Most collaborative structures fail, sometimes after initial success is unable to be repeated or scaled, even in the face of a compelling logic.
Over the years I have put together a number of alliances, in several industries, with vastly different objectives, from buying simple manufacturing inputs together, to jointly entering export markets with high barriers.
While the nature of them is different, there are four challenges that simply must be addressed before the collaboration has any hope of survival let alone success. These four common characteristics of all of them need to be acknowledged and managed.
Profit potential.
The collaboration must be seen by both parties, sometimes all parties where there is more than two (as is often the case in agricultural alliances) as being worth the effort. The potential value must be positive for both the alliances and every individual member of the alliance. This is always a fragile calculation, and the tragedy of the commons always comes into play.
In areas where there is no profit motive, such as between government departments, finding a unifying motive is even harder, and usually in my experience succumbs to politics and ego even faster than in the private sector.
Complementary skills.
The chances of success are enhanced when the strengths of the parties are complementary, the strengths of one serves to fill in the weaknesses of the other. There is always overlap, sometimes considerable. At each point of overlap the parties should be asking themselves if that particular area is of significant strategic importance to them, is it a key part of their value proposition and differentiation. Where it is, and there is overlap, trouble follows.
Common view of the outcome.
Differing expectations of the outcome results in stresses that kill off any collaboration. In the absence of a very clear and common view of the outcome of a collaboration, both for the collaborating group and its individual members, it will fail. This is a challenging proposition, as all sorts of human characteristics and frailties become enmeshed in the manner in which they all behave. This common view of the value and outcome of the collaboration must be clear at all levels in all the collaborating enterprises, and the resources of all focussed at least to some extent on making the collaboration work.
Governance of the collaboration.
Managing an enterprise where there is the opportunity to exercise institutional power is hard enough, it is geometrically harder when the institutional power is absent, or significantly diminished as it usually is in a collaboration.
Collaborations vary as noted from one-off transactions to financially, operationally and strategically merged entities, with most residing somewhere between these extremes. There must be governance rules that define the appropriate behaviour of the parties to the agreement in all sorts of situations that can be envisaged, as well as those that cannot. These rules must go beyond the scope of applicable regulations, as we are dealing with people. The role of Directors and senior management is to enhance the value of an enterprise, and given there is mountains of data demonstrating that collaborations, particularly at the M&A end of the continuum destroys value, the governance of any form of alliance is critical to its commercial success and longevity.
Normally there are common concerns that can be agreed up front, but there also needs to be agreement on how to manage those situations that are not specifically a part of the initial agreement, but that pop up in the course of operations.
It is always best to hammer those out and put them in writing, irrespective of the goodwill that may exist at the outset, as both people and circumstances change. Tiny molehills that emerge tend to rapidly become mountains unless addressed in a consistent manner, early.
There is considerable benefit in working on a ‘code of conduct’ at the formation stage. This can be an agreement over coffee of two sole trader entrepreneurs to a several day workshop of the parties to hammer out the agreements against a pro forma that covers the areas necessary for success.
Such a pro-forma must cover a range of areas, the most important being:
- Expressions of the specific outcomes each party expects.
- Definition of what is in, and what is out of the collaboration.
- Definition of the roles and responsibilities of each of the parties.
- Creation of joint decision making processes, and the means by which they will be communicated, evolved and managed.
- The investment requirements of the parties, including non-financial investments, the area where the most challenging disputes can emerge, and how these differing investments will be valued over time.
- What happens to the assets of the collaboration in the event of a dissolution of the collaboration.
- A specific list of governance rules and the investments required to maintain them.
- Specifically set out to build and maintain trust, without which all the foregoing is a waste of time, and trust is always a function of behaviour, it has to be earned, rarely is it just given..
A final point upon which all collaborations hang, and have always hung since the beginning of people living together in some sort of interdependent manner. A collaboration, or co-operation can only succeed over time when all parties to the agreement see that their best interests are best served by serving the best interests of the group before their own.
Cartoon credit: Scott Adams creating Dilbert, and his wry commentary
