Managing an Alliance Portfolio: Large Companies Often Have Dozens of Alliances-And Little Idea How They Are Performing

Abstract

As corporations have evolved from command-and-control structures with sharply defined boundaries into loosely knit organizations, corporate alliances (1) have become central to many business models. Most large companies now have at least 30 alliances, and many have more than 100. Yet despite the ubiquity of alliances--and the considerable assets and revenues they often involve--very few companies systematically track their performance. Doing so is not a straightforward task. In our work with more than 500 companies around the world, we have found that three problems typically bedevil efforts at measurement. The first is a failure to measure the performance of individual alliances rigorously. Our experience suggests that fewer than one in four of them has adequate performance metrics. (2) As a result, alliances are run by intuition and incomplete information; partners may not agree about the progress of their ventures; and senior management can't intervene quickly enough to correct problems. Companies frequently have three to five major alliances in desperate need of restructuring--but don't know which ones they are. Second, companies often fail to recognize performance patterns across their alliance portfolios--patterns concerning particular deal structures, types of partners, or functional tasks. A failure to spot and fix such recurring problems can be costly; one leading pharmaceutical company had so many slow launches, for example, that it was losing an estimated $500 million a year from missed product sales and other opportunities. Finally, few senior management teams know whether the alliance portfolio as a whole really supports corporate strategy. Executives at a leading US airline, for instance, couldn't quantify the total revenue from its alliances five years after it made them a centerpiece of its international strategy and thus had no idea if the returns were positive or negative. (They have since calculated that the deals generate $500 million a year in direct revenue, plus indirect revenues and cost savings.) At a time when alliances are increasingly important, underinvesting in efforts to measure their performance isn't a realistic choice. To get the maximum value out of all alliances and the ability to intervene when their performance veers off track, managers should learn to measure their fitness on several levels--a process that can also reveal fundamental weaknesses in the way companies create and manage them. With this deeper understanding, senior executives can assess whether alliances fully contribute to the corporate strategy and can spot new opportunities to use them. The challenge To measure the performance of alliances accurately, a company must start by recognizing the obstacles. Because each partner has its own reporting processes and systems, the first hurdle is agreeing on a common approach to performance measurement. Each partner might have different aims (such as gaining access to specific technologies or customers), so it can be hard to agree about what to measure. And since alliances are fundamentally about collaboration, managers must constantly attend to the health of the relationship--a soft and frequently overlooked issue. Second, the operations of an alliance are often entwined with those of the parent companies, and this complexity makes benefits and costs difficult to track. Most alliances receive some inputs--raw materials, customer data, administrative services--from the parent companies and provide outputs to them, thereby creating complicated transfer-pricing issues. Before Airbus Industrie was revamped in 2001, for instance, the four consortium members made aircraft sections and sold them to the joint venture, which then assembled and marketed the airplanes. Setting accurate transfer prices was a challenge because of the sensitivity of the partners about sharing detailed cost data. …