By: Seth Weiss
Recognizing that every collaborative endeavor is unique and should be evaluated on its own merits, companies must do their homework before starting to work together. Successful innovation collaborations start with a clear understanding of how each company wants to benefit from the partnership, and how they will work toward a win-win outcome. This article highlights matters to be considered and memorialized in this formative stage of a partnership.
What the parties bring to an alliance
Parties engaging in open innovation are attracted to working with other companies because of what they may gain through the affiliation. Here, size does matter, and certain generalizations of contributions are reasonable.
What SMEs typically bring to collaborative relationships:
- Innovative culture
- Entrepreneurial spirit
- Less formality
- Risk takers
- Speed and agility
- Quick decision making
- Disruptive technology
What large companies typically bring to collaborative relationships:
- Investment money and resources
- Channel to marketplace and sales
- Supply chain
- Scale up equipment and engineering capability
- Scale up manufacturing and operation capability
- Management and organization skills
- Regulatory and permitting knowledge
Symmetrical collaborators – SMEs working together
While SMEs can differ greatly in size, capabilities and competencies, they usually share more similarities with other SMEs than what they share with large companies. In this sense, they can be considered symmetrical collaborators.
These relationships are characterized by a high degree of mutual reliance and trust. Often each party “needs” the other to optimize the ability to create and capture value. Written agreements are very important, but the personal relationship between the parties is paramount.
Asymmetrical collaborators – SMEs working with large companies
Large companies recurrently rely on intellectual property developed by SMEs. The intellectual property can take on many different forms; for example, it can be a commercial product (or component thereof), a service, a unique manufacturing methodology, or piece of equipment.
An SME’s main bargaining chip is its intellectual property.
Regardless, the relationship between an SME and a large company is not one of equals. SMEs are frequently in a position of placing much greater reliance on the association, thus giving the large companies significant leverage, because they are better capitalized, more diverse, and usually has the marketing and distribution network needed for commercialization.
In this situation, an SME’s main bargaining chip is its intellectual property (e.g. unique technology, capability, or know-how). To be effective, this form of collaborative relationship requires a clear and comprehensive agreement. Personal relationships are important, but they do not rule the collaboration.
What to discuss and determine early – term sheets as “pre-nuptial agreements”
Successful partnerships are premised upon the parties being aligned in all aspects of their relationship. As such, the parties should agree on the following issues before commencing their cooperative work:
- Parties to the collaboration – Who will participate in the collaboration? This is especially important if more than two participants are involved.
- Purpose of the collaboration – The parties must be innovating toward a clearly defined goal. A lack of specificity here can undermine the endeavor.
- Conduct of the program scope – What is each party expected to deliver in the pursuit of the project objective?
- Schedule or milestones – When do the parties expect or need to achieve the project objective?
- Intellectual property ownership and IP rights – Who owns and has rights to use IP developed as part of the project?
- Fees — How is money earned and shared by the partners?
- Term and termination — What if things don’t go well and the partners need to split up? What will a separation look like?
Key considerations to negotiating a path to success
Successful collaborations begin well before actual project work starts and even before a term sheet is finalized. Achievement is an outgrowth of thorough discussions and planning. Integrating the following considerations into those processes improves the likelihood of a positive outcome.
Understand that no two deals are the same.
- Each deal had its own nuances
- Each negotiator has his own style
- Be patient
- Be a good listener
- Try to understand what the other side really wants to gain in the alliance
Do your homework.
- The other organization – What do the do? What do they add? How do they work? Have they had other successful partnerships?
- Your counterpart — Does she have decision-making power? Where does she sit in the organization? What are her accountabilities?
- Know your “envelop” — What are your target deal terms? What’s your bottom line?
Define a clear strategy and ensure alignment.
- Know what you bring to the affiliation
- Know what your partner brings to the affiliation
- Alignment in strategies — Are we going in the same direction? Do we have the same goals? Do we have the same strategy to get there?
- Division of responsibilities — Who does what? In what timeframe?
Understand the value of the opportunity — How much is the deal worth?
- Ensure the 1+1 is greater than 2. The collaboration must create value that can be shared.
- Deal has big enough value for both parties
- Use external valuation
- Are there a future add-ons such as new markets
Put people in the right roles.
- Strong personal relationships across companies boundaries are important
- Multi-functional teams are advantageous
- Blend knowledge and experience with youth and passion
Seek to build long term relationships, not a one time fling.
- Establish trust and respect and expect the same in return
- Offer and expect clear communication
- Establish good governance
- Ensure fairness and balance in the relationship — Do the responsibility and sharing percentages make sense? How are risks shared?
Don’t get too greedy.
- “Win-lose”arrangements lead to “lose-lose” ventures
- Would you sign if you were on the other side — How fair are you being?
Don’t be too eager.
- Learn who has the time pressure
- Do not show you are anxious
- Don’t disclose your desired schedule to reach an agreement
- Anxiousness translates to giving in early
Measure what you want to achieve.
- Keep metrics simple
- Keep an eye on value extraction…this is what matters…find a metric that measures this
- Metrics lead to incentives
- Incentive drive behaviors
Demonstrate patience…it is rewarded.
- Understand BATNA (best alternative to a negotiated agreement)
- Know when to walk — Better to walk away then sign a bad deal.
Warning signs – things to watch out for when forming a strategic partnership
- Poorly aligned business models, business strategies or vision
- Position in value chain – Is your partner positioned to help?
- Competitive products – Do you and your partner have conflicts?
- Cultural differences that could undermine the achieving the project objective
- Risks to working with a particular partner
- Pace of decision making…SMEs can be fast, large companies can take a long time
- Stage of development — Do both parties understand the current status of the product or service?
- Intellectual property rights cannot be agreed upon
- Valuations – SMEs may over-value ideas whereas large companies may undervalue the same idea.
- Communication – Is it frequent and fluid or irregular and stilted?
- Trust – do you feel it, do you offer it?
Collaborative partnerships afford SMEs many new business opportunities, but these relationships can only succeed and flourish if carefully formed and properly managed.
Finding the right partner may seem like a daunting task, but a company with a clear understanding of its core competencies is well positioned to discover a complementary ally. Understanding the company’s needs helps to define what the SME requires in a partner, which in turn limits the pool of potential partners. Ensuring that a potential partner is competent requires an SME to do its homework before it starts collaborating.
Successful partnerships start with a clearly articulated understanding of how each company wants to benefit from the collaboration. Sometimes desired benefits are readily apparent and sometimes they are not. Ensuring alignment regarding matters such as motivations, contributions, compensation, and management are crucial to eventual and continuing success. Accordingly, negotiations are not merely about getting the most money for your company, it’s about establishing a relationship that works well for all involved parties.
By Seth Weiss
About the author
Seth Weiss educates, writes and speaks about innovation, collaboration and intellectual property. As an attorney and skilled practitioner of Open Innovation, Seth has extensive experience operating and consulting for SMEs. Understanding the unique and varied characteristics of SMEs, he designs pragmatic programs and strategies for effective open innovation implementation.