Establishing a long term strategic partnership has often been compared to getting married, and there are some similarities. The partners should spend enough time to get to know each other before tying the knot; there has to be a foundation of mutual trust and respect for the relationship to endure; and in some cases, it may not work out and the result is divorce, perhaps even a bitter and expensive divorce.
Fortunately, one important departure from this analogy is that in a business relationship the "pre-nuptial" agreement can, and should, have clear guidelines on how to measure performance in order for the relationship to be renewed from year to year.
Establishing the standards is important, as is having the ability to measure the performance of each partner. However, having the flexibility to make adjustments based on the measured results as well as the underlying factors that impact the performance, can take the relationship to new levels.
Let's take a look at the three stages of a partnership, and how performance monitoring and measurement plays an important role at each stage.
Before the Contract is Signed
This is the due diligence phase. Obviously each party believes that by joining forces they can both make more money, but the expected outcome is often not clearly quantified (or if it is quantified, it is based on assumptions that might not be valid, especially over an extended period of time).
The reality is that no one can predict what the revenues will be in two or three years, but that doesn't stop companies from committing to multi-year targets. There are two basic elements that have to be established in the contract:
- Performance targets, very often revenues or a certain number of units sold. A common mistake is to set targets that are actually stretch goals, and during the first year or two of a relationship they are almost never achieved. Overstating the objectives leaves everyone feeling disappointed if they are not met, even if the actual sales figures were really quite good. And it exposes the party doing the selling to the possibility of termination despite putting in a good effort.
- The true purpose of targets is to ensure that a minimum level of marketing takes place. For example, everyone might agree that $500,000 is an achievable number if everything falls into place, but that should not be the contractual target. Instead, the formal target might be $200,000. The effort required to sell $200,000 of most products is significant-it means that the partner is actively marketing and selling the product. If the market conditions are as good as everyone thought, the sales might hit the $500,000, but if the ramp-up is longer than predicted; or the product has to be re-positioned for a particular market segment; or there is an unexpected level of competition, reaching $200,000 could very well be an acceptable result. If that is the case, a partner should not be penalized, and no one should feel disappointed.
The Marketing Program
This point has been covered in my other article in this Collection, but the contract should contain monthly marketing activities that can be monitored. There can be no sales without a pipeline, and there can be no pipeline without marketing. In our experience it has been more important to agree and commit to a marketing program than to agree to specific targets during the first year of an agreement, because numerical targets almost always involve a certain amount of guessing. If your partner does a good job on the sales and marketing side, revenues will come.
The First One to Two Years of the Agreement
This is the time for a reality check. At the end of the first year both parties will know if everything is going according to plan, or whether adjustments need to be made. There are three possible outcomes:
- The targets were missed. If the partner has made a real investment, and a good faith effort to sell the product, this can be a very difficult situation. It is important to understand why sales didn't occur. Was it the economy? Is the market not ready for this technology? Was there a problem with the marketing message? Was there a problem building a pipeline? If the pipeline was okay, does the partner have good enough salespeople? Finding a partner willing to make an investment in selling your product took time and resources, so the decision to terminate them should be not be taken lightly.
- The targets were achieved. Great, now work with the partner to establish higher, but realistic minimum targets for the next twelve months.
The targets were exceeded by a large margin. This is, of course, a wonderful outcome, but it also has to be analyzed to see if it is sustainable. Did the partner sell one huge installation, or was it a broad-based success, with many clients across many sectors? If it was the former, then the second year targets should focus on the number of installations, to ensure a greater market penetration, rather than absolute dollar targets. If it was the latter, then there is a foundation for accelerated growth that justifies a co-investment to make it happen.
On-Going Management of a Mature Relationship
If the relationship is running smoothly, with an acceptable level of sales from the partner, many companies make the mistake of leaving well-enough alone, and simply renewing the agreement year after year. Every significant partnership, i.e., any relationship that is generating hundreds of thousands or perhaps millions of dollars per year, should be thoroughly evaluated every year.
On the downside, you want to determine how important you are to your partner's overall business. Were you 20 percent of their business three years ago, and 5 percent now? This could indicate that they are moving their business away from segments that are important to you. How much of the sales are coming from new installations? If most of the sales are repeat sales to existing customers, they may have dropped their marketing investment in your product. It is important to understand where you are in your partner's overall business.
On the upside, by sitting down for a day or two with your partner, you may discover that there is a lot of untapped potential, but it requires more of an investment than the partner is willing or able to make on his own. If their sales have been running at $500,000, but could jump to $1 million with additional marketing resources, then the right decision for you might be to agree on a business plan that involves a co-investment. In the example mentioned earlier, if they overshot their first year target by a wide margin, then you have clearly found the right partner in the right market, and you should be willing to invest along with your partner to make the most of this compelling market opportunity.
As you can see, careful measurement and management of your partnerships can protect you from entering into agreements with the wrong partners, and it can give you the basis for making the most of your productive partnerships. Your partners want to succeed as much as you do — and by establishing reasonable and flexible standards for defining what makes the relationship successful, keeping the lines of communication open, and making adjustments based on changing market conditions — you will build the foundation for long-term, profitable partnerships.
© 2006 Harald Horgen. All rights reserved.
Harald Horgen President and Founder The York Group