Don't have the skills you need in-house? Form an alliance to fill the gap
-- Li/Saltzman Architects PC is a puny company by most measures. Principals Roz Li and Judith Saltzman, who specialize in historic restoration, have just six full-time architects working with them in their trendy loft offices in Lower Manhattan. Even so, the firm manages to compete against firms many times its size. How do they do it? By offering, like the bigger players, everything their clients need--from historians to paint conservators to engineering services. The company bulks up (without getting fat) by creating teams with other companies, both large and small, on a project-by-project basis. "The key to success is having the right people in place," says Li. And these days, thanks to the Internet, it doesn't much matter where that place is. "We were working with one partner from New York who happened to be in Malaysia, and we still put an entire proposal together immediately," says Saltzman.
-- For Austin-based Smart Technologies Inc., having a good product wasn't enough. An Internet software company with 130 employees, Smart had to convince a potential customer, a large PC maker, that it could install and integrate its Web-based customer-support software product. The client urged Smart to hook up with a partner. Approaches to several consulting firms eventually led to a deal with PricewaterhouseCoopers. Smart provided the software, PWC installed it. Smart's founders are now so smitten with the alliance concept that it's an essential part of their strategy. Partnerships have put the company into "hypergrowth," says Jason M. Parrish, co-founder and vice-president of business development.
As these two tales from the trenches show, when you team up with another business, one plus one can often equal more than two. While companies of all sizes are now rushing out to form strategic alliances, the appeal to small outfits is particularly compelling. You can look and act bigger than you are and accomplish what you can't alone -- often more quickly and profitably.
Partnerships can be an effective way to pool resources and cut costs, as some networks of U.S. manufacturers have found by sharing training costs, for example, or bidding jointly on contracts. Cooperative arrangements with suppliers or distributors can help your product get to market more quickly.
And sometimes, by providing different pieces of the puzzle, a group of companies can offer up an entirely new package of products or services. The advantages? You don't have to hire more people than you need or develop costly in-house expertise. Partnerships let you stay nimble and flexible, bringing in the right players for the job at hand.
"These days, you need to be too good at too many things to do it all yourself," says J. Trent Williams, a principal at Regional Technology Strategies Inc., a Chapel Hill (N.C.)-based research firm that advises companies and local governments on how to set up partnerships between businesses. In a survey last year of eight states, Regional Technology found that the number of manufacturing companies participating in cooperative "networks" (another commonly used term for such partnerships) tripled from 1994 to 1997, to more than 3,300. On a national level, Arthur Andersen reports that almost one out of five small businesses has used strategic alliances as a way to expand.
The bottom-line argument for such teamwork is particularly striking for high-growth companies. Consider the results of a just-released survey by PricewaterhouseCoopers of 436 chief executive officers of "trendsetter" companies with up to $50 million in sales. The study showed that 43% of the companies that launched breakthrough services and products did so with outside collaboration. They were a little smaller than their counterparts who didn't, but they experienced 31% more revenue growth than the other businesses and projected 28% more growth for the next 12 months.
They churned out more innovative products, too -- 79% more than the companies that developed everything internally -- and they recouped their investments faster -- in 15.6 months, vs. 17.8 months. "It's a very lopsided picture in favor of companies with one or more strategic partners," says Pete Collins, director of Barometer Surveys for PricewaterhouseCoopers.
The More the Merrier. Indeed. "A good rule of thumb is that a good strategic partner can double the value of your company," says James Atwell, a global managing partner at Private Equity/Venture Capital, PricewaterhouseCoopers, who works with venture capitalists and emerging companies in Silicon Valley.
While such relationships can pay off, no business should form partnerships just because they're trendy. In particular, Atwell cautions, small companies should not pin all their hopes on any one alliance -- particularly when it's with a large corporate partner whose interest in your smaller company may be fickle and fleeting.
But don't underestimate the value of teaming up with a big company, even if it's your former employer. Consider Knoxville (Tenn.)-based American Secure Care. It was founded in 1996 by three former executives of Philips Consumer Electronics to distribute a $399 "plug and play" Magnavox-brand home-security product that Philips was having trouble selling through its traditional network of electronics retailers.
Convinced that they could do a better job, the founders first struck a deal with their former employer, securing a licensing agreement to sell the product, which was produced for Philips by a Hong Kong company. Then ASC's owners set out to form other alliances to help them find ways to distribute the security product -- and create new products, too.
For example, co-founder Brian Boling networked his way into the marketing department of homebuilder Oakwood Homes Corp. of Greensboro, N.C. Boling pitched the security system as a way to differentiate Oakwood Homes from its competitors. "Two weeks later, we inked a deal to add security to their new Dreamline homes," Boling said. American Secure Care's sales increased tenfold from its alliance with Oakwood, and Oakwood found a new sales hook. Jim Steinmeyer, senior vice-president of marketing and product development at Oakwood Homes, says he had some concern at first about forming a partnership with a small company, but that ASC has always delivered. "They're a pleasure to work with, and I trust them -- and that's what I look for in a strategic partner," he says.
First Steps. If you've never tried to form an alliance with an outside company, how do you get started? First, figure out what capabilities you lack internally and the sort of partner who could help. Your network of business contacts can help you find referrals. "Don't just grab anyone," cautions says Jessica Lipnack, co-author of Virtual Teams and chief executive of NetAge Inc., a consulting firm in West Newton, Mass., that helps companies form teams. The process should begin with mutual visits between prospective partners, where you share a limited amount of information -- "not your crown jewels" -- and carefully define the areas of cooperation (table). Determine how revenues, profits, and costs will be shared from the outset.
Richard T. Horan Jr., a partner in the McLean (Va.) office of law firm Hogan & Hartson, also advises clients to spell out the relationship in writing. "A small or emerging company might not want to run up legal fees, but there is always more risk if you don't formalize the business relationship," he says. Plus, if you ever need to raise money, whether in equity or debt, a backer will want to to see those terms spelled out.
Even if you have a contract, you can run into problems if you're not specific enough. Raj Khera, co-owner of the Rockville (Md.) Web site govcon.com for government contractors, wanted to expand to serve government purchasing agents. So Khera teamed up with a search engine company and a third partner with access to 150 different catalogs to offer products to the agents. But his contract didn't specify how many catalogs the partner would supply.
As it turned out, only 40 were available in electronic form. As a result, that portion of the Web site didn't attract enough visitors, and Khera had to shut it down, kissing his $50,000 investment goodbye. "In retrospect," he says, "we should have done a little more due diligence."
In other words, know thy partners. Architects Li and Saltzman make a point of it. They work regularly with about 20 other businesses on the East Coast and count more than 40 in their informal network. In the most recent phase of a 10-year multimillion-dollar project restoring a National Historic Landmark -- the Lower East Side Tenement Museum in New York -- the firm brought in a structural engineer, a lighting consultant, a historian, materials specialist, and architectural photographer -- all from companies they've worked with time and again. The architects view these partners as integral members of their specialized team, rather than mere subcontractors. Everyone knows and trusts each other; they even share contract leads. And if a problem arises, the client knows they can talk with the principals.
Evidently, they're doing something right. "We've been approached by larger firms that offer excellent architectural services," says Renee Epps, vice-president of the Tenement Museum. "But because we have such particular needs, I don't know where we would get all these specialized services."
In short, Li/Saltzman manages to be a giant for its clients without losing what it considers its best selling point -- its small-firm feel and personal touch. Not only that, the architects say, working with partners inspires creativity. That's team spirit at its best.
By Samuel Fromartz
This article was originally published in the Apr. 26, 1999 print edition of Business Week's Frontier. To subscribe, please see our subscription policy.
TABLE: Grab Your Partner