Clinching the Partnership

By John R. Engen

As alliances become more important to future profitability, banks must do a better job of prioritizing and managing these relationships.

One of the great articles of strategic faith in recent years has been that companies, both financial and non-financial, should aggressively reach beyond their own borders to access the technologies, expertise and products needed to stay fully competitive in a networked economy. Banking companies certainly have taken this message to heart: The top 100 banks alone are involved in several thousand relationships with external affiliates, according to Speer & Associates, an Atlanta consultancy.

But many companies are encountering severe problems as they wind their way deeper into the alliance labyrinth. Research by Accenture shows that 30% of all alliances — across many different industries — fail outright, while another 49% substantially fail to meet expectations.

Of the 10 financial services companies that participated in Accenture's study, seven reported experiences with alliances that failed to meet expectations. "There's a general pall of disappointment" surrounding alliances, says Russell Wehrlin, a Speer senior vice president.

Why are these arrangements falling through? Experts say the typical culprits are lack of strategic forethought and weak organizational commitment. Even though alliances are usually focused on capabilities that are considered add-ons, as opposed to core banking functions, they are typically more complex than meets the eye. As a result, many bankers underestimate the effort required to make them work.

Such misfires won't do. Forging the capabilities needed to capitalize on new technologies, skill sets and business models has become critical to success in financial services. But no institution possesses the resources to go it alone, not even the very largest. To provide the new products and services that customers demand, banks must learn to work more effectively with nonbank technology partners and other associates.

This point is illustrated in the explosion of Internet-related activity. McKinsey & Co. estimates that 74% of the 37,000 alliances announced by U.S. businesses last year fell into the e-business category. By leveraging competencies developed and maintained elsewhere, successful online alliance managers have been able to expand their reach and provide cutting-edge products much faster than would have been possible on their own, and at a fraction of the cost and risk.

Elevating alliance management to a core discipline is the necessary first step in ensuring success. Institutions such as KeyCorp and Wells Fargo & Co., for example, have transformed alliance management into a line
of business. They have developed centralized policies, procedures and specialized skills to help identify good partnership opportunities, negotiate smart contracts and monitor results. The alliances that are struck within this framework then receive a commitment of resources and attention from senior management commensurate with their strategic importance.

Outside experts who have studied alliances cite governance as a critical issue. A joint venture must be formed with either its own management structure, or with the stronger partner in charge, since shared governance leads to gridlock. But that doesn't mean the alliance should be run as a dictatorship. To the contrary, a rich give-and-take is essential, along with a sense that both sides are benefiting from the arrangement.

"The hardest issue banks have with respect to forming alliances is treating their partners as true partners," says Charles Kalmbach Jr., a global managing partner with Accenture's financial services unit in Chicago. "A lot of people propagate the myth that an alliance is like a marriage. The right metaphor is of a diplomatic relationship. Both sides need to retain some bargaining power."

Now that the crazy urgency once surrounding e-commerce has died down, market discipline will force banks to produce more tangible results from their alliances. All bankers in the Accenture study said they plan to enter new alliances during the next three years — but they also expect greater pressure on those partnerships to deliver short-term financial results.

"Barney" Alliances

Banks have a long history of engaging in alliances, both bank-to-bank and bank-to-nonbank. Deals in the first category have tended to focus on core payment or transfer areas, where industry cooperation was considered essential to growth. Examples include credit cards, electronic funds transfer, check processing and shared automated teller machine networks. By and large, these arrangements have proved successful.

Results from bank-to-nonbank arrangements, however, have been more mixed. Distribution-related deals, such as in supermarket banking and asset management, often worked well. But those involving technology, particularly Internet-related, have proven troublesome. The failure rate for such "e-alliances" is high.

To begin with, bankers are playing on unfamiliar turf. The world of e-commerce demands a level of agility and innovation that is beyond the scope of traditional bank information technology departments oriented toward mainframe computing. At the same time, new delivery channels and tools, from wireless to account aggregation, are rapidly changing customer expectations. "It's a bewildering, highly competitive environment where most bankers don't feel comfortable," says Lawrence Baxter, executive vice president of e-commerce with Wachovia Corp. "They don't have the expertise to do it all themselves."

Financial institutions have linked up with technology and e-commerce firms to acquire that expertise. Wachovia, for example, hooked up with Atlanta-based First Data Corp. to facilitate online business transactions. J.P. Morgan Chase & Co. and Bank of America Corp. joined with IBM Corp. to provide customers with digital access to check images over the Web. And FleetBoston Financial Corp. works with Bottomline Technologies, Portsmouth, N.H., to offer Web-based payment services to business customers.

While some of these partnerships appear to be bearing fruit, failures abound. Perhaps the most notable was last year's collapse of Integrion Financial Network, a consortium comprised of 17 large banks and IBM aimed at creating an online banking solution. Formed in 1996, the company was beset from the beginning by internal bickering, competing agendas and a general lack of commitment from its partners.

Such episodes are disappointing, but realistically, keeping partners focused on the same goal is never easy. Forrester Research Inc., in a recent survey of 50 financial services companies, found "ongoing alignment" and "keeping momentum" to be the two biggest challenges in alliances, each cited by 28% of respondents.

Last year's dot-com implosion can also be blamed for some of these setbacks. It hasn't been unusual for a bank to announce a high-profile deal, only to see its partner go out of business. Some 60 lenders, for example, including FleetBoston and Chicago-based Bank One Corp., participated in an online small-business loan Web site operated by Boston-based PrimeStreet Corp. Then, this spring, the PrimeStreet.com Web site shut down when the technology company ran out of funding.

More typical is the alliance that slowly fizzles from lack of attention. Baxter recalls a deal Wachovia entered into several years ago where the responsibility for monitoring the partnership was handed off to lower-level officials. "Different people showed up for every meeting. You could see it sliding very visibly on our priority list. And eventually it died."

KeyCorp similarly dropped the ball on a merchant-services joint venture by handing over day-to-day control to the partner. "They had the sales force and experience. We thought we could let it go," says James Heide, a vice president and manager of KeyCorp's e-commerce strategy group. In retrospect, he adds: "I think we got into a lot of partnerships solely for the sake of being there — for the 'me-too' aspect."

David Ernst, a Washington, D.C.-based principal for McKinsey, and author of several books on strategic alliances, uses the term "Barney deals" to describe such me-too partnerships, a reference to the popular children's television character. "They're 'I love you, you love me' agreements that over-estimate the synergies that will result." In many cases, Ernst says, the press releases announcing a partnership seem designed to give the vendor's share price a short-term kick. A true alliance, by contrast, "creates new value by bringing together complementary strengths," and exposes both parties to measurable risks and rewards.

Accenture's Kalmbach says banks have lagged other industries such as airlines and chemicals in graduating from operational alliances, which enhance some existing services, to ones that add strategic capabilities. "Financial services companies have only just begun to appreciate, much less use, true strategic alliances."

The steep learning curve shows up in the Forrester survey, where 60% of respondents cited no plans to create a separate organization to manage their partnerships. Only 22% said they were using this technique, while another 12% maintained alliance-coordination groups within their key business units.

Taking Control

A few banks are taking a more strategic approach, including Wells Fargo, KeyCorp and FleetBoston. All three have devised policies and procedures to help their business lines get the most out of these arrangements. A key first step is to centralize the screening of nonbank partners, either in the bank's compliance or e-commerce units.

Just as banks need technology partners to acquire expertise they don't possess in-house, technology companies crave the huge customer bases and distribution systems possessed by banks. Virtually all bankers with alliance or e-commerce responsibilities have tales of being besieged by steady streams of queries from partner wannabes eager to pitch deals.

The smart institutions are taking more control of this process. They begin with a strategic review of their own needs and then determine where alliances will help. "We have to set our own strategy first — understand what we want to accomplish in the next 18 months — and then seek out partners to help us achieve those goals," says Pamela Reed, senior vice president of strategic alliances in the Internet services group at San Francisco-based Wells Fargo. "Rather than waiting until they approach us, it's just as likely that we will call them."

While there's no "right" way to analyze an alliance's potential, questioning basic assumpions is a must. Before partnering, Baxter asks himself a list of questions: What are the common objectives? Can the bank achieve return thresholds while sharing profits with a partner? How will success be measured? What sort of commitment is required? "You have to figure out if the reward of an alliance is worth the effort it will take to make it a success," he says.

Cleveland-based KeyCorp analyzes potential partners using a more formalized 12-question "business grid" that incorporates all the competencies and attributes considered necessary for a successful alliance — a kind of best-practices template. "We're trying to make it as much of a formula as possible," Heide says. "While it's not exact, it does help us justify the process before we jump into something."

Those potential partnerships that pass this first hurdle are then referred to a multidisciplinary group, which includes representatives from KeyCorp's information technology, operations and legal departments, as well as the affected business units. The group mulls over questions such as: Will the partnership complement the bank's existing offerings? Does the business unit have sufficient experience with partnerships? Has a senior-level management sponsor been identified to champion the alliance across the organization?

Only when the proposal has cleared this multidisciplinary review does the appropriate business unit conduct due diligence on the prospective partner. This includes the obvious background checks into track record and financial stability, as well as intangibles such as whether there's a sufficient "comfort level" between the two organizations. "We look at their management style, their compatibility with our organization and their ability to perform," Heide says.

This is the stage where many potential obstacles to success should be uncovered. The bank needs to know, for example, whether the prospective partner is working with other large competitors, or has the potential to do so. Such commitments could drain the partner's resources. Financial wherewithal is a particularly important consideration at a time when many small technology companies are losing their access to funding. Heide recalls one firm that offered to sell small-business procurement services over KeyCorp's Web site. "Before we finished the review, they were out of business."

Win-Win Agreements

Once a partner is selected, both sides must lay out their expectations and come up with some way of measuring performance. Most banks in the Accenture study admitted they generally lacked the skills needed to identify explicit objectives before partnering. "Bankers have to be able to say what measurable results they want from an alliance," Kalmbach says.

Increasingly, banks are employing dedicated groups of attorneys that negotiate all of their alliance deals. Since they do it regularly, these lawyers know how to structure agreements to safeguard the bank. In addition to setting goals and defining accountability, such contracts now typically include performance standards, reporting requirements and provisions for quarterly or annual progress reviews.

Writing a solid contract is especially important for banks dealing with young firms that typically lack the strict reporting culture and regulatory framework under which financial institutions operate. Rules about customer contact and ownership, privacy matters and security all must be spelled out — and backed by enforcement provisions.

Such clauses help reassure regulators, but they also provide the bank's own management with some peace of mind. "Alliances, by their nature, are not about the core things we do at the bank; they're the gravy on the potatoes," Heide says. "If that core business isn't safeguarded, management will shut down the partnership before we even get started."

These negotiations must also yield a mutually advantageous agreement. If either side feels shortchanged, the partnership won't last long. And to protect both sides in case of failure, exit clauses with built-in safeguards are necessary. Banks might want to escrow computer codes, for example, to protect their vital secrets. But McKinsey's Ernst also warns against "setting the table for failure" by building too many dispute-resolution and exit clauses into a deal.

Once an agreement is inked, the real work begins. In McKinsey's research, governance structure emerged as one of the thorniest alliance-management issues. Ernst recommends that the partnership either be structured as a stand-alone joint venture, with its own dedicated management, or that the stronger partner be vested with final decision-making authority. Shared governance, he says, often results in gridlock.

Weak governance was clearly a feature of some failed bank alliances, such as Integrion, which went through several managers before its demise. "For an alliance to be successful, someone has to own it," says Robert Brown, a senior vice president for business payroll services at Wells Fargo. "If nobody owns it, there's no accountability and it will wither on the vine."

Brown notes that he's directly accountable for managing Wells Fargo's alliance with SurePayroll, an online payroll processor based in Skokie, Ill. "I monitor the relationship, make sure things are running smoothly and communicate to the partner what we want in terms of new products or services."

Organizational support is also crucial. Senior managers must communicate to the troops that the bank values the alliance, while the employees involved must be incented to help it succeed. Otherwise, there's a risk that the venture will be regarded as a "poor stepchild" undeserving of effort.

This is a common problem. Participants in the Accenture survey rated their institutions' support and integration capabilities low — perhaps due to a lack of attention from senior management. Garnering that attention can be difficult, especially when the typical company is involved in so many partnerships.

McKinsey's Ernst recommends that top executives prioritize their institution's alliances and devote more time and energy to those that count. Out of the dozens of arrangements that a large institution might have, "Most organizations have three to five alliances that have the potential to really move the needle," he says.

What happens when an alliance does fail? The cord must be cut quickly and a post mortem conducted to avoid similar mistakes in the future. The key is institutionalizing the review process. "If an alliance fails, everyone wants to run away from it," Heide says. "You need to have the corporate discipline to conduct a thorough review of what went right and wrong."

Despite the difficulties, alliances will likely become even more important to the typical large bank. A recent Arthur Andersen survey found 47% of financial service executives consider their company a "candidate for alliances." Accenture estimates such arrangements will account for as much as 40% of some large financial institutions' market values by 2004. The promising areas for banks include cross-marketing alliances with brokerages and insurers.

With so much shareholder return riding on the results, it pays to take alliances seriously.

Mr. Engen is a freelance writer based in Minneapolis.

Copyright © 2003 by Banking Strategies, published by BAI.

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