Alliances Vs Partnerships - An IT Industry Context

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Purpose

While both Alliances & Partnerships serve strategic business objectives of companies, however many confuse the terms Alliances & Partnerships to be same/similar and interchangeably use them in an incorrect manner. Especially in the context of IT industry, wherein in most cases both are looked at through the narrow prism of Go to Market (GTM) strategy & planning, and not through a broader lens of being strategic growth drivers.

This blog is an attempt to explore what are alliances & partnerships, their differences, which one works better than the other & in what contexts, etc.

Definitions

As per Investopedia, “a strategic alliance is an arrangement between two companies to undertake a mutually beneficial project while each retains its independence”, whereas “a partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits”.

Differences

Let’s look at some key points that makes Alliances & Partnerships different from each other:

1. Alliances are more oriented for organic growth, while partnerships tend to lean more towards inorganic growth. Partnership agreements in many cases also include clauses for Exit or Merger & Acquisitions (M&A) options amongst the parties.
2. An Alliance can be an informal arrangement, but a partnership tends to be more formal with binding clauses.
3. An Alliance agreement is less complex / formal and less binding on the participating companies compared to a Partnership agreement, which is more complex and structured including taxation implications for the partners.
4. In case of Alliances the participating companies retain their independence, contrary to Partnerships where the companies pool in resources to create and operate a separate business entity.
5. In case of Alliances, the benefits gained by the companies will define the longevity of its tenure, with Alliance agreements having termination and annual/bi-annual renewal clauses. Partnerships however are more like Joint Ventures (JVs) and hence have a longer-term perspective.
6. In case of sharing business benefits, alliances are more about sharing revenues whereas partnerships entail sharing of both revenues and profits.

Usage & Benefits in IT Industry Context

In case of IT industry, below are some contexts when a company can look at strategic alliances and when for a partnership:

1. When a company plans to expand into a new market / geography expansion

1. E.g., an Indian IT services firm wanting to expand to say, Canada / Australia market, by working out a strategic alliance with a local Canadian / Australian IT service provider.
2. The operational model tends to be with the local firm fronting / priming the contracts with the local customer(s) for the overseas firm’s offerings, and the overseas firm providing the actual / lion’s share of the customer contracted services / support from the back-end.
3. The revenue / profit sharing mechanism is mostly pre-discussed and pre-agreed at a customer-specific or contract-specific basis, while there may be a basic framework of revenue sharing guidelines covered in the alliance agreement in some cases.
4. This model works best during the initial / exploratory phase of an overseas firm’s geo expansion / new market entry plans, during which period the overseas firm learns more about the new market & customer types therein, business & regulatory requirements, critical success factors for a long-term presence in that particular market and in what model (setting up its own subsidiary organically / through a local M&A, or signing a longer-term partnership / JV agreement with the same local firm, etc).
5. So, net-net, for new market entry / geo expansion context, strategic alliance model works better in the initial phase with a shorter-term outlook, while partnership model works better for a longer-term perspective.

2. When a company plans to create a new offering or enhance its existing service offerings

1. E.g., an IT services company like Accenture/TCS/Wipro/Infosys/Atos/Netlabs Global, etc. signing into a strategic alliance program with a product/platform company like Microsoft/IBM/Oracle/AWS/Google/Automation Anywhere/UiPath, etc..
2. The operational model being the IT services company creating say an ERP service offering using SAP/Oracle platform or say creating a Cloud service offering using AWS/Microsoft/Google platform or say a RPA/Automation service offering using Automation Anywhere/UiPath, and priming the contract with customers.
3. The revenue sharing model is simple with the IT service provider retaining the services-related revenues, while transferring the license/subscription related revenues to the platform providers, minus the pre-agreed margins/commissions on license revenue.
4. While strategic alliance is the de facto model used by product / platform companies for the services companies’ ecosystem, there can also be contexts when a partnership model between them works better.
5. An example scenario can be when both the platform and service provider companies decide to pool in their resources to create a niche offering targeting say a specific industry vertical, they set up a partnership model and create a new legal entity. E.g., say a service provider with a deep domain expertise in the Oil & Gas sector partnering with an ERP platform provider to create a new industry-specific version / module for the Oil & Gas industry that can provide an edge over other ERP competitors.

3. Context of a Very Large Customer Acquisition / Mining

1. An IT services company with its own offerings can / have a particular amount of wallet share in a very large enterprise account. However, if it works out a strategic alliance with another IT services company with supplemental offerings, then their combined / expanded offer set can eke out a larger share of the wallet / customer’s IT spend pie, sometimes even at the cost of another incumbent player thereby enabling them to empty the field!
2. However, a partnership approach will work better for the two same aforesaid companies when the context is expanded beyond just one large customer to a set of similar such large customers in the same industry or across geographies. When the stakes are high, higher are the commitment and resource asks, and partnership model has already been discussed and defined earlier in this blog as appropriate for such cases.

4. When a company plans to raise funding from investors / having IPO plans / in M&A cases

1. A strategic alliance story will not add as much bang for the buck vis-à-vis a partnership story, as partnership(s) carry more heft as they directly add to the asset base of the company in terms of its valuation.
2. In such cases, partnerships clearly prevail over alliances.

5. Context of a company’s Growth model

1. In case of a company’s organic growth, both strategic alliance and partnership routes can work.
2. However, for a company’s inorganic growth, partnership model suits better. E.g., in cases of M&A, a company’s partnership with another company say through a JV, lends itself more amenable as a model to grow inorganically by acquiring the JV partner’s stake or the JV itself acquiring a 3^rd company.
3. Further, even in cases of exit / reverse M&A, partnership model is applicable with strategic alliance model having no locus standi there.

6. Context of Scale and a company’s Evolution stage

1. When a company is small in scale or in its formative years (including start-ups), it works best for it to ride on and leverage strategic alliances to generate business growth and build its brand.
2. However, once it reaches a critical mass of revenues / growth, it may want to explore other avenues of growth like setting up subsidiaries in other geographies or going in for partnerships to scale further.

Having said the above, there may be many more scenarios / contexts to evaluate applicability of alliances vis-à-vis partnerships. Each such context will merit / define which model works better for a company’s interest.

In IT industry context, both Alliances & Partnerships are key cogs in the Sales & Marketing wheel. Both models / routes are strategic and important for a company’s growth, and needs voice / representation in corporate boardrooms / company’s executive leadership positions.

A Blog Series on Partnerships & Alliances

Dated: July 18, 2022

Author: Subham Sarkar (https://www.linkedin.com/in/subham-sarkar-519b7114/), Chief Strategy Officer, Netlabs Global IT Services, www.netlabsglobal.com

Disclaimer: The contents of this blog are based on the personal opinions and experiential learnings of the author.