by Mark Brigman
Many people don’t know the full story about Ray and versions that are commonly told are not entirely accurate, especially those from Hollywood. If it were not for strategic partnerships it is likely that the McDonald’s franchise would not exist today. His success doesn’t stem just because of a partnership between Ray and the original McDonald brothers but other strategic partnerships that were forged by Ray long before he ever heard of the burger drive-in.
Early in his career, Ray got into the food industry by selling paper cups for Lily Tulip Cup Co. in Chicago. He did this with great success for sixteen years, but he always seemed to be on the lookout for something bigger. While selling paper cups, the “door of opportunity” opened when he met an inventor named Earl Prince. Earl was one of Ray’s paper cup customers and in 1939 he developed the “Multimixer.” This revolutionary machine was able to make five milkshakes at one time. Ray, being the consummate opportunist, knew that this invention would significantly reduce the time and labor required to make milkshakes. He believed that the majority of his paper cup customers would be thrilled to purchase the amazing Multimixer.
At the age of thirty-seven, Ray set out to develop a strategic partnership with Earl. He negotiated an agreement that gave him exclusive rights to sell Earl’s Multimixer across the entire US (a sales & distribution partnership). Ray was quite successful in selling the new invention to shops across the country. According to John Love, author of McDonald’s: Behind the Arches, Ray earned $25,000 per year during the late 1940s and early 50s, which is equivalent to $255,000 in 2017. It provided a great living for Ray and his family and he sold the Multimixers for seventeen years. But the best part about the partnership with Earl is that it led him to San Bernardino, California in 1954 where he met the McDonald brothers.
Dick and Mac McDonald purchased eight milkshake Multimixers from Ray. Absolutely stunned by the volume of business that the McDonald brothers were generating, Ray had to learn more. Dick and Mac showed Ray their end-to-end business processes. The brothers explained that years before, they literally shut their once dominating business down for a period of time to completely redesign all of their processes to focus on speed and quality. Dick McDonald stated they had to change with the times by moving from a “horse and buggy” drive-in to a “jet propulsion” food production system.
Prior to the temporary shutdown, the McDonald brothers had the most successful hamburger carhop in the region. But after implementing their revolutionary processes, sales increased by forty percent in less than three years. When the brothers told their customers that they were going to temporarily shut the business down to reengineer their processes, most people thought they were crazy, according to Dick McDonald. But the power of great processes was quickly proven and people from across the country took notice after the small hamburger stand made the cover of American Restaurant Magazine in 1952. This notoriety was in part why Ray Kroc traveled from Chicago to California to meet the brothers.
When asked how they achieve exponential growth, the brothers explained they had innovated by simplifying their business and reducing their menu from twenty-five items down to nine. The establishment also converted from carhop service to self-service where customers could have more control over their time by proactively placing their order at a window. This method of customer ordering is where the term “hamburger stand” was coined. With their new processes in place they were able to churn out hamburger orders in thirty seconds.
Constantly seeking additional ways to improve on speed, the McDonald brothers wanted to address the process of making milkshakes. Before Ray began selling the Multimixer across the US, the only milkshake mixers were single-design mixers. Ray’s new product could mix five milkshakes at a time. This is exactly what the McDonald brothers needed, but one was not enough — not even close. They purchased eight machines from Ray. The brothers needed to be able to make as many as forty milkshakes at a time in order maintain their low wait times during peak hours.
The operations of the McDonald brother’s burger stand blew the minds of other drive-in owners from across the country and it gave Ray an idea. Ray approached the brothers about franchising the business, not to him, but to other restaurant owners. Ray did not want to own a burger stand; he wanted to sell his Multimixers to burger stand owners. Ray was seeing dollar signs, lots of them. He had a vision of hundreds of McDonald’s being built across the US and he wanted to sell eight multi-mixers to each location owner. Not having the same grand vision, Dick and Mac said they had no interest in managing and selling franchise licenses directly, but they would allow Ray to do it. And the rest is history.
According to the 2015 McDonald's Corporation annual filing, the company’s total value was nearly $70 billion, generated by restaurants from 119 countries. McDonald's operates 36,525 restaurants worldwide, employing more than 420,000 people that serve an average of 68 million customers each day. This incredible volume is only possible through efficient processes.
Internal Change Processes & Their Implications
When considering the topic of processes, I urge you to spend time during the negotiation phase discussing process with your partnering companies and specifically partnership funding. Here, you will want to understand your partner’s internal process for funding partnering initiatives and for making changes to approved plans. The internal processes of your partner will have a significant impact on your partnership’s overall success. The more dynamic and fluid your partnership can be, the higher the probability of overall success.
Take, for example, your partner’s internal “change order process.” Let’s suppose for your new strategic partnership that your partner’s executive team approved spending 100 man-hours per month to build a software application that will efficiently provision new orders for retailers. This innovation will streamline the sales process and allow for significant revenue growth for your partnership. The new software is a critical piece of the competitive advantage that your new partnership is seeking to create.
Now, three months into the partnership, team engagement is high and the partnership is hitting milestones weeks before they are due—you’re well ahead of schedule. The collective teams are now so far ahead that you can see an issue. That is, unless the software development project can be accelerated to meet the shortened timeline, the partners will be waiting for at least a month so the software solution can be finished.
This is where you will be really glad that your partnering team has a well-defined change order process. As a part of the agreement, your partner is “on the hook” to deliver the new provisioning software according to schedule. But now, the schedule is a month off because of the team’s great progress. You now need the PDL from your partnering company to obtain approval to increase their man-hours from 100 to 150; otherwise, the collective teams will have a month of “dead time” while they wait.
The additional 50 hours per month will cost your partner more money in the short-run and nobody likes to spend more than what was projected, right? However, this new, accelerated schedule means that the partnership has the opportunity to score sales revenue sooner than projected, and we love bigger, faster revenue. The problem you will face, especially if your partner is a bureaucratic beast, is change order approvals that can turn political and take a long time to gain approval.
Most large companies are inherently bureaucratic and require multiple levels of approval if costs exceed the approved business case. If your partnering company is a bureaucratic beast and/or the executive sponsor(s) has low levels of financial authority, your partnership could become a painful experience. Strategic partnerships must be agile. Strategic partnerships by definition and design are not “business as usual,” and they cannot be treated that way. It is best to have specific processes and authorizations put into place that will allow your unique partnership to thrive by efficiently accomplishing the stated goals.
Here are a couple helpful ideas to consider in relation to partnership funding. Rather than create a rigi
d budget for your partnering initiative, include the following elements into your partnership’s budgeting practices: 1) gain budget approval for 10% more than your anticipated costs and 2) use a cumulative cost versus line-item cost when reconciling a partnership project budget. A 10% cost over-run will allows your team flexibility to make necessary adjustments without stalling the project to gain approvals. And by using a cumulative cost reconciliation method, your team will have the latitude to “reinvest” the cost savings that are created to further develop the strategic partnership and “smooth” other items that have higher than expected costs.
In strategic business partnerships, momentum is critical. Having sufficiently defined processes around the key functions of your partnership will be important as they will ensure a more timely and consistent means to execute against the various elements of your partnership. You must see to it that your team, as well as your partner’s team, is prepared for success by having the core processes defined.
Identify Partnership Processes
As you consider your company’s strategic partnerships, first identify each of the major processes that exist (or should exist). Remember, less is more and simplicity is your friend. With that said, it is imperative that you identify, design, implement, and communicate all processes that are needed in order to efficiently govern your partnerships. Process communicates the needs and expectations of the partnership and without them accountability is not possible.
As discussed in Chapter 1, there are many types of partnerships that your company either is or may become a party to. Partnership structures can be quite unique from deal-to-deal. A sales and distribution partnership, for example, will have processes that are quite different than a technology development relationship. What is important to note is that you must identify critical processes within each partnership so they can be designed and implemented to ensure long-term partnership success.
As you begin to identify your various partnership processes, your list should, at a minimum, include the following:
Term Sheet Creation
Strategic Partner Plan (SPP) Creation
Contract Negotiation
Goal Setting
Standard Partner Meetings (working team)
Leadership Team Meetings (governance team)
Partnership Communications (performance)
Governance
Escalation
Change Management
Dispute Resolution
Dissolution of Partnership
Metrics Development Identify metrics (what to track)
Results capture (how to track)
Scorecard communication
Process Design
After identifying all of the core processes related to your strategic partnership efforts, it is now time to design and document each of the processes. Again, less is more. Don’t seek perfection the first time through and know that getting each process documented 80%-85% is a great first pass. It generally takes companies a year to fine-tune their processes after they have been implemented.
Don’t make the common mistake of defining processes around people—people move. Make sure you have the discipline to define your processes according to what is needed, regardless of who will be performing the tasks and his/her strengths. If there is a lack of ability with an employee, conduct training or replace the individual with someone better suited for the position.
Document each of your partnership processes and don’t get bogged down in the minutiae. Remain focus on the key procedures that facilitate success—details can come later. The reason that most people do not like process is because process engineers make them overly complex and burdensome. You should be able to sufficiently document most of your partnering processes in two pages or less. If you determine that you need a more detailed approach, you can always build upon the process you have started.
The following is a framework to help you understand how to construct each of your processes. Remember, the important thing is that your teams understand and follow the processes to ensure consistency and efficiency. Make sure that each process is useful and usable.
Term Sheet Creation Process (Example Framework)
Step 1: Company
A) Share information about your company including mission, vision and core values
B)Describe the type of company with which you seek to build a partnership (emphasize core values — beliefs)
Step 2: Opportunity
A) In general terms, describe the type of partnership you are seeking (sales & distribution, software development, market research, digital content creation, research & development, etc.)
B)Describe the basic needs that the selected partner must deliver
C)Describe additional capabilities (wants) that the ideal partner will be equipped to perform and/or provide
D)Timelines to engage and deliver requirements
Step 3: Qualifications (specific requirements)
A)Years in business and/or in a particular industry
B)Reach (have national sales team)
C)Revenues (quarterly or annual sales volume)
D)Hold specific certifications or qualifications (ISO, etc.)
Step 4: Goals of the partnership
A)Establish a national sales channel penetrating at least 30 states by 2019
B)Generate total annual gross sales of $20 million through the channel 2018
C)At least 20 dedicated sales representatives in the channel by yearend 2017
Step 5: Team
A)In general terms, describe the make-up of your PDL team
B)Describe your basic expectations / requirements for partnering (for example, having a dedicated PDL as a primary interface)
C)Requirement to establish a governance team that will be sponsored by at least one senior executive from each company
Step 6: Communications
A) Expectation that the PDLs from each company will hold weekly working team meetings to manage and lead the initiative
B)Expectation to hold regular (quarterly or semi-annual) leadership team meetings that will include the senior executive sponsors from each company.
C)Expectation to collect and share a scorecard on a regular basis (daily or weekly)
Step 7: Structure (core terms of anticipated agreement)
A)3 year agreement with auto-renew terms
B)Revenue share based upon partnership performance
C)Revenue multipliers for accelerated achievement
D) Potential for exclusive rights to sale & distribute if monthly sales volumes are met
Remember, it unlikely that your company will have a non-disclosure agreement that will cover the opportunity presented in your initial term sheet. You will need to find a balance between offering enough information to communicate the opportunity yet not share information that may “tip your hand” at the competitive advantage that you are seeking to build. The initial term sheet is used to facilitate a conversation with potential partners and subsequent communications with prospects will allow you to further build on the specifics in due time. As conversations deepen, it will likely be appropriate to execute an NDA prior to negotiating and signing a partnership agreement.
Standard Partner Meetings
As previously discussed, the types of partnership initiatives that you may enter can vary significantly from one relationship to the next. If your company has a need and it makes more sense to partner than to buy (acquire) or build it on your own (organic), then a partnership is your wildcard answer. When detailing a meeting plan process with your partner, build what you need. There is no one-size-fits-all answer as to the meeting length or frequency. Use your best judgment to get started and know you can adjust if you need more or less time to achieve full coordination.
Although nobody is looking to add more meetings to their calendar, you should err on the side of over-communicating as you embark on new partnerships and/or new projects with existing partners. Having regularly scheduled meetings is considered a best prac
tice. Close coordination is key to success and given everyone’s hectic schedule, you are best served to set regular meetings and simply cancel a particular meeting if it is not needed.
The specific cadence that you will need depends on the speed and level of interdependencies that your company has with its partner. Initiatives that require precise, intense cross-company coordination where inaccuracies come with a big price may require daily meetings with PDLs and working groups. Sales channel partnerships however, where intercompany communications is not as critical may only require monthly meetings. The vast majority of strategic partnerships are managed and led by using weekly meetings with email and voice communications shared as needed to facilitate momentum.
Governance Team & Governance Process
The core purpose of a governance team and governance process is to efficiently address challenges that arise within a given partnership. The governance team will consist of several members from various specialties from both partnering companies. Generally speaking, the governance team will include the following roles from each company: executive sponsor, PDL, technical lead, marketing/sales, and performance management.
Having the sponsorship and engagement of “empowered” executives is absolutely critical for partnership success. Remember, the question is not “if you will have issues” within your partnership, the question is how quickly your teams will work to resolve issues so momentum is maintained. It is imperative that each executive sponsor has sufficient authority to make decisions that obligate their respective company to reasonable requirements.