News

The Care and Feeding of Revenue-Sharing Partners

You’ve had a couple of dinners and a few phone conversations; there is chemistry, and a relationship looks promising. But how do you really know if that next step is worth taking? Since founding Advanced Internet Technologies, Inc. (AIT) in 1996, my officer corps and I have talked to, literally, hundreds of companies about partnership possibilities. By partnerships, I mean situations in which the parties work together to serve clients and share revenue, not vendor agreements in which one company simply buys what it needs from another.

by Clarence Briggs http://www.entreworld.org/Content/AuthorsBio.cfm?BioID=254
Advanced Internet Technologies, Inc. http://www.ait.com

http://www.entreworld.org/Content/EntreByline.cfm?ColumnID=586

As the information technology (IT) industry matures and customer demands evolve, the growth of a services company like AIT depends upon an ability to bring greater value to customers and to develop new sources of revenue. Partnerships are integral to this strategy. That is because developing new products or services internally is expensive and time-consuming, and buying is often out of the question because they typically aren’t for sale. But how do you really know if the potential partner on the other end of the line will be a good fit?

Think Methodology, Think DIRE

During AIT’s eight years, we’ve had more than 60 partnerships, of which 20 are current. We have refined a methodology for distinguishing between genuine opportunities and inquiries targeted at gaining access to our customer base. Ours is a model that other entrepreneurs, both in and out of IT, might consider when pursuing partnerships.

To be sure, we have learned painful lessons, but one hallmark of a thriving company is not to repeat mistakes. Thus, the AIT partnership doctrine serves the purpose, first, of minimizing the chances of a bad choice being made and, second, minimizing the damage, just in case. Our approach of very healthy skepticism is based on experience. Not everyone who wants to be your partner is your friend, and not everyone who is your friend makes for a good partner.

Dominate

Our partnerships are governed by a philosophy that we call “DIRE.” Acronyms are a carry-over from my days in the U.S. Army where virtually every function or process can be condensed into eight letters or fewer. When putting DIRE into practice, start by considering that D stands for Dominate, which is less intimidating than it sounds and primarily speaks to value proposition—both theirs and yours.

Ideally, yours is so compelling the other company cannot afford to say no. Of course, it is important to consider what the potential partner offers. Does the other company offer name or brand recognition? To what sales channels can the company help you gain access?

For its part, AIT hosts more than 190,000 business domains, counts more than 5,000 value added resellers (middlemen who sell our offerings), and has appeared twice on Inc. magazine’s list of the 500 fastest growing privately held companies. That means our value propositions include a healthy customer base and robust reseller channel, both of which are constantly searching for additional products and services to offer their customers. Combined, they can act as both customers and sales force for a partner.

We also have industrial grade infrastructure, offer 24/7 customer support, and have a certified technical staff to assist with problems. That should inspire confidence that we will deal with any issues quickly and professionally. Add to that AIT’s financial and institutional credibility, and our solid foothold in a growing industry sector, and you have several powerful selling and negotiating points.

Interest

“I” stands for Interest, the “so what” that forms the basis for continued talks. Does the other company know anything about what your business does? Is what the company does complimentary to what you offer? Ideally, partners offer related products or services to the same target market.

For example, one of our recently formed partnerships is with Kanoodle.com, which provides pay-per-click advertising on search engines. There is mutual benefit in our working together. Kanoodle gets a new customer channel, plus AIT co-markets the offering. Our customers gain by having access to affordable marketing help for their Web sites, and AIT gains by giving its customers one more reason to remain loyal and by creating a revenue stream that would not have otherwise been realized.

Reciprocity

The successful partnership, of course, is the one in which both sides bring something of value, leading to next step: R for Reciprocity. Is there any aspect of your potential partner’s business that competes with any aspect of yours? Is it really more cost-efficient to buy or borrow another’s product or service than to build it yourself?

In the perfect world, the businesses are complimentary, and you can each sell to the other’s customers. In the semi-perfect world, one of you has something that the other’s customers need, and the buyer gets a cut of the revenue. In the world to avoid, a potential partner is too closely aligned to your core business and will likely become a competitor.

One of our partners, Cardservice International (CSI), offers merchant accounts that online stores use in order to process credit cards, a natural tie-in for AIT to offer its customers who use their Web sites to make sales. Initially, CSI wanted an exclusive agreement and one that had a non-compete clause in it. We demurred – and rightly so. Indeed, it wasn’t long before CSI’s repertoire expanded to include hosting, which would have made the non-compete a very dangerous part of the agreement.

Or to take a hypothetical: Eggo, the waffle-maker, recently went into the syrup market, which its own commercials depict as a no-brainer of a decision. Now, imagine that you’re Log Cabin or another syrup maker, and you had a co-marketing arrangement with Eggo. How valuable would that deal now be?

Escape

Be wary of any deal in which ownership of the customer, exclusivity, or length is an issue, bringing up “E” for Escape. Is the potential partner in a hurry to close a deal? Is there an upfront or setup cost? In the rapidly changing IT industry, be especially careful about locking in for more than one year. Any partnership agreement must have a clause that allows for reasonable termination in case the deal sours, or if cooperation becomes competition.

Some years ago, Network Solutions Inc. (NSI) was the only game in domain registration, and mindful of both its monopoly and the coming of de-regulation, NSI offered companies like AIT long-term partner agreements. AIT also anticipated de-regulation, and eventually modified its original agreement with NSI to a month-to-month basis while creating its own accredited domain registration entity. NSI has since added Web design and hosting, making it a direct competitor and confirming the importance of the escape clause.

Partnerships have become a fact of entrepreneurship as companies look for ways of developing new customers and giving existing clients more reasons to stay. They’re also a catalyst for serious self-analysis: being sure of who and what your company is, and equally important, who and what it is not. A little introspection is vital in determining how to respond to current trends and how to be pro-active in planning for what your customers will expect next. So after those initial dinners and late-night phone calls, make sure you follow through with details like due diligence, checking of references, and using the Internet for research. Just as the right partnership can be rewarding, the wrong one can be disastrous.

News Catrgory Sponspor:


Dorsey & Whitney - An International business law firm, applying a business perspective to clients' needs in Missoula, Montana and beyond.

Leave a Comment

You must be logged in to post a comment.