Value Creation - Developing a Joint Value Proposition

First, I would like to wish a Happy and Prosperous New Year to all of my readers! I have to say that 2009, while a year of hope and change, was also one of challenges for many friends as everyone figured out how to live in a recession. Although the news from Haiti makes us all realize the importance of basic life, health, family and friends, 2010 promises to be an exciting year!

I have circled around the subject of Value Creation in previous blogs, so I thought I would spend some time discussing development of a successful Joint Value Proposition (JVP). As discussed in my October 1 blog "Moving Northeast", developing a Joint Value Proposition involves considering the potential of value created by the alliance. Sounds simple enough, right? Well, there are challenges to getting it right.

First, you are probably trying to figure out the JVP at the same time as you are forming the alliance and, hopefully, even quite early in the alliance (see August 1 blog, "While using a chainsaw..."). So, the target is moving. And, it will continue to move as the alliance evolves, so there will be ongoing opportunities for Value Creation that should be exploited.

Second, you don't know what you don't know - about your potential partners strategies, goals, potential market-changing moves, acquisitions, development plans, constraints and so forth, so you will need to listen well along the way.

Lastly, it is important you are not representing your company's offerings as they exist today, but the entire company's capabilities, including subsets of products and services that might be pieced together with those from your partner to create value. That takes a special skill.

So, how do you get to a JVP?

In my experience, one key to success is building a trusting relationship early in the alliance development phase, so that you can explore opportunities for value creation with your counterpart. Another is having the right people in the room - so that you can seize opportunities to explore value creation when presented.

Personally, I favor the 2-hour brainstorm, where one or two business and technical people from each partner can jump to the white board and test out concepts for value creation and explore the other party's interest. It is always best to walk in with a few ideas of your own, of course - your "agenda", I suppose - so that you can steer the discussion in a direction that is based on your knowledge of markets, products, services and customers. I have been amazed at the results we've obtained when the right people are in the room, with the right attitude. Setting the scene for this is part of the critical skill set of BD professionals, in my view.

Let's contrast this with the typical selling proposition or reseller recruitment effort. In that case, I have a set of products and services in my sales bag, and my goal is to consult with and sell those to my prospective customer or channel partner. Developing a JVP is closer to consultative, solution selling than to traditional sales, but solution selling still lacks the flexibility. The sales exec is, by design, constrained to offering what is in the bag.

With Business Development, the whole company's capabilities are in the bag, and we need to be able to represent all of them to a prospective partner, without going so far out on a limb as to suggest something that cannot be done.

Identifying opportunities for Value Creation definitely uses skills from the artistic side of the Business Development tool set, but following some basic steps can increase the likelihood of success. A marketable Joint Value Proposition is the basis for all truly successful relationships.

See you next time.

Michael

What's up?

This article is intended to raise questions rather than to answer them. So, please read on and let me know what you think.

I have been pondering for some time the question of whether there is a sea change underway: The emerging role of varying forms of "rolls ups" as a more frequent exit for growth technology firms. For so many years, management teams focused on the IPO and public company acquisition as the primary exit strategies - then IPOs went away (they're creeping back, some say), but M&A continued to provide excellent outcomes for entrepreneurs. In the past year, the options for small companies seeking an exit have gone from bad to worse. Exit multiples (of trailing sales) have been comparatively horrible for most.

Enter the roll-up as an alternative exit for early stage companies. I define a roll-up as a company forming a core set of products, technologies and access to markets through small, targeted private mergers or acquisitions. Roll-ups can be led by public companies, often Private Equity (PE)-backed; By private companies with often major PE or Venture Capital (VC) backing; By VC firms seemingly focused on completing a whole product offering in a market as a core investment strategy; or directly by Private Equity firms themselves.

So, what's the difference between a PE firm and a VC firm? Many traditionally VC companies are acting more like PE firms, and vice versa. Strictly speaking, VC is probably a subset of the PE asset class which includes venture capital, LBOs and later stage investments. Historically, VCs have provided higher risk equity for early stages and PE firms have led mezzanine rounds in more mature companies. Those lines have blurred significantly. Is this the result of increased competition in equity financing markets caused by oversupply? If that is true, wouldn't that increase valuations seen by entrepreneurs? I have not seen that, although things have certainly improved in the past few months. Are those related?

So, I am left with several questions to ponder. I have my own theories, but would appreciate any thoughts on them that you can offer:

• Is this a sea change, maybe just a natural result of the recent economy, or nothing at all?


• In the past, combining growth VC firms with solid teams and powerful VCs was near impossible. Must that change for this to work? Is it changing?


• Are VC/Preferred board members considering PE exits more these days?


• I've heard the "they pay low multiples" concern largely ruling out the PE category in the past. Is that changing?

Of most significant concern to me is the effect, if any, this change has on how venture firms approach fundraising? How does this change the way in which CEOs obtain capital if many VC firms are still pessimistic about PE-funded exits, or are resistant to lose some control to a larger group of investors, different management teams or new board members? Of particular interest to me is how this changes alliance strategies for growth companies if their more likely exit is no longer IBM or Oracle, but Thoma Bravo, Attachmate, Brazos or Blue Coat?

I plan to assemble what I gather from this quest into this blog and continue this discussion here. Please join in.

Happy Thanksgiving to all!

MJDE

Coopetition ?

My friend and colleague, John Soper, and I spent some time last year thinking about collaboration amongst competitors: Coopetition. Having worked at Novell during their heyday as an alliance magnet, I practiced strategies every day but hadn't tried to explain what we did; what we discovered.

Every alliance is potentially Coopetitative. Successful BD executives need to be skilled in recognizing and managing in that context, or risk being outmaneuvered.

We defined two types of Coopetition:

First Order, where an alliance is formed between two competitors (A and B). That competitive overlap ranges from small to very large. Such alliances are usually driven by customer demand or competitive threat: the enemy of my enemy is my friend. Industry standards often play a role in these alliances.

Examples about in the market today? On the large scale, Oracle and IBM work together to optimize Oracle databases and applications on IBM hardware, and Oracle applications running with IBM infrastructure software. Clearly, major market forces are at play here. These two companies compete fiercely across Database and Infrastructure software and services, and are about to compete in hardware as well! Coopetition is typical for small companies forming alliances with major players, but examples between small companies are less prevalent, probably because most have simpler product portfolios, so the competitive overlap is large.

The Second Order of Coopetition involves at least three parties (A, B, and C). A forms alliances with B and C, where B and C are significant competitors.

Look at any major vendor (BMC, IBM, Oracle, McAfee, Microsoft) partner program to see examples. The IBM hardware team has close alliances with both SAP and Oracle.

We deemed the imagined 3rd - Nth order cases to be mostly noise unless they reach Second Order status.

So, why do you care? A company trying to approach an alliance partner with First or Second Order Coopetitiion must consider the impact of the overlap on potential marketing and business outcomes, adjust the proposed joint value proposition, and handle the potential competition on both sides. To do otherwise risks a strategic misstep.

If there are complex interrelationships, it can be helpful to plot competing and collaborative products on a “core-context” dimension – the degree of Coopetition then becomes apparent.

In these days of industry consolidation, even if your partner is not a Competitor yet, they may become so soon. So, it is always worth spending time understanding the competitive posture of your potential partners and adjusting strategies and the joint value proposition accordingly.

A value proposition that grows the pie and achieves business goals for both parties will usually trump a critical or peripheral competitive threat!

Back to my coffee.

Michael

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