Strategic Alliance Magazine Q4 2017 - 48

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When the extra work only impinges upon a
single alliance member with no effect on the
others, the inefficiency is isolated and easier
to manage. But when the extra work spills over
to impact other adjacent alliance members, it
becomes significantly more complex. The work
that is created by an adjacent alliance usually
takes on three forms: process redesign; extra
work created by the loss of operational degrees
of freedom; and increased coordinating activities.

Looking across a company's alliance portfolio, adjacencies
take a variety of forms-large and small, malignant and benign-with each business deal containing multiple sets of
unique commitments. While no contractual arrangement
is necessarily created to interact with another, they sometimes do interact, often in unforeseen and strange ways.

our experience that simple opportunity costs
are usually discussed as part of an individual
deal and are fairly and adequately valued and
accounted for in the contracting process. What
an economist's theoretical treatment of these
costs lacks is the ability to quantify weaker restrictions that a contract may impose on the
parties, as well as the ability to predict the addition of future partners.

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Loss of operating degrees of freedom created
by contractual boundaries

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GETTING FIT

Three common alliance adjacencies and
sources of alliance inefficiency
THE THREE-LEGGED RACE: Within an alliance, more

To better understand alliance adjacencies, it might be
helpful to consider what happens in a typical contracting
cycle. The deal teams from each company-negotiators,
lawyers, and key stakeholders-are tasked with ensuring that the contract accurately captures what was
agreed upon during negotiations. The contract has to
describe under what conditions value is exchanged and
the rights each party has under the agreement.

time and effort is needed to coordinate activities such
as press releases, key decision making, budgeting, and
spending. This increased effort is a bit like the childhood
game of running a three-legged race. Those who can best
coordinate their movements win, while those who cannot
usually fall down. The race is entertaining to watch, but it
can be expensive and time consuming if run metaphorically in an alliance setting.

In addition, almost all contracts define the alliance's
duration, how to handle mutually generated intellectual
property, conditions that would trigger the end of the
alliance, how post-termination alliance assets would be
allocated, and how disputes are to be handled. These
rights and value statements, along with all other guidance given in the contract, define the boundaries within
which the alliance will operate.

THE ONION: Some alliances require companies to protect
and separate their intellectual property. There are legal
names for some of these protective systems: firewall,
clean lists, washout periods, and so on. This process is
reminiscent of how an onion is treated if it is stored in
the refrigerator with other foods. The onion needs to be
contained so that its properties don't spill over into the
other foods kept in close proximity. There is an additional cost to containing an onion. It is a cost measured
in time and money, and in alliances it represents an
additional source of inefficiency.

If not addressed effectively, these contractual boundaries can become the source of countless alliance
inefficiencies and other forms of organizational friction, which can become major problems for current and
future partners. These inefficiencies might be called an
opportunity cost by an economist; however, it has been
STRATEGIC ALLIANCE MAGAZINE | Q4 * 2017

GULLIVER'S TRAVELS: Many companies are engaged
in multiple alliances, with each governed by a contract
that circumscribes the activities and boundaries of each

Table of Contents for the Digital Edition of Strategic Alliance Magazine Q4 2017