What is the financial value of a partnership, alliance or strategic collaboration? What network orchestration roles are there and how do these roles influence the value?

1. Alfred Griffioen
MSc, CSAP, FC
Presentation for ASAP
16 April 2014
Financial valuation
of alliances and
partnerships

2. Alfred Griffioen
• Specialist in business partnerships and
alliances
• Track record in marketing, business
development and strategy consulting
• Author of 2 books about alliances and
competitive advantage and 1 about
strategy
• Certified Strategic Alliance Professional
• Founding partner of Alliance experts

3. Alliance experts:
an international network of partnership specialists
Collabora'on
strategy
&
Market
research
Interna'onal
matchmaking
Nego'a'ons
&
Partnering
agreements
Benchmarks
&
Training

4. Agenda
1. Introduction
2. Traditional company valuation
3. Information alliances
4. Three ways to valuate a partnership
5. Roles in alliance management and their impact on value

5. The importance of alliance management
• Alliances can add direct value to a
company
• On the other hand, partnerships
frequently tend to fail
Poor$or$
damaged$
rela+onship$
40%$
Poor$strategy$
or$business$
plan$$46%$
Bad$legal$and$
financial$terms$
14%$
0%#
1%#
2%#
3%#
4%#
5%#
6%#
7%#
8%#
Exper1se#
alliances#
New#
business#
alliances#
M&A#like#
alliances#
7.7%#
1.3%#
0.7%#
Market response
to alliance
announcement
Source: BCG research Source: Vantage partners

6. Why financial metrics are important
• Practically every company is
driven by return on investment
• This makes the CFO in most
cases the second-in-command
• If you can’t show what the added
value is of an alliance, why
should a company invest in it?
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7. Agenda
1. Introduction
2. Traditional company valuation
3. Information alliances
4. Three ways to valuate a partnership
5. Roles in alliance management and their impact on value

8. Traditional company valuation
• In most cases the discounted cash flow method is used
• The value of a company then is:
• However, as it is difficult to predict the future cash flows, the average
normalised cash flow of the last three years is taken
• Interest and risk factor normally add up to 10 to 15%. Calculating the
formula for an infinite number of years will result in around 4 to 6 times the
normalised cash flow
cashflow in year x
(1 + interest + risk factor)x
x=0
∞
∑

9. Results from the past do not give any
guarantee for the future
• What happened to Nokia, Ahold, Enron or Microsoft?
• In three years time, more than half of the critical staff will have changed jobs
• New technologies make older business models obsolete
Like Darwin said: the companies that can adept best to changing market
circumstances, will be the companies that survive
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10. Agenda
1. Introduction
2. Traditional company valuation
3. Information alliances
4. Three ways to valuate a partnership
5. Roles in alliance management and their impact on value

11. The value chain relies heavily on information
• The value chain is not linear any more but has shortcuts, twists and bends
• Value chains and related production costs are heavily impacted by product
design and the application of the right production technologies
• Information about (end) customer needs is dissipated through the chain very
slowly
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12. Creating exclusive partnerships sets an
incentive on information sharing
• Information sharing takes time of key
employees
• Traditional sales or purchasing behaviour
is mainly filtering of information
• Only with a joint goal and the right
contractual setting companies start to
share about customer needs, leads and
experiences.
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13. Carefully create your alliance portfolio
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Direct
value
and
cash
flow
big
small
small
big
Contribu'on
to
the
company
mission
and
innova'on
Core
ac'vi'es
Oppor-­‐
tunis'c
Innova'on
porKolio
extension

14. Agenda
1. Introduction
2. Traditional company valuation
3. Information alliances
4. Three ways to valuate a partnership
5. Roles in alliance management and their impact on value

15. According to IFRS-11
• The core principle of IFRS 11 is that a party to a joint arrangement
determines the type of joint arrangement in which it is involved by assessing
its rights and obligations and accounts for those rights and obligations in
accordance with that type of joint arrangement. [IFRS 11:1-2]
• Two types: joint operations or joint venture
• Procedure:
– Check for ‘Control’
– Check for ‘Joint Control’
– Check for ‘Significant Influence’
• Outcome can range from (partial) consolidation to classification as just
‘a financial instrument’
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16. The cost savings methodology
• Partnerships save on investments and
operational costs
• Examples:
– Choosing for a franchise concept
over opening own outlets
– Sharing investments for
instruments that are hardly used
– Joint product development
• Cost savings can easily be calculated
and should only be corrected for
income sharing
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17. The discounted cash flow method (revisited)
• The value of an enterprise is:
• The value of an alliance is:
• But typically:
– The duration of the alliance can be limited
– The initial investment is much lower
– The risk factor is higher
– Your share will be between 30 and 70% of the profits
your share ×
cashflow in year x
(1 + interest + risk factor)x
x=0
n
∑
cashflow in year x
(1 + interest + risk factor)x
x=0
∞
∑

18. Investments for market entry through a
partnership will be lower
• Your distribution partner will already have the economy of scale in his
sales force or logistic network
• Your partner (if selected properly) has a known brand name and credibility,
which allows the partnership to ask a premium price
• Your investment will mainly be in small adaptions to the product (e.g.
translations) and product support

19. The risk factor is higher
• Shared ownership means less flexibility in decision making: this is a risk in
itself for quick adaption to market conditions
• Having a shareholder’s agreement or other collaboration agreement also
means restrictions in divestments or changes in strategy
• There always is the risk of opportunistic behavior of the partner
On the other hand:
• Especially in less developed countries or countries you’re not familiar with,
working with a service provider or agent also brings risks.

20. You will have to share your profits
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21. There are three ways to enhance your share in
the alliance
• To make your offering more attractive
– Better adjusted to the new market
– Partly do your own branding and advertisement
• To become more attractive as a partner yourself
– Improving the ease to work with you
– Profiling yourself in a more attractive way
• To take the initiative in partnering
– This also enhances the chance of ending up with the best partner

22. Game theory shows that it’s favourable to
involve other companies one by one
A
B
C
A
B
C
First A and B, then C A, B and C simultaneously
1
2
3

23. Agenda
1. Introduction
2. Traditional company valuation
3. Information alliances
4. Three ways to valuate a partnership
5. Roles in alliance management and their impact on value

24. Roles in alliance management
Hinterhuber (2002) distinguishes four types of network orchestrator roles:
• Architect:
– Defines the objectives of the network
– Decides who becomes a member of the network
• Judge
– Defines and maintains performance standards
• Developer
– Creates new concepts and intellectual assets
• Leader
– Motivates partner firms and creates network identity
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25. Each role has a specific influence on value
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Architect
Developer
Judge
Leader
Has
influence
on
the
split
of
shares
Influences
the
life
span
of
the
network
Influences
the
investments
Reduces
risks
in
the
collabora'on
your share ×
cashflow in year x
(1 + interest + risk factor)x
x=0
n
∑

26. Conclusions
• We need to rethink how we valuate companies, the real value moves from
assets to exclusive collaborations
• Choose your collaborations carefully and balance your involvement
• The architect role is the most strategic one, but also other roles need to be
taken care of
• Proper alliance management increases both the pie and your share of it!
Questions or comments: alfred.griffioen@allianceexperts.com
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