Northeast, you say?

In my opinion, the Lax-Sebenius book 3D Negotiation offers the most innovative perspective on negotiation strategy and tactics. One of the important concepts maps to 3D Business Development (3DBD): moving "Northeast" in negotiating share of value formed by an alliance. I call it creating a joint value proposition.

Chapter eight highlights the importance of realizing that negotiations are not just about claiming value already on the table, but about unlocking value created by the alliance itself and sharing that between the parties as well.

I have spent a good part of my career developing joint value propositions around each alliance. It is surely easy to see that negotiating a royalty between 0 and 100% of your own product revenue is a much tougher task than negotiating a share of the total value formed by the alliance, including what you bring, what your partner brings and the value you create by working together.

Whether that is a channel, a new approach to a problem, a market opportunity, reduced waste, a new product or global reach, the result is the same - the combined value makes everyone far better off than they would have been if they'd focused solely on claiming the value already present. So, dividing up that value becomes easier as well.

So, how does that work in our world of Business Development? Some examples might help trigger the imagination:

• The combination of your product with that of your partner forms a strategic edge over all competitors - a whole product - that increases the forecast for both products substantially.
• A licensing alliance that drives volume for your hardware product, resulting in a reduction in per-unit COGS for all sales, increasing margins for your entire business unit.
• As part of a deal, your partner's service personnel call on customers and can provide on site services for you while they are on site, reducing overhead and increasing value with almost no increase in cost.

Of course, each is specific to the negotiation at hand. But, it is easy to see how negotiating shares of a pie that is, say, 50% larger than the basic value on the table is much easier to do.

So, next time you negotiate a product or service licensing alliance, take time to consider both the value you bring to the table and the value created by the alliance and the work you'll be doing together, and make sure you highlight both to your partner.

Life will be much easier, and everyone will be happier if you can use your skills as a Business Development executive to help create value for both companies. A true win-win.

A bientôt.

Michael

PS Thanks to my friends at Lax-Sebenius for their insights

Of Kings and Queens?

I am just back from visiting the old country, including seeing a real live Lord and a few dead kings and queens in churches, hence the delay in my blog schedule - and hence the blog title!

Well, this is not exactly about kings and queens. But, I did want to talk about Royalty - those large, pesky charges that can take months to negotiate, make accountants and operations cringe, yet oil the machine that drives strategic distribution deals including OEM, Strategic Reselling, and so forth.

I have had several questions recently about royalties. and what they should be for a particular situation. Rather than prescribe what a royalty should be, I want to highlight some areas that affect Royalty percentage - the knobs to turn, so to speak.





This chart provides a helpful framework. To explore this, first let's establish terminology: Royalty is what is paid by your distribution partner to you for the right to distribute that product to their customers. And, "Discount = 1 - Royalty"; the inverse. So, if you prefer to think in terms of the discount you give to a partner, you'll need to invert the following discussion. Note that I have carved out the royalty on maintenance or services from the product revenue stream. That is crucial, as the work share is entirely different for each revenue stream.

Margin is paid for effort from the selling partner: Including sales, marketing, G&A, inventory carrying, manufacturing, support - etc. All the things it takes to create and sell a product except, usually, the act of creating the Intellectual Property itself. The amount of royalty is typically inversely proportional to the amount of effort your partner does in helping you deliver the product to revenue-generating customers. The more work they do, the greater commitment they make, the lower the Royalty paid to you. Simple, right? Well, not really.

Here are just a few of the things that make negotiating Royalties so hard:

1. Companies have financial goals. If you place a product in their sales channel, it is subject to the same internal "taxes", SG&A costs, etc, as for their own products. And, SG&A alone can be 50-60% of revenue, so that half of your product margin gone!
2. Commitment. The greater the commitment from your selling partner, the lower the royalty you should expect from them. That works both ways, as you can sometimes negotiate higher commitments from your partner in exchange for a reduced royalty to you. Commitments can come many forms: taking on product manufacturing, making up front financial or volume commitments, assistance from you in selling the product, etc. A double-edged sword, so use it wisely.
3. Channel differentiation. If your selling partner is going to be selling the same thing as you currently sell, how do you differentiate the products so that the result is incremental business to you? Do you even care if the volume is large enough? So, differentiation or "value-added" arrangements can drive down Royalties as they drive up channel differentiation. Again, a double-edged sword as they can be used to arrive at the selling partner's desire royalty by increasing differentiation in the market.
4. Time. Royalties can vary over time. The best example for this is what I call the ramp-up period. For the first 6-12 months, a selling partner will often need lots of help from you to build market presence, expertise, close business and excite their sales team. That costs you something. At a minimum, you might pay sales people so they cooperate and not compete with your new partner. Use a discussion in this area to highlight the value of "effort" and negotiate an increase in your share of the deal.
5. Joint value proposition. Lastly, and most importantly, remember that you are not just negotiating the share of YOUR revenue - you are sharing in the income from the joint value proposition you've created with your potential partner in the deal. So, make sure the partner takes stock of their own upside - that is most likely why they are doing the deal with you, to be sure, regardless of what they actually tell you! Use it in negotiating Royalty.

Another area of complexity is the meaning of "list price" in your own selling model. If you are selling enterprise software with a typical 50-70% discount to customers, you must base the royalty equation on a model reflecting those discounts, or on a Net to Customer rather than List Price basis, if feasible. Can be quite complex, but can kill a deal if not well understood.

So, have fun in the Royal court, and let me know if you have any scenarios or stories to share on the subject.

Until next time,

Michael

Nothing can go wrong, go wrong, go wrong ...

I am not sure who coined the phrase in today's title, but all of us in high tech can relate to it!

Unlike buying and selling real estate or even a car, forming a strategic alliance doesn't end with the signing and announcement of the contract. That's why an alarmingly high percentage of alliances "fail" over time - alliances are more like marriages: they require attention and an evolutionary approach in order to remain relevant, vital and important to both parties. Expectations, business imperatives, and people all change over time and so must the alliance.

So, how does a company improve its chances of being on the successful side of the ledger? While the real answer will depend on the parties and details involved in a specific alliance, following a few careful steps can make the difference.

1. Consider what "success" and "failure" mean - both to you and to your partner. Often, an alliance will seem to be running well for one party, and horrible to the other. Take steps to understand the changing metrics that your business and your partner's business use to measure success, and adjust accordingly.
2. While "Win Win" is a rather hackneyed term, targeting to follow the curve of success for both parties will increase the odds both parties are in for the long haul
3. Maintain executive contact - particularly through organization changes and periods of stress. Just like a marriage :-) Required Quarterly business reviews with sponsoring Executives is essential. Make sure they happen!
4. Don't be afraid to change the fundamental basis of the alliance if you see things going horribly awry. Consider alternative ways to work together, generate incremental revenue or improved market position for your company - think out of the box. For example, if you have a product licensing arrangement and your partner isn't happy with the selling relationship or profit margin, propose a well-considered alternative to increase margins and self-sufficiency. Remove the pain.

Successful alliances take work - not just at the start when the lights are on, and the stage is filled with music, but during the darkest hours when tempers are frayed and there's grumbling in the wings.

Does anyone have a story of an alliance saved from the dead by a well-considered change of course? Please tell!

A bientot

Michael

While using a chainsaw...?

There is nothing like 2 3-hour sessions using a chainsaw to cut a pile of wood in the Texas summer to focus your mind on something - something other than cutting hard, aged oak!



I have spent a great deal of time over the past 3-4 years with my friend and colleague, John Soper of New Paradigms Marketing Group, talking through the various phases of the Alliance Spectrum and when and how various transitions occur (or can be made to occur) during the discovery, formation, management and endgame (or rebirth) of each alliance. One of the most important transitions to understand or control is when negotiations begin and end, understanding how to determine those points, and what to do to optimize your desired outcome.



Some would say negotiations start explicitly when one party presents business terms, starts drafting a contract, or sends one of those "we never change it" standard form agreements to the other party. At least then, I say. In fact, in my view (and I think John shares this view), a good approximation for determining the starting point of negotiations is to find the date when the two companies first sat down together to identify a joint value proposition for the relationship. At that point, with quick minds at the table and a solid understanding of the technologies and business parameters involved, each side has the opportunity to start the negotiations and gain advantage. Identifying ways that fit your company's strategy where capabilities might fit into your partner's strategy, laying out key facts, market realities, technical or market capabilities that set the direction for the alliance from the start. And, most importantly, doing so while establishing the new value created for the other party. As I said, quick minds are needed as one usually doesn't enter the meeting with enough information to predetermine those points. You may not even enter the meeting realizing that you are about to start negotiations.



Missing the opportunity is not deadly. But, for a small company the ability to direct the joint value position in the most positive light for your company at an early stage can be the difference between success and failure in forming the alliance, and in maximizing the benefits. It doesn't always happen then, but you can make it happen then by choosing your team carefully, and being well prepared.



So, next time you walk into a meeting or a call with a potential partner, it might be the one. Make sure you are prepared, and have the right people with you to seize the moment!



So, where do chainsaws come into this? Well, I really have been pondering this blog the last two days while cutting a pile of wood into logs for this fall. But, it also occurred to me that it is a wise strategy to approach each cut as if it could be the one where the blade slips, and one that has kept me safe for 15 years of happy sawing!



Carpe Diem! Until next time.



Michael

A Balancing Act: business focus versus exit planning...

I trust everyone is having a fine summer, and more rain than we have in Central Texas!

Boards of Directors will make it clear to a CEO that building and running the business is central to success, and suggest strongly not to focus too early on who might acquire the company and when. Good advice. It is a world-class team, a solid value proposition, and a strong revenue growth curve that create value in the business - and that eventually affects price and interest from potential acquirers.

But hold on - forming strategic alliances is often critical to both the marketing and revenue picture as well. And, if my competitors are out talking to their friends at potential acquirers, am I not missing the boat by focusing on the business?

Most startups that reach the go-to-market phase where customers are buying their products are balancing business execution with Corporate and Business Development. It is a balance. The executive staff needs to be involved in development of alliance strategy, but generally line organizations should not. Details about progress with strategic alliances should be compartmentalized.

An Alliance Strategy should be based on:

• A clear sense of the value of your product and service capabilities, including both what you sell to your customers and any unique capabilities and components that underly
• A well-considered view of adjacent markets that leads to partner selection - thinking as broadly as possible
• Articulation of a rational joint value proposition to approach each potential partner, and any desired outcomes
• Availability of someone skilled in approaching partners and driving a strategic exploratory process (refer to my June 17 post!)
• Availability of technical resource (e.g. CTO) to keep them honest, technically.
• A market view of your competition and what they might or might not do

I work with each of my clients at quarterly offsite or board meetings to fully develop this plan, and formulate an evolving list of targets. From there, the team can start to execute and then refine the process over ensuing quarters.

Business development becomes more complex as you look 1-2-3 years down the road, consider potential acquirers (or "Chairs" - see May 13 blog), and start to understand what will attract (or repel) you to those chairs. It is not always the right answer to approach or form an alliance with your comfiest chair early on.

There are good examples of companies who tried to get a deal done in the wrong sequence, without considering broad market factors, and drove their preferred chair to their stronger competitor. Consider this example: A company has a market-leading flagship product, but a competitor has both a poorer, but often sufficient, offering in the same area and an adjacent product offering that could provide additional value to partners. A strong alliance strategy may be to complete the offering by internal development or forming an alliance with someone who also has this adjacent capability, and then to approach the desired chair with the combined offering. Approaching the desired chair too early might simply educate them and send them to your competitor.

So, given the importance what are some techniques to manage the balance between business execution and corporate exit? If you have a designated executive running the BD process who manages their strategic work separate from any day-to-day responsibility, you already have some separation. Maintaining confidentiality of the process from the line organizations, particularly if the effort is bearing fruit, is important - but the pressure to pre-announce a revenue or go-to-market alliance to the sales team can be distracting. Choose carefully what you communicate. Sales teams are paid to find out information - including from your corporate team - so I recommend having a clear executive decision process for what and when BD information is provided to line organizations.

In the end, strategic BD should start at the go-to-market phase of the business. The challenge is to find good, focused resources to begin the Corp and BD process - aimed at supplementing revenue and market presence, but always playing the game with an eye to the exit.

Next time, we'll talk about when negotiating actually starts with a potential partner?

Peace,

Michael

Barney? What's he got to do with this?

As you set alliance goals and develop the relationship, you must consider the type of relationship that you and the potential partner seek, ranging from a simple joint press release to a strategic alliance focused on managed services or outsourcing, to value-added reselling, OEM and beyond.

The joint press release is fondly known as a "Barney" relationship because of its superficial nature, but it does have its place in the spectrum. As an aside, I have found that companies who overuse Barney will tend to lose credibility with analysts and press, making that strategic alliance press release harder to pitch.

As you walk across the Alliance Spectrum, you can explore a range of co-selling/marketing alternatives with both products and services. Further to the right on the Spectrum you will find revenue sharing and OEM deals, joint ventures and, of course, the exit: mergers and acquisitions.

As you engage your partner, I encourage you to share expectations about where each firm would like to start, and where you would like to end up on the spectrum. Many leading technology firms now have formal programs that are designed to evolve from a co-selling model at the start to a value-added reselling or OEM relationship as both partners gain experience and success. This makes good sense, and I applaud those who have recognized that truly strategic alliances evolve over time.

Under the Alliance Spectrum you will see a typical distribution of work between the partners. While the distribution of work varies from what is shown here, I have found it important to be clear about precisely who is going to do what. Who is going to build the product or the integration between products? Who is going to market the solution, and sell it? Who will provide customer support and other services? And so forth... From experience, I have found that companies name these types of relationships differently: For example, some companies use the terms "Strategic Reselling" and "OEM" to mean the same thing, and others use them to mean something quite different, so it is crucial to discuss in fundamental terms who is going to do what in order to determine how the relationship, and the contract terms, will develop. Failure to do so can result in misunderstandings and unmet expectations.

So, don't get caught expecting an outcome based on the "name" a relationship is given; talk to your partner about the distribution of work, and how your alliance might evolve across the spectrum so you have a clear picture about the value each is adding to the relationship over time. From there, you can set expectations, and determine how to allocate revenue, cost and margin to each in the term sheet.

Next time I will explore the corporate development arena, and how your eventual exit impacts how you act today, even if it is years away. If you like the game of Chess, we will have some fun!

Until later,

Michael

Defining "Success" for BD professionals

Well, I am back from an extended vacation spent at the 38th annual Kerrville Folk Festival (http://www.kerrvillefolkfestival.com/), which is a special place and time to share music with old friends. I am well rested, albeit a bit sleep-deprived!

At first glance, it may seem trivial to spend time discussing how to define success for the Corporate and Business Development executive. But, over the years I have seen cases where results would have been very different had the goals & incentives been wrong.

As an example, when I engage with a potential partner for a client, one of the first things I determine is the organization and role of the people I am dealing with. Who does the partner BD person report to?; are they in sales? , or do they report to the CEO in a Corp and Business Development team?; are they part of the product team? We've all seen the BD title used in the sales organization, and it usually means something very specific relative to revenue - often with an OEM or reseller revenue goal, coupled with a Market Development function driving new business opportunities for sales. Some of my best friends are sales executives, but they will all acknowledge that their focus on revenue is paramount, and that strategic business development is different.

So, if I am discussing an alliance someone who has a revenue goal, and my expected outcome for the alliance doesn't involve direct revenue for the partner, there is going to be a mismatch at some stage, so it is better to find that out sooner rather than later, and finding another contact in the organization with a more strategic focus.

Why does this matter? Well, we all know that people tend to optimize their own incomes; that is why companies have variable incentive plans! So, working across from someone carrying a primary revenue goal will always drive the conversation to how much revenue I am going to provide for them, resulting in frustration and wasted time if I don't share that goal.

Here's a more interesting example. Many times, my clients seek alliances as defensive moves - either in an attempt to prevent a smaller direct competitor from gaining the upper hand, or in order to prevent the partner from entering your market in competition. In either case, while revenue may be important, the critical goal is to engage with the partner, even if it doesn't result in substantial revenue, or even result in an alliance. So, while the intended goal may be to form an alliance if possible, "distracting" the partner for a period of time is just as effective, so signing a contract and generating revenue are both secondary. If the person assigned to handle this transaction is measured and paid primarily on revenue, it is easy to see how they could fail to achieve the strategic goal.

But, defining measurable goals for BD is important for both the company and the individual. Direct or indirect alliance revenue is obviously important to the business, and is always a component of that goal set. BD professionals who are tasked with forming and managing Strategic Alliances should be goaled and measured on quantitative strategic outcomes aligned with business objectives, such as:

• Forming a specific number of alliances in a specific period of time, possibly with a list of targets or classes of prospects;
  
• Managing a review process with the executive team to define the target list of partners over time - at least quarterly - so that the goals remain fresh, reflect market dynamics, and changes in company strategy;
  
• Generating marketing success - measuring Press Releases, positive analyst coverage, lead generation resulting from activities with partners;
  
• Engaging with a specific target partner to limit or prevent competitive threats, and of course
  
• Generating direct or indirect revenue from partners. Indirect revenue is that generated by the business as a result of influence by the partner. Direct revenue is that generated through and by the partner.

I welcome hearing examples from readers of situations where goal-setting was used effectively, or resulted in disasters - nothing is better as a learning tool than seeing the results of such a mistake.

Next week, I will spend some time discussing the Alliance Spectrum: different types of alliances and how each adds value to the business. Suggestions for future topics are always welcome!

Until then ... thanks for listening!

Michael