The Connected Partner

Author Richard Solomon is a conflicts and crisis management lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.

Business relationships come in all sizes, colors and varieties. Every project that can be undertaken unilaterally has the potential to be shared in some profitable manner. Owning it yourself is the most frequent decision. Sharing it is usually for the purpose of spreading risk and obtaining access to capabilities you don’t have.

Sharing itself has strategic potential. This is especially true when projecting your presence in some dimension into a “space” (physical or technological) where you may be a newcomer. It is also sometimes the better choice for “political” reasons.

There are myriad configurations available for the articulation of sharing arrangements, some actually structural, like joint ventures, partnerships, parent-subsidiary, and some entirely unstructured relationship configurations, like tolling, teaming, agency and representation.

Most companies with sales under $ 100,000,000 do not have a group focused upon strategic opportunities such as merger/acquisition, joint venture, other kinds of teaming. When the moment arrives in which that is appropriate, it is usually approached through an intermediary like a bank or financial advisor. Entry into new territory implies lack of familiarity. It is usually of critical significance, however, that a proper operating relationship with a firm that knows the lay of the land be selected.

Illustratively, when Pillsbury Company decided to go into the refrigerated dough products business (the Pillsbury Dough Boy group of products), it teamed with Kraft foods because Kraft “owned” the refrigerated product (other than meat and fish) space in most supermarket chains. That pairing decision gave Pillsbury a great advantage in marketing that line of its products. Competitors struggled to get space, waging a constant uphill battle. Similarly, another food company with serious business in vegetable based emulsifiers teamed with a prominent in country grower of guar and locust gum trees, rather than try to do it as a foreigner or in its own country from scratch. These are examples of “connected” affiliation ventures.

An essential selection factor in deciding upon the affiliate’s identity is the aspect of the balanced relationship. Many companies make the mistake of trying to make a connection with an affiliate that is much more powerful and would bring a lot more throw weight to the relationship. The mistaken thinking of that is that no one with great strength really wants to be in a host-parasite affiliation. In some instances that works because the host company receives the lion’s share of the revenue stream of the enterprise. Allocation of revenue participation will always be skewed in an unbalanced affiliation. Everything has its price, but from a management prerogative perspective it must be accepted that the host firm will call the shots, albeit with diplomatic gestures of consideration for the point of view of the other company. Dissent from the program of the host company threatens the relationship in seismic proportions.

Not infrequently, a group of smaller enterprises will affiliate in some loose manner to give the appearance of gravitas. That usually fails in infancy, but sometimes takes a while to come undone. Illustratively, about 40 years ago a Midwest law firm decided to try a franchising, networking approach to an enterprise that would give the appearance of a “national” law firm. They configured an affiliation protocol that was very similar to a franchise. It worked mainly in the personal injury and mass tort area with a menu of reference fee structures, almost like a pyramid scheme in some instances. It failed to attain credibility and eventually flew apart.

The quest for participant balance is critical to success over an intermediate or longer term. It cannot be merely a paint job and endure. The affiliates need to be realists and either create a relationship endowed with credibility and durability or simply not go down that road at all. Prematurity has endangered many business relationships because expectations that the model will perform like an authentic affiliation model are not realistic.

The process is often two tiered in its development in the sense that finding the right affiliate is done with the aid of a management consulting firm, bank or other similar resource (sometimes even through a social club). The implementation stage, however, should be handled differently because it then becomes more personal in nature and addressing it institutionally simply won’t yield the desired result quality. That should be accomplished with in house resources and perhaps an outside, light touch guide resource. The guide resource should have a background that provides sensitivity for the personality issues, the feasibility issues and the legal risk issues.

Forty years ago, when everything moved at a much slower pace, teaming affiliations were mainly seen among very large companies. Today, however, since markets evolve at much greater speed, teaming ventures occur far more frequently amongst smaller companies capable of meeting the rate of market condition changes. That is why I use the $ 100,000,000 in sales ceiling as the subject of this tutorial.

Since the rate of market changes is so much faster now than it used to be, the durability of these affiliations is often thought of more in a tactical than a strategic mode. Ponderosity is a distinct disadvantage today. What used to endure for 15 or 20 years is now fortunate to be useful for 5 years. One would think that innovation would enable greater survival of these ventures. The fact of the matter is that the innovation comes from elsewhere, not from the participants themselves. It is also not unusual that the participants may be aware of oncoming developments and ignore or try to suppress them for the purpose of enhancing the assumed durability of the relationship. That is always illusory. Innovation moves markets regardless of the aspirations of those being eclipsed.

International teaming affiliations are more frequent today than previously. Smaller companies wish/need to project their identity and throw weight with greater agility. The large firm mode of accomplishing these affiliation configurations is no longer as useful as it once was, except of course for those very large firms. They are much more often the product of tactical than strategic thinking. They should be established in a manner that permits the relationship easily to recognize the realities and deal with them in an orderly, non-confrontational manner.

It is also much smarter today to place the enterprise in a convenient rather than an ostentatious location. The big expensive cities consume much more of the available resources than many that would be more opportune for numerous reasons. That is why we chose Cyprus as the center of our operations facilitating enterprise projection in the EU, the Middle East and Africa.

     

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