Banking

Find the right match: Strategic alliance, vendor partnership, or joint venture

When your consultancy is ready to augment the services it offers, a strategic partnership may be the answer. Depending on your goals, clients, and services, one of three types will fit.


When management and IT strategies consultant Tom Casey lands a client, he usually follows his good fortune with a phone call to one of a dozen partner companies.

Casey, president of Malvern, PA-based Business Consulting Services, relies entirely on partner relationships to fulfill client projects. The partners range from IT staffing agencies to change and organizational management consulting companies.

Casey and each partner negotiate the level of compensation and expectations for each client; Casey considers such arrangements essential for him and for his business. The benefit to clients is that the firm and a partner are able to offer what he calls "partner-level" consulting for less than it would cost at similar, top consulting agencies.

Such arrangements are common and often integral to the existence of a small or mid-size consulting firm. Partnerships between companies, individuals, and vendors—or even full-on joint ventures—can grow a consulting business by attracting higher-profile clients and more lucrative projects. The goal for an individual consultant is to remove the entire burden of a single client and its needs and share larger clients, larger risks, and bigger projects among several parties.

In addition to greater financial resources, strategic partnerships offer solo consultants "a chance to have backup when they get sick and a chance to try new projects, or exposure to a new technology that they might not have otherwise," said Aldonna Ambler, president of Ambler Growth Strategy Consultants, Inc.

Research firm Booz, Allen, & Hamilton found that in 1998 and 1999 more than 200,000 strategic alliances were formed between companies. The firm also noted that for the top 2,000 of those companies, the return on investment (ROI) from the partnerships averaged 17 percent.

While such figures apply to larger organizations, the potential gains for an individual cannot be ignored. I asked several consultants how they formed partnerships, what level of legal responsibility they held, the benefits, and how they determined which arrangement was the best fit.

Strategic alliances
When Vicki Monti realized she needed access to a larger client base for her Web design business, Web Catalyst, she turned to a local e-business consulting company for a potential partnership.

The company, ThrottleNet, a small St. Louis-based firm that works with dozens of clients on CRM, strategy, value, and supply-chain applications, occasionally required the services of a front-end designer, according to ThrottleNet’s Marc Arbesman. Because they didn't have enough projects to justify hiring an employee, the company agreed to outsource its design needs to Monti.

Because many of her clients require database work, Monti agreed to contract ThrottleNet for such applications and offered a lower hourly rate than if the client hired the firm themselves.

The two companies wrote a standing agreement to provide each other with complementary clients and outlined how payment and project management would occur. Monti anticipates the relationship will net her an additional two to three design clients each month and that she'll be able to provide nearly the same for ThrottleNet.

Such an arrangement is the definition of a strategic alliance: Both parties benefit from the relationship, decision making is shared, and the goals achieved could not be accomplished alone.

Before entering into any type of partnership, you should consider the following.

What is the goal of the relationship?
Do you wish to enter new markets, develop new technologies, or influence standards?

What are the benefits?
Will you generate increased revenues or save money with this partnership?

What are the risks?
Is it possible that you have underestimated the time and cost of partnering? Would there be a loss of control over intellectual capital created by you or the partner? Would the partnership potentially dilute your core business? Is there a market?

What are the alternatives?
Could your clients' needs be outsourced just as easily?

If a partnership would benefit your business and better serve your clients—and potentially make new markets available—the next step is to find your partner. Arbesman said that, when a partner is being considered for his company, it does an evaluation, asking:
  • What is the potential partner contributing to the arrangement?
  • What is their experience in the industry?
  • What is their reputation among clients and vendors?
  • Is the company or individual ready for a commitment?
  • Do we trust the potential partner?

"The partnership is really about trust," Arbesman said. "We talk to their customers, take a look at their client list. We are looking for a long-term relationship."

Joint ventures
While partnerships are more varied in their structure, length of time, and benefit to each party, joint ventures are agreements between companies most often used to sell a specific product or service, according to Catherine Berlin, a founding attorney of the law firm Altreuter Habermehl in Buffalo, NY.

Essentially, such an agreement creates a third entity between two companies, and sometimes a third company altogether. Businesses that undertake a joint venture usually offer similar services or products, and the agreement is typically limited to a specific period of time.

"Parties enter a joint venture to work on one discrete project. By working on a single venture, the members can take advantage of each other's expertise," Berlin said.

During the mid-1990s, Tom Salzer of the consulting firm Advanced Information Services, in Marlboro, NJ, considered a joint venture with a software company looking to sell its newest release. Salzer saw how his firm could help in selling the product, and how landing major sales contracts could bring more money to the software company by way of venture capitalists.

But, in examining the deal further, Salzer realized he needed more financial stake in the arrangement and that if the joint venture was only to market and sell the other company's software, a joint venture was not the best arrangement.

"The benefit to me was having equity participation in this particular product," Salzer said. "But I didn't want to have it where I was reselling their product or acting as a partner because, in essence, I would be driving sales opportunities and creating value to their company and less value to ours."

Evaluating whether a joint venture relationship would be of benefit to your company includes answering the following questions:
  • Would my company gain access to new products, services, and expertise?
  • Would my company be able to enter related or new markets, particularly new geographic markets?
  • Would we gain technology knowledge?
  • Would a commitment of less than five to seven years be sufficient?

Each participant in a joint venture must perform an evaluation similar to that of evaluating a partner, although Berlin said, "a due diligence review is over the top. You are not buying a company."

Berlin said the other advantage of working on a joint venture is that neither party is suddenly responsible for the other's legal affairs once it signs the contract. Instead, the parties are only beholden to their new venture and any claims that may arise from that.

"But the character of the company is important, so review work product, assess working methodology and conditions, and, if they have done a joint venture before, check up with [their] prior partners," she added.

Once a joint venture is agreed on, according to Berlin, you should outline the arrangements and include the following items:
  • The purpose of the venture, including the scope of the project
  • A designation of what each member will contribute (money, services, property)
  • How and when such contributions are to be made
  • What happens if additional contributions are required
  • Who manages, who controls, and what is the expected course of conduct
  • Whether any member should post a bond
  • How to divide profits and losses
  • Fiscal year and method of accounting
  • Insurance needs and methods of settling disputes
  • When the joint venture will begin and terminate
  • Impact of a member's failure to live up to obligations or a member's default

Vendor partnerships
A third type of partnership can also bring increased business to your firm and lend a level of credibility: vendor partnerships.

While not for everyone, particularly if multiple or competing vendors are used in client solutions, the vendor partnership can open doors for consultants that otherwise remain inaccessible.

For Eagle Technology Consultants in Atlanta, a consulting firm that specializes in Lotus software, its two vendor partners—IBM and Microsoft—are the source of numerous leads from the companies' call centers and field representatives.

One recent IBM lead that involved a potential Lotus Notes and Domino upgrade for a company turned into a month-long development contract, in addition to the potential upgrade, said Eagle Technology Consultants sales director Chad DeMeyers.

The company's two vendor partnerships also enable additional technical and training assistance and product discounts from the vendors and lend the company credibility with potential clients. Both partnership agreements with IBM and Microsoft required Eagle's consultants to have a certain number of software certifications and to submit up to five case studies that showed how the company successfully used the vendor's products as a client solution.

For Eagle, which has grown to 30 employees in six years, the partnerships were a natural extension of its area of expertise, particularly with IBM, because Eagle had been a Lotus partner before IBM purchased the software company.

But even if vendor partnership is attained, you won't necessarily reap instant results.

"Don't expect that just because you can use their logo, business will start flowing through the door,” DeMeyers said. “It's about relationships, and it's about proving to Microsoft and IBM that you're a good partner."

Of course, vendor partnerships don't work for every consulting firm. ThrottleNet's Arbesman said the company is not interested in a vendor partnership that would tie it to one company and its products.

"We would rather find the best solution for the client, not a vendor," said Arbesman, who added that whether it's open source, IBM, Microsoft, or other types of software, such a vendor commitment could stifle solutions.

"In some cases, if you don't do enough business, they shut you off," Ambler said. "So there is a pressure, in some cases, to be bigger than what a solo consultant had wanted to be. Or there is a pressure to specify a product they would not if they were being totally objective."

For Eagle, the IBM partnership made sense. "If that's their training and they love the program and it's so much better than the competition, then they're going to think nothing of being a preferred vendor," said Ambler.

 

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