“Alliances have become an integral part of contemporary strategic thinking.” Fortune magazine
Strategic alliances can be extremely important for small businesses. As I’ll illustrate in a couple of paragraphs, forming strategic alliances was key to my business for its entire 30-year life, and my first alliance started barely two weeks after I founded the company. It was not only an integral part of my business . . . it was an absolute necessity, and without it I couldn’t have grown the business nearly as quickly and effectively. As a small business entrepreneur, you need to be thinking that way, and I hope to give you some tips about it here.
You should think of a strategic alliance in terms of increasing the outreach of your business, with the ability to give you access to customers that you may not have the necessary resources. Capitalizing on strengths an alliance partner can have, the alliance can give you an edge over competitors. Moreover, a strategic alliance allows your company to project – either visibly or invisibly – a larger business profile than you actually have, thereby increasing your brand awareness, and doing it with a lot less of your own money at risk. Depending on the alliance, it can increase your technology base, giving you access to ways that can improve your product development or . . . you name it . . . any part of your business that the alliance was created for.
So, what is a strategic alliance? Are they difficult to arrange? Are they hard to manage? Should you be afraid of entering into one? Can an alliance come back to bite you? Can it overwhelm you? Can it mire you in legal difficulties? What should you know about strategic alliances before you enter into one?
Frankly, there’s a huge amount of ink and pixels expended on questions such as these, and it’s far more than we can cover in a blog post. What you should do is sit down with a tall cool one, with a fair amount of time on your hands, and read up on it. I’ll give you a few links to get you started (with the actual links found at the end of the post)…..
here[1], here[1], here[2], here[3], here[4], here[5], here[6], and here[7] – plus a book dedicated to the subject[8].
What I can offer in this post might be of more immediate value to you, with a few examples that illustrate real-world situations that you can draw from.
Example #1, Right Out Of The Box, and the Value of Not Burning Bridges. I started my company with basically no capitalization – with savings of less than two month’s living expense in the bank. My planned small business, though, had a very low financial barrier to entry – a software education company that would teach in-house classes to employees at companies that had very large mainframe computer centers. My only product was a couple of course curriculum modules for classes that I would offer, plus myself as the company’s sole employee, standing in front of a class and lecturing, week in and week out.
Once I was out on my own, I spent my first couple of weeks mailing out promotional feelers (this was in 1978, long before the internet, web sites, and e-mail). The odds were extremely high that I would be returning to my previous Fortune 100 employer if some large business or government computer center didn’t respond – and very soon.
Luckily, a week after starting this effort, an acquaintance in the in-house training division at my old company contacted me about a subcontracted teaching assignment at one of his customers. The course would be on a highly technical topic that I was only peripherally familiar with, and had never actually worked with in-depth – but being a brand new (and very hungry) entrepreneur, I wasn’t about to say no. After a thorough briefing on what the course entailed – and after being told that I had two weeks to be ready to fly to New York for a comprehensive grilling on exactly how much I knew about this topic area and to present a detailed course outline – I hunkered down for a whirlwind of work ahead of me. (Tell me, how do you think this fits into my earlier blog post on “breaking out of your comfort zone”? I think it epitomizes it . . . or illustrates the mark of a fool.)
Two weeks later I flew to New York for the hot seat grilling at the customer site, and while it’s mostly a blur after all of these years, I obviously passed it with flying colors, as I not only taught the class shortly after that, but, incredibly, taught three hundred more classes just like it at this one customer. Over the next two years, I also taught hundreds more like it at other customer sites for this new-found alliance partner – my old employer (so this is my lesson for not burning your bridges).
Unique with this particular strategic alliance, it was essentially an invisible alliance. My alliance partner printed the course materials for each class, they put their course book cover, name and logo on each booklet, and in class I acted as if I was an instructor for the alliance company. At the same time, it didn’t prohibit me from teaching my class at my own customer sites that I directly marketed to – at which I used the same course material with my own logoed presentation.
The beauty of the arrangement was, about 75% of my business was subcontracted with this alliance partner, and I remained a very happy (but busy) one-person company for almost three years – making about three times the salary I earlier earned as an employee. This business percentage also meant that my sales and marketing requirements were down by the same amount. My overall staffing requirements were way down too, owing to the alliance partner doing the lion’s share of course material printing, shipping, and end-customer contracting and detailed arrangements.
The strategic alliance broke up about three years later, mostly because the business directions of my larger partner veered away and they were no longer bringing me any new business. I managed to convert their original customer into one of my own, and I contracted directly with them for several more years.
As the alliance began to wane, an even larger mainframe software education partner came along, one whose software training operation was a hundred times larger than my previous alliance, and with my reputation firmly established, it wasn’t difficult to slot my courses right into the new vendor’s course catalog (by now I had at least six courses to offer). As things took off with this new partner, I began adding technical staff who could teach an ever-growing schedule of courses each year, and within a couple of years I had 14 highly-skilled instructors traveling not only the U.S., but around the world.
Contractor-Subcontractor relationships. Let’s stop here to explain a bit about my previous example. Did my relationship with my former employer become a strategic alliance, or was it simply a contractor-subcontractor arrangement? Well, you could call it either one, depending on how you want to look at it. The agreement that my tiny company signed with this very large Fortune 100 company was definitely a subcontractor agreement, and most (if not all) of the terms in the agreement stipulated how my company (i.e., me) would perform in this relationship, how my company would create, manage and maintain the course material that I was presenting on their behalf, and how – and how much – my company would be paid for these services.
But implicitly in the agreement – and explicitly in my discussions with the contractor’s management – it was a partnership, which is just another way of saying strategic alliance. It was in both of our best interests for my company to “bring” additional business to the agreement, particularly when I discovered other large businesses that wanted my education courses, but for whatever reason couldn’t/wouldn’t contract for them with a tiny company such as mine (large companies often prefer to do business with other large companies). Whenever my larger partner heard about additional courses that a customer might want, but didn’t have the course in their curriculum, they asked me if I did. In other words, we were scratching each other’s backs.
Another question to ask, is the relationship a one-off, or continuing? If it’s the former, it’s probably better defined as a simple contractor-subcontractor relationship. In my case, though, I knew up front that my partner’s contract with their end-customer called for an additional 10 of these classes, one a month, for the next 10 months. We both knew that the course topic area was a hot one at the time, so both of us stood to gain handsomely on it with additional customers if I did well on it.
Looked at in these terms, it was definitely a strategic alliance.
Example #2, When the Bottom Drops Out of You’re World, Maybe It’s Time To Reinvent. As my company moved to our second software education strategic alliance partner, it heralded huge growth for my company. Soon I was adding instructors every other month, and within a couple of years I had 14 instructors roaming the world.
With this largest-ever education alliance partner, I would receive the entire next year’s course schedule each October. At its peak this amounted to about 350 five-day courses throughout the year, and it represented a huge majority of my entire business revenue for the year. We were expecting the same for the next year. But without any advance warning whatsoever, when I received the 1986 course schedule it was cut by almost 80% – to fewer than 80 courses for the whole year. It was devastating.
While I’d known all along that having virtually all of our eggs in one basket was a potentially troublesome situation, there were no indications that this was coming. It wasn’t due to any problems within our alliance situation, but rather, to the word our alliance partner had learned from their end-customers – that they were drastically cutting their education budgets for the coming year. It was simply being passed through to us (although I think it would have been honorable if we’d been given a bit more advance notice).
What followed this near-disaster will be the focus of an upcoming blog post – re-inventing your company to stave off disaster (and how to handle serendipitous events) – but suffice it to say that we quickly re-engineered the deployment of our technical staff, from a software education focus to a software consulting focus. What precipitated the change was landing a huge contract – one that we went all-out to get – at a very large U.S. airline to implement a major disk storage revision at their corporate HQ computer center (yes, it was intentional to have lots of superlatives there). Within months, half of our idled software instructors were moved onto this consulting contract.
More significantly, this new business direction led to our working very closely with a very large mainframe computer manufacturer – one who was benefiting from similar consulting contracts with their own customers to help sell more disk storage hardware. It wasn’t long before we entered into a strategic alliance with them, helping them win the consulting contracts and then contracting to actually perform the consulting work. (We helped them win the contracts by first partnering with their sales teams to provide the highly technical pitch about a proposed contract, convincing the potential customer of just how good we were. Then, after our partner sealed the deal, we used our technical staff to actually perform the contract work.)
It was a beautiful strategic alliance relationship, again helping us to grow the company very quickly and capitalizing on the broader customer access that we could never have developed on our own. Because we were ultimately “helping” this mainframe computer company sell their very expensive disk storage hardware, we could charge “big company” prices for our consultants – something we couldn’t have done on our own as a small business provider. It was a triple-win situation, where the end-customer got top-notch consultants, we got blue ribbon customers to work with, and the computer hardware manufacturer got a lot of help selling their hardware. Within a couple of years, our business had doubled, and if it continued, would double again every year.
Example #3, Partner Up With the Biggest of the Big. By now, though, it was also becoming obvious that having so much of our business predicated on an alliance partner was dangerous. We knew from various alliance glitches cropping up from time to time – such as whenever the strategic direction of our partner’s business model changed – we’d sweat bullets that our cushy situation might suddenly end. It finally convinced me that we needed to re-invent our company once more – this time we’d transition to a full-fledged, bona fide software development company, selling our software directly to a customer base that we would develop and support. The plan was for our strategic alliance days to phase out, and hopefully we’d totally stand on our own two feet.
Little did we realize just how difficult it is to break into the software business. If you develop a product that already has competitors in the market, you’re chasing business that a competitor is also going after (or has already sold to). If you develop a product whose features don’t already exist, you’re ahead of the market, without competitors, but the customers don’t yet know they even need your product, so it turns into a “solution sell”. We chose the latter – almost no one wants to be a tail-end entry in a marketplace
Wisely (and fortuitously), we were able to remain in the consulting business while we rolled out our first software product and tested the waters with it. Sure enough, it was a slow slog. It was definitely a highly technical solution sell, and we typically had to make multiple on-site or seminar presentations to illustrate why potential customers should buy it. It took a couple of years, but we finally started to build up a reasonable customer base. At the same time, though, we also had to build a sales and marketing staff, a tech support organization, and along with that, an increased back-office administrative staff. All of that costs a lot of money, and being loathe towards outside investment capital, we funded all of this “organically”, which kept us cash-starved most of the time.
As we moved into our second, then our third, and our fourth software products, the attractiveness of once again having a strategic alliance partner became obvious. It could easily fill an entire book to describe how it all came about, but slowly – and very determinedly – we began to attract the attention of the granddaddy of all mainframe hardware/software companies – IBM. It took a long time and a huge amount of effort, but we managed to become one of the first-ever small software companies to sign a remarketing agreement with Big Blue. Today’s equivalent would be to link up with Microsoft, although hundreds – maybe thousands – of small companies have strategic alliances with Microsoft so there’s already a smooth pathway towards it. In our situation, we were entering a big unknown, and so was everyone we worked with at IBM. To our surprise, they were very good to work with, and never once treated us like a poor second cousin. Negotiating our partnership agreements was easier than negotiating a lot of our individual customer software contracts. Closing customer deals was even easier, surprisingly so, as the dollar amounts for each deal were really big to us, but in the scheme of things, they were small peanuts compared to the main software/hardware deals each customer was doing with IBM.
I won’t put words in the mouth of our eventual acquisition company, but I think that having a strategic alliance with the likes of IBM was one of the biggest reasons they took an interest in acquiring my company. The ultimate strategic alliance for us was actually the crown jewel for my company.
– – – – – – – – – – Additional sources on strategic alliances – – – – – – – – – –
[1] Strategic Alliances: How They Can Benefit Your Business, posted by Maria Martyak, Powerlinx, August 8, 2014, https://www.powerlinx.com/blog/what-are-strategic-alliances/
[2] How to Build Business Alliances, by the Inc. magazine staff, Inc. website Outsourcing section, June 1, 2010 (but still as current and relevant as it was seven years ago), https://www.inc.com/magazine/20100601/how-to-build-business-alliances.html
[3] Strategic Alliances: Possibilities Through Collaboration, by SBA Georgia District Office Director Terri Denison, U.S. Small Business Administration (SBA), https://www.sba.gov/offices/district/ga/atlanta/resources/strategic-alliances-possibilities-through-collaboration
[4] Why are Strategic Alliances Important to Your Small Business?, a blog post by Mark Smiciklas, Intersection Consulting, Inc., http://www.intersectionconsulting.com/2008/why-are-strategic-alliances-important-to-your-small-business/
[5] Gain a Competitive Edge with a Small Business Alliance, a blog post by Lisa Flaherty, Tanner Insurance Agency, Inc., October 17, 2016, http://www.tiains.com/blog/entryid/11560/gain-a-competitive-edge-with-a-small-business-alliance
[6] Beyond the Promise: Four Steps to Making Strategic Alliances Work, a blog post by Pamela Harper, for Insperity Presents . . . Jim Blasingame – the Small Business Advocate, November 8, 2008 (oh, that was a bad time in our business history, but having nothing to do with that, the lessons in this post are well worth heeding), https://www.smallbusinessadvocate.com/small-business-article/beyond-the-promise-four-steps-to-making-strategic-alliances-work-1896
[7] 7 Tips To Manage Strategic Alliances for Small Business, a blog post, vesellis.com, LLC, January 25, 2013, http://www.vsellis.com/strategic-alliances-for-small-business/
[8] Intelligent Business Alliances: How to Profit Using Today’s Most Important Strategic Tool, by Larraine D. Segil, available in Kindle, hardcover, and paperback from Amazon.com, https://www.amazon.com/dp/B004DEPGRG/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1
Sorry, comments are closed for this post.