Proposing, designing and negotiating strategic partnerships is tough. This framework could help entrepreneurs to work it through.
Partnerships: Promising, but Tough to Create
In the past few weeks, I’ve had several conversations with entrepreneurs who are trying to form strategic partnerships with other companies. Partnerships can present promising strategies to add jet fuel to a growth strategy – and the prospect of joining forces to attack a market segment, getting access to broader marketing channels, or merging two companies to obtain synergies can all be attractive for a young company.
However, they’re tough to set up and many entrepreneurs struggle with it. They can see an opportunity but have no idea what kind of arrangement to propose, or how to approach the negotiation.
There are two major challenges. Firstly, no matter how impressive a small company’s short history might be, its managers are probably negotiating from a perceived position of weakness when talking to a larger and more established player. The larger company is prone to thinking, “you need us more than we need you,” and once that mind frame sets in, it’s hard to remove. Secondly, the larger company inherently knows much more about its market and probably has experienced negotiators on its team. That makes it much easier for the larger company to push its weight around the negotiating table.
I believe there is a way around this kind of problem, and in this post I’d like to introduce a simple framework that can help an entrepreneur propose, design and negotiate a strategic partnership.
Introducing the Strategic Partnership Canvas
This is a very simple, six-part framework in the familiar “canvas” style. It is meant to act as an iterative tool to help propel a team through the process of designing and negotiating a strategic partnership.
Here’s how it works:
There’s a natural sequence to follow when working through the framework.
Step 1 – Identify an Unattainable Opportunity
There has to be a reason for two companies to be at the negotiating table – and that reason is to harness a market opportunity which neither of them can fully capture alone. Step 1 is to identify an unattainable opportunity that becomes attainable if the companies work together.
Identifying this idea is the start of the process and can get two companies who have never worked together at the same negotiating table. Identifying the unattainable opportunity is an exercise or entrepreneurial thinking. The unattainable opportunity has to be a compelling strategic idea to dramatically increase market share, revenue or profitability in a way that neither company can achieve alone. If it’s good enough, the conversations will start, so it has to be good.
It’s important to avoid the pitfalls of suggesting a one-sided opportunity. Larger companies won’t respond well to ideas that offer them little incentive to get involved. Ideas driven by a one-sided motivation, like “if we could do a deal with Big Company A, we’d get access to their distribution network,” are pretty bad places to start a partnership conversation. A better starting point would be “there’s a market segment that we both know is profitable, and we might be able to win it if we work together. Our technology plus their distribution.” Spotting opportunities like this is the core strength of innovative and more entrepreneurial-minded companies, so identifying the opportunity generally plays to the strength of the smaller company at the table.
Step 2 – Discover Interests, not Wants
Once you’re at the table, it’s time to work out what both sides are interested in achieving.
No one likes a negotiation that turns into a tug of war. In much of the business world, tug-of-war battles are the normal way of negotiating, and the “winner” is the one who has the most “power” to pull the negotiation in their favor. This is called “positional bargaining” and when it happens, the negotiations can become fragile and painful. Such negotiations rarely result in the optimal solution, especially when the parties are not obligated to come to an agreement.
The alternative to “positional bargaining” is “interest-based bargaining” – made famous by the Harvard Negotiation Project and the accompanying book, “Getting To Yes.” The central idea from that work is that beneath every demand (a position) is a reason (an interest). The most powerful negotiating platform is when you truly understand what your negotiating partner wants to achieve, but most importantly, why. Coming from this perspective creates substantial flexibility when you’re designing an agreement that can work for both parties.
To discover a person’s interests, you have to keep asking “why is that important?” each time you hear a demand being made until you know the underlying motivations or reasons for making that demand. To illustrate, consider this example: you want to buy a house and the seller is asking for $500,000 but you only want to pay $450,000. It could easily become a back-and-forth tug of war, never meeting at an acceptable price. To get to the heart of the negotiation problem, you could ask, “Why is $500,000 the right number for you?” The answer could be “because we have a $495,000 mortgage and we will go broke unless we pay it off,” or it could be “because our friends just sold their place for $480,000 and we want to beat them.” The underlying reasons are what’s important, not the demand. When you understand the reason, you have much more choice about what you can offer to get to an agreement.
In your first conversation with a potential partner, the ideal approach is to focus on interests: what does each party hope to achieve from working together and why. The Canvas can help you to capture what you’ve learned about your interests and theirs as the discussions progress. As you learn more, add more, and use the canvas to guide the communications.
Step 3 – Create a set of Assets to Contribute
In the second conversation, you can focus on what each party could bring to a partnership.
With a deep understanding of your negotiating partner’s interests, it’s time for both sides to put some cards on the table. You’re looking for ingredients to add, on your side and theirs, that can bake the partnership cake! What can you contribute? Do you have technology, or skills, or relationships the other side doesn’t? Do they have distribution, financial resources, or brand-name cachet that you don’t?
The objective is to list everything that each side can contribute to a partnership. Actively listen for assets that your potential partner could contribute to the deal during your negotiation conversations and record what you learn on the canvas. Ideally both parties should freely give information about what they can contribute. You’re not coming to a deal just yet – the idea is to get the possible ingredients on the table so a creative conversation can happen in Step 4.
Step 4 – Design the Combined Activity
In this third and final set of conversations, the objective is to combine the assets of both parties into an shared entity or “combined activity” that is perfectly suited to chasing the un/attainable opportunity.
Having several options to choose from is a great approach. If possible, you should seek to develop combinations that empower you and your potential partner to chase the un/attainable opportunity.
To use a metaphor, you could think of this step as designing a vehicle that will compete in a race. Both groups need to contribute parts, and the vehicle must be perfectly suited competing in order to win the race.
Designing several different combinations avoids the tug-of-war and keeps everyone focused on whether it will satisfy their interests. Creativity is paramount as there are probably multiple good solutions. A good goal is to develop three completely different combinations and then evaluate them against each other to isolate the best one. This puts the focus of everyone at the negotiation on the best possible way to work together.
Importantly, the way you combine assets will also determine what the payoffs are to each party. If one party contributes more, they should get more value in the form of revenue or profit. Valuing the contributions of each party is the hard thing (probably resulting in a robust debate!) but it is a logical and wholesome approach to reward the party who contributes the most. Your partnership will be unique, so a cookie-cutter valuation formula is not going to be meaningful. Expert legal advice can definitely help at this stage as a term sheet gets put together.
Keys To Success
Of course, negotiations don’t always go to plan. They can get complex and messy and require a bit of improvisation. However, if you can (1) identify an opportunity that is only attainable by working together; (2) identify assets each party can contribute; and (3) design combination of those assets that meets each party’s interests which is perfectly suited to chasing the opportunity – you’ll dramatically increase your chances of getting a good deal done!
The key to success is to stay interest-based throughout the negotiation. The virtues of interest-based bargaining are vast and too much for a single blog post but if you would like to learn more, I encourage you to read “Getting To Yes.” Taking an interest-based approach, in my view, is the secret sauce in making a strategic partnership happen.
Build a Great BATNA
If developing a strategic partnership is critical for your company’s growth, the most power you will have is to develop several other alternatives. Harvard calls this the “Best Alternative To a Negotiated Agreement,” or a BATNA. The party with the best BATNA has the most power at the table. They don’t need to wield their influence, they can just walk away to a better opportunity if an appropriate deal is not possible.
You can increase your bargaining strength by having several of these conversations happening with different potential partners in parallel. The process stays the same for each, but if you can develop several alternative partnerships, you’ll have the most power at every table you sit.
Share your thoughts in the comments below, or connect with me on Twitter.