Do you Manage your Alliance Partner like a Supplier?

Some companies manage their important collaborators and alliance partners as if they were strategic suppliers. But this does not always make sense for every commercial and R&D alliance in today’s networked business world. In this article, we outline how the approach adopted for alliance management has evolved from the strategic sourcing and supplier relationship management paradigms, and discuss in more detail why it needs to go well beyond those roots in certain circumstances.

Historical Antecedents – Emergence of Outsourcing Partnerships

One classic model of supplier collaboration is outsourced manufacturing. Many products today, whether these be running shoes, cars, smartphones or asthma inhalers, are manufactured by assembling components from a network of global suppliers. Historically, the prime reason for outsourcing was cost – the suppliers exploit a lower cost base for the components that they manufacture owing to either their geographic location, huge volume economies or both. During the 1990s, the concept of strategic sourcing[1] became very popular as a systematic approach for designing and managing these kinds of outsourced manufacturing arrangements. Increasingly, as companies began to rely on certain suppliers, and as certain suppliers began to offer distinctive value customized to their buyers’ needs, these arrangements evolved into strategic partnerships i.e. “alliances”. Supplier relationship management[2] then emerged as strategic sourcing’s successor concept for managing such partnerships, with a stronger emphasis on the two-way nature of the relationship. The management of these arrangements consequently moved from procurement functions to dedicated alliance management functions, adopting a medium-to-long term “win-win” perspective rather than just focusing on short-term savings. Hence certain suppliers moved from being commodity suppliers to being outsourcing partners as they became strategically essential to their buyers’ businesses.

A second classic model of supplier collaboration is the local distributor arrangement, whereby a local company imports and markets a product on behalf of a foreign manufacturer – the distributor knows the local market conditions and has relationships with local channels, customers, logistics providers and regulatory authorities. And a third classic model of supplier collaboration, very prevalent in the bioscience and healthcare sectors, is the contract laboratory that conducts certain kinds of experiments or scientific studies more efficiently than its buyer’s in-house laboratories, without putting a burden on the latter’s fixed costs. Over time, as certain distributor and contract research relationships became strategically important, companies also started to manage these arrangements as “alliances”, a natural progression from the approach they already had in place to manage outsourced manufacturing partnerships. Hence these highly-valued distributors and R&D contractors also became outsourcing partners, essential to their buyers’ businesses.

Most companies soon segmented their suppliers into broadly two categories, namely commodity suppliers and outsourcing partners. The former were primarily managed by the procurement function against short-term cost and service parameters within tight quality standards. Whereas in the case of the latter, an additional proactive effort was also made (facilitated by a dedicated alliance management function) to strengthen the two-way relationship and to manage the efforts of both parties for mutual win-win benefits in the medium-to-long term.

Alliance management functions in many companies emerged in response to the need to manage important outsourcing partnerships. Over time, as new kinds of strategically important partnerships emerged, it was inevitable that these too became part of the alliance management mandate. So it is no surprise that the underlying collaborator paradigm assumed (consciously or otherwise) by many alliance management functions is that of the strategic outsourcing partner.

Managing Outsourcing Partnerships

Alliances with strategic outsourcing partners require proactive investment from both parties to strengthen the two-way relationship and ensure mutual benefit over the medium-to-long term. These alliances exhibit two important defining characteristics:

1. The activities of both parties are mostly conducted separately, i.e. they are compartmentalized with limited and well defined interactions.
2. Both parties’ activities also generate parameterized outputs that have well defined combination protocols.

Very clear parameters can be defined at the outset of what each side needs to deliver. Hence the collaboration can operate without a great deal of complex or unscripted interaction between the parties. This in turn leads to a management approach which focuses on clearly defined rules and metrics to govern what each side is supposed to deliver and how they will interact – for example, the use of a Balanced Scorecard methodology[3] to align the two parties.

Managing an outsourcing partner alliance thus involves:

• Defining or clarifying the rules of engagement, monitoring the relevant metrics and enforcing compliance if necessary.
• Resolving any misinterpretations of the rules, mutual misunderstandings and conflicts of interest which might arise when working within these guidelines.
• If necessary, facilitating decisions to “bend” the rules or to change them as circumstances evolve.

Excellent alliance managers also have strong people skills which they can apply to solve problems in the difficult emotional and political situations that might arise.

What’s Increasingly Different – Collaborative Innovation

The approach outlined above for managing outsourcing partner alliances continues to make sense for those commercial, R&D and supply chain collaborations that exhibit the two defining characteristics mentioned earlier. However, in today’s networked business world, we are seeing an increasing number of collaborations and alliances where collaborative innovation is the primary motivation, i.e. where the parties collaboratively solve new problem classes and/or jointly innovate new processes, products and services in a complex rapidly-evolving environment. In these situations, the best solutions arise from frequent complex interactions between both parties where the efforts of both parties are integrated under less rigid protocols – over-compartmentalizing activities and over-parameterizing outputs tends to have a negative effect. Consider for example the following illustrations of arrangements that are increasingly the norm:

• Discovery alliance to jointly develop an unprecedented drug class between one company with unique biology expertise and another company with strong chemistry competencies.
• Commercial partnership for a new orphan drug with an innovative companion diagnostic, involving a platform biotechnology company, a molecular diagnostic developer and a specialty pharmaceutical marketer, to gain regulatory approval, agree reimbursement/pricing with payers and market the combination. This is a 3-way collaboration governed by separate bilateral agreements that the biotechnology company has with the diagnostic developer and the specialty pharmaceutical marketer respectively.
• Manufacturing collaboration to develop an approvable and cost effective manufacturing process for a new antibody drug conjugate with an innovative linker and a new class of cytotoxic payload. This is a 4-party collaboration governed by three separate bilateral agreements that the antibody platform company has with a specialist biologics contract manufacturer, a linker technology company and the discoverer of the new payload class.

In my experience, I can distinguish at least two levels of collaborative innovation in situations such as those illustrated above. At one level, it involves the parties collaboratively solving challenging problems by combining the best of each others’ expertise and skills with minimal friction as regards time and cost i.e. efficient divide-and-conquer despite frequent “to and fro”. At another level, it involves the parties stimulating each other in such a way that the resulting solution is “more than the sum of the parts” i.e. co-creation of an altogether new solution not definable at the outset. A typical characteristic of successful co-creative collaborations is that each party delivers outputs that re-define best practice because it has being “pushed” and challenged by the other party.

In addition to the above examples, Professor Jackie Hunter’s Spring 2014 paper in Drug Discovery World highlights the growing proliferation of different models for open innovation and pre-competitive collaboration spreading across the bioscience sector, the vast majority of which involve a significant degree of collaborative innovation.

For all these kinds of partnerships where collaborative innovation in challenging situations is a crucial element, it is not sufficient to manage with rules and metrics. In fact, over-reliance on rules and metrics in these situations is often counter-productive. The different parties’ outputs are not precisely specifiable in advance, their interactions are not easily defined or scripted beforehand, and much spontaneous new value is generated by the processes in which their activities and outputs are integrated.

Management Challenges of Collaborative Innovation

Managing collaborations and alliances that involve a high degree of collaborative innovation is an emerging competence, at both the level of the individual (project leaders, alliance managers, project team members, executive sponsors) and the organization (project management functions, alliance management functions, governance committees). The emphasis here needs to be on “combinatorial performance”, i.e. not just the performance of individual components but performance of the combination. This in turn also involves managing interactions and inspiring joint creativity, not just managing rules and overcoming personnel issues.

Depending on the level of collaborative innovation that is required, your alliance partner can either be just a collaborative problem-solver or additionally a co-creator as well. Taking into account the supplier roles mentioned earlier, there is an evident continuum of how you could perceive and work with your alliance partner – the further along the continuum, the greater the need to manage combinatorial performance (see figure below):

In both my own consulting experience and my research for my forthcoming book on R&D collaborations, I have come across many positive and also negative war stories. But so far, I have not found an organization with a systematic, reliable and consistently repeatable approach for managing collaborative innovation – although some organizations are trying and will eventually succeed!