Alliance Law

by Julian Gresser

Of the 4,000 new strategic alliances being formed each month, a significant percentage aspire to extraordinary or "breakthrough" returns--ie. over 30% in earnings, in addition to strong gains in innovative capacity, organizational efficiency, and competitive advantage. From these cases a body of best practices has developed, which give insight on how to structure these alliances intelligently.The keys to success are clarity of purpose, trust, synergy, (combining resources so that the sum is greater than the parts) and integrity--in other words the capacity of the alliance to maintain its dynamic balance, coherence, and adaptive vitality, in the face of constant change.

The most successful alliances are coherent, not only in strategy, operations, and human chemistry, but also in their legal structure and rules. Given the high stakes, a prudent CEO simply will not tolerate a legal framework that chills, encumbers, or even strangles the best energies of the participants. Yet, many ambitious alliances neglect the legal dimension, viewing it with a sigh as a necessary evil. If an alliance is like a galleon setting out on a new voyage, then the most creative lawyers will make her seaworthy, steady and sturdy, but able to fly with the winds of chance. Here are a few guidelines:

1. Recognize the Necessity for a Significant Philosophical Shift

Today's business climate is rapidly changing, ambiguous, and unpredictable, which turns the traditional lawyer's biases on their head. In the new legal model uncertainty creates value, risk is your friend, and reducing risk is increasingly costly. These tenets demand new thinking of managers and their lawyers:

• from risk mitigation to value creation
• from overzealous protection to facilitation and collaboration
• from narrow, rigid, and suspicious ways to ones that are expansive, flexible, and adaptive
• from an emphasis on legal correctness to a more creative balance of legal logic, common sense, and intuition

2. Keep the Terms Simple, Efficient, and Adaptive to Fast Time

As fast time is now the most powerful source of competitive advantage, an ability to flex the production process, suddenly and radically, to incorporate new, unprespecified requirements is critical. The challenge for lawyers is to design a structure and rules, which will enable, not frustrate, such real time adjustments.

Moreover, since most successful strategic alliances evolve out of arms length tactical relationships, the ideal structure will anticipate a future desire of the parties to "jump up" their relationship to a higher level of trust, interdependence, and integration.

3. Establish Principles of Effective Collaboration

The best alliance agreements, like charters, embody the basic principles and tenets, which the parties pledge to follow--standards of trust, loyalty, and accountability, protocols of communication (most alliances begin to deteriorate first through poor communication), principles for creating value, sharing gains and losses, commitments to excellence, and guidelines for change and disengagement. When parties can truly live by these principles, detailed rules become unnecessary.

4. Avoid Corporate Joint Ventures/ Favor Corporate Partnerships and LLCs

In general a corporate partnership or limited liability company is simpler and more flexible and offers far greater tax advantages than a cumbersome corporate joint venture. Yet many alliances are structured as joint ventures as if this were the only option.

5. Allocate Control To Capture Synergy

In the old legal model the struggle mainly centers around who will have legal control

( board seats, voting rights, etc.) of the venture. In the new legal model the parties will understand there are many other sophisticated ways of "controlling" a venture---for example, through its strategy, financing, operations, or technology. Particularly, as trust and integrity develop, the skillful alliance lawyer will ask: How can these various forms of control be optimally allocated to help the alliance capture synergy? What configuration will best serve both the separate and distinct interests of the parties and their alliance?

6. Design Profit Sharing and Risk Allocation Based on the Joint Value Proposition

Since most breakthrough strategic alliances are planned with a 5-year horizon, there is ample time to allow flexibility in the rules for gain sharing and risk allocation. The scope of licenses or the terms relating to improvements and cross-backs can be written to encourage synergy. Royalties can be adjusted as a percentage of newly captured market share. Provisions for compensation should allow trade-offs of short term concessions for the longer term joint gains from collaboration.

The beacon in the highest performing alliances, which guides all these adjustments, is the breakthrough joint value proposition.(BVP). This is a succinct, clear, powerful, measurable, and extraordinary statement of the value the alliance seeks to bring to the marketplace and its participants. When the BVP is brilliantly etched in the minds of the parties, ideas for the creative allocation of gains and losses flow easily.

7. Turn Differences and Disputes Into Opportunities by Alliance Mediation

Most strategic alliance agreements include "boiler plate" provisions for arbitration or judicial settlement inserted with little reflection by the lawyers. This old fashioned approach fails to recognize that in strategic alliances differences and even disputes are the fuel of innovation, once a " container " is in place.

This container is alliance mediation. Alliance mediation differs from ordinary mediation in several important respects: 1. since the relationship in alliances is valuable (in most other mediations the parties part company), the principal objective is to build synergy and integrity not simply to settle disputes; 2. the process applies to the entire life cycle of an alliance from pre-formation discussions, formation, restructuring, regeneration, and termination; 3. often mediation takes place early on before the parties become polarized; iv. a two tier structure is employed. The first line of defense is a trained team of internal mediators, who will be supported by professionals when the mediation falters.

The ability of an alliance to deal effectively with its differences is a resource of inestimable value, because it gives the parties time and space to focus all their energies in conceiving, nourishing, and bringing forth their creative work together.

Julian Gresser --A former Mitsubishi Visiting Professor at the Harvard Law School, Julian Gresser is an international lawyer, negotiator, mediator, inventor, and recognized expert on Japan. His work on artful negotiation and breakthrough strategic alliances, which is described in his book, Piloting Through Chaos, has been the subject of numerous TEC programs.

(c) Copyright - Julian Gresser, November 1998, All rights reserved

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