Partners in Power

Don't blink. This story will change on you.

You have to accept that when you set out to assess how the industry's most powerful companies try to fortify their positions by selectively teaming with other players.

Change is a constant, for even the mighty can't go it alone anymore. Partnering is a competitive necessity, whether to fill out product lines, catch up to competitors or gain knowledge about a hot new technology. But there are partnerships and then there are partnerships. Some of the strongest just seem to emerge, like the long-standing symbiotic relationship between Intel Corp. and Microsoft Corp., while the most meaningless often are announced with great fanfare and chest-pounding, only to disappear six months later.

All of which makes it hard to piece together an accurate partnership picture, and to be frank, what we present here is only a snapshot of the most prominent deals among the industry's heaviest hitters. Even these change overnight. Consider that three of Cisco Systems, Inc.'s seven major partners were just named last year.

The reason new partners crop up so often is that established alliances fail so rapidly. According to research by Larraine Segil, partner and cofounder of The Lared Group, a Los Angeles consulting firm that specializes in vendor-teaming, 55% of alliances fall apart within three years of conception (see www.refresher.com/!alliances for more information).

Short-lived or not, it is telling to look at how the industry's biggest companies use partnering for competitive advantage.

WHAT'S A PARTNER? Partnerships come in many flavors. You have your basic distribution partners, your joint development deals, equity investments, industry alliances, OEM arrangements and your press release partnerships.

Odd thing about the latter: All vendors acknowledge their existence but always say it's the other guy doing them. Even when you recognize these and discount them for what they are, it still can be hard to separate the meaningful deals from the holograms, especially since everything seems to be labeled "strategic" nowadays.

Chuck Papageorgiou, president of Intellisource Advisory Services, a consultancy in Atlanta, offers up a five-tiered model to help customers evaluate alliances (see graphic below). "Generally, we pay little attention to activities in the bottom two stages, the joint marketing/ distribution agreements and OEM/licensing agreements," Papageorgiou says. "Level 3 alliances - joint [research and development] and technology transfers - can be important if one of the partners really needs the other's technology to succeed. Level 2 and 1 alliances - joint ventures/equity investments and mergers/takeovers - are usually strategic and where we start to pay attention."

Whether you buy into Papageorgiou's model or not, it's obvious that alliances span a continuum beginning with the meaningless and culminating with mergers and acquisitions. And, of course, the most common alliances ring the most hollow. The dime-a-dozen marketing, distribution and licensing deals are created to build up mass, says Tom Nolle, president of CIMI Corp., a consulting company in Voorhees, N.J. "Buyers are increasingly unable to perform all the technical tasks associated with network building and operation so [they] look for single sources," he says. Manufacturers respond by teaming up to provide broader storefronts.

The problem is that these partnerships are "easy to enter but relatively difficult to make effective because massing doesn't make products work better in the network," Nolle says.

These deals also have a tendency to die where they were born - in the boardroom.

"A lot of these deals are done by executives who never make the effort to see that it gets filtered down to the troops," says Christopher Stone, senior vice president of strategy and corporate development at Novell, Inc. and the former CEO of the Object Management Group. "You need to have a lot of buy-in to make a partnership work, and you need to assign resources. If you don't assign resources, these things go sour."

Nolle seconds that, saying senior management often forgets to make partnerships worth everyone's while. This is particularly common where joint sales are involved. The compensation plan doesn't get overhauled and, because the partnership's products usually have lower margins than the goods in the sales reps normal port-folio, the deal is dead on arrival.

Speaking of money, Stone says licensing deals that involve the exchange of large sums are more or less guaranteed to fail because you always end up fighting about the cash. "Some-body doesn't pay, it's late, you didn't deliver 'A' so I'm not going to pay you 'B'. That's the stuff that ruins them." Stone says another common problem with alliances is the tendency to try to save the world. "You should always be leery of deals where the partners talk about doing 15 things, because they're only going to do one or two of them." Stone's philosophy at Novell: "Put together a fairly long-range plan and then only bite off what you can chew." For example, Novell has committed to putting Oracle Corp.'s Web application server and Oracle 8 database on NetWare. "We said we would ship something by the end of the year [1997], and we did," Stone says.

Other core Novell partners include Hewlett-Packard Co., Sun Microsystems, Inc., IBM and, of course, Novonyx, Inc., the company Novell created with Netscape Communications Corp.

Asked whether Novell would partner with arch enemy Microsoft, Stone laughs. "Hold that thought. You can't get away without partnering with them. We will be embracing a lot of Microsoft's products." He would not elaborate.

PUTTING TEETH IN IT

While Novell is not partnering from a position of strength today, over at industry powerhouse Cisco, alliances typically are handled like this: "Pack your bags. We just bought you."

Or at least that's the perception. Ed Kozel, Cisco's chief technology officer, says the reality is a bit different. True enough, the company has made 13 or so acquisitions since 1993, but it also has minority investments in 25 partners. "We judge the size of the market and, if it looks promising, determine if we should shoulder the development internally," Kozel says. "If the size is interesting but we can't see the revenue or there's a lot of technology risk, then we favor a minority investment."

Investments rank high on Papageorgiou's alliance analysis model, but at Cisco, none of these deals are considered strategic. Strategic partnerships are those that can generate $500 million annually in incremental revenue for Cisco and its partner, Kozel says. "We used to have a huge list of partners, but those were primarily distribution partners. A couple of years ago we defined this category of high-end partners," he says. Companies on the short list include Microsoft, HP, Intel and, more recently, GTE Communications Corp., EDS Corp. and KPMG Peat Marwick LLP. Microsoft is perhaps king of the hill. Kozel says Cisco has some 25 projects going with Redmond, the most important involving directories. The idea is to groom Microsoft's Active Directory to serve the network and client/server computing.

A common directory allows for things like single-user logon and provisioning of all the necessary network services for that user.

"We wanted a single directory platform that will support current services, such as security and virtual private networks, and future services such as telephony," Kozel says. "[Microsoft] agreed to extend Active Directory for us and agreed to let us port it to Unix so we can sell it to carriers and people that don't use NT. It's a long-term strategic investment for both of us. We both have put some of our future on the line here, and there is nothing like having shared skin in the game to motivate you."

PUTTING IT ON THE LINE

Shared risk is what it's all about, agrees Doug Kaewert, director of global partners at Sun. "Partnerships that work are the ones where there is an equal amount of risk taken by both sides," Kaewert says. "They both have something to lose, and it's basically the same, and they both have something to gain that is basically proportional."

Unlike Cisco, Sun shies away from equity investments, arguing that they don't deliver any value to customers. Kaewert defines value as less risk, faster implementation or product improvement.

As such, all Sun partnerships include an engineering component. Sun teamed up with Oracle, for example, to launch a line of Sun systems preconfigured with application-specific Oracle software and molded to support groups of 25, 50 or 100 users.

Ideally, partnerships will deliver a whole that is greater than the sum of the parts, and Kaewert is hoping a deal Sun has with Netscape will pay such dividends.

Sun and Netscape use many of the same core technologies, such as the Internet Message Access Protocol (IMAP), TCP/IP and directory services. Both companies have been pitching these technologies independently to developers and today see an opportunity to join forces to save on resources.

"But ultimately we may ask ourselves, 'Why do we both build IMAP 4 mailers and proxy servers and directory services? What if we build this, you build that and then we cross license?'" Kaewert says. "Things like that make the collective engineering of the partners much more efficient. You get to market faster, build better products and deliver value to the customer faster."

Kaewert says the key to getting the most out of partnerships is approaching them like marriage: "You have to keep working on them. If you stop paying attention to your partner, you end up with a lot of misunderstandings. Your competitors come in and position you as not caring about them any more, and then it's hard to rekindle the relationship."

While Sun avoids equity investments, 3Com Corp. has raised investing to an art form, perhaps because acquisitive Cisco has it spooked.

To help ensure 3Com is always pushing the technology envelope, the company has what it calls a direct investment strategy: It invests in companies that it establishes OEM partnerships with.

"There are lots of young companies out there focused on innovative technologies that aren't hampered by caring for an installed base and providing migration paths," says Janice Roberts, 3Com vice president of marketing. "They're focused and very quick. We want to stay as entrepreneurial as possible, so we have a business development team that continuously looks for these type of partners."

For technologies that are further out on the horizon the company has the 3Com ventures fund, a way to nurture promising technologies and relationships. The company may invest, for example, in a multimedia technology that may or may not ultimately get integrated into a 3Com product. That's simply a calculated risk.

Is the long-term goal of all investments to acquire the player? "Not necessarily," Roberts says. "But we have acquired companies that we've made an investment in, such as Synernetics, [Inc.]."

As with Cisco, 3Com's more strategic partnerships are with larger, established companies. Roberts classifies the deal 3Com has with Siemens AG as a "Class 1 strategic partnership." The Siemens deal is multifaceted. Siemens is a systems integrator for 3Com in certain parts of the world, it is strong in markets where 3Com is weak, and the companies are evaluating joint development work in areas such as LAN telephony.

Other top-tier 3Com partners include IBM, the Siemens/Newbridge alliance, Dell Computer Corp. and Gateway Communications, Inc. The PC companies are becoming more strategic as 3Com works with them to build network readiness - Ethernet cards or high-speed modems - directly into the box.

3Com also is affiliated with an oft-maligned alliance, the so-called Network Interoperability Alliance (NIA), which some consider to be a prototypical press release partnership. The NIA was formed in May 1996 by 3Com, IBM and Bay Networks, Inc. to help ensure that internetwork products from different suppliers could interoperate. But many thought it odd that Cisco was not invited to the party when, after all, it had the largest installed base of internetwork gear.

Roberts insists the NIA is still alive and kicking. Even if that is true, who will care about anything it produces? It would be like Lotus Development Corp. teaming up with Novell to come out with a stamp of approval for PC operating systems.

WORTH THE PAPER?

Although not addressing the NIA, longtime industry watcher Stewart Alsop, a venture partner with New Enterprise Associates, is bearish on all partnerships. "Ninety percent of partnerships announced in press releases are pure BS meant to satisfy some internal agenda or persuade everybody that everything is hunky-dory when it's not." A classic case was IBM and Microsoft standing up at Comdex a few years ago and announcing a strategic partnership on the marketing of Windows and OS/2, Alsop says. "Every-one walked away scratching their heads, going, 'What did they say?' A few months later, they announced they were dissolving their joint development agreement."

Nevertheless, partnering seems to have become some sort of "moral or ethical thing you have to do to be good in business," Alsop says. "Kind of like going to church. But a successful partnership is simply an opportunity for two companies to help each other make more money. It's just doing business." Alsop says he thinks successful partnerships don't require any kind of formal agreement because it is simply in the best interest of both companies to cooperate.

The relationship Microsoft and Intel enjoy is a perfect example of this, he says. "If it's in the best interest of Microsoft and Intel to help each other out, they will. They don't need a strategic partnership to formalize that. If, however, they perceive it is not in their best interest, there is no contract in the world that will get in the way of them going after each other, because they are both aggressive competitors."

That shows just how difficult it is to deliberately exploit partnerships, Nolle says. "The market is what the market is. And if you're not prepared to make a lot of effort to change it, then simply creating treaties and alliances isn't going to do you any good. But where something really substantive happens to change the market - like the creation of the PC, which pushed Intel and Microsoft together - powerful partnerships can be created, even between unwitting parties."