would broaden its market from the 45+ year olds who typically bought from Ulta and boost its in-store and online sales. For Kylie, the prize was the profits from selling her cosmetics in Ulta’s 1,124 stores during the 2018 holiday season.
If you can’t see such a significant growth opportunity, keep searching.
3. Figure out who will do what.
Next, decide who will do what. That means agreeing on how best to split up key activities such as:
- Product design
- Sales and marketing
- Customer service
- Financial management
4. Choose how you’ll split the investments, revenues, and operating expenses.
Next your lawyers and financial analysts should help you reach agreement on what investments, revenues, and operating expenses you expect to incur and how you will split them with your business partner.
5. Agree on the metrics for success and the terms of your divorce.
Finally, you should agree on how you will measure the success (or failure) of your partnership — especially once the partnership is up and running.
Remember that partnerships don’t last last forever — for example, after selling a chunk of stock to Coty Cosmetics and a year of plummeting sales during the pandemic, Kylie shut down and relaunced in July 2021. Meanwhile, Ulta Beauty is now doing very well — having launched new shopping concepts, new skincare lines, and partnering with Target.
Although these two are still together, their divergent paths show why it is so important to think up front about how you will handle a business divorce.