Every year, the struggle to conduct business in the increasingly complex world of international commerce intensifies for companies in all industries. The labyrinth of confusing and often conflicting laws, regulations, tax schemes, coupled with an atmosphere of financial instability and political uncertainly have settled like a thick fog on American companies, making it hard to chart a clear course and increasing the risk of a nasty collision that might sink the business.
In response, more and more companies are getting back to basics, shedding business units that do not contribute directly to their core operations. They are focusing on what they do best, and forming alliances and partnerships with experts in other companies who can provide much needed support in specialty areas. The magnitude of these divestitures can be staggering. Exxon Mobil, for example, has been quietly selling off their worldwide refining capacity for years, getting back to what they term "upstream operations" which encompasses mainly exploration and production. This is a radical shift for a mega-corporation with a famous appetite to own and operate everything.
This alliance strategy presents its own special challenges. When you depend on another business to provide operation-critical products and services, the risk of failure is intensified by the inherent lack of control. How can you be sure your partner will deliver? How can you be sure where they are prioritizing your needs relative to those of their other partners? The answer lies in your ability to align your interests. This is where Success Sharing comes in.
Simply put, Success Sharing is a financial arrangement whereby the business that has been engaged to provide a mission-critical product or service shares the risk of failure (and the benefits of success) with the company that is purchasing these services. Unlike traditional fee-for-service arrangements, Success Sharing ensures that both partners have skin in the game. Here's how it works.
Step 1 -- The company engaged to provide the service (Company A) conducts a needs assessment of the company receiving the service (Company B). This assessment includes (amongst other things):
- Defining the desired outcomes
- Quantifying the magnitude of these outcomes
- Determining the future value of these outcomes
- Developing a detailed roadmap for achieving these outcomes
Step 2 -- Company A and Company B enter into a Success Sharing arrangement whereby Company A agrees to accept as compensation for their future involvement a portion of the value that they create for Company B. This might be all Company A receives for their involvement, or it might be part of a larger compensation program. For example, if Company A is able to prove that their efforts on behalf of Company B will result in Company B enjoying a $5 million improvement in some area of their business, they may agree to pay Company A 15% ($750,000) when/if that improvement occurs. If the improvement is smaller, so is the payout. But if Company A manages to exceed expectations, they will enjoy a larger return for their efforts.
Step 3 -- Both parties agree on milestones and measures that will determine when/if results are achieved. This may involve qualifiers and/or modifiers related to quality, timeliness, and other factors.
Step 4 -- Company A goes to work, supported as necessary by representatives from Company B.
While simple on the surface, Success Sharing arrangements can be complex to manage. Here are some issues to watch for:
- Company A must take great care to ensure that Company B is dedicating enough of their own resources to the partnership to guarantee success. Without proper support, Company A can easily find their success being unwittingly thwarted by Company B, the very company they set out to assist.
- Company B must assign a "champion" to the effort to clear the way within Company B for Company A to succeed.
- Both companies must understand and agree to this relationship from the beginning. I have seen it happen where Company A invests huge sums of money and time in developing a roadmap to success, then having the rug pulled out from under them by Company B who decides to go it alone.
Despite these obstacles, more and more innovative companies are entering into Success Sharing arrangements. The reason is that Success Sharing more completely aligns the interests of a service provider and a client company than any other arrangement. It spreads the risk and shares the return in a manner that is difficult to achieve by other means.