When & How to Develop Strategic Partnerships that Work…and Avoid Wasting Time on Those that Don’t

December 12, 2008

Case categories include: Strategy & Planning   

By Raji Nagarkar and Steven Siner
Hoge, Fenton, Jones & Appel, Inc.

Today more than ever, successful companies are employing strategic partnerships to gain competitive advantage.  These vehicles can help companies expand their capabilities and market share at a much greater pace than going it alone.

The reasons for strategic partnerships vary significantly, but primary motivations typically are pooling of resources and market expansion.  The relationships often involve companies of unequal size.  While big companies look for the cutting-edge research and entrepreneurial energy in smaller companies, small companies look for greater credibility, financial and technological strength, and vast distribution networks in their big company partners.

There are key elements to a successful strategic partnership.  First, to ensure that the partnership is a true collaboration, the parties need to identify partners who can complement each other’s capabilities.  Second, the benefit should be mutual, even though it may not be equal; strategic partnerships with one-sided benefits almost always fail.  Third, timing is critical to the success of any collaborative effort, and the partners’ time frames should be well aligned throughout the course of the relationship. Fourth, recognize that differences in corporate culture can present management challenges that should be addressed at the outset of the relationship.  Ultimately, a successful alliance is one that results in benefit to the customers of both strategic partners, and not merely to the partners themselves.

Strategic partnerships created to develop new technologies can involve a minefield of legal and business issues that should be dealt with carefully and with expert guidance.  One of the first steps is to investigate the technology, which requires the disclosure of highly confidential and proprietary information.  Any discussion relating to a strategic partnership, therefore, should be preceded by a well-drafted nondisclosure agreement (NDA).  The NDA should dictate how such confidential information may be used, who may have access to it, the terms and conditions under which they may have access, and procedures for return or destruction of the confidential information once the collaboration ends or fails.

The potential partners next embark on a phase of negotiating agreement terms.  The parties should have legal counsel involved from the very outset to ensure that none of the agreed upon terms compromise legal protection.  The parties then reduce the agreed upon business points to a definitive agreement which structures the relationship and its operation.

A number of hot button issues arise in almost all technology alliance negotiations, some of which are deal-specific.  For example, let’s look at a strategic partnership for the joint development of technology.  During the diligence phase, the parties should consider all issues relating to the ownership of existing intellectual property (IP), and the impact of such ownership on IP developed pursuant to the definitive agreement, such as: (a) who owns the technology and whether such party owns all aspects of the technology; (b) whether any aspects of the technology are licensed from a third party; (c) whether such partner has obtained the right to sublicense the technology; (d) the risks of not having such sublicense rights; (e) indemnification rights in the event of any actual or threatened infringement resulting from the use of third party technology; (f) the competitive risk of not having exclusive licenses to the third party technology; and (g) any limitations on non-compete provisions in the definitive agreement resulting from use of third party IP.

Many strategic partners fail to have a clear vision of the length of the relationship and challenges that may arise down the road.  The collaboration may not succeed because of changes in the economic climate, internal changes within one of the companies, or extensive delay in the project.  Strategic partners should consider the fate of the technology if the proposed alliance fails before successful development of the proposed technology.  Ownership allocation of independently developed IP should be clearly defined in the definitive agreement and ownership of any jointly developed IP should be considered.  Due to the uncertainties in collaborative arrangements, partners may intentionally leave the ownership issues relating to jointly developed IP to be decided later. In those situations, the agreement should provide that upon the completion or termination of the development project, the parties will review any jointly developed IP and mutually agree upon the allocation of ownership rights.  In the event of a failure to agree upon allocation of ownership, the agreement should provide effective dispute resolution methods such as mediation, arbitration, or resolution by a court, and specify the choice of law applicable to disputes.  The agreement may also set limitations on each other’s rights to use the jointly developed IP, including any non-compete provisions.  Partners should consider how to treat improvements to their separate IP and/or the jointly developed IP.  Specifically, should such IP be jointly owned, or should it be cross-licensed for a royalty and, if so, on what basis?

Strategic partnerships are dominated by human relationships and organizational cultures.  Partners should agree on proper exit criteria and procedures.  They should also agree on the potential consequences of breaching the agreement and ongoing rights and obligations after its termination, including ownership rights and any non-compete obligations.

Note that in most strategic partnerships, especially those that are long term, not all issues can be resolved at the outset.  The parties should bear in mind that the definitive agreement executed at the start of the relationship may not be the final agreement.  It may have to go through many iterations as the business and technology landscapes change.  The level of importance of an issue can change during the course of the relationship.  Parties must reconsider the terms at various stages throughout the relationship. 

As in all human relationships, expect to have conflicts.  Deal with the conflict in a strategic and timely manner to avoid a complete failure of the collaboration.  While a good plan is a great start for a successful strategic partnership, execution of the plan with periodic check-ups and constant management of mutual expectations are the keys to its success.