Team Players

In business as in sports, sometimes the right chemistry makes all the difference. On the surface, there may be logical and compelling reasons why two companies should strike a strategic alliance. But if the principals can't work well together, both companies can lose.

Sportvision, an interactive sports marketing and technology company in Chicago with 50 employees, has figured that out. In 2002, it entered a strategic alliance with Dartfish, a sports broadcast enhancement company. Sportvision had developed a technology that allows broadcasters to insert images such as a virtual first-down line in football or a virtual strike zone in baseball. Dartfish had developed a technology that allows broadcasters to produce a composite display showing two athletes competing at different times over the same terrain, making it appear as if they were competing against each other. The two businesses' products complemented each other without directly competing, making Sportvision and Dartfish well-suited alliance partners.

Sportvision already had relationships with every TV network, yet could benefit from Dartfish's technology. And Dartfish wanted Sportvision's access to the TV networks to reach the athletic coaching markets, says Jeff Jonas, Sportvision's executive vice president for business development. "They needed to beef up their operations and sales and marketing, and we already had that in place. Partnering just made sense."

In this era of rapid technology development and globalization, there are more opportunities than ever for small businesses to tap previously unavailable markets. But small businesses often lack the bandwidth and staff to perform all the functions needed to reach these broader markets. Because of this, they are banding together and forging strategic alliances, relationships with other companies that have complementary or compatible business interests and goals.

According to a study conducted last year by the National Federation of Independent Businesses (NFIB), strategic alliances in the United States have increased almost tenfold during the past 20 years. The study surveyed 761 small companies with fewer than 250 employees, including 610 manufacturers and 151 general small businesses. It found that about 64 percent have been or currently are in some type of alliance. Among the manufacturers, the most common type of alliance was to increase production. Among the small businesses, it was long-term licensing agreements.

Among large companies, alliances are notoriously tricky. In fact, 65 to 70 percent of alliances fail, according to Vantage Partners, a consulting firm that advises companies on such relationships. But the NFIB study indicates that small companies tend to do a better job at partnership. More than 84 percent of the manufacturers and 76 percent of the small businesses rated their oldest continuing alliance as good or very good. Only 3 to 4 percent reported having bad experiences. They also reported that the alliances produced good financial returns and improved their ability to compete.

There are several keys to making these relationships work. Experts, such as Jonas of Sportsvision, say that partners need to know each other well enough to have developed trust, understand what each party wants out of the relationship, clearly delineate goals, define what constitutes success and work diligently to maintain communication at all times.

Scouting Report

Companies that are looking for partners might try their local chamber of commerce, says Nancy Eisenbrandt, senior vice president of business services with the Nashville Area Chamber of Commerce. Joining the chamber is a good way to hook up with other businesses in the area, and meeting other businesses just might lead to new ideas for partnerships, she notes. "People do business with people who they know," Eisenbrandt points out. "You don't necessarily know where connections are going to lead."

Indeed, the NFIB study indicates that alliances tend to be formed with partners who are drawn from either prior social or business relationships. More than 40 percent of the small-business owners reported a social relationship existing prior to forming the alliance. More than 50 percent of the small-business owners had known their alliance partner for more than five years; almost 8 percent had known them for more than 20 years.

These longstanding relationships may be one reason why small business alliances tend to have such a good record—there is a deeper level of personal knowledge and trust. Experts advise that partners have a solid understanding of each other's goals and practices before entering into an alliance. If not, there are likely to be a few nasty surprises that are unpleasant at best and financially disastrous at worst.

With common goals and motivations clearly outlined from the start, alliances are more likely to yield increased productivity and a better bottom line, according to Larraine Segil, a consultant with Vantage Partners and author of several books on alliances. Segil suggests assessing how compatible the company cultures are, whether they operate using the same value systems and whether they have the same priorities.

"Understanding someone's interests isn't just asking what they want, but understanding why they want that," Segil says. "Make sure you understand their dreams and fears rather than just trying to make them happy." Each partner may have a different definition for success, and it may not be spelled out in detail in the contract. The definitions don't have to be the same, but they do have to be compatible, she notes.

One of the most important reasons their partnership has worked is that Dartfish and Sportvision executives work so well together, says Mike Jakob, Sportvision's chief operating officer and CFO. "We've tried to do other partnerships, but they didn't work because the people got in the way."

MLR Design, a brand design firm in Chicago, makes understanding its partners a priority, says Shel Rysner, vice chairman. The firm has 27 employees and a client list that includes the berry-flavored soda Pepsi Blue and the CVS Corporation, among others. In MLR's business, its clients are more than just customers.

"I don't want a vendor relationship," says Rysner, whose responsibilities include managing client relationships. "I want a client in a partnership in which I can speak my mind, in which I can take risks, in which we can challenge each other. That sort of direct communication allows us to honestly assess how it's going and then make improvements." Such a relationship benefits not only MLR but also, and perhaps more importantly, the client. "It assures that the client not only gets what he wants, but it also helps him to discover what he needs," says Rysner. In his business, he not only has to understand his client but also must understand the consumer to which his client is marketing.

MLR also strikes alliances with other companies when a client needs something beyond MLR's expertise. These include firms with expertise in engineering, product development or "ideation"—specialized group thinking to help solve a strategic problem.

"These are done through reputation and referral," Rysner explains. "I'm very ­reticent to bring someone in without a good knowledge base of their operation. In one instance I actually worked in their company for a week to better understand what they are."

In that situation, MLR designed the packaging while the partner designed the product. It was a large, complex assignment.

"There is risk when you bring another firm to a client," says Rysner. "You need to make sure there's harmony of communication rather than a cacophony of communication."

Maintaining Communication

Once an alliance is formed, keeping open the channels of communication is critical to success.

"The difficult part of making an alliance work is the execution," says Mark Weaver, chair of Entrepreneurial Studies at Rowan University and co-author of the NFIB study. "We can agree on alliances much more easily than we can agree on how to execute them. If you're manufacturing something, one party may want to build slower and the other party wants to build faster. The key is reaching a place where both parties are served."

Personal compatibility becomes more important the longer an alliance exists, says Sportvision's Jakob. "It's important to document how to handle problems early on, so when uncertainty and surprises arise, you already have key points of contact in place and a way to resolve the conflict," he says.

Jakob recommends naming two point people with a strong personality match on either side of the partnership. "When problems inevitably occur, you then have a direct conduit at the other organization who will push past personality issues."

Adds Vantage Partners' Selig: "One of the issues people don't talk about is, 'What happens when we have a disagreement?' People can talk about arbitration and litigation and mediation, but what happens when we have a disagreement but we want to stay in the relationship?"

Exit Strategies

Rysner likens a strategic alliance to a marriage, where having the tools to work through obstacles—especially the ability to listen—increases the chance of success. But if there are "irreconcilable differences," partners should not wait too long to make a clean break.

Rosie Herman, CEO of Mykytyn Enterprises, learned that lesson the hard way.

When demand for her product, the One Minute Manicure, skyrocketed and she found herself with a $1 million order, Herman partnered with a nearby manufacturer. But the two companies' value systems proved incompatible. The manufacturer's priority was to make a product quickly and efficiently at a low cost, whereas Herman's goals were to make a quality product out of all-natural ingredients.

"The day I had to destroy an entire flatbed of product was the day I brought production back in-house," Herman explains.

Since then, Herman has had better luck forging partnerships with distribution partners as her company expands into Europe and Asia. "But I've learned to ask a lot of questions," she says.