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New Realities Of Alliance Partnering By Fred A. Kuglin December 2002 (Financial Executives International) The disclosures of corporate reporting and accounting scandals have spawned a frenzy to determine what companies had partnership relationships with the Enrons and WorldComs of the world. Now, more than ever, companies are being judged by the company they keep. With alliances a proven engine for growth, companies are being pressed to choose their partners well. In the parking area of a major airport, a sports car blocked the main entrance. On it, a sign, in bright bold letters, read: "Lemon of the Year, 2002." This owner had apparently taken his/her complaints into an open public forum.
This scene brings to mind two concepts. The first is one of "reach." If the owner went to the trouble of putting a sign on the car, there must have been other communications methods (Internet, email, verbal, etc.) that could have conveyed the complaints to a wider audience. The second concept is one of "partnerships." The automotive original equipment manufacturer (OEM) has an extensive network of suppliers and partners. The trouble with this one car was probably connected to a particular sub-system or system and involved a less-than responsive dealer service department. However, not only were the suppliers, partners and dealer of the problem area pulled into the situation, but by partnership association, the whole automotive OEM ecosystem was tarnished by this owner's actions.
Indeed, the global automotive OEM ecosystem can involve thousands of suppliers and service providers. As the system has evolved, some OEMs outsource whole parts of cars and entire assembly operations have been outsourced to third parties. The final product with "one face to the consumer" carries with it the reputation of all the companies involved. Thus, the success, failure and liability associated with the performance of the vehicle are all shared across the OEM ecosystem.
These integrally connected relationships make it more important than ever to diligently scrutinize every step in the alliance partnership chain. Major retail chains have been under scrutiny for years over their purchasing activities with Third World suppliers and the connectivity of these suppliers to child labor. The same holds true in the automotive industry. In one country a few years ago, the owner of a Tier-Three supplier was jailed for fraud and embezzlement. In the following days, the automotive OEMs and Tier-One and Two suppliers were all in the news connected with this owner. Yet, the only link that all of them had with the questionable owner was as suppliers of parts in the automotive supply chain.
In order to help mitigate the risk involving alliance partnerships, executives can do two things. The first is to understand the different categories of alliance partnerships and their connectivity to risk exposure. The second is to understand the fundamentals of successful alliance partnerships so that the proper disciplines can be implemented to make certain that the company avoids -- and stays out of -- trouble.
The Five Categories of Alliance Partnerships
As described in the OEM example, the ecosystem of a major corporation includes suppliers, service providers, customers, consumers, employees and overall stakeholders. Imbedded into this ecosystem is a network of alliance partnerships that provide the underpinning of major corporate operations. There are multiple versions or categories of alliance partnerships, each having its own unique characteristics and performance expectations. For simplicity, these multiple versions are bundled into five major categories.
Alliance Partner Fundamentals In each alliance partnership, expectations of performance and results dictate the behavior of both parties. These expectations are usually managed through a series of legal documents (see adjacent sidebar) that govern and protect both parties. It is the proper due diligence and execution of these documents that enable companies to avoid partnering with a questionable company or group of executives. While not the end results, these documents are intended to govern the behavior of both parties and protect each in case bad things (or unintended things) happen.
The Enron Factor
Much has already been written about Enron and the collapse of the non-regulated gas-trading platforms, especially EnronOnLine and DynergyDirect. Enron and Dynegy Inc. have both been investigated heavily for their involvement in gas-trading irregularities. However, these two trading platforms had ecosystems of their own. There were software companies, hardware companies, telecommunications companies, financial advisors, accountants, systems integrators and consultants - all of which had a part in building and/or operating these trading platforms. These companies have been and are being investigated for possible contributions to the fraud that triggered the collapse of the platforms. Most of these companies probably had legitimate, best-intention activities with these trading platforms -- although it appears that a few did not. However, the intensity of the ongoing investigation represents a drain on executive resources and a source of bad publicity for all involved.
If each company had defined the nature of its alliance partnerships and done its due diligence -- at the outset of forming the partnership -- perhaps association with these trading platforms would have been avoided. If the associations still went ahead, at least these companies would have had the necessary documents to detect, address and rapidly respond to the trading platform crises. It's evident that some companies responded well, while others did not. How would your company respond if a crisis hit one of your alliance partners tomorrow?
Responding to New Realities
Following the Enron scandal, the CFO of a Fortune 500 company had his organization thoroughly review its auditing and accounting policies and procedures. Yet, he expressed surprise when asked about his alliance partnerships and joint ventures; he had not considered such a review, explaining he only reviewed the company's joint ventures when his firm had operating control. Since then, this CFO has created a new position and hired a vice president of alliance partnerships, whose job description has two objectives: first, to formalize and centralize the process to develop alliance agreements and joint venture partnerships; and second, to perform the necessary due diligence to ensure adherence to high standards and values.
Following the WorldCom Inc. scandal, this CFO, again, had his organization thoroughly review its auditing and accounting policies and procedures. However, this time he also included alliance partnerships and joint ventures. The net result was a cancellation of one alliance agreement and a review of a joint venture where the company had a minority interest. "Right or wrong, we assume the same reputation and values base as our partners. We cannot afford adverse publicity because of improper behavior of our partners," he said. During the process, the new VP turned up accounting questions at one of the company's joint venture partners, which included questions surrounding off-shore registration and venture financing.
Know Who Your Alliance Partners Are
An old television commercial for child safety, broadcast just before the 11:00pm news, posed this question to parents: "It's 11:00 o'clock; do you know where your children are?" Given the recent scandals that have rocked major corporations and their entire ecosystems, combined with the hyper-sensitivity of Wall Street and security analysts, it is entirely appropriate to ask, "Do you know who your alliance partners are?" Even more appropriately, the question should be, "Have you developed the discipline to implement and execute the basic fundamentals of alliance partnerships so that your company can enjoy the benefits, while mitigating the risks associated with these partnerships?" Your stakeholders will surely want answers to these questions long before trouble erupts.
It is the fiduciary responsibility of financial executives to take the necessary steps to protect the shareholders' assets and avoid being the lead article in the evening news or The Wall Street Journal for the wrong reasons.
Understanding the different segments and executing the basic fundamentals of alliance partnerships are two things within each financial executive's control, and they can maximize the benefits and mitigate the risks.
What Type of Alliance Is Needed?
Critical Documents for Alliance Partnerships
These documents include but are not limited to: Memo or Letter of Intent (MOI/LOI). A non-binding agreement for companies to begin working together on a proposed alliance partnership. This document covers business and legal items ranging from joint development and intellectual property rights to marketing costs and the intent of the proposed partnership. Companies should place language in the MOI or LOI that refers to ethical and illegal behavior to set the stage for expectations in the follow-on documents.
Alliance or Partnership Agreement. A formal, legal document with multiple parts. In it, the responsibilities of both companies are spelled out in detail, along with representations, warranties, disclaimers and limits of liability. It also addresses the handling of intellectual property rights and confidential information.
Limits of Liability may be an area where the issue of partnership behavior is addressed. Some companies have changed the wording of their agreements to be more aggressive in seeking damage recovery when the other party commits acts of fraud or deception. Others have strengthened the wording in the area of disclaimers, warranties and representations to allow an immediate distancing of the two in case of bad behavior by the other party.
Subscribe to Financial Executive! The flagship publication of Financial Executives International (FEI), this premier magazine provides senior financial executives with financial, business and management news, trends and strategies to help them work better, faster and smarter. For more information about FEI, visit www.fei.org. Was this information helpful? Please rate this article in the box below or write to editor@smartpros.com
2002 Financial Executives International. Reprinted with permission.
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