Two by Two

Dec 01, 2002 10:30 PM  By

One company designs and manufactures auto parts. Two more are in the book business. A third and a fourth sell off others’ excess inventory. What they have in common is the way they approach their business, and in this they may well be pioneers in what could be an entirely different way to approach distribution, fulfillment, and operations.

Traditionally, one company has always been the customer that hired the second company to do a specific job, be it warehouse services, filling orders, or delivery. This new arrangement, on the other hand, blurs the distinction between customer and service provider, creating a marriage between equals that deals with very specific, one-of-a-kind situations where little money may be exchanged.

“For so long, companies have focused on product excellence, on building the best widgets,” says Al Montgomery, vice president and global leader for logistics and fulfillment consulting at Cap Gemini Ernst & Young in Vienna, Va. “What they haven’t focused on until now is the excellence of the supply chain, how they get the widgets to market. And strategic partnerships are one way to do that.”

The concept is clearly different, say experts, from the other new trends — outsourcing, contract projects, and the like — that have created so much industry buzz over the past several years. That’s because the customers-as-equals relationship that is central to a strategic alliance is more complicated to put together than something like an outsourcing arrangement, and even more complicated to dissolve if it doesn’t work. This means that it’s not for everyone, and that anyone who wants to do it had better be aware of the pitfalls well in advance.

“What happens entirely too often is that two companies will enter into an arrangement with two completely different sets of goals,” says Deborah House, a Chicago consultant who runs The Adare Group. “Then, when it doesn’t work well, they not only can’t figure out why, but they spend a lot of time and money trying to get out of it.”

In other industries, strategic partnerships have thrived under a variety of names and in a variety of situations. Energy companies, for example, have customarily formed joint ventures to share risks and reduce costs when they’re drilling for oil or natural gas. Hollywood can’t make a movie these days without a series of joint ventures and partnerships — a major studio to distribute and secure financing, and a smaller studio to put the actors and director together to attract distribution and financing. And there are any number of research and development projects in which several firms put up cash and resources to create a whole that’s greater than its parts.

Marc Zasada, a senior consultant for Los Angeles’ PartnerStream, which works with high-tech firms to devise partnerships, identifies 11 kinds of partnerships, from outsourcing on the one hand to an outright merger on the other. Also in the mix: the Wal-Mart-like relationship, where hundreds of companies, some big and some small, work to standards imposed by the customer — a relationship that also sets many standards on their head.

“I think, when it comes to partnerships, that we’re seeing a return to an older business model,” says Zasada. “If you look at the 1980s or 1990s, there was a lack of loyalty and commitment regarding partners. Everyone would throw over their partner if they thought they could get a better deal from someone else. But today, there is more commitment in a partnership relationship.”

That sentiment is borne out by the results of the seventh annual third-party logistics survey, conducted by Cap Gemini Ernst &Young, Georgia Tech, and Ryder Systems. The researchers queried 260 companies in North America, Western Europe, and Asia. The results show that more companies are looking for a “partnering approach built around collaboration” and that these relationships are becoming more sophisticated than just outsourcing. Intriguingly, companies in Western Europe seem more likely to pursue these deals than North American companies.

The survey also found that nearly 60% of the respondents use alternative cost-sharing programs with logistics providers — one of the ways new-style strategic partnerships are unique. Giles Wright, the director of supply chain management for Cascade Engineering, a $215 million company that supplies plastic parts to the automotive, office furniture, and waste management industries, notes that his firm’s seven-year relationship with Dow Automotive probably wouldn’t fit under any of the old definitions. Cascade manufactures and designs according to specifications that Dow gets from General Motors, but Cascade’s partnership is with Dow, with which it splits revenue from GM. Says Wright: “This is a perfect example of why you don’t need to reinvent the wheel.”

The differences between strategic and traditional partnerships include:

  • An emphasis on the supply chain and fulfillment. Log on to Borders.com, and that’s what you get — a Web portal featuring the Borders brand. But the nuts and bolts for the site, such as fulfillment, privacy, and maintenance, are handled by Amazon.com. Borders gets an Internet presence without the aggravation, and Amazon gets to take advantage of its skills and excess capacity, as well as attract online customers without much effort or cost on its part.

  • An emphasis on producing revenue for both sides, rather than cutting costs for the firm doing the outsourcing (which is the opposite of outsourcing). Jeff Erhlich, who runs Fulfillment Plus, a regional fulfillment center on Long Island, says his clients want a traditional outsourcing firm, because they don’t want to spend the money to handle warehousing and fulfillment. Wright says that the Dow deal brings in revenue from GM that Cascade would probably not be able to get on its own.

  • An emphasis on finding new and better solutions. When Internet retailing seemed the way to go in the late 1990s, Petco, the national pet retailer, didn’t open its own Web site, as its competition did, but still wanted to keep its hand in. So the company formed a strategic partnership with an online pet retailer, providing supply chain services. When Web retailing collapsed, Petco was not only less exposed than the competition, but was able buy the e-retailer and keep its Internet presence.

  • An emphasis on reducing conflict between partners. This goal is not always achieved, but it is one that is key to a strategic partnership. In outsourcing, systems may vary and expectations may vary, and it doesn’t make all that much difference as long as the task is performed satisfactorily. In a strategic partnership, on the other hand, the reason for being is for each party to share expectations, systems, and the like. This gives each side an incentive to reduce conflict.

“A strategic partnership is both a huge challenge and a huge opportunity,” says Montgomery. “It requires lots of time and lots of resources to make it work, and that’s just one reason why a high degree of collaboration between the partners is required.” Which is why so many people refer to strategic partnerships as a wedding. The pitfalls and missteps that can wreck a deal are ironically similar to the same ones that can wreck a marriage. Experts note that the courtship is always more enjoyable than the partnership and that neither side expects problems to crop up that can wreck the deal later on.

“And just like a marriage,” says The Adare Group’s House, “it’s a whole lot easier to get married than it is to get divorced. Once partnerships are formed, it’s extremely difficult to get out of the partnership if it doesn’t work.”

Companies forming strategic partnerships must agree on a host of things, and then agree on ways to make the agreement work. One axiom: the more points of contact between companies, the more complicated the arrangement, and the more complicated the arrangement, the more possibility of conflict. In outsourcing, there are a couple of points of contact, and it’s relatively easy to fire a shipper or fulfillment house. In something like Borders-Amazon, just the opposite is true.

Says Zasada: “What we always tell companies that want to do partnerships is that they can work out very well, but that each side must be aware of the dangers. We also emphasize that a partnership is not an end to itself, but a means to an end. That’s something else not enough companies realize.”

Which means potential partners should set up strict performance standards, says House, with consequences for each company if they don’t live up to the standards (or if they exceed them, since that’s the goal of the partnership). First, understand the purpose of the partnership. Talk to analysts, and they’ll say this most obvious of questions can sometimes present the worst problems. “Where are each company’s allegiances?” asks House. “Is it with their company or with making the partnership work?”

Second, ask yourself: What’s in it for me? What’s in it for them? Make sure your needs are well defined, and that you understand your partner’s needs. Washington, DC-based Liquidity Services, which operates an online bulk liquidation auction, has signed what it describes as a strategic partnership with ReturnBuy, which sells excess inventory for its clients, much of it consumer electronics, through ReturnBuy.com to consumers. In this deal, Liquidity will sell ReturnBuy’s merchandise through its B2B system — giving Liquidity more merchandise to sell, while ReturnBuy, based in Ashburn, VA, gets customers it normally wouldn’t access through its consumer-oriented channel.

In addition, says Asad Haroon, Liquidity’s vice president for marketing and business development, the two companies plan a series of co-marketing and co-selling ventures. ReturnBuy will pay Liquidity a commission on sold merchandise, but that’s about the only typical part of the deal. “In this way,” says Haroon, “it’s a natural fit. And it’s much more elaborate and intricate than just a relationship between a buyer and a seller.”

Third, say consultants and those who have formed partnerships, each side should understand its specific responsibilities and duties vis-à-vis the other. If there is a problem about a delayed delivery, who is supposed to handle it? If there is an unhappy customer, who has the job of placating the customer and making it right? Division of responsibility means less work, but it also means problems can fall through the cracks. In addition, there are a host of concerns, from whether outsourcing would be a better solution to whether your company could manage the demands a partnership would entail to whether you want to give up the extent of control over your business — or even a part of it — that would be necessary to make the project work.

“I just can’t see where a smaller company like mine has the need for it,” says Erlich, whose arrangements with catalog, Internet, and infomercial clients are all very traditional. “It’s not so much that I don’t appreciate the concept, but I need to see the profit in it. Do we have the excess capacity to work like that? No. Plus, I need to use my space to generate a profit.”

Hence the deeper pockets and more sophisticated approach that are probably necessary. “It’s a challenge to find the right partner,” says Montgomery. “It’s not like outsourcing, where if it doesn’t make sense you can go find someone else. You have to make sure all of the different aspects are seamlessly tied in.”

Look out for myopia

Companies must also be aware of several other pitfalls common to strategic partnerships. A major one is deciding who owns any innovations that come out of the partnership, an intellectual property debate that can tear any marriage asunder. It’s amazing, say several consultants, how even the most carefully worded agreements can become meaningless when one party develops something that no one anticipated and that turns out to be very, very useful.

Another is part of the reason companies form partnerships. If, as Zasada says, one of the strengths of such a relationship is that it gives you partners you can depend on, that could turn into a weakness. “Through the 1990s,” he explains, “everyone talked about flexibility, that you had to be ready to change your course to take advantage of new business realities. Then, when the focus shifted to loyalty, companies lost that flexibility, and there is a danger of developing a kind of myopia. If you only move in the same circle all the time, how are you going to know what’s going on outside of it? This is especially true with emerging technologies.”

This means, as is so often the case, that someone always needs to be evaluating the situation. “The first thing companies need to understand about strategic partnerships,” says House, “is exactly what they’re getting into, the good and the bad. Until then, they’re talking in circles. If they know first, they can have a good outcome. Otherwise, it’s murky, and they’re going to get burned.”

Jeff Siegel is a Dallas-based freelance writer whose articles have appeared in Forbes, American Way, and a variety of other magazines.