Getting Revenues from a Big Partner
Harald Horgen, President and Founder, The York Group
Entering into a strategic partnership with a larger company can be a turning point for an entrepreneur leading an emerging firm. For some, the relationship can provide a significant increase in revenues as their new partner markets their product to their own customer base. For others, especially in the life sciences arena, it could mean an infusion of capital to help finance the further development of their technology. And for yet others it is simply the prestige associated with having an industry leader include the smaller company's product in their catalogue.
There are many factors to consider when dealing with a larger partner, including the technology review process; protecting your intellectual property rights; non-compete provisions that might limit your ability to sell through other partners or channels; and pricing and revenue targets.
However, the key to success is almost always defined by sales, so this article focuses on the dynamics of what should be the revenue-producing relationship of a small company entering into an OEM (original equipment manufacturer), licensing, or bundling agreement with a larger company.
It is widely estimated that 80 percent of partnerships and strategic alliances don't work out. After the initial burst of enthusiasm and press releases, both companies go back to what they were doing before. Very often there is no execution that takes place-the focus has been on reaching an agreement, expecting or hoping that the other party will take the ball and run with it.
The recipe for a successful relationship is quite simple: someone has to actively sell the product. At the end of the day it always comes down to selling, and it isn't going to be the people that negotiated and signed the agreement that will be doing it. They will hand the product over to someone else.
In some cases the product might be handed over to a division within the organization, and it will be the salespeople in this division that have to make it happen. This means that a small company could have two degrees of separation from the people who will ultimately be responsible for driving revenues. They negotiated and signed the agreement with the VP of Product Strategy, who passed the product on to the division manager, who turned over the product to his sales and marketing team. The reality of strategic partnerships is that there are usually only two outcomes: either they produce a lot of revenues or they don’t produce much at all
Salespeople sell what they know how to sell, and they often take the path of least resistance, which is normally to sell the products with which they are already familiar. They rarely do the missionary selling necessary to introduce a new product. However, they follow up on qualified leads if their company has a program in place to generate leads.
For the relationship to be successful, then, the larger company has to agree to a plan to market the product and commit to the funding to implement it. There can be no sales without a pipeline, and there can be no pipeline without an activities-based marketing plan, which should be part of the final contract.
The marketing plan should describe, month-by-month, what the partner is going to do. Will it be a mail shot to existing customers? Telemarketing to 3,000 prospects? Trade shows and conferences? What they do isn't as important as the fact that they have committed to doing it. If the product, the company, and the market are all a good fit, then the marketing activities will produce leads that the salespeople can follow up.
Having the marketing plan as part of the formal contract also allows the smaller company to terminate the agreement at an early stage if the plan is not being implemented, sometimes as early as two to three months into the relationship. Very often the contract has an annual renewal provision, with renewals tied to meeting revenue targets.
However, this means that the contract can be in place for a year or longer before it can be terminated, while the partners both know that the revenue targets are not going to be achieved.
Strategic partnerships with large companies can be a tremendous catalyst for a smaller firm when they are structured properly. During the negotiations the focus should be on how the product will be sold, who will be doing the selling, and how the larger company will make it easy for their salespeople to be successful.
Don't be bashful about asking the larger company to document their commitment, because if they are unwilling to put resources behind marketing your product, the relationship will be just another one of the 80 percent that failed.
© 2006 Harald Horgen. All rights reserved.
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