Alliance ROI Considerations
By CTX Associate Greg Burge
Growth through strategic alliances is fraught with financial decisions. Identifying a realistic budget and credible return-oninvestment (ROI), for instance, are key decisions in building an effective alliance. As an aside, these decisions can be derailed
by conjecture, innuendo and wishful thinking executives and stakeholders could bring to the process. A successful alliance boils
down to sound financial decisions supporting the team responsible for the alliance. This brief examines a few critical steps in
those decisions.
Historically, strategic alliances form with expectations of low start-up and operating costs offset by revenue generated
from cooperative client pursuits. These expectations are misguided because more than 50% of alliances fail according
to the American Management Association – a number also cited in Cisco’s Steven Steinhilber’s 2008 book Strategic Alliances.
So what are acceptable financial expectations in alliance investment decisions? The approaches can be laid out into roughly three
buckets: Simple, Involved and Complex based on the financial model considerations below.
complex
Working Capital
Impact
CAPEX
Budgeting
Sales, Marketing
Customer
Support, Training
organizations
Involved
Multiple pursuits
per client
Three year
revenue outlook
Gross Margin
simple
Break even
analysis
Avg Selling Price
Alliance
Lifetime Cost
operational linkage
executuve oversight
Cash Flow
projections with
Seasonal Skew
adjustments
Simple => Per Unit Cost, Average Selling Price per bo oking, Cost over Lifetime.
These relationships rely on expense to revenue (E to R) and budget to breakeven (budget target for breakeven number of unit sales)
ratios. They are generally contract services with little, if any, operational linkage required. These relationships are often labeled
“vendor/supplier” relationships. Though they are not limited to one-way arrangements, Simple alliances tend to be one-way with
many partners supporting a single company’s objectives.
Involved => (Simple) + 3-year revenue outlo oks for bo okings, seasonal skews, Gross Margin and EBITDA.
These relationships use funds to offset partner’s short-term expenses and entice sales performance. They are interdependent (more
two-way commitments) and some operational linkage is sought to streamline costs. Involved alliances need executive participation
with planning, stewardship and governance on its progress. Involved alliances have a projected life of 3-5 years although their success can lead to a more substantial, Complex relationship.
Complex => (Involved) + Cash Flow Projections, Working Capital Impact & Ratio Analysis, Internal Rate of Return (IRR)
because capital expenditures (CAPEX) are often necessary.
These relationships are akin to a Joint Venture or Merger and Acquisition (M&A). Therefore, financial due diligence is approached
with similar urgency and rigor. Pricing-level negotiations and services rate-cards are commonplace in support of joint client pursuits. Complex relationships are interdependent (multiple two-way commitments) with extensive operational linkages necessary.
While operational funding may be designated by the activities they support (e.g. development, marketing, sales support), it is not
uncommon to earmark the funds as “infrastructure for partners.” A Joint Project Office is recommended for planning, stewardship and governance given the impact these alliances have on both partners. Lastly, Complex alliances require senior executive and
board-level participation. These alliances are rarely less than 5 years and often continue and evolve over decades.
191 post road west
westport, ct 06880-4625 USA
1
Alliance ROI Considerations
By CTX Associate Greg Burge
breakeven analysis
After you’ve categorized and decided to
invest in the alliance, a breakeven analysis is
warranted to define then measure the success
criteria. This financial measurement identifies
the point at which returns from the alliance
will match the investment.
The accompanying sample chart points to a
dotted vertical line identifying the breakeven
point in the 8th month (period) and at $8750
(dollars).
Breakeven represents where the
return-on-investment moves from a negative
(-) to a positive (+) thus the dotted line is ROI
= 0 (zero).
Additional scenarios stimulate broader discussions around the alliance investment. One example is looking at monthly sales highlights
for a view of product mixes (e.g. bundles) and for promotion ideas. It’s also worth noting the alliance’s Profit & Loss (P&L) must roll
into the stakeholder’s P&Ls for ongoing legitimacy. Lastly, compare the breakeven chart with the financial model considerations chart
to guide your alignment of internal and external messages with the partner.
SUMMARY
There are many avenues to growth, but alliances remain an effective, strategic choice. As long as finance is the “lingua franca” of
business, alliance investments rely on financial guard rails for clarity and discipline. When two organizations come together in search
of mutual benefit, the secret is ensuring your alliance – no matter how large or small – makes financial sense to everyone involved.
For examples of alliance partner support services that CTX Resources can deliver to information technology providers please click
here to visit our website: http://ctxresources.com/index.php/channel-project-services
about the author
CTX Associate Greg Burge led IBM alliance relationships with major software partners like Arriba,
Salesforce.com, Lawson, & Rational producing over $100M in average annual revenues over 15
years. He forges and leads joint ventures with a deep understanding of the critical success factors
for venture capitalists and IPO underwriters.
Greg holds an MBA from Golden Gate University and a BSc in Mathematics from Santa Clara University. Greg earned IBM’s prestigious Client Executive Certification from
Harvard Business School and is an ASAP Certified Strategic Alliance Professional.
191 post road west
westport, ct 06880-4625 USA
2