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The hidden perils of partnering with large organisations

 
 
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By Stelios Kavadias, Margaret Thatcher Professor of Enterprise Studies in Innovation and Growth, Co-Director of Cambridge Judge Entrepreneurship Centre.

Key takeaways:

  • Partnering with other organisations is almost a necessity for new ventures that will take place sooner or later – most likely these other organisations will be larger
  • Partnering with larger organisations takes different forms; a new venture needs to strategically approach how to partner
  • Within each partnership, there are sources of friction, which need to be diagnosed and mitigated appropriately – these depend on the type of partnership

The word ‘ecosystem’ appears so very often in the business press these days. Especially when it relates to new ventures. The financial ecosystem and the fintechs, the life science ecosystem and the biotechs, and so forth. There is a reason for that: more and more companies small and large alike start realising the power of those ecosystems. The fact that certain things can happen more effectively when engaging within an ecosystem. Therefore these engagements are promoted as a must-do strategy.

But is this possibly only the rosy side of the reality out there? Ecosystems have always been in place. Eco from the Greek word “οίκος” (house) and system, essentially they describe the systems within which different types of entities, like small ventures, “live”. As expected, living in these ecosystems makes the interactions with other members of the ecosystem a natural necessity; especially when a company is a newfound small entity that tries to survive and grow. Research confirms that.

It repeatedly points out that successful entrepreneurs (and their ventures) are particularly effective at exploiting their ecosystems (see Kavadias et al. 2016). They are able to leverage their engagements with other companies to make up for the lack of resources necessary for a new venture to take off: capital (e.g. through VCs and other different financial institutions), specialised talent (e.g. through connections with universities), specialised services (e.g. through specialised providers like accounting firms, head-hunting firms etc.), but most importantly complementary strategic activities (e.g. marketing channels, or logistics providers, or contract manufacturers etc.) that will enable the venture to fulfil their USP. The message from this work is rather clear and it translates into an entrepreneurial strategy as follows: as an entrepreneur, you need to form and exploit partnerships. You can’t do otherwise…

Yet, what is often not spelt out is the challenge of engaging in such partnerships. Partnerships are not always the straightforward collaborations they are meant to be. They imply a certain notion of interaction, coordination, and exchange, which in turn implies a level of… “friction”. Interestingly, these frictions are not generic. They depend on the type of partnership undertaken. So, to understand the type of challenges that partnerships impose on new ventures we better start elsewhere; by understanding what type of partnerships large organisations and new ventures can form. Here is a categorisation based on various businesses I have worked with:

  • First, the simplest form of partnership can be the one whereby a new venture engages with a marketing/logistics/manufacturing platform to deliver their value to the end-user/customer. I call this the simplest form as it is pretty clear what the scope is of such an engagement (the partner offering the new venture access to some capability that the venture does not have the economic depth to build themselves, e.g. an efficient manufacturing plant). It is pretty straightforward that the outcome of these partnerships are measurable and relatively certain. Said differently, these partnerships exhibit what I call low coordination intensity, that is low complex and contact touchpoints between the engaging parties. As such, in these cases, it is important to spell the scope and output completely upfront, to set the rules clear, and contractually enforce that the parties stick to them. 

  • Second, a slightly more complex form are the partnerships whereby new ventures become contributors to broad open (re)search initiatives of larger corporations. Examples are the pharma companies that invite new biotech ventures to explore existing assets they had developed without obvious commercial targets, or larger banks that try to share large datasets with fintech companies in an effort to develop new methods for assessing risk, driving processes etc. At some level, these are masked corporate accelerators and incubators that offer opportunities for new business development to the new ventures. In these contexts, the coordination intensity remains low, but the scope of the partnership (and the outcome) is usually not well-defined upfront. As such they present opportunities but also traps for losing significant time and effort in unclear value endeavours.

  • Third, come partnerships that exhibit increased complexity, joint co-development projects. The IP or special talent of certain ventures makes them attractive partners for specialised projects. In that capacity, larger organisations engage with them in the fuzzier front end of developing specific new products, services or technologies. As one may guess the coordination intensity of these projects comes much higher than before. The different parties share personnel, co-locate assets and equipment, even though the outcome and scope might present enough specificity (and low uncertainty). As one expects, in these circumstances the big challenges revolve around the how of the partnership: who exactly works with whom; who makes what type of decisions etc.  

  • Finally, the fourth comes the epitome of challenging partnerships: the joint ventures. In those circumstances, both the coordination intensity as well as the outcome uncertainty become very high. The partners join forces to set up yet another entity, i.e. a new start-up. So one can imagine that the associated challenges are of the magnitude of setting up another new company… Does it ring a bell?

These four categories respond to two basic questions: how specific and certain is the outcome of the partnership? How significant is the amount of coordination required to make the partnership work? Those two strategic questions must come high in the agenda of any entrepreneur (or entrepreneurial leadership team for that matter) that seeks to consider entering in a partnership. Why? Because the answer to these questions will point to the challenges that will emerge within the context of the partnership.

Low outcome uncertainty and high scope specificity point to the need for clear formal metrics and monitoring mechanisms which ensure that deliverables are happening as per the aspired specifications. And obviously legal support is an important input to any such decision. Strategically, a critical question relates to whether such partnerships could erode any competitive advantage of the venture; could the contract manufacturer that a venture engages with to produce their offering bypass them and go straight to the customer? As the outcome uncertainty increases the challenge shifts away from measuring and monitoring efforts and outputs, and more towards aligning outcome expectations (are both partners expecting similar outcomes in similar timelines?) and deciding how to share the potential “pie” – the value appropriation challenge.

This latter part is a true Achillean heel for many attempted partnerships – especially the ones that are also characterised by higher coordination intensity, or in other words settings where both partners work closely side by side and it is not clear how to attribute the outcome to clear percentages of input efforts/resources. In those cases, one tends to see joint governance emerging as a solution: instead of trying to map exact input efforts into outputs, a new structure is formed and the entities can at best agree on a broad equity sharing agreement. 

Last but not least, in high coordination intensity partnerships that are also characterised by risky outcomes (or loosely specified scope) it becomes imperative to work explicitly on trust building during the partnership. The complexity of the work and the associated uncertainty make for an environment conducive to suspicion (are the “other” guys working with us or exploiting our capabilities?), which can eventually lead to failure.     

Does this change the positive message we outlined earlier about leveraging partnerships? Hopefully not! But it should insert a small asterisk above the word “leveraging”; it depends on what partnership we are seeking and how we go about it.  

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