Take your partner by the hand

The partnering of small businesses with larger companies is not without risks - but it can reap huge rewards, says Gareth Chadwick

It is often said that setting up a business is easy, the hard part is finding the customers. No matter how good you think the product or service is, customers are unlikely to beat a path to your door to snap it up.

It is often said that setting up a business is easy, the hard part is finding the customers. No matter how good you think the product or service is, customers are unlikely to beat a path to your door to snap it up.

Particularly in mature markets, finding the right channel to entice customers to buy your product is often more difficult than creating the product in the first place. Many a budding business has been frustrated by apathetic customers, while in some of the country's largest and more competitive markets, buyers will only deal with suppliers who brands are globally recognised. As the aphorism goes, nobody ever got fired for choosing IBM.

Building up the brand and credibility of a small business, however, takes time and money, the two things that dynamic young companies lack. But there is another option - partnering - which, if managed correctly, can give smaller companies a step up the ladder to success.

Partnering with a larger organisation can provide access to new customers, new markets and strategic support that could ordinarily take years to develop. The concept isn't particularly new, the "approved supplier" agreements common in many industries are a form of partnering, but what is new is the growing focus on partnering as a way of improving the UK's competitiveness.

It has support at the highest level. In a speech in September 2004, Lord Sainsbury, the then Minister for Science and Innovation, said that "there is evidence that SMEs (small to medium-sized enterprises) who enter strategic alliances, usually with larger companies, are often able to achieve faster and higher growth rates than companies who try to go it alone."

The speech was given at a corporate venturing conference, reflecting the fact that partnering can be seen as a simple form of corporate venturing. This covers a range of mutually beneficial relationships between organisations, from large PLCs which invest in their own spin-out companies to exploit new technologies, or invest in small independent companies in the same or related markets, to collective investment funds which enable companies to pool their investment in other ventures.

Partnering, however, tends to be a less formal arrangement, rarely involving any long-term financial investment on either side. It is usually done between two organisations, one larger than the other. For the larger organisation, the benefits often centre on access to innovation, new technology and new markets. For the smaller company, it is primarily to do with enhancing its profile and credibility and using that to enter new markets.

"Partnering is often a reflection of a mature market," says Nick Powell, head of technology at business consultants Ernst & Young. "Mature markets develop their own eco-system, with defined ways of getting to market. If you are a small company, it is difficult to distinguish yourself in that environment. Big companies will only buy from big companies, small companies from small companies. If you want to get round that, partnering is an attractive option," he says.

One of the main benefits in partnering for a smaller company is the credibility boost. Being able to piggy-back on the brand and reputation of a much larger partner can do wonders for your market perception. Not only may the partnership itself create publicity, but being able to say to a customer in the IT market for example, "IBM is one of our key partners", is bound to improve how the firm is perceived.

Depending on the structure of the partnership, you might also be able to actively approach your partner's customers with a view to cross-selling your products. Similarly, customers who may once have passed you by due to their concerns about the risks of dealing with a small, unknown company, will be more likely to take an interest, reassured by the link-up with the larger partner.

"You can use that stamp of approval from your partner to attract larger accounts and sell more products to more customers. In any market, having solid credentials and the explicit support of a larger organisation can be crucial," says Powell.

It was crucial to Wire-e, a communications software developer. Founded in 2000, Wire-e created a suite of business software applications that enabled mobile workers to communicate and operate more effectively. But it realised that in such a crowded, competitive market place, getting itself noticed would be difficult. It decided to tap into the market reach of a mobile operator, so it approached Vodafone.

By March 2001, Wire-e was an official partner of the telecoms giant and its product, Rapide, was at the heart of Vodafone's corporate portfolio. The partnership took Wire-e to a different level."Vodafone was just right. Our product was closely aligned with its entrepreneurial approach and we were working with teams who were a big priority internally. We were about building the average revenue per user, a key buzz-phrase in the industry, and we felt valued. The partnership enabled us to win some of the UK's largest companies as customers," says Wire-e chief executive, Nigel Shanahan.

Partnerships are not just about improved sales, however. Being able to tap into the management expertise and resources of a larger partner, can help in terms of defining a clear business strategy and developing the most effective procedures to pursue it. It can also help when recruiting, reassuring recruits, at all levels, that the company is a respected, if small, industry player, with the potential for significant growth.

But forming a partnership with a larger organisation isn't a one-way ticket to guaranteed success. Professor Gordon Murray, head of the school of business and economics at Exeter University, warns that there is a skill in managing a partnership. It can't be assumed that just because the partner is larger, they have that expertise. "Large firms rarely know how to work with small firms. It's not an obvious or natural skill. For one, they work on very different clocks. Small firms have to be able to turn on a sixpence to survive, whereas a large firm may take years to reach a decision. Those differing ways of working can be incredibly frustrating," he says.

Strategic priorities also change quickly. A change in the market may mean that the partnership that fitted perfectly into the business strategy six months ago is no longer a priority area, which can have huge repercussions for an unprepared partner.

It's a risk that Nigel Shanahan has experienced first hand. Through its partnership with Vodafone, Wire-e enjoyed rapid growth. But when Vodafone's strategy changed, so did Wire-e's position in the list of priorities. "At the beginning of the partnership, our ideas and vision were shared by Vodafone, but today the company's focus is on other challenges. We've fallen from the strategic sphere into the product space, and that means less attention, fewer resources and only occasional windows to develop the product," says Shanahan.

Fortunately, Wire-e had never let itself become over reliant on the partnership. It was only one of its growth strategies and, while continuing to value the partnership, the company has also been able to focus on alternative routes to market.

This is the key to minimising the risks, says Murray. Becoming over reliant on a partner leaves a company incredibly exposed to a change in priorities or market focus over which they have no control.

"Partnerships can be incredibly positive, but it's a relationship you need to go into with your eyes very wide open. Don't go into it just because you're flattered to be asked. The benefits need to be analysed and it needs to fit into your growth strategy, without becoming too dominant. Look at the costs of the relationship, too, as well as the benefits," says Murray.

When they work well, partnerships can open up enormous opportunities for both parties. But if they fail, it is invariably the smaller partner that is hardest hit.