Wednesday, October 17, 2007

How Do You Define Good Business Partners

Finding good business partners is critical to the success of growing businesses. Businesses, especially small businesses, can live or die based on the success of their partnerships.
Partnerships can help you take advantage of or create opportunities. Partners can typically share resources and knowledge and achieve objectives sooner than they could have otherwise on their own. A new partnership increases the size and scope of a business which can open up opportunities that the business was previously not open to participate in.
Although there are many advantages to partnerships we all need to be wary and choose partners carefully as you will be judged by the company you keep.

So how do we define a good partner?

Whether looking for a direct partnership with someone who will own shares in a business, or an indirect partnership with an independent product or service provider, partners can be found for any aspect of a business. These days it's possible to outsource all business functions to partners. Partnerships can be formed on loose verbal arrangements or formal agreements with penalties for failures.

My first career job, many (many) years ago, was actually my own business. In the first year of operations my partner and I decided to base our business on a single vendor's product. The product was innovative and promised ease of use for our customers and ease of support for us. We were fortunate not to sell a lot of those products in our first year as we spent our second year of business replacing that vendors product with another product at our own expense. This was the manufacturer's (Our partner) first offering using new technology that they obviously did not fully understand. This was a hard lesson to learn and it nearly killed our young business. We had other failures but they were on a much smaller scale as I adopted a policy of assessing and testing new products internally and with a few customers before I approved those products for sale. Over the years I researched and tested many products from the least expensive to the most expensive and tracked and assessed the long term support costs. If I attached the long term support cost to the initial product or service price it wasn't always the cheapest product or service that was the most profitable.
The right product or service could be the difference in your maintenance and support being an expense rather than revenue on your balance sheet. For example license or maintenance agreements are only profitable if fixes and maintenance aren't required. This is where many new and small businesses can get into a lot of trouble. After all, it's the after sale costs that will provide a clear understanding of real costs and only then can a pricing model be developed that guarantees profitability. If the product or service is sold too cheaply it will effect cash flow and the businesses viability going forward. And if there is a lot of unexpected after sale support then your customers aren't likely to recommend you to others. Therefore product/service cost is not a factor of reliability or profitability.

So based on my experience a great set of partnership rules would be:

  1. Consider more than one potential partner (investor/vendor/manufacturer/distributor)
  2. Research the partner's capabilities directly and by calling at least 3 references
  3. Quantify those capabilities by testing (pilot projects/beta testing)
  4. Calculate the real costs over time of using this partner
  5. Assess the partner's value not only monetarily but through customer feedback
  6. Keep you eyes out for better partners
  7. High cost does not always mean high quality. Low cost does not always mean value.
These rules only really scratch the surface though because if you aren't just piggy backing on your partner's product, service and brand then what are the differentiating factors in choosing the right partner(s) to do business with.
About 5 years into my first business we decided to partner with a company in a vertical industry. We felt that this would be a good strategic partnership because we could cross sell each others products and drive new business without hiring more sales staff. In a further effort to save costs we also decided to move into, and share, new office space with this company. It wasn't long before cracks started appearing in this relationship. We created a compensation model for this external partner to resell our products and services. The compensation model included a fee structure for them to refer a client to us as well as a commission structure if they sold the product or service directly acting as our agent. Because the direct sales commission model was more lucrative they opted to do this every time. This satisfied us as it would be less sales calls for us and more sales.
Unfortunately their sales staff would and did say anything to the customer to close a sale. A customer to them was someone to extract money from in any way possible. Particularly disturbing was how they preyed on those aged over 65. They had no concern for referrals or repeat business and it was our high rate of referrals that had precipitated our growth up until that point. When we showed up to deliver our product or service we would invariably have to talk the customer down and do a complete redesign on-site. There were also situations where we had to just walk away from the project because what they sold could not be delivered to the customers satisfaction. This always cost us hours or days of productivity and future referral business from these clients. In comparison we did not try to sell their products or services outright because we just weren't knowledgeable enough about them. Initially we referred our customers to them but after learning that our values were not shared we started referring our customers to one of their competitors who did share our values.

This brings us to the meat of great partnerships. Just like personal relationships, successful business relationships are based on what the partners share in common. They may share common goals, values, objectives, visions, standards, interests and the more of these things they share the stronger the bond.
My first business was a 2 person partnership that was very successful in that we seemed to compliment each other as our areas of interest were in different areas of the business. My partner took on the hats of sales and finance and I took on the rest of the operational roles. Having more than one internal partner take on the same role or accountability is one of the top reasons for acrimony and failure of businesses that are formed by partnership. One person is not going to execute as well in the same role and at the end of the day it's almost impossible to determine WHO is really accountable or responsible for failure or success.
Our values and standards were different but we were open about and understood the differences and we shared a common goal. We both wanted to create something on our own terms and do it better than everyone else. The two of us together created a dynamic that was much larger than each of the individuals. We brought different perspectives to every issue which was a natural antidote to group think. I pushed for rapid expansion and my partner pushed for limited risk.

Vision is very important because you need to know how your partner envisions their business going forward. The partner may want to maintain the same size and scope or may envision something much bigger for the future. An important part of their vision will be their exit strategy. Will they still be around in five years or will they exit when a financial or personal milestone is met. You need to know if your relationship is just a stop gap or something that is strategic to their organization long term. They could be considering a shift to a new business model, a move to a another partner, a different product or service or they may even be planning on doing what you do themselves.
Vision is one of the most critical aspects of a partnership and it is a discussion that you should have with your partners at least annually so that you are not surprised by, and can prepare for, change. If your partner doesn't know where you are going then they won't be able to help you get there. The end to my first business came when our vision for the business diverged.

Once the vision thing is out of the way you can get to the heart of your relationship which will be the Objectives.
The objectives, or goals, of each partner will be what is used to create the basis for the relationship for it is the shared interests that will determine the near term success of the partnership. Knowing what each partner wants will not only help align and justify the partnership but will also help facilitate efficient communication. If your partner doesn't know what you want they won't be able to help you achieve it. Without understanding objectives or aligning objectives it will be difficult to really quantify the success of the partnership. If your partner does not deliver on time or does not deliver new business or makes you unproductive they would not likely be meeting your objectives and the partnership would be a failure. The objective(s) should be used to determine the value of the relationship and the most important thing to remember when setting objectives is to make sure the objectives are quantifiable. This means that there should be numbers attached to the objective(s) so that you can keep score. For example you may have partners that resell your product or service and you may decide to sign up as many of these types of partners as you can. This is a great way to build a sales force but what is the real cost to support all of these resellers and are all of the partnerships returning enough new business to meet your objectives. Setting objectives like the number and value of sales will help you quantify your partnership(s). An example would be to pay commission on a sliding scale rising with the number of sales or with the total amount of sales over a specific period of time. Also don't forget that when rating your partners always, always, always include the customer experience or customer feedback in your rating.
When setting financial and functional objectives make sure that your partner is investing human and financial resources to ensure the success of your partnership. If you are purchasing product or services you will need to know that your partner is making a special effort to address your current needs and is preparing for changes in the market so future offerings will be as compelling as current offerings. A lot of time signing on a partner is the beginning and the end of the relationship because neither or one of the partners is not upheld to a set of functional and financial objectives.

And finally we come to the one area that will create most of the conflicts and place most of the stress on any kind of partnership, Values and Standards.
It seems obvious that shared values and standards would be the cornerstone of any partnership but it is the area most ignored by people entertaining and entering into partnerships. I think that most of the time we are so blinded by the short term opportunity that we forget about the risks. Probably the biggest risk is not getting paid or paying for something that isn't delivered but it could be even worse if the product or service is of poor quality and places you at the wrong end of a multi-million dollar lawsuit. You will want your partner to be open and honest and uphold the highest standard or a least agree to uphold your values and standards prior to you entering into a partnership agreement.

Look for clues in how the potential partner speaks. If the potential partner only talks about sales and profit you should expect that money is their prime motivation. If money is the sole motivation then customers are only a means to an end and that primary motivation will also be the basis of your relationship with that partner. In this type of partnership one of the partners may eventually be looking to cut the other out to ensure more money for themselves. Another speech pattern to be wary of is talk of working around regulations or agreements as if the source of all of problems were external forces weighing in against them. Well, guess what, you may just become another external force to this partner and it won't be long before they are complaining about you, demonizing you, and then justifying working around you. Another form of speech pattern to be wary of is the "no money" mantra. These people will continually respond that they don't have the money even as they shake your hand at the end of a meeting and step into their brand new $50+ thousand dollar vehicle. Your partners should be investing their time and their money to ensure the success of the partnership.
Weave behavioral types of questions (How do you, When do you, Why do you) into your initial conversations with potential new partners. Find out how they create, deliver and support their product or service and how they overcome failures or reward successes each step of the way. Discover what their primary focus or motivation is whether themselves, customers, employees the community and what mix of any or all. It's easier to communicate with people and organizations that behave in a similar fashion as you or your organization. Knowing they will respond to success and crises the same way you or your organization does is very reassuring especially when your customer relationship is at stake.

Which brings us to the final act. Get it in writing. The purpose of the written agreement is not so you can sue your partner over perceived failures but to document the terms and quantifiable objectives. You may have conversations with your partner over time and you don't want to rely on verbal communication when it comes to responsibilities and accountability.
It's also a good idea to create a Service Level Agreement. SLA's commonly include segments to address definition of services, performance measurement, problem management, customer duties, warranties, disaster recovery and termination. It's important to note that agreements can be simple letters of intent. If you plan on taking your partners to court for failures then you should consult a lawyer. Most people will just find a new partner if the current one is failing so creating a detailed legal agreement is not necessary and legal agreements can be expensive to create and time consuming to administer.

These rules should also be added to the list:
  1. Discuss Vision - how big, where and for how long
  2. Define Objectives - What will be achieved financially and operationally short and long term
  3. Define Values & Standards - How we treat customers, employees, the community
  4. Ensure partners invest human and financial resources to ensure success
  5. Define and divide up roles and assign accountability
  6. Formalize your agreement in writing
Partnerships are a great way to stimulate growth and improve efficiencies. Great partnerships create a dynamic that is far greater than all the individuals involved.

Dave Soteros is President of Alrym Consulting. He believes that great companies have great partnerships and return value to not only customers but to the greater community.

Tuesday, October 9, 2007

The Art of the Start

If you are still in start-up mode or a young company or even just considering starting your own business then I recommend you view this video featuring venture capitalist Guy Kawasaki here.