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How to Create a Successful Strategic Alliance

By Rubesh Jacobs

One of my clients has entered into several strategic alliances. They have the product and access to the customers. They needed the advisory services in order to grow their business. Consequently, they inked agreements with premier advisory firms.

Similarly, firms in good financial health are looking for effective and profitable ways to grow. Clearly industry merger and acquisition activity is on the rise. However, gaining access to products and markets through alliances is just as effective for growth as an acquisition.

In the asset management industry, the business models of firms such as BNY Mellon and Nuveen are based on strategic alliances.

More often than not, strategic alliances in the asset management industry meander with no focus or fail to deliver on their objectives altogether. Several of past and present clients have alliances that could be very profitable, but sadly are not.

Instead of dwelling on why they fail, let me point out the key questions to ask when planning a strategic alliance.

Strictly speaking, only Joint ventures, Equity alliances, and Non-equity alliance are strategic alliances. However, in the spirit of accommodating a wider array of agreements that are generally called strategic alliances, I encourage you to think of scenarios where firms agree to exclusivity, or a key client is treated differently because of the volume of business.

1. What is the driving reason for the strategic alliance?
Objectives can range from association with a credible brand, access to a distribution channel, access to products, and access to international markets, to eliminating the risk of outright acquisition. Regardless, the company has to determine why a strategic alliance is the best structure to execute its strategy. Here lies clarity for the objectives of the strategic alliance. This is also the source of the value from the alliance.

2. What constitutes the foundation of the alliance?
Legalese notwithstanding, the company has to decide which of its resources and capabilities (assets) are valuable to potential alliance partners. Is it high-performing mutual funds (products)? Is it a fantastic brand? Is it market share (access to distribution)? Remember, this is what you are selling to a potential suitor. Get the facts straight.

Keeping in mind the answer(s) to #1, what are you willing to give up in order to get what your alliance partner has? Be very careful about what you are asking for in return. Specificity is critical.

The risk of moral hazard (partners providing resources and capabilities of lesser value than represented) is high when the stakes are high.

3. What are the performance goals for the alliance?
Have a crystal-clear view of what you expect to see from the alliance. As with any other business venture, draw up a business plan to support the theory behind the alliance. The short and long terms goals of the business plan are they key milestones of the alliance. Revenue targets, profitability, productivity, market share, and other metrics will be the key indicators of the health of the alliance.

4. Who is the right partner(s)?
Treat selection and due diligence of target partners just as you would an acquisition. Not all potential partners are good alliance partners. Their culture may not fit with yours. They may have skeletons in the closet. The risks may outweigh the benefits.

As with mergers and acquisitions, this is where most strategic alliances start going down the tube. Once close to the "deal," walking away become very difficult.

5. How will it be managed?
Read day-to-day management as well as governance. Who from each firm is accountable for the smooth running of the alliance? How will key decisions about the alliance be made? How will periodic reviews be conducted?

6. How to exit?
If the performance criteria are not being met, then it is time to exit. There is generally little exception to this rule.

Ironically, the exit has to be planned during the setup. While it's impossible to foresee the future, there is sufficient information and experience within your legal team to determine why and how to exit gracefully.

Partnerships are an important and cost-effective way of growing a business. I know a few foreign asset managers who made acquisitions to enter the U.S. market. The post-merger results have been lackluster at best. One of our clients is considering options on how best to enter the U.S. market. Among the options we recommended is a strategic alliance. Why? It is a way to learn about the market and its nuances, hedge against incorrect valuations, post-merger integration challenges, and cultural fit. Moreover, you could still structure an agreement that includes an option to acquire.

The point is this: strategic alliances are a great tool for growth, but they have to be crafted and executed intelligently.