Partnerships are more critical than ever in today’s market. And we mean partnerships in the truest sense of the word, not the traditional vendor-buyer relationship. In an age where change is the only constant, it is virtually impossible to out-innovate the market. So why waste time trying? Focus on what is going to deliver real business value instead.
The concept of open innovation is not new. There have been many articles and discussions about the topic since the 1970’s. The model was first coined by Dr. Henry Chesbrough, Executive Director for the Center for Open Innovation at Haas School of Business, who is a proponent of firms using both external and internal ideas, as well as internal and external paths to market, to advance their technologies.
In the past, it was the domain of the high-tech and pharmaceutical industries, but companies such as GE, Coca Cola and LEGO have since been achieving success by collaborating with experts, entrepreneurs and consumers.
“In an age where change is the only constant, it is virtually impossible to out-innovate the market. So why waste time trying?”
What is fuelling open innovation today is the rapid acceleration of advancements in technology, such as the internet, the growing sophistication in ecommerce models, cloud computing, and ever-increasing data processing speeds. This has led to an explosion of startups that are built around solving very specific customer or business problems, often with sheer obsession, and fuelled by significant venture capital investments. All this is set in an environment of heightened customer expectations for immediacy, intuitive experiences, and ease of access to information. These factors have spawned innovations like we’ve never seen before, at an unprecedented pace.
What is becoming increasingly important is the need to build an ecosystem of partnerships between corporates, startups, venture capital firms, incubators, accelerators and universities. Accessing these innovations and finding the best way to harness them is critical. Be that through gaining inspiration, entering into a vendor-buyer commercial relationship, creating a ‘skin in the game’ joint risk-reward partnership, sourcing and retaining the talent, or investing in or acquiring the company outright.
What is a partnership?
Partnership is a term that tends to be used loosely to mean any of the types of relationships listed above. According to Caribou Honig, Co-Founder of QED Investors and Insuretech Connect, who we spoke to recently on this, a partnership is traditionally defined as ‘a monogamous relationship between two parties that includes shared risk, investment and responsibility’.
Corporates tend to use the term partnerships for relationships that are beyond vendor-buyer commercial arrangements, whereas startups use it more loosely. When startups work on a proof of concept (PoC) with a corporate, they consider this a partnership, due to the amount of time and commitment the startup is investing in the PoC vis-a-vis other potential clients.
But let’s not get hung up on the definition. The point is, companies need to be open to relationships of all different shapes and sizes. Building and managing multiple types of relationships in terms of breadth and depth will be a real competitive advantage.
Learning from banking & fintechs
To better understand the role that partnerships can play, we can look to the banking industry. Initially as fintech startups began to emerge, the view was that they would disintermediate the banks. What has actually happened over time however, is that both fintechs and the banks have realised that they need each other.
This is where innovation meets distribution. Fintechs are able to offer innovative products that solve real customer needs at speed, while the banks offer powerful distribution networks, in-depth understanding of the sector and rigour, particularly in a heavily regulated market.
We recently spoke to John Stewart, Global Head of Scouting and Research at RBS, who said it best when he said, “Every part of our business is under threat, and customer expectations are very high. We have problems that need solving, and there are numerous companies out there that we haven’t considered before and never knew existed. They are entrepreneurs, they work at pace, and sometimes fill a ‘white space’. They bring talent and we bring scale.”
There are many examples of these partnerships, such as Wells Fargo and Blend, the online mortgage provider, Chase and Ondeck, the digital small business loans startup, RBS with FreeAgent, the cloud accounting software for SMEs, and Sensibill the digital receipt management business.
By collaborating, fintechs are helping banks become much more customer focused, enhance their value propositions, and provide a broader set of products/services on top of their core offerings.
In fact, what seems to have emerged is that the banks and the fintechs must partner with one another, in order to fend off the tech titans like Google, Facebook, Amazon, Microsoft and Apple, all of whom have both innovation and distribution. We believe this is where the real battle line has been drawn.
There are typically 6 reasons why firms partner:
- Speed to product enhancement– improving the customer proposition and experience (whether enhanced features or a ‘white space’) by bringing new products and services to an existing set of customers faster than if developed in-house
- Market and channel growth – access to new customers through new sales and distribution channels and geographic markets
- Operational efficiency and way of working – dramatically reducing the cost to serve using externally developed technology, and helping to bring in a new way of working, that is more agile and entrepreneurial
- Participation in new business models – with the emergence of peer-to-peer and marketplace platforms, partnerships allow corporates to participate in opportunities that tend to exclude and disintermediate them
- Talent and capability – bringing in the necessary expertise and capabilities to compete and win in a rapidly changing market
- Medium to long-term relationship development – partnerships are not born strategic, so experimentation and collaboration to establish trust and develop a relationship over time is key.
Richard Kerschner, one of Elixirr’s Senior Advisors, says, “A basic but critical and overlooked strategic discipline is to constantly think about how to deliver better products and services, faster or cheaper to your customers. Then ask the question “Do we build, buy or partner in order to do that?” Then be rigorous in applying these categories, usually in combination with each other. Don’t do partnerships without a disciplined and consistent approach.”
Considerations for partnering
Naturally, there are some considerations when deciding to partner with another firm or organisation…
- Culture fit – as with any relationship, a culture match between the corporate and the startup is needed to make it work. Corporates need to be comfortable with the dynamic nature of startups and the unknowns that come with them, as well as to have a tolerance for failure and pivoting.
- Clarity of what is being brought to the table and why, and the role of each party, including the economics of the arrangement consisting of pricing, revenue and costs.
- Alignment on mission, execution and burn-rate – not to be under estimated, the appetite, ambition and timescale expectations, all need to be in sync. As Honig clarifies, “The time perception of a startup vastly differs from that of a corporate, wherein a five-month PoC may seem fast for a corporate but very slow for a startup that has a set amount of funding.”
- Ensuring the right enablers are in place, such as a faster process for onboarding a new partner or vendor from a legal and procurement perspective, a tolerance for failure and pivoting, and a method of funding PoCs that is similar to the way VCs do it. Stewart explains, “We have adapted the procurement process… we use simpler NDAs and sometimes there is no requirement for RFPs. We adapt the process down as we need to get things done and do them at pace.”
Essentially, a mindset shift is required from a traditional vendor-buyer relationship. The key to a successful partnership is when the focus is less on ‘who gets what piece of the pie’ but rather on ‘what is possible together’.
Companies must realise that they can create the most value when they combine what they bring in terms of ideas and capabilities with those of others. Being smart about how to collaborate and partner is the secret recipe for bringing real innovations to market, and therefore future profitable growth.
Talk to us. Let’s change the game together…