SPECIAL REPORT
ALLIANCING: A PARADIGM IN TRANSITION, GETTING THE INCENTIVES RIGHT
By Peter D. Loftspring
Editor's Note:
This series of articles is based upon a paper presented by Mr. Loftspring at the "Partnerships, Contracting & Strategic Alliances" Conference
presented by the Strategic Research Institute in New Orleans on February 26-27, 1997.
Part Four: Alliance Fundamentals
A relatively short list of the most significant elements necessary to form a successful supplier/customer alliance, while helpful, is difficult to compile. Due to the project specific nature of many these alliances, a general overview of any one alliance's features serves little utility as direction for a different type project. Only after experiencing the evolution of a number of large and small alliances and becoming intimately familiar with the compromises and trade-offs required to assemble different versions does one gain full appreciation for the effort required. Nevertheless, an outline of significant aspects of alliance formation serves as a useful guide. The following "keys" to successful alliance structuring are based on the experience and insights gained from several innovative alliance arrangements in the North Sea, Gulf of Mexico and onshore U.S. combined with input from a number of academic and commercial studies:
1. Complementary Skills - Alliance members' skill sets must be complementary. While some overlap between members' skills and capabilities is inevitable and even useful, excessive redundancy creates conflicts of interest and the potential for squabbles. Members are typically convinced that their own product is generally "better" and the resulting rivalry can be destructive. Furthermore, overlap of proprietary information and trade secrets can lead to problems with intellectual property development and allocation.
2. Avoidance of Weak Partners - An alliance should not be formed to correct a company's weakness1 but should consist of members desiring to leverage their unique strengths. A member with perceived weaknesses will inevitably be at a disadvantage to the other members and ultimately will not garner sufficient trust to support enough of the project. Ultimately, the alliance's ability to perform and be successful will be based on the synergy of the strengths that its members are able to provide. While worldclass capabilities should be sought where appropriate, each member should be able to provide superior expertise in its core competencies at the very least. A successful alliance is not necessarily built around having the absolute best in class of every specialty - it's about being able to make the best use of the best that each member has to offer.
3. Avoidance of Corporate Culture Clash - Among the most difficult organizational qualities to attempt to quantify is clearly personality type and corporate culture. To be successful, however, any multi-company relationship must be made up of entities with similar values, strategies and business methodologies. An attempt to force a large, stogy, conservative entity that is only comfortable doing its business by committee together with a lean, aggressive, brash, fast moving and highly de-centralized organization is only asking for trouble. Although not quite as blatant, troubles can also arise if members' formal policies and procedures don't permit flexibility or the consideration of new ideas. For alliances with significant scope and strategic importance, the "buy-in" of senior management from the earliest stages can often permit enhanced flexibility where necessary.
4. Member Commitment - Members that have never experienced working as an alliance before must be willing in good faith to take the chance that working outside the conventional business model will succeed. As a first step, each participant must be willing to provide personnel empowered to make necessary decisions and commit company resources as required. Depending upon the size of the project and the financial commitment involved, officers or their direct reports may need to participate early in the process.2 Once the commercial structure has been approved, operational staff that have participated in the early phases of the formulation of the chosen structure should be empowered to go forward with coordination of the design and implementation.
5. Long Term Dedication - Depending upon the scope and nature of the alliance's charter, the parties should be willing to dedicate quality personnel and sufficient resources throughout the life of the relationship. Since the success or failure of any project relies heavily upon the personnel, their communication, and trust relationships developed, the members and the persons they designate for participation should be willing to commit for a significant portion of the alliance's duration. While personnel changes are inevitable, consistency is extremely important through the early stages of alliance building. If the alliance is established solely for the performance of a particular project, member participation may vary with the duration of the particular portion of the project over which the member is responsible, but will nevertheless require some level of participation throughout implementation, commissioning and possibly even operations. If the duration is to continue indefinitely, arrangements should include periodic review, analysis, and agreement of ongoing scope and resource requirements.
6. Consensus Building - Strong alliance management requires consensus building. Attempts to run an alliance in an autocratic fashion often end up losing the benefit brought by the smaller members. Although clearly not a democratic organization, an alliance should utilize an integrated management team ("IMT") chaired by the customer (or the most experienced supplier in a supplier/supplier alliance) with representatives from each member. The IMT should see to it that each member has unfettered access and the ability to provide unencumbered input to all aspects of the project from design to implementation. As in any successful distributed organization, a strong leader with the ability to make well reasoned decisions is required.
7. Barrier Elimination - The process of bringing a group of dissimilar companies from a variety of related industries together to build a strong alliance is an exercise in team building. Ingrained barriers between companies created by traditional concerns for liability and profit enhancement must be overcome. Once the parties are brought to realize that their goals and incentives are appropriately aligned, enhanced confidence and trust can be built and the members can begin working as a team. Communication and close cooperation are thus fostered from the very earliest commercial meetings that discuss the general framework of the organization through the (often laborious) negotiation of legal detail and into the project design and implementation phases.
8. Structured Planning - The old adage "the devil is in the details" could not be more true than in the formulation and implementation of an alliance. On very complicated projects, many of the finer details of the alliance will need to be considered by different parts of each member's organization. Commercial analysis, financial arrangements, tax issues, insurance coverage, legal requirements (both internal/organizational and external/regulatory), engineering specifications and operational concerns all must be considered and addressed. Effective use of sub-committees or special purpose teams to handle these issues requires appropriate delegations of authority, constant communication and a framework for interaction between the groups and the core decision making body ("steering committee"). Regularly scheduled meetings of the steering committee to (i) vote on pertinent issues, (ii) consider reports from the teams, and (iii) designate target dates for the resolution of outstanding issues are critical for effective organization.
9. Measurement and Goals - Even a well run alliance that spawns prodigious innovation will not be deemed a success unless there are clear measurement techniques that permit the alliance to reach attainable goals. Failure to establish and implement manageable assessment criteria will not only frustrate and disappoint the participants, it will ultimately lead to disputes over allocation of newly created value. Moreover, goals that inequitably benefit one party will cause the alliance to ultimately fail. By recognizing from the outset that the alliance relationship will enable the parties to achieve greater efficiencies and higher returns, the parties can include a formula to adjust the goals as a project progresses. For instance, in a project involving repeated implementation of a particular process (e.g. drilling wells in the development of a new field, re-working wells in a field to enhance production, etc.), the formula to maintain a fair distribution of the improved revenues or lowered costs must recognize that a large number of process improvements will occur within the first 40 - 50% of the project. Successive improvements are likely as new technologies and refined procedures evolve, but the rate at which these are encountered will necessarily diminish. The goals must, therefore, be set flexibly enough to equitably compensate the parties for both the initial risks undertaken and the continued effort invested to achieve additional success.
10. Well Conceived Implementation - The close interaction between organizations fostered by an alliance requires clear boundaries to be established from the beginning. Indeed, Robert Frost, in his poem "Mending Wall," put it so eloquently, "Good fences make good neighbors" - in the same way flexible, yet explicit contracts provide the necessary foundation for the parties to build upon. In addition to previously discussed provisions addressing alignment and risk allocation, several significant issues that should be addressed in the alliance agreement include:
a. Organizational Structure - As with any partnership or joint venture, governance issues, including leadership, management and dispute resolution must be addressed. Clarification of the members' expectations through documented procedures for certain common situations will reduce disagreement in the event difficulties are encountered (e.g., inadequate performance of a member) or critical decisions must be made quickly (e.g., emergency response). Since it is impossible to address every possibility, guidelines for alliance preferences are recommended and a delegation of authority to an appointed alliance "executive committee" is indispensable. The executive committee should be empowered to approve general alliance expenditures, special work, cost overruns, re-allocation of members' interests and other important issues. Execution of the day-to-day work, however, should be controlled by an integrated implementation team (the IMT mentioned previously) composed of representatives from each member that is involved in a particular phase of the project. This delegation of authority allows the alliance to remain flexible and respond quickly to both opportunities and problems.
b. Responsibilities - Definition of responsibilities and the expertise that each party is contributing to the effort should be delineated. Once agreed upon, each member should have wide latitude to implement its portion of the project as required. Overlapping member's expertise should be addressed and generally should only be utilized for consulting purposes. Only one member in each discipline should have an active role in the project implementation and be responsible for project results. Should additional expertise be required, the member responsible for a particular area should be free to consult as necessary.
c. Intellectual Property - Clear designation of confidentiality requirements and areas of expertise are essential. As the alliance's objectives are achieved, new technologies should belong to the members in accordance with predetermined guidelines. Generally, members with little or no commercial value for a new invention within their core competencies are entitled to less of the future benefit from any such development. Special consideration of the equities must be given to these issues in a supplier/customer alliance where the customer arguably "sponsors" the development effort.
d. Member Regulation - Provision should be made for the addition of new members and precautions must be included for member defaults. While admission merely requires obtaining designated approvals, declaring the occurrence of an event of default can be very disruptive. Default provisions often proscribe procedures for dealing with members that have declared bankruptcy, become insolvent, failed to make cash calls, performed inadequately, injured others through willful acts or omissions and even perpetrated fraud. Neglecting to address these "ugly" issues can make removal of a member in a timely and cost effective manner without significant delay and litigation very difficult.
e. Administration - Simple, flexible guidelines that preclude elaborate procedures are best. Regularly scheduled meetings, clearly specified voting procedures and delegations of authority remove sources of conflict and expedite performance. Similarly, changes of scope requirements, payment schedules, audit rights, assignments of interest and subcontracting guidelines should be clearly spelled out.
Coming Next Issue:Mr. Loftspring's series concludes with
"The Oilfield Alliance of the '90s -- and Beyond"
1 The Compass Gazette!, Compass Management Group, (http://www.compassmg.com/g_sps.htm; 1996)
2 Ernst, Managing Alliances -- Skills for the Modern Era, THE ALLIANCE ANALYST (http://www.allianceanalyst.com/mckinsey.htm#top; March 18, 1996)
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