I’m On a Mission!

In Bob Dylan’s song “Gotta Serve Somebody” he points out that, no matter who we are, we all have to make significant choices:

You’re gonna have to serve somebody
Well, it may be the devil or it may be the Lord
But you’re gonna have to serve somebody

The implication is clear for our spiritual life, but the broader principle applies in our work life. At the core of what drives us are competing priorities, and the one at the top will be the “decider” most of the time. What is the top driver in your work life?

What drives me personally is a passion for building effective business partnerships. Over the years, I’ve seen great ones lift companies to new levels of value and effectiveness. Much more often, I’ve seen poorly planned ones consume significant resources with little or nothing to show for the effort.

Three principles characterize the most effective partnership strategies – context, planning, and execution:

Context means understanding your own organization and its offerings in relation to the market they live in. What kind of company are we? What value do we deliver? Whom do we compete against? How are we unique? A simple positioning project can bring great clarity of thinking and purpose, yet it’s amazing how unclear the answers to these questions often are.  If you don’t understand your own company, don’t expect success in partnering with others.

Planning partnerships is imperative. Stephen Covey’s second habit “Begin with the end in mind” is based on ancient wisdom from Aristotle that’s often ignored. Once armed with a clear understanding of your market positioning, you’re ready to think about partnering and what you want to accomplish. What is your vision for growing the value of your company? If you clearly understand where you’re going, business partnerships will help you get there faster.

Execution of partnerships requires effort and resources. Why expend time and effort in creating a business relationship only to let it die from lack of care? A partnership needs focus in order to produce expected benefits. Increasing the odds of success requires architecting self-sustaining elements into the partnership from the beginning, and that can only be done successfully through clarity of purpose and a clear vision for growth.

Anonymous, my all-time favorite writer, said it best:

“Action without Vision just passes time.”

Reason for Optimism

The 2010 Global MootCorp Competition will finish up this evening on the campus of the University of Texas at Austin. Started in 1984, it’s the oldest of a number of business plan competitions held each year at U.S. universities. In addition to providing a richer educational experience for many MBA students, it has helped launch many businesses that went on to become successful enterprises. The UT program’s pioneering work pointed the way to a number of other competitions including related programs at Arkansas, Louisville, Manitoba, Oregon, and Rice.

This year was my first time to participate since moving back to Austin a few years ago, and I felt fortunate to be invited. As a beginner, I was a “judge” in the warm-up round where panels of industry veterans help the teams hone their presentations before the real judging begins. We were indeed able to offer helpful suggestions, but each team my panel heard was already quite accomplished at presenting their plans before we met them.

It’s a cliché that we only hear the worst news in the media and good news rarely gets reported. In the case of these competitions, however, the mainstream business press does pay attention. Expect a story soon in the New York Times on this competition.

My panel viewed plans from U.S., Hong Kong, and Brazilian teams for new businesses in the domains of agriculture, healthcare, and transportation.  The experience was refreshing and reinforced my sense of optimism about the ability of free enterprise to create new ways to solve problems.

Congratulations to Rob Adams and team at UT for a stellar job!

Technology M&A Is Accelerating

A few days ago, I posted links to interesting articles in an exit strategy update. Indications are that the next 12-18 months  will produce an increase in the acquisition of technology companies, so having an exit strategy in place and aligning with potential acquirers remains top of mind for CEOs. Let’s review some of the evidence.

One significant indicator is that tech companies have started using debt to raise capital. A recent WSJ article said that “the decision to take on debt breaks from tradition in tech, where companies have typically preferred to raise money by selling stock. Debt has become a more attractive fundraising option largely because interest rates are low… Turning to debt is an especially big change for software companies, which typically generate lots of cash and aren’t saddled with large one-time expenses like opening a factory.”

While the focus of the article was on the largest companies like Cisco, Microsoft, H-P, Oracle Corp., International Business Machines Corp., and Dell Inc. who raised more than $20 billion combined in 2009 selling bonds, smaller companies are following suit. Salesforce.com’s $575M debt offering and Adobe’s of $1.5B, both in January, mean that the acquisition drive is broadening.

Yesterday StreetInsider.com quoted an FBR Capital Markets report that “software vendors are flush with cash given the cashflow-rich nature of the software model and more than a handful of vendors have even recently raised additional capital.” The FBR Capital report even suggested some likely acquisitions:

So what should CEOs of smaller technology companies who want to grow shareholder value do? At a minimum, three things:

  1. Understand who your most likely acquirers are and keep the list up-to-date.
  2. Ensure that your company stays focused on activities that increase your attractiveness to those acquirers.
  3. Create partnerships with potential acquirers and other companies who make your company more compelling to those acquirers.

Whether you want to be acquired in the short term or the long term, your company’s value is in the eye of the beholder, and the most important beholders are acquirers.

Exit Strategy Update 04/22/2010

WSJ: Tech Firms Bulk Up With Debt
“The decision to take on debt breaks from tradition in tech, where companies have typically preferred to raise money by selling stock. Debt has become a more attractive fundraising option largely because interest rates are low. The shift comes as mergers and acquisitions are reshaping the industry, with a handful of tech giants that have huge cash hoards—such as Cisco Systems Inc. and Hewlett-Packard Co.—snapping up firms. Now smaller tech companies are hoping that adding debt will allow them to get in the buying game.”

Virtual Intelligence Briefing: AOL dumps $850M Bebo acquisition – Why big M&A rarely works
“Don’t pay product valuations for feature companies – It is a good strategy to acquire small companies to gain super star employees, cool new features, and access to new market segments. But, the acquiring company needs the discipline to only pay a valuation commensurate with a “feature” not a “product”. Don’t add lots of valuation for synergies that probably won’t happen, or for revenue streams that may not materialize.”

WSJ: Eating Into Apple’s Cash Pile
“With a market cap of around five times book, Apple could choose to use its stock for large-scale acquisitions. But as its market value is around $220 billion, this would need to be a very large-scale acquisition indeed. To give some perspective—and not to propose these companies as targets—U.S. software giant Oracle Corp. has a market cap of around $130 billion, while European leader SAP AG is valued around $60 billion.”

MercuryNews: Palmisano Needs ‘Bold Strokes’ to Sustain IBM Growth
“Under Palmisano, IBM has spent $25 billion buying companies. Compare that with at least $42 billion for Oracle and Hewlett-Packard’s $45 billion. IBM’s share price had risen 31 percent in the Palmisano era, versus 53 percent for Oracle and 165 percent for Hewlett-Packard.”

The Reality of Being a CEO

Tactics is knowing what to do when there is something to do.
Strategy is knowing what to do when there is nothing to do.
– Savielly Tartakower

The reality of being a CEO differs in many ways from the popular conception. After many candid conversations with CEOs, it’s clear that the media portrayal of the CEO role as being glamorous, highly lucrative, and psychologically rewarding is incomplete at best. All of the above are true at least some of the time for many CEOs, yet when they’re being candid, most will tell you that it’s far from being chocolates and roses all the time.

In fact, one business leader laughingly told me that people don’t realize how often a CEO gets to “experience sheer terror.”  Many things can go wrong that adversely affect the business and ultimately impact CEO priority number one, i.e. increasing shareholder value. What moves are competitors taking that we can’t respond well to? What drivers in the economy threaten the willingness and ability of customers to stop buying? Is our own inability to execute holding us back? Do we have a realistic vision for growing the company?

An earlier post about “The CEO Dilemma” discussed these and other challenges. Many CEOs live life on a high wire, balancing operational issues, cost and cash management, a realistic vision for growth, productive business partnerships, market presence, go-to-market and sales strategies, and many other priorities. Contrary to the supremely confident leader portrayed on-screen, a CEO is not always sure what to do.

Should we pity the poor, downtrodden CEO? Hardly! Most tell me they can’t conceive having any different role. They love what they do and feel fortunate that they have the opportunity. At the same time, life at the top can be lonely. The buck always stops there. As the CEO, you ultimately have to make the big decisions. And sometimes it pays to get assistance.

Where do CEOs look for help? If they’re lucky, experienced individuals on their board of directors are able and willing to serve as sounding boards, yet the fiduciary nature of their relationship may limit those discussions. Alternatively, the CEO may have one or more friends who are or have been chief executives whom they can trust for advice.

Often CEOs are more isolated than they need to be. Organizations like Vistage, CEO Netweavers, and others have evolved to meet the needs of CEOs over the years.  They comprise CEOs who are willing to give time to help other CEOs with advice in a trusted environment, often facilitated by experienced serial CEOs. And, of course, there are independent trusted advisers who work individually with CEOs as well as with groups of CEOs to share expertise and experience that can help companies reach new levels of performance.

When Should You Partner?

Given that we’ve answered the “why partner” question, now let’s think about the “when to partner” question. Marketplace issues, whether threats or opportunities, commonly drive partnership decisions. For each issue, consider three factors that determine your desire and ability to grow through partnering:

  • Timing: What is the timing associated with this threat or opportunity? Is it immediate or long-term?
  • Potential Impact: What is the potential impact of some threat or opportunity that is currently presenting itself? Is it high or low?
  • Ability to Respond: What is my current ability to respond? Is it strong or weak?

As far as the Timing factor goes, if an issue, i.e. a threat or an opportunity, is not immediate, set it aside. Maybe someday you’ll find time to worry about that one!

For each immediate issue, determine whether it can have a relatively high or low impact and how strong is your ability to respond. Here’s a diagram depicting these points, followed by a brief description of each one:

Partnerships When

High threat/opportunity, strong ability to respond (“Pursue Aggressively”)
This issue is too pressing to postpone, and your company has the resources needed to address it aggressively through product enhancement and new product creation.

Low threat/opportunity, strong ability to respond (“Quick Hits”)
When you spot a weakness in a competitor’s ability to respond to such an issue, attack by leveraging your strength in this area.

Low threat/opportunity, weak ability to respond (“Prepare to Respond”)
These are usually “who cares” issues now that may grow into high impact issues later, so keep an eye on them while doing little to address them.

High threat/opportunity, high ability to respond (“Create Partnerships”)
If you can’t adequately respond to a pressing threat or opportunity, a partnership is the right answer. A partnership can be a precursor to an acquisition.

If I’m right and I’ve communicated clearly, you have a better understanding of why and when to form a business relationship. These are practical business concepts that will ensure your efforts are directed at the best opportunities to achieve the desired outcome for your business – a business that knows where it’s going!

So Why Partner at All?

Developing a partnership strategy is a critical concern for any company. Key to its formulation is an understanding of why partnerships make sense and under what circumstances they should be pursued. Understanding the context for developing a partnership strategy clarifies the decisions that need to be made.

So why partner at all?

“Whether it sells computers, clothing, or cars, your firm’s fate is increasingly linked to that of many other firms, all of which must collaborate effectively in order for each to thrive…                                          more than ever before, success depends on managing assets your company doesn’t own.”            (from The Keystone Advantage by Marco Iansiti and Roy Levien)

While this is universally true, it’s especially the case in immature and fragmented markets where no one company can possibly own all the pieces of a solution. Customers face a bewildering array of possibilities and choices. Gaining their attention and commitment is not as simple as relating your value proposition. You’re not just selling against direct competitors – you’re usually competing for a piece of a finite budget, and the customer can choose to invest in another area while declining to buy anything from you or your competitors.

By understanding the broader space in which you compete and by knowing how your company fits within that broad context, you’re more likely to successfully educate your customer and help them move to a buying decision. If you’ve analyzed the total market and have partnered and/or acquired to achieve a more complete set of offerings, you’ll be in a position to meet almost any customer’s needs.

So what are the most common reasons to partner? Here are some that come to mind, in no particular order:

  • Increase: ability to deliver, credibility, revenue, market presence
  • Leverage market clout and intellectual assets of market-leading companies
  • Become certified on a process or technology
  • License a product or technology
  • Remove a competitor
  • Negotiate strategic alliances
  • Prepare to execute acquisitions

While these are fairly specific, here’s a matrix that boils the reasons down to the most common ones:

Partnerships Why

In evaluating potential partners, determine early on which drivers are important to your company, the partner, or both. Then begin compiling a list of specific factors that may be important to the target partner. These may become critically important in later negotiations (we’ll talk about “elegant negotiables” another time).

Next we’ll address the issue of when to partner, i.e. under what circumstances does it make sense).

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