UPFRONT Survival of the fittest

How do companies that are used to competition, independence and business predation cope in an environment where collaboration, interdependence and business alliances are increasingly important?
Not too well, according to recent international research carried out by global consultancy Deloitte.
Its recently released “Survival of the Fittest” report confirmed the growing significance of alliances but also found that “failure rates remain high so value is more likely to be destroyed than created”.
Alliances can range from marketing partnerships and joint ventures to outsourcing or licensing based deals and are being used to achieve range of business objectives such as reducing development costs, improving customer service capabilities, accessing new skills, or expanding into new markets.
Alliances, says the report, represent an “attractive alternative to organic activity or the use of mergers and acquisitions for driving growth and profitability”. Two-thirds of the companies surveyed anticipated their level of dependence on external relationships would “increase significantly” over the next three years.
Alliance activities in New Zealand tend to fall into two broad categories, according to Deloitte partner Wendy Lai. These are outsourcing work that’s been formerly handled inhouse, and collaborative commerce arrangements where companies are partnering to enter new markets and develop new products.
“We haven’t noticed increased activity [in outsourcing] here, however this trend should continue provided the outsourcing partner continues to add value and has viable service proposition.”
Commercial collaboration is evident but at low level.
“We’re seeing initial signs of increased activity in New Zealand but it’s still in its infancy,” says Lai. “The challenges identified in our global report are likely to be primary cause of caution – plus large corporates may need discussion and approvals from offshore headquarters,” says Lai.
So what are the challenges? Extended enterprises offer real opportunity for value creation but, says the report, there are associated risks that must be managed.
These include issues of trust around sensitive information or performance expectations, the difficulties of establishing common goals across multiple organisations, the need for strategic overview and means of measuring the worth of individual alliances.
While such challenges are being recognised and there have been some notable success stories – much of the effort is not delivering results, says Deloitte.
Companies need to be proficient in three related spheres of alliance activity:
* managing the portfolio – in terms of business process;
* creating alliances – embedding the option for this in strategic decision-making through relationship building, transaction, execution and launch; and
* managing alliances – maintaining the relationship, achieving targeted business benefits, managing the ongoing risk and alliance exits.
Portfolio management is “the essential set of activities that differentiates those organisations that have recognised the value of operating as an extended enterprise from those which manage multiple alliances on an individual basis”.
This includes developing the portfolio consistent with strategic goals, evaluating and managing dependency risk, and measuring the portfolio performance.
The creation of new alliances begins with strategy, clear fit with core competencies and an option for achieving organisational goals. In reality, partners are selected on whim, personal relationship or because they made speculative approach and there is too much focus on “the deal” rather than building relationships founded on aligned interests and focus on implementation.
Alliance management should drive directly from their creation but the transition is often critical issue.
“While for most the creation of strategic alliance is likely to have some involvement from central expert team of negotiators and alliance creators, ongoing management must be part of business as usual – and the challenge is to ensure that transition is effective,” the report says.
Issues include ongoing focus on cost rather than revenue growth, not being sufficiently focused on the partner’s business, insufficient focus on performance management and organisational culture or practices that hinder collaboration.
Although the specific reasons companies cite for enterprise extension vary, all are driven by key features of today’s marketplace, says Deloitte. These include focus on cost and capital efficiency, weakness in capital markets and M&A failure, growing customer power, and need to access technology products, skills and experience.
Alliance activity is unquestionably becoming more significant in business, and professional alliance capability will become prerequisite part of the selection criteria for partnering due diligence in future. The report suggests “having capability to partner could be the difference between business success and failure”.