Up front investments

One area where negotiators spend a great deal of time in discussion software contracts is sizing the up-front investment, or commitment, each company is making to an alliance. Often, this is shrouded or overtly captured in subjects like: Pre-payment, up front payment, initial royalty, Non-Recurring Engineering (NRE) charges, and so forth. But, in general, each is a measure of what one company expects the other to "commit" to the relationship in exchange for a special license, commitment to resources, preferred market position, time to market, corporate focus or other less quantifiable "stuff".

As an example, a company may be seeking a preferred (e.g. source code) license and associated set of (e.g. engineering, marketing) services from a software supplier in order to achieve market advantage. In exchange, the supplier must commit resource and an implied single-mindedness to the relationship due to its magnitude or complexity.

For some negotiators, it is hard to get past the size of the financial commitment requested by the supplier (in my example) in exchange for the required license and resource commitments. How do I justify charging "millions" to my potential strategic partner? I find it useful to break down the kinds of value that a supplier is offering in order to come to agreement on the figure.

There are several items that might be embedded in that up front $ figure. Often, the figure was originally based on a need to supplement company revenue (caution!), but the supplier probably doesn't want to share that with its intended partner;-) So, it is helpful to justify the amount on a business level.
I find it useful to consider the following list of components that may be included in that figure. First, value the concrete items such as:

• NRE - Committed engineering labor at fully-burdened cost
• "Buying down" the royalty % from standard rates
• Specilaized ongoing support and maintenance

And, less quantifiable things like:

• Scale (the partner's needs necessarily require you to limit efforts elsewhere)
• Special (e.g. Source code) licenses
• Extended term of a license
• Market exclusivity for a period of time (a scary topic, but this can actually be valued!)
• Cross-licensing of collaborative efforts

To achieve the optimum outcome, the supplier's negotiator should use their skills to break apart the desired financial commitment into one or more of these, and demonstrate to their intended partner the value being delivered for the required commitment. It should help!

More on this over time. Enjoy the spring - the trees and flowers are blooming in Texas!

Peace,

Michael

Cloudy in RSA

Well, for those of us who have been in San Francisco and anywhere near the Moscone Center for the past few days, both the weather and the messaging has been decidedly "cloudy". The weather was typical for February.

The amount of messaging tied to "the cloud" was pretty amazing. I have to say that the level of marketing pile-on I saw relative to messaging for the cloud was a little over the top. From panel sessions to banners and billboards, Cloud was pervasive. At one level, it is exciting that so many vendors see the value in delivering messages, and hopefully product, in support of cloud deployments.

However, digging a little deeper, I and others I talked with during the week have real concern that this feels like another High Tech Marketing Frenzy, not dissimilar to "Virtualization", "The Internet" and "Eyeballs" that we've seen over the course of the past 15 years. In each case, the frenzy dramatically outweighed the eventual value to customers, resulting in more than a few missed expectations for vendors, investors and customers buying into the hype. This is reinforced by customers I've talked with recently that say they need help offsetting the hype with their business users, and that the industry is doing them little favors with self-serving hype.

So, let's be careful out there folks. We all know a bandwagon when we see one, but let's not jump so high that we miss the real opportunity to deliver value to customers. Hype doesn't create value!

It was great to see everyone (and I do mean everyone!) this week.

Until aye

Michael

RSA Monday

Well, despite this being a St Valentine's Day away from home, and a damp day in San Francisco, Monday was as I had hoped.

Maria and the America's Growth Capital team once again put on a fine conference for CEOs, SVPs and interested financial organizations at the Westin SF. As for the past few years this was a very long day, but a day filled with interesting topics, old friends and colleagues, and stimulating conversation. AGC manages to bring together so many people involved in the security marketplace. Most people I saw spent the entire day discussing new opportunities, meeting old friends and finding ways to change the game.

In addition, my colleague John Soper and I met with local San Francisco lawyer David Tollen. David provides outside legal services to local tech and other firms, and also offers training to help contract and legal teams in medium-sized tech firms to help them improve their skills and comprehension. We discussed the potential to collaborate on delivering services to Business Development and legal/contract teams in those firms to help them improve communication between contract teams and BD, and to improve their overall effectiveness in completing the alliance deals they need to maintain their competitiveness in the market, and to build long-standing alliances.

Specifically, we would aim to improve the BD team's comprehension of the business issues implicit in typical alliance contracts, and their ability to communicate using structured term sheets. Likewise, to help the contract team understand the business imperatives and gain trust in the BD team's representation of the issues, to improve the overall outcome and so that otherwise legal "hard stops" can be explored more fully in the negotiation process. I am interested in whether my readers see value in this. John may bring this to the local ASAP chapter for discussion if there is interest.

Particularly exciting to me was the unexpected opportunity to spend time with an old friend from 20 years ago who has some great strategic business development opportunities. Without this conference, we'd never have talked. Because of the conference, we may both have new opportunities. Such is the magic of this week in San Francisco!

Tomorrow is the first full day of the RSA Conference - for me, a day filled with meetings and my chance to visit the show floor. I'll plan to provide a synopsis of what I see as major trends.

Until then...

Michael

From the RSA Conference

The RSA Conference has, for me at least, become the leading Business Development event in the security industry. Combined with the America's Growth Capital conference, it makes getting together with old friends, colleagues and potential business partners easy, fun and rewarding.

So much of what BD folks do in this business is based on building trusting relationships - with partners, and most importantly between people - between colleagues - between friends. This conference enables those relationships to flourish, renew, and create new opportunities. Many former business partners and friends are working at their third or fourth company since we first did business together, and we enjoy catching up and looking for opportunities to collaborate. That's what makes this industry exciting and keeps us coming back - after soooo many years.

I'll add commentary on any interesting events as they unfold.

Good night from San Francisco!

Turning over "Rocks"?

First, I would like to extend my apologies for taking so long to post again! With music performances, Kerrville Folk Festivals and client work, it has been a busy year!

Following my earlier posting on JVP's and Extracting Value, I thought it would be interesting to discuss an example where finding strategic Joint Value unlocked an alliance discussion and led to a unique opportunity for both sides.

In this case, the two companies were participants in the adjacent segments of enterprise security. One large company - call them BigSecure - with a mature customer base and an ageing product in this market, and the other, a smaller company - NewTech - offering complementary technology. During some relatively tactical go-to-market discussions, NewTech realized that its own product direction would eventually compete directly with the mature product from BigSecure.

An interesting dilemma. Should NewTech (i) continue down the go-to-market path, which promised some exciting revenue opportunities, albeit tactical, ignoring the eventual, likely inevitable, collision that risked alienating BigSecure when its new product came to market, (ii) drive the go-to-market discussions off the road and avoid wasting any more time, or (iii) try to figure out how to engage BigSecure in a discussion about the potential collision.

NewTech knew that BigSecure's adjacent product was old, but there was still considerable momentum in the field and a huge installed base to be reckoned with. More importantly, NewTech could turn this approach to its advantage, by finding ways to integrate its technology with BigSecure, and realize even more upside (than a tactical GTM). Finally, there was the threat that NewTech's competitors would get to the table first, eliminating the opportunity. But, NewTech also risked the loss of competitive IP and marketing plans to BigSecure if they opened discussion too far.

What to do? What to do? Tactical gains vs. longer term strategic gains vs. a complete blowout!

The answer is often found in how you negotiate, rather than an "either-or." NewTech decided to negotiate down path (iii). But before showing its cards, it spent considerable effort in a short time negotiating away from the table exploring ways to move forward. NewTech began by carefully assessing BigSecure's options and possible moves, before making a more of their own, introducing a 3D approach into the strategy. With more information about BigSecure's challenges, and its plans with other partners to improve customer satisfaction with the ageing product, NewTech decided it would be able to gain advantage and decided to disclose its own new product plans.

This resulted in (i) identifying competitors who were vying to partner with BigSecure in addressing the problem; and (ii) unlocking new Value Creation opportunities to work with BigSecure by delivering its innovative capabilities into BigSecure’s installed base and new initiatives, both huge strategic advantages.

Lesson learned: It wasn't foreordained to turn out this way. “Turning over rocks” at BigSecure yielded significant rewards. But it was certainly true that the partnership would remain only a tactical GTM alliance if they did nothing. So the key was to explore strategic options in a 3D negotiation paradigm. Then decide a way forward.

Think 3D - it really can make a difference in the outcome and help identify and unlock Value in a relationship...

As aye.

Michael
PS Thanks to my friend John Soper for his invaluable editing!

Panel discussion - Dec 7th - San Jose CA

Friends & colleagues,

I will be participating in what promises to be a most exciting and interesting panel next Tuesday evening (Dec 7th) in San Jose. The subject is "You've signed the deal, now show them the money: engaging alliances in the field". The panel starts at 5:30 and is to be held at TechMart
Network Meeting Center
5201 Great America Pkwy
Santa Clara, CA 95054

You can find more details about the event here:
http://events.linkedin.com/Youve-Signed-Deal-Now-Show-Them-Money/pub/484626

There is also a LinkedIn group you can join to engage in the discussion before and after the panel... check here LinkedIn Alliances Field Engagement Group >>

I hope to see you there! Please come and share your experiences in creating a strong and effective sales effort within a strategic alliance.

Michael

Creating Value – What is a JVP anyway?

As I have thankfully been quite busy since January, I have been talking to my friend and colleague John Soper at New Paradigms Marketing about collaborating on some postings - this is the first in that series of work. Thanks, John, for taking the initiative!

In a previous blog [Northeast, you say?] I have talked about Creating Value with an alliance partner, leading to a compelling Joint Value Proposition (JVP). This is one of most important components of a successful alliance and requires focus over the life of the alliance.

Creating Value is about connecting points of value in you and your alliance partner's business that yields "1+1 is greater than 2" value to your joint customers. But as I pointed out earlier, the best yields usually come from looking beyond existing products; or existing systematized marketing and sales channels; or the existing structure of the support organizations: beyond what's already in your collective "sales bag."

Rather, the Joint Value that often yields the highest return is found by peeling back the layers and looking at the underlying technologies, marketing and sales capacities, service offerings and so forth. For example, you might find move value in combining a platform underlying your product with capabilities in your partner’s application to expose higher value functions that are “must have” upgrades for your collective customers. Or more value in adjusting sales processes to better complement each other (e.g., in combination, broader market coverage, more technology depth). Or, possibly, you can create more value by combining an innovative product offering with your partner’s strong service expertise, so they are seamless to customers.

Progressing down this path of value creation is an evolutionary risk-taking exercise for both companies. So, often you will find executive resistance to devoting effort and expending time and money towards new value creation when you have not yet extracted the obvious value that brought you and your partner together, or there is concern that you don’t yet know the “joint customers” needs well enough to devote more scarce resource. The challenge for the Business Development executive is, then, to lead the formulation of an evolutionary plan that creates sufficient value for launch, demonstrates success and learning from that value creation and then builds on the success to create new value. And repeat! Easy to say, but harder to do successfully – it requires a commitment on both sides to stay in tune with the pulse of the alliance, to learn from each experience, and to have well-supported plans ready to move down the evolution path together.

This search for new Joint Value can be the most creative. And fun! But how do you do you get this value to your bottom line? How do you Extract Value so you are getting your share?

In the next blog, I will discuss some examples, leading into how to Extract your fair share of the Value Created.

Until then - Michael