Alliances can help small-to-midsize firms kick-start growth

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One of the fastest, least capital-intensive ways for small-to-midsize companies to grow is to connect with a larger, more powerful partner or brand. But that involves risk. Experts estimate a failure rate as high as 60% among new alliances. An Executive Action report from The Conference Board looks at how mid-market companies can go about finding a large partner they can trust.

Alliances: engines of growth

For all the risks, an alliance with a larger company is one of the only ways that some smaller and midsize companies have to accelerate growth without huge capital outlays. Normally, growth takes patience and a very long time. Brands are not created overnight. But with help from a powerful partner, a smaller company can raise its visibility, develop a new technology or product, gain access to broader marketing channels, tap into sources of new customers, or ride the coattails of a strong brand.

Making an alliance work takes tremendous effort and commitment. And the risks are not to be underestimated. What if the larger company is not so well-intentioned, and walks away with the smaller company’s secrets? Sometimes the larger company develops other priorities and allows the partnership to fall apart.

“Since the sharp falloff in alliance creation after the dot-com bust in 2001, companies have learned much about how to design and manage these partnerships more effectively,” says Howard Muson, author of the report. “Alliances are making a strong comeback, and companies have more-realistic expectations about what they can achieve.”

“The deals being done now tend to be better thought out — with the caveat that there are still tremendous challenges around governance,” says David Ernst, leader of global alliances for McKinsey & Co. in Washington D.C.

The Conference Board examined a few small and midsize companies that appear to have gotten over the hurdles to see how they benefit from alliances and collaborate with their partners.

Choosing a partner firm

Experts interviewed by The Conference Board suggest some criteria when selecting a potential partner:

Before drawing up contracts, get the partnering teams together in a room to talk about philosophy and goals. Robert Spekman, professor at the University of Virginia’s Darden School, and author of Alliance Competence, says: “I don’t care how good the deal is. If your partner doesn’t share the same vision, the same set of morals and ethical standards, walk away.”

Look for clues that the larger partner takes you seriously and truly wants to help foster your growth as well as its own. You need assurances your company will be listened to and have a voice in major decisions.

Do your due diligence about the potential partner’s behavior in past alliances, whether it has kept its promises and maintained the trust of its partners.

Although an innovative smaller company might fear that a bigger company will steal its proprietary technology or processes, a bigger risk is that it will take too long to do the deal or won’t achieve the alliance’s objectives because the more process-heavy partner can’t move fast enough, says Ernst. He suggests a few ways to reduce the risk when small companies partner with big companies:

Talk to at least three companies and create an “auction” for the product or technology that you want assistance in commercializing. Without a firm auction date, big companies may take their time coming to the table.

Ask for estimates on how long it takes the company, on average, to make key decisions, such as hiring a new plant manager or launching a new product.

Find out what marketing and R&D resources the company plans to assign to the alliance. Ask, for example, “Whom are you going to assign to work on this project?” and write their names into the contract.

The smaller company should estimate how much of the CEO’s time will be consumed by the alliance. Because the smaller company may be staking its future on it, the CEO often takes charge of the alliance. Lost time for small to midsize companies means fewer sales. Will the returns justify this diversion of the leader’s attention? If so, the CEO should have a backup team in place to run the company while he or she is keeping the alliance on track.