Friend or foe

How can you grow your capabilities without growing your financial obligations? Bob Cronin, The Open Approach, has some suggestions

The label industry has seen a flurry of M&A activity as of late. Continuing consolidation, mega-mergers, rising investor interest… the sheer amount of M&A alone indicates its undeniable effect on the marketplace.

But for many companies, M&A is not a desirable goal. You may be perfectly content running your third-generation family business. You could still be partnering with an old college friend or simply enjoying your day-to-day routine. Your 20 employees may be like family, and you couldn’t even imagine wanting to grow into another label giant.

Indeed, virtually 90 percent of our great industry is made up of players with less than 10 million dollars in sales. While you probably have never lost a job because you 'weren’t big enough,' you may have lost a few because of a service you didn’t offer in-house or a type of label you couldn’t produce efficiently. And as customers continue to narrow down their vendor pools, you could be losing more projects, more often.

What’s behind the M&A spike is not a quest for size, it’s a move to gain the essential capabilities, technologies, and skill sets the marketplace demands. So how can you grow your capabilities without growing your financial obligation?

For companies that aren’t ready for M&A, the solution could be a strategic alliance. Not simply a 'preferred vendor' or outsourcing arrangement, a strategic alliance is a formal agreement between two companies to bring together their equipment, technological, and human resources – without any upfront financial commitment or physical relocation. Strategic alliances can multiply a company’s sales – bringing both entities greater capabilities and sales potential, along with enhanced market positioning.

But strategic alliances must be well-defined and well executed to be effective. They must also provide for real and meaningful solutions that can respond to changing market dynamics and customer needs. Too often, these arrangements get hung up in egos, selfishness, lack of forethought, or inequities. Any of these can derail the relationship, and fast.

We all need to find ways to reinvent our business. In today’s fast-moving world when cash flows are scarce but needs are real, a strategic alliance may provide the needed benefit without burdensome financial requirements or challenging integrations. As you consider whether a strategic alliance may be right for you, I am available at any time to help you think through it. While I strongly recommend an advisor, many entities wish to begin the process themselves. As you start, I offer the following six critical steps/considerations. These certainly aren’t an exhaustive checklist, and you should be prepared for much review. It may actually take longer to put together a strategic alliance than an acquisition – since with an acquisition, there is typically a 'lead' player. Regardless, any move to transform or grow your business is worthy of the extra time and effort, and any and every move you take should be scrutinized as closely as possible.

1. Select the right partner

Many owners’ first consideration for an alliance partner is a trusted long-time supplier. This may seem logical – you already know them and they get your business. However, nine times out of ten, these companies do not bring any real strategic alliance value. They are with you because they support your offerings, not because they extend your platform and attract  new business.

What you need from a partner is growth. Who has the capabilities, means, position, vertical expertise, equipment, etc. that can best propel your sales?

While your 'friends' may be able to help you adapt your value proposition, they are often unable to tell you what you really need. Some of the best strategic alliances are those with a formidable competitor. They know your gaps and weak points and have likely crafted solutions to fill them. But be careful that they represent themselves honestly and will represent your company well. Ethics and scruples are important, too. You don’t want to lose your service image. In the end, you need a partner that brings about significant new power and abilities, while maintaining your brand value. Look for substance, not supplement.

2. Establish a system for shared risk and reward

The sharing of risk and reward is central to strategic alliance success. Most alliances that fail do so because the proper considerations for risk and reward have not been made. Like M&A, strategic alliances allow for significant variance in how the final contracts are set up. Because of this, many partners are inclined to have certain proprietary assets, copyrights, or technologies still in their favor, which may affect the alliance’s ability to forge ahead.

For example, a digital and a conventional player could form a strategic alliance, but the agreement might give the digital player 70 percent of the digital sales, even though more sales are brought in by the conventional sales force. Or, a new asset is purchased and one of the partners is required to take on a greater share of the expense. If the asset proves successful, that partner benefits more than the other. If it fails, that partner could lose everything.

The lack of shared risk and reward will ultimately break down a strategic alliance. Profit sharing, loss sharing, capital expense sharing, and the like will ensure decisions are made jointly and will keep both parties aligned and directed toward mutual objectives. Of course, to do so, you must also make sure you are in agreement as to how financials are calculated, recorded, and distributed. You simply can’t partner with two vastly different systems for managing money. 

3. Define management structure, roles, and decision-making processes

One of the most difficult things to do when forming a strategic alliance is keeping management teams collaborative. As part of the strategic alliance agreement, you need to consider how leadership direction is determined, how operations will synch up, how negotiations will be conducted, how disputes will be handled, etc. Also, determine who does billing, who controls the customer, and who handles marketing. Make considerations for organizational cultures to avoid potential clashes. Set up provisions that provide acceptable influence and also sufficient protection to both parties and support a common strategy. And don’t forget to determine how to synergize resources.

4. Create a strategic plan for marketing

A strategic alliance must be purposeful and meaningful to your collective audiences. It must be backed by a strong marketing plan – and buy-in from your people – so that it comes to market as a powerful solution that can extend customers’ businesses and not just a distraction. Too often, companies believe a press release or word of mouth can take them through this phase. If a strategic alliance is introduced badly, it will perform just the same.  While negotiating your agreement, determine how you should bring the new business to market. What new capabilities will be the most compelling? How should you be revamping your sales presentations? What’s your value story? How do you start coordinating promotional email, social media, and website efforts? Can you showcase your new combined abilities with a promo/leave-behind?

5. Consider your sales force

Strategic alliances can be challenging – and counterproductive – if there is too much sales overlap. Certainly, this is an initial consideration before getting too far into things. If the arrangement does indeed hold value, you must accommodate the combined sales team.

Don’t neglect cross-training on the respective partner’s systems and capabilities. Keep the doors open for plant tours, visits, and sample sharing. Make sure each side is comfortable with the other side’s offerings and equipped to sell the additional products and services. Perhaps incentivize each team at startup. Explore large discrepancies in compensation structure that can lead to resentment or refusal to sell your new combined lineup.

6. Set limitations, assessments, and exit opportunities

As with any formal agreement, you should always make provisions for periodic reviews, refinements, or dissolution. Most of the time, well-executed strategic alliances can be greatly successful, but occasionally they simply don’t work out. Sometimes, they can even become buyout opportunities. Planning for options in the future will safeguard the investment of your time, resources, and efforts.

Forging a strategic alliance can be challenging. Just like the parties involved, it can be your friend or foe. It must be done with the right level of participation, effort, and commitment – and it must be established so that both parties equally share in its risk and reward. Executed properly, it can be the big move you’ve always needed. Who knows, your next venture might be a step into M&A.

About the author

Bob Cronin is managing partner of The Open Approach, an M&A firm/consultancy focused exclusively on the world of print. In addition to spearheading several large label industry transactions, the firm regularly handles value-enhancement initiatives and organizational workouts/turnarounds. To learn more about The Open Approach, visit www.theopenapproach.net, email Bob Cronin at bobrcronin@aol.com, or call (001) 630-323-9700.

This article was published in L&L issue 5, 2011