by Mark Brigman
If you would like to become a negotiating ninja, I encourage you to explore some of the resources that are available. However, be mindful of this section and add it as the graduate-level course that follows whatever resource you utilize. I also encourage you to specifically search under the relatively new science of “incomplete contracts” in order to specifically address the specialty of strategic partnerships.
It sounds cliché to say that a business relationship must be a “win-win,” but this is exactly what the outcome of the contract negotiation must be in order for a partnership to be successful. If your view and approach to negotiating a contract is for you to “win” at all costs, stay out of the strategic partnership profession. It is critical to understand that contract negotiations, in the world of strategic partnerships, are not a single transaction. There is no game that you are trying to win. Games have a finite timeframe or set of rules that govern the game’s conclusion. The intent of a business partnership should be viewed as infinite.
Consider the difference between negotiating a “complete contract” (transactional) versus an “incomplete contract” (strategic partnership). A hostage negotiator knows that he/she is playing a game. That is, his or her negotiation has only one round. If the hostage negotiator “wins” (is successful) everyone lives. But win or lose, nobody comes back the next day to play the scenario again. In this single-phase game, there is virtually no penalty for breaking trust. Actually, this tactic is commonly used as a means to successfully end hostage situations.
Strategic partnership agreements are all too often treated like a hostage negotiation. That is, many contract negotiators view the negotiation as a finite, zero-sum game. But seasoned PDLs and smart business executives realize that strategic partnerships are infinite in nature and agreements must be symbiotic. I’m not saying partnerships never end, but we don’t know when they will end. When negotiating commodity purchases, some finite-game tactics can be used. However, these tactics will fail miserably when applied to strategic partnership agreements.
That’s because these agreements are very different from commodity transaction agreements. Strategic partnerships must be symbiotic where mutual trust, respect, and value continually flow from side-to-side. Contract negotiations are based upon gives, takes, compromises, and value. Yes, you have a duty to professionally represent your company and its financial interests. However, as soon as your partnership agreement is signed, you have grown a new family member and your future success is partially dependent upon your new partner’s success.
By definition, strategic partnership means that your organization and your new strategic partner’s organization are interdependent. If your agreement hampers their ability to thrive or does not provide incentive for them to provide value to your organization, you will lose. By the time you get one year into a new strategic partnership, the amount of time, money, and other resources that have been spent will be significant. Make sure each partnership agreement that you sign provides strong value and great incentives for all parties involved.
If you structure the agreement correctly, the success of your partner will facilitate your success. Strategic partnerships are not a zero-sum game where having a winner requires having a loser. In fact, it is the opposite. When structured correctly, a “win” by either party serves as a win for both parties—it’s symbiotic.
The grand goal is for your new strategic partnership to be a perpetual value generator for your organization and customers. Negotiating and signing a strategic partnership agreement is not the end game, but rather the first formal step in consummating a new business relationship.
As you visualize a strategic partner negotiation in your mind’s eye, envision both companies sitting on the same side of the table with the competition on the opposing side. This will be the approach as you join forces and hit the market and the negotiation should be no different. You must work to address those challenges by defining each party’s roles and responsibilities in the agreement given the known information.
Working With Your Attorney
Oh, yes, the lawyers. We know them and love them all, don’t we? All kidding aside, attorneys are a critical element of the agreement process. They can make or break a deal as fast as any single player. I have been asked countless times by people from both huge and small companies, “When should I get my attorney involved?” As you can imagine, my answer is typically, “It depends.” After negotiating hundreds of strategic partnership agreements, I have developed pretty strong thoughts regarding this piece of the equation. There are many variables to consider when evaluating the subject of attorney involvement.
I openly admit that I have pretty strong thoughts on the subject of contract negotiating and working with attorneys. I want to share my recommendations and experience so you can benefit. Generally speaking, many attorneys have a win/lose mindset when it comes to negotiating contracts. Remember, strategic partnerships are not zero sum. Make sure that your attorney understands the partnering approach. The simple fact is strategic partnerships come with more risk, more uncertainty, and more ambiguity than traditional transactional agreements.
Do you have in-house counsel or are you working with an outside firm? If you work with outside counsel, be smart about your approach. Obviously they are paid by the hour, so do your part to use them only when needed. Take cost and subject mater expertise in mind as you engage an outside attorney and know that a seasoned PDL can draft contract terms as well as an attorney and frequently at a lower cost.
The first time you engage an attorney to assist you with a strategic partnership agreement, meet early in the process. This allows you to get synchronized and ensure both sides understand the impending negotiation and upcoming process. Timing is critical when working to close a deal, so don’t put yourself in a position where you are killing time because your attorney is absent or does not understand what your partnership goals entail. When working outside counsel, you are the client. You tell them what you want, and they support your approach.
Working with in-house counsel has its pros and cons. Attorneys who work within your firm have an obligation to the firm, not you. Typically, the Partner Development Leader who is negotiating the agreement for your company does not own or control the company. Therefore, the in-house attorney frequently takes a very conservative approach when it comes to risk tolerance. If your organization has a political, bureaucratic legal staff and your impending agreement has a new twist, it is a good idea to include your attorney early in the process so the red tape can be cleared.
Working with in-house counsel can be a great benefit. If you have questions or recommendations that may lead to a smoother process, you are generally free to collaborate with your legal team and not hear the “invoice meter” running in your ear. In-house attorneys also understand the nature of your business much better than an outside attorney. This knowledge helps the contracting process progress efficiently.
As with your prospective partner, it is important to develop a level of trust and mutual understanding with your attorney. If possible, try to work with the same attorney on future agreements. By your second and third agreement, your attorney will understand your template agreement, risk tolerance, and approach to closing a deal.
Do you have a Strategic Partnership Agreement (SPA) template? You will want to work with an attorney to get a good SPA template created. If you are working with in-house counsel, your attorney should be able to give you a template to use. If you work with outside counsel, your PDL probably has a template from a past life or he/she can surf the web for a template that can be modified. Your PDL should be able to construct a suitable SPA given the unique needs of your company and strategic partnering interests. If you obtain a SPA from a source other than your attorney, have your attorney look it over to ensure that all legalese is sufficiently covered.
Be sure to work with attorneys who specialize in strategic partnership agreements. Attorneys have specializations that go far beyond just contracting. Eve
n within contracting, some attorneys specialize in procurement and supply chain (complete contracts) deals, which is different from strategic partnership agreements (incomplete contracts). Risk factors, payment terms, intellectual property rights, solicitations clauses, service levels, termination clauses, and licensing rights are just a few areas that are frequently positioned differently between procurement and partnership agreements.
As you reflect on your impending partnership, consider if intellectual property (IP) has a play or potential play in your deal. If it does, you will need to contact an IP attorney and address that element. The legal aspects of IP are highly specialized and a general contract attorney should not be your sole source of advice. Recall that fears of inadequate IP protection were named as the top reason that company executives did not participate in more strategic partnership agreements according to the 2013 ARPA-E Summit Survey.
Your PDL’s job is to understand, draft, and lead the entire contract negotiation process. He/she will be the single point of contact throughout the negotiation from your partner candidate’s perspective. Your PDL will negotiate all business terms of the impending agreement, but your attorney may need to address the legalese if the PDL is not well versed on these items. It is important that the PDL be the single negotiating voice throughout the negotiation.
Having multiple lines of communications actually puts your company at a disadvantage as information flows from multiple, potentially inconsistent channels. Having too many cooks in the “negotiating kitchen” will undoubtedly spoil the meal. Your attorney will advise you regarding the legal terms (risk), but your PDL should be the one leading and negotiating the agreement. Your attorney’s job is to communicate risk and while helping you mitigate risk.
When I negotiate agreements, I also negotiate the risk elements, but only after advisement from my attorney. This keeps the flow of communications very clean. There is no doubt that contracts are serious and they are binding. Bad deals can cripple or even kill your company. Working with a seasoned attorney makes a big difference and offers you the protections that you need. If your PDL did a good job until this point, the negotiation should be a predictable and non-adversarial process.
Terms of a Deal
Revenue Share
The majority of strategic partnership agreements do not have a purchase order that is tied to the execution of an agreement. In fact, almost every strategic partnership that I have negotiated or managed had a revenue share component without a guaranteed payment. Revenue share relationships are structured in a way that allows each party to be compensated based upon the risk and resource factors that contribute to an opportunity. Under this arrangement, there are no payments unless value is created.
Similar to the approach that most firms take with their internal sales teams, you will want to provide financial incentives to your partner that drive future revenues. Structuring your strategic partnerships to pay based upon a revenue share will provide an incentive to produce future sales while simultaneously mitigating risk because your firm will pay only if revenues are received.
Although revenue share arrangements are common with strategic partnerships, there are other alternatives to consider. For example, certain agreements may include an upfront investment or a minimum financial commitment from one party to the other. Think of this arrangement as seed capital. I have seen many examples where a small firm and a large firm join forces and the larger firm provides an infusion of dollars in order to fund or accelerate the partnership. Even in these seed capital cases, they frequently include a revenue share component.
Value Beyond Direct Revenue
Value can be presented in many forms when considering strategic partnerships. One form that can be significant, especially if your company is partnering with an industry giant, is the publishing of a press release. Landing a deal with an industry giant is not easy to do and their market power can transcend into significant revenues for your growing company. If you feel that a press release can offer value to your company, be sure to address the topic in your partnership agreement.
It is also smart to discuss co-marketing and co-branding efforts between you and your prospective partner. As your new growth engine hits the market, you will likely be spending considerable resources to market the new capability. By forming a co-marketing arrangement with your partner, you will have an opportunity to share in the cost of evangelizing the joint endeavor.
Co-branding is another effective way to increase the value and equity of your organization through a partnership. Oftentimes a company’s brand is one of the most valuable assets they own. Since we are looking to partner with industry leaders, our partner candidates should have brands with which your company will want to be associated. By engaging in co-branding efforts with your stellar partner, your brand’s equity will get a lift, so take advantage of this great opportunity.
Exclusivity
Exclusivity can be a powerful tool to consider as you design your new partnership. This mechanism can provide great incentive and financial reward for the partners and quickly create economies of scale and simplify the go-to-market process. With exclusivities, by definition, the amount of parties involved is limited so energy can be focused on the actual participants. Exclusive arrangements can, however, be a blessing or a curse—beware.
In the case of Project Vogue, AT&T was the exclusive retailer for the iPhone when it first launched. The five-year clause gave AT&T a huge competitive advantage over its major industry rivals Verizon, Sprint, and T-Mobile. This arrangement made for a much more streamlined and simplistic launch for Apple as their teams had only to focus on the AT&T network and systems for the first several years to ensure they “got it right.”
Agreeing to an exclusivity clause without certain protections can be detrimental for a partner. For example, if your company agrees to only buy chipsets from a partner manufacture, you must ensure that their company can deliver what is needed. Otherwise, your production of units (and impending sales) is completely limited by your partner’s ability to produce and deliver quality chipsets.
If your company agrees to an exclusive arrangement, make sure you also include minimum performance standards that must be met by your partner. The minimum performance must include, at a minimum, cost, timeliness, and quality. Regardless if an exclusive arrangement is related to sales, development, manufacturer, or other strategic service, the exclusivity clause is only valuable if both parties work to make it valuable to the end customers. Exclusivity clauses should always have a provision that ends the exclusive nature in the event of non-performance.
Multi-year Deal
Strategic partnerships almost always include the creation or combination of capabilities between partnering companies. The simple fact is this process is frequently laborious, messy, and requires a good amount of time to make the vision become reality. As you can imagine, the spectrum of strategic partnerships is quite wide. But generally speaking, most strategic partnerships require one-to-two years to begin to generate respectable revenues.
As a general rule, plan on using the majority of the first year of your agreement primarily on administrative and relationship tasks as opposed to generating revenue. Granted, some partnerships can quickly begin to generate revenue, but the majority of strategic relationships take at least one to two years before reaching “cruising altitude.”
It is imperative that you and your partner candidate are realistic when setting goals and expectations on future revenues. After a deal is signed, a quick sense of urgency on revenue creation can quickly appear. But both parties must remember that water cannot flow until the plumbing is built. When structuring the term length for your strategic partnership contract, be sure that your agreement has an initial term of at least two years.
You and your partner will need a sufficient amount of time to combine resources, build processes and relationships, and generate revenue through your newly created venture. The last thing you want to do is spend a significant amount of resour
ces to climb 80% up the mountain only to have your strategic partnership terminated because the term has expired. Keep in mind that business leaders tend to be overly optimistic when it comes to creating timelines. Inevitably, the path to sufficient and sustainable revenues takes longer than we plan. Make sure your “rose colored glasses” are off when you and your partner candidate decide on an appropriate initial contract term.
Termination for Convenience
It is not uncommon for general agreements to contain a termination for convenience clause. Essentially this means that a particular party can end the agreement if they decide the relationship requires too much effort. One thing is certain, strategic partnerships take much effort and success never comes without challenges. Managing and leading strategic partnerships is analogous to the story of the Halfway House where climbers attempt to a summit the Swiss Alps. At some point along the journey, any sane person will contemplate quitting.
I urge you not to accept a termination for convenience clause in your partnership agreement. Granted, a special case may exist that warrants such a clause, but they are typically a bad idea for relationships that require the investment of significant resources. Again, you do not want to find yourself 80% up the mountain only to have the rug pulled out from beneath you. As soon as the partnership is terminated, your ability to generate revenue to recoup your investment is also terminated.