Corporate Partnerships

R E P R I N T N U M B E R 5 5 2 2 1

W I N T E R 2 0 1 4 V O L . 5 5 N O. 2

Rewriting the Playbook for Corporate PartnershipsBy F. Ass Martnez-Jerez

Please note that gray areas refl ect artwork that has been intentionally removed. The substantive content of the article appears as originally published.

SLOANREVIEW.MIT.EDU

TODAYS BUSINESS ENVIRONMENT is unforgiving of companies that are slow to adapt. To extend their capabilities and facilitate change, many organizations have experimented with

different types of strategic partnerships with suppliers and customers that help them design and

deliver products and services efficiently. But some innovative companies are attempting to redefine

the parameters of strategic partnerships as we know them, navigating between the risk of being

exploited by an opportunistic partner and the risk of being trapped in the rigidities of vertical

integration. These organizations have initiated multileveled relationships with customers and

suppliers that leverage the resources and capabilities of the respective parties in an effort to create

superior products and services.

What makes such partnerships which I call adaptive strategic partnerships counter-

intuitive is that they are being formed in situations where the two most relevant streams of

organizational economics would predict vertical integration.1 Moreover, managerial literature

cautions against establishing customer-supplier agreements that, like those contemplated here,

lack conditions of specifiability, verifiability and predictability.2

Bharti Airtel Ltd., a telecommunica-

tions services company based in New

Delhi, India, is among a growing group

of companies that have nevertheless

elected to take a different path. Back in

2004, Bharti Airtel, currently the worlds

third largest wireless telecom service

provider, with more than 275 million

subscribers in 20 countries, was strug-

gling to keep up with the growth of

Indias wireless telecom market while

also competing for broadband and land-

line telephone customers. Increasingly,

Bharti Airtel managers found that nego-

tiating and updating contracts with

To facilitate growth in a fast-changing market, Bharti Airtel Ltd. negotiated unconventional part-nerships with some of its leading vendors.

THE LEADING QUESTIONHow can companies collaborate effectively when the business envi-ronment is changing rapidly?

FINDINGS Establish incentive arrangements that focus partners on joint value creation rather than distrib-uting value.

Share information extensively so you and your partners can solve problems together.

Create processes to promote learning, trust and adaptabil-ity to a changing competitive envi-ronment.

Rewriting the Playbook for Corporate PartnershipsIn fast-changing markets, some companies are developing more flexible, adaptive strategic partnerships to leverage the resources and capabilities of both customers and suppliers. BY F. ASS MARTNEZ-JEREZ

S T R AT E G I C PA R T N E R S H I P S

WINTER 2014 MIT SLOAN MANAGEMENT REVIEW 63

64 MIT SLOAN MANAGEMENT REVIEW WINTER 2014 SLOANREVIEW.MIT.EDU


vendors interfered with their ability to focus on

satisfying customers and outsmarting the compa-

nys competition. Contrary to what other telecom

operators have done, Bharti Airtel negotiated

unconventional relationships with some of its lead-

ing vendors, including Nokia Siemens Networks

(now Nokia Solutions and Networks), Ericsson and

IBM vendors whose interests at times have col-

lided with its own.

Typically, companies with outside partners rely

on simple tools such as service-level agreements,

which specify what is expected from each party and

provide for performance standards to assess compli-

ance. But in rapidly changing business environments

where companies are making decisions every day

about how to evolve their products and services to

surpass their customers expectations, such agree-

ments can have limited effect. They can also lead to

problems down the line, because they call for levels

of service that are meaningful at the time of the

negotiation but less so as service needs change.

Bharti Airtel wanted to have a greater level of coordi-

nation to facilitate its contemplated expansion in

Indias (and later, the emerging worlds) wireless

communications market.

Bharti Airtels relationships with partners Erics-

son, Nokia Siemens and IBM were fundamentally

different from the more traditional business part-

nerships other telecom companies favored. Instead

of expanding network infrastructure by purchas-

ing increasing amounts of equipment (such as

exchanges and cellular antennas), which often

results in unused capacity, Bharti Airtel pays the

vendors to operate the network; it compensates

them based on telecom volume (measured in

erlangs), paying only when equipment is in use.

In addition to rethinking the approach to network

capacity, vendors take responsibility for network

performance and troubleshooting. To facilitate

this transfer, Bharti Airtel gives vendors access not

just to data on usage but also to sensitive strategic

information, such as demand forecasts and expan-

sion plans. By having a more open information

exchange, Bharti Airtels suppliers can optimize

their delivery schedules and leverage their knowl-

edge of building capacity with less equipment;

Bharti, in the meantime, avoids the cost of having

to buffer excess capacity and frees management to

focus on developing the relationships with the

companys own customers. Without being solely

responsible for the equipment risk, it can invest

more heavily in capacity, which, in turn, benefits

the suppliers through higher upfront equipment

sales and fewer rush orders.

In managing its partnerships with vendors,

Bharti Airtel uses a joint governing structure that

encourages people at different levels of the organi-

zations to communicate and address problems as

they arise (for example, restoring service after a

severe storm). In some cases, such interactions have

led the company and its partners to redraw the

scope of their collaborations (for example, assign

responsibility for building and maintaining the cell

towers to a new company), something that would

be more difficult to do in a more traditional part-

nership. With flexible contracts, the companies can

adapt to shifts in the competitive environment and

implementation challenges. The incentive system

rewards vendors for efficient network manage-

ment. By sharing information, Bharti Airtel and its

telecom equipment providers are incentivized to

develop processes that advance learning, innova-

tion and mutual trust.

Since implementing its contracts with its strate-

gic vendors, Bharti Airtels total customer base has

grown at an annual rate of more than 35%,3 and the

company has maintained its leadership position in

the Indian wireless market. Much of Bharti Airtels

growth and success can be attributed to the way

it has structured its relationships with vendors.

Its adaptive strategic partnerships break some

traditional rules of business relationships by out-

sourcing core capabilities to partners and being

somewhat loose in specifying what the partners are

expected to do. As a result, building such partner-

ships can be more easily said than done. But for

companies in fluid environments, these partner-

ships offer opportunities for strategic leadership

and adaptability.

The examples in this article involve a customer

and a supplier uniting their efforts to navigate in an

uncertain world. However, most of the insights

presented here could also apply to other types of

strategic alliances (such as horizontal alliances be-

tween different businesses in the same part of the

value chain).4 (See About the Research.)

ABOUT THE RESEARCHThe ideas presented in this article draw upon the re-search I have done with colleagues about successful and unsuccessful initiatives of strategic partnership between suppliers and customers in a variety of industries. The first stage of the research was exploratory in nature and consisted of 15 interviews with execu-tives representing 12 industries on four continents. I also ran roundtable discus-sions with six CEOs and divisional managers. Based on these interviews, I identi-fied managerial challenges faced by customer-centric firms. Subsequently, I con-ducted 14 in-depth field studies that helped to shape the ideas in this paper. I con-ducted additional interviews with the intention of devel-oping specific aspects of the article. Finally, I discussed my research in several man-agement forums and taught the ideas to MBA students and participants in the Driv-ing Corporate Performance executive education program at Harvard Business School. The research process was iterative throughout: An ongoing analysis of and reflection on the insights from the first interviews and the reactions from partici-pants in conferences and academic programs helped identify the subjects and inform the direction of my subsequent interviews.

SLOANREVIEW.MIT.EDU WINTER 2014 MIT SLOAN MANAGEMENT REVIEW 65

A New Framework for Adaptive Strategic PartneringThe traditional relationship framework for govern-

ing interactions between two or more organizations

assumes that the different parties act in their own

self-interest. Whether a company sells a machine

tool to a customer (a transaction) or buys a mainte-

nance contract for a piece of equipment from a

service provider (a relationship), the ultimate ob-

jective for each side is to get a larger share of the

overall value. Companies, therefore, try to curb op-

portunistic behavior by other players that deprives

them of potential benefits.5

Although it is impossible to anticipate all possi-

ble contingencies, customer relationships have

traditionally been defined by contracts that include

detailed service-level agreements and rewards and

penalties linked to performance specifications. In

this context, parties share information on an event-

driven, need-to-know basis in order to measure

performance or to indicate a need to renegotiate

terms based on unexpected events.

Traditionally, parties not satisfied by this type of

institutional framework have opted for vertical in-

tegration. However, the cost of vertical integration

is often considered too high in light of the technol-

ogy and business risks. Whats more, changes in the

talent market have shifted the balance toward flexi-

ble partnerships; many high-caliber professionals

prefer environments in which they can learn and

grow by working with leaders in their field. Many

analytics specialists, for example, might prefer

working for IBM doing big data analytics to work-

ing in the information technology department of a

less analytically sophisticated company. The result:

Many organizations outsource functions that were

formerly considered core to their business.

When outside entities control core business

functions, the traditional relationship framework

which includes setting detailed specifications,

pursuing costly renegotiations and participating in

limited information exchanges is not consistent

with the conditions necessary for successful adap-

tive strategic partnerships; traditional contracts

discourage flexibility, stifle innovation and erode

trust. A new institutional framework is required.

Adaptive strategic partnerships can provide an

effective vehicle under three conditions: (1) The

product or service in question is of strategic impor-

tance to the customer; (2) the vendor or service

provider has more domain expertise than the cus-

tomer; and (3) the evolution, outcome and purpose

of the relationship are fairly uncertain.

If (2) and (3) are present but (1) is not, then its

usually adequate to pursue short-term contracts

and to renegotiate them as necessary. If (1) and (3)

are present but (2) is not, it is more efficient for the

customer to perform the function internally.

Finally, if (1) and (2) are present but (3) is not, the

traditional contracting environment, with detailed

service-level agreements specifying the supplier

outputs, is usually the best choice. Although

adaptive strategic partnerships are by no means a

universal solution, the range of circumstances

where they are worth consideration is increasing,

particularly in emerging markets and rapidly

changing industries such as telecommunications

and information technology. (See When to Con-

sider Adaptive Strategic Partnering.)

Companies like Bharti Airtel that are moving

away from traditional customer-supplier relation-

ships toward adaptive strategic partnerships are

shifting the institutional framework on three

dimensions: (1) incentives, (2) information and (3)

collaboration mechanisms. By managing across

these dimensions, they are paving the way for a new

level of collaboration. (See Changing the Relation-

ship Framework, p. 66.)

WHEN TO CONSIDER ADAPTIVE STRATEGIC PARTNERINGAdaptive strategic partnering makes the most sense when the product or service in question is of strategic importance to the customer, the vendor has superior domain expertise and there is a fair degree of uncertainty about the evolution and outcome of the relationship.

Strategic importance to customer

Traditional contract

Spot contracts

Keep in-house

Adaptive strategic

partnering

Vendors superior expertise

Uncertainty in relationship



Incentives Relationships between companies and

their suppliers and customers frequently break

down, not because they dont create value but be-

cause of disputes over what is seen as an attempt by

the other side to capture an unfair share of value.

Innovation suffers as well; no one wants to inno-

vate for fear of not being rewarded. The road to

success in adaptive strategic partnering needs to

start with incentive arrangements that focus part-

ners on joint value creation rather than on value

distribution.

Detailed service-level agreements with steep

financial rewards and penalties linked to prespeci-

fied performance parameters often lead to

opportunistic behavior. Incentives often encourage

parties to focus on the things that entitle them to

receive rewards, and performance indicators are

selected to encourage parties to produce what the

other side wants. Unfortunately, the performance

indicators are almost never perfect proxies for true

value. In complying with the letter of the contract,

parties may violate the spirit of the relationship.6 For

example, the service agreements for call center oper-

ators sometimes specify the amount of time service

reps can spend talking with a customer, with little

flexibility for the cases that require extra time. The

result: Some customers end up being treated rudely.

Adaptive strategic partnerships, by contrast, en-

courage incentive systems that support innovation

and the partnerships success. The incentives tend

to be flatter and more linked to the totality of the

relationship and the value and profits the relation-

ship generates. While there is a risk that suppliers

will become complacent as they gain familiarity

with the client and as the cost of switching to other

suppliers increases, that risk is relatively minor

compared with the potential benefits.

As the supplier internalizes the clients problems,

theres an opportunity to refocus the incentive sys-

tem from the individual inputs/actions of the

exchange (time and materials) to more comprehen-

sive aspects of the collaboration (the project or set of

projects). That is essentially what Carrefour S.A., the

French retail chain, did several years ago when it de-

cided to redesign its purchasing function. Under the

old system, Carrefour set an annual list price and ne-

gotiated individual promotions with consumer

packaged goods manufacturers. However, that ap-

proach prevented the retailer and its suppliers from

collaborating on market intelligence and created an

adversarial dynamic. Carrefour pushed to get as

many promotional dollars as possible from the man-

ufacturers; the manufacturers, in turn, aimed to

minimize that amount while keeping Carrefour

happy. Under the new arrangement, Carrefour

awards decision rights typically assumed by the re-

tailer to one supplier (or category captain) in each

product category. That supplier has access to sales

information for the category and decides which

products and formats Carrefour will carry, as well as

the shelf space and location of each product. In ex-

change, the suppliers commit to an annual target for

the total margin generated by the category.

Of course, the ultimate mechanism for aligning

incentives is revenue or profit sharing. To compen-

sate IBM for managing its IT system, for example,

Bharti Airtel provides IBM with a percentage of its

revenues. That gives IBM a vested stake in the out-

come of its own innovations. Normally, revenue

sharing in such situations is regarded as inappro-

priate after all, the link between IBMs actions

and Bharti Airtels revenues is fairly remote. How-

ever, the decision to share revenue has positive

overall effects in terms of building trust and sup-

porting innovation and flexibility.7 Because IBM

has much to gain in the future, it is less tempted to

emphasize short-term performance.

Its no accident, then, that telecom companies

located in emerging markets are among the leaders

in the development of innovative partnerships and

revenue-sharing agreements. However, some of the

same principles are being used at other rapidly

CHANGING THE RELATIONSHIP FRAMEWORKAdaptive strategic partnering changes the framework of the relationship in regard to incentives, information exchange and collaboration mechanisms. As a result, the institutional framework evolves from aiming to curb opportunistic behavior to promoting collaboration and trust.

RELATIONSHIPASPECTS FROM TO

Incentives Reward for job performed Share the risk and success

Information Describe object and circum-stances of the exchange

Describe needs and value created

Collaboration Mechanisms

Preempt and solve conflicts Identify and solve problems

WINTER 2014 MIT SLOAN MANAGEMENT REVIEW 67SLOANREVIEW.MIT.EDU

growing companies in young industries. Sanjay

Purohit, senior vice president responsible for prod-

ucts, platforms and solutions at Infosys, a major

provider of business, consulting, information tech-

nology, software engineering and outsourcing

services that is based in Bangalore, notes that an

openness to innovative arrangements such as reve-

nue sharing is being shaped by three factors: (1) a

cultural aversion to risk, (2) an orientation toward

growth and impatience with inaction, and (3) a

competitive environment, which makes people

more open to trying new things that will allow

them to stay ahead of the curve.8

The spirit of revenue sharing and risk sharing

underlines the sense that partnering is a joint and

several venture. Both partners should be rewarded

for the success of the venture, and both partners

should take responsibility for its setbacks. The

surest way to undermine the spirit of such a rela-

tionship is to point the finger of blame at the other

party. A classic example of this danger can be

found in the very public clash between Ford Motor

Co. and Firestone in 2000, which came to a head

following press reports about rollovers, injuries

and deaths from the failure of Firestone tires on

Ford Explorer SUVs. Ford publicly stated that the

problem was the tires, and Firestone responded by

contending that the Explorers design contributed

to the problem.9 The accusations destroyed the

trust the companies had built during almost a cen-

tury of collaboration.

In working out the terms of their business rela-

tionship, Seattles Virginia Mason Medical Center

and Owens & Minor, a distributor of medical and

surgical supplies based in Mechanicsville, Virginia,

were well aware of the risks of adversarial customer-

supplier relationships and took conscious steps to

create a different kind of partnership. Traditionally,

the fee structure in the medical and surgical sup-

plies distribution industry is based on cost-plus

pricing adding a fixed percentage of the cost of

the products delivered. However, this pricing struc-

ture can create perverse incentives for hospitals to

cherry-pick which items to buy directly from the

manufacturer, as well as careless planning that re-

sults in too many rush orders. For Owens & Minor,

the traditional pricing structure led to high costs and

low margins, hurting its profitability. Therefore, it

proposed a more efficient supply chain and offered

to share whatever savings it created with the medical

center. In working out the agreement, the two parties

anticipated that there would be process failures (for

example, out-of-stock surgical rooms), but they

didnt establish any penalties. Instead, they agreed to

share the cost of all errors and defects equally.10 As a

result, the emphasis shifted away from who caused

the problems to resolving them.

Information Another important tenet of effective

partnerships is open and extensive information

sharing. The information environment in tradi-

tional customer relationships is often characterized

by detailed definitions of the data to be measured

and the targeted performance levels for each

metric. Service-level agreements are based on a

philosophy of compliance and designed so that

predetermined triggers result in price adjustments,

contract extensions or new orders.

In adaptive strategic partnering, the purpose of in-

formation exchange goes far beyond compliance;

having common information allows partners to solve

problems together and allows suppliers to anticipate

and define customer needs. Although compliance is

still important, the number of metrics linked to re-

wards and penalties is fewer, and the most helpful

ones are those that reflect the performance of the

partners vis--vis their end customers.11 Having just a

few metrics can result in fewer arguments and greater

emphasis on the outcomes that are important to the

success of the partnership. In Infosyss partnership

with a major U.S. retailer, for example, one of the most

important performance measures is the number of

out-of-stock items at the clients stores. This metric is

far more relevant to the retailer than the number of

bugs in the companys stock-replenishment software.

Organizations that want to achieve success with

adaptive strategic partnering give less weight to

compensation linked to metrics and more weight

to building a common understanding of opportu-

nities to create value. In fact, contracts are often

longer and the number of operating indicators

exchanged larger as partnerships evolve and as cli-

ents and suppliers get to know each other better.12

Thats because contracts fulfill two distinct roles:

(1) the traditional role of formalizing the rights

and obligations of the parties to it and (2) helping



customers and suppliers identify and communicate

their expectations about their contributions to and

benefits from the relationship, which can be more

important in this context.13

Monitoring delivery on preconceived expecta-

tions is not enough to build superior competitive

strength. Infosys, for example, uses what it calls a

relationship scorecard (a type of balanced score-

card) to support information exchange with key

customers. The scorecard includes metrics repre-

senting current developments in the relationship

(such as the number of improvement suggestions

approved by the client), each partys business per-

formance and the alliances future potential.14

Infosys managers say that sharing such informa-

tion helps maintain a holistic view of the

partnership and how it fits within the bigger pic-

ture of the clients strategic priorities. Given that

the purpose of the exchange is problem solving

rather than performance evaluation, it is more flex-

ible than a set of operational metrics would be.

Successful collaborations recognize that reliable

information is essential to establishing trust with

suppliers, and the absence of credible information

can erode trust and destroy opportunities for col-

laboration. The experience of Metalcraft15 (a

pseudonym for an actual auto supplier) underlines

this principle. Metalcrafts supplier scorecard, which

it used to rate and classify suppliers, produced de-

tailed supplier performance reports that were

designed to promote continuous improvement. In

an effort to build flexible and constructive relation-

ships with its suppliers, the company gave its own

sourcing managers the authority to adjust the

measurements when they felt that circumstances

warranted it. The intent was to avoid situations in

which a strict application of a sourcing agreement

would lead to an unfair result for example, the

placement of a good supplier on the no-order list.

However, some suppliers cried foul; they considered

the adjustments to be arbitrary and blatantly unfair.

They lost faith in the fairness of Metalcrafts deci-

sions and in the scorecard system itself.

Information mistrust can be the result of wide-

spread practices in certain industries. For example,

a McKinsey & Co. study documented that in high-

tech supply chains, clients fear that common

suppliers may leak confidential information to

their competitors leads them to share projections

that are inaccurate. Suppliers interpret this infor-

mation with clients biases in mind, thus further

undermining the efficiency of the supply chain.16

Collaboration Mechanisms Although establish-

ing incentives for value creation and generating

information exchanges are extremely important,

they are not enough. Partnerships also need mech-

anisms that allow partners to join forces in

generating value. The best partnerships create pro-

cesses that promote learning, trust and adaptability

to a changing competitive environment. (See New

Mechanisms for Collaboration.)

One of the virtues of traditional service-level

agreements was clarity. When circumstances

changed (for example, the price of oil increased),

there were specified consequences and remedies.

Of course, anticipating every contingency is diffi-

cult, even impossible. Still, when unforeseen events

do occur, organizations need mechanisms for rene-

gotiating their agreements.

The new paradigm for adaptive strategic partner-

ing does not completely eliminate the need for

contracts. However, so that the organizations in-

volved can adapt to changing circumstances,

contracts are no longer the law governing the par-

ties actions. In practice, the negotiation process

(during which both parties discuss what they expect

and the value that they aim to create) is more im-

portant than the contract itself.17 As observed by

Akhil Gupta, deputy group CEO and managing

director of Bharti Enterprises, Bharti Airtels parent

company, The key to minimizing conflict between

partners is to write contracts that are simple enough

so they leave room to the pragmatism of the parties

to make things work. If circumstances show us

that things are not working, then, together with our

partners, we have no problem in reinterpreting or

redefining the contract.18

In adaptive strategic partnering, the driving prin-

ciple is problem solving, and the institutional center

of gravity is a decision-making body (often a steering

committee) charged with surveying the progress of

the relationship and maintaining a big-picture

perspective. Traditionally, a committee with repre-

sentatives from different sides would be a clear

acknowledgment that the relationship is financially

SLOANREVIEW.MIT.EDU WINTER 2014 MIT SLOAN MANAGEMENT REVIEW 69

significant. In adaptive strategic partnering, how-

ever, the committee plays a more comprehensive

role. Customers use such a forum to learn how the

relationship is helping (or has the potential to help)

their competitive position. For suppliers, commit-

tee meetings can provide information on new skills

they might acquire in order to work more effec-

tively with the client. Having senior leadership

involved in the committees can be a huge plus: It

can help in securing critical resources and magni-

fies the potential impact. Infosys, for example,

assigns a member of its management committee

(its top executive body) to the steering committee

of each of its major clients.

Regular and open communication between the

operating levels of the organization is essential.

Scheduling periodic performance reviews at the

operating level and knowing who to go to when

problems occur are two mechanisms that facilitate

day-to-day communication. The goal is to solve

problems as opposed to assigning blame. At Bharti

Airtel, for example, dispute resolution mechanisms

have been created but are rarely used; typically,

managers step in to solve the operating problems

before formal intervention is necessary.

No governance framework is complete without

highlighting three types of agreements that are

typical in adaptive strategic partnering: exit agree-

ments, noncompete clauses and rights of first

refusal. These mechanisms contribute to flexibility,

innovation and trust, providing opportunities on

both sides to improve the partnership.

1. Exit Options Bharti Airtel had a well-defined

exit option with its network management compa-

nies, facilitated by the fact that the standard

equipment it used could easily be redeployed by an-

other company. In cases where the assets are more

specific, a detailed plan is necessary for transition-

ing assets, personnel and knowledge. Exit options

in partnerships are similar to prenuptial agree-

ments: The parties enter the agreements hoping

that they will not need to terminate them. Rather

than being a symptom of a lack of trust, they enable

partners to commit more fully to the relationship

by controlling the damage in case of failure.19

2. Noncompete Clauses There are conflicting

views about noncompete clauses as well. If a sup-

plier cannot apply the knowledge developed in a

partnership to other client situations, it will be cut

off from one of the major sources of value and lose

some of its incentive to innovate.20 Moreover, shar-

ing knowledge across different customers advances

the suppliers learning curve and generates operat-

ing scale, which can directly benefit clients. But

clients may be reluctant to collaborate with suppli-

ers that can transfer the competitive advantage

developed in the partnership to competitors. My

research suggests that absolute prohibitions on

working for or extending innovations to other

organizations even competitors are rare in

adaptive strategic partnerships.

3. Rights of First Refusal Partnership contracts

and memoranda of understanding often give suppli-

ers an explicit right of first refusal in areas close to

the current scope of collaboration. For instance, In-

fosyss customers that build relationship scorecards

typically promise Infosys the opportunity to bid on

new projects before opening the process to other

suppliers. Such agreements symbolically reinforce

the trust necessary to sustain the partnership.

Managers are exploring new structures for rela-

tionships between vendors and customers to

address todays circumstances. Companies are

learning to respond to the changing market re-

quirements, and the relationships they develop will

NEW MECHANISMS FOR COLLABORATIONTo make adaptive strategic partnering work, the collaboration mechanisms need to be redrawn to promote learning, trust and adaptability.

COLLABORATIONFEATURES

TRADITIONAL CUSTOMER-VENDOR RELATIONSHIP

ADAPTIVE STRATEGIC PARTNERING

Inspiring Principles

Codify and enforce Trust and verify

Main Goal of CollaborationMechanisms

Protection against opportunistic behavior by the other party

Joint identification and development of value-creation opportunities

Role of Contract Basis for renegotiation Developing expectations about each partys contri-butions to, and benefits from, the relationship

Role of Decision-Making Bodies

Policing the enforcement of the contract

Managing the evolution of the partnership

Nature of Interventions

Emphasis on compliance Interactive resolution of any problems that may hinder the partnerships performance



continue to evolve to meet the challenges of inno-

vation, flexibility and trust. Although the specific

elements of the relationships will differ, the basic

principles presented in this article could help com-

panies navigate the uncertain future.

F. Ass Martnez-Jerez is an assistant professor in the department of accountancy at the University of Notre Dames Mendoza College of Business, in South Bend, Indiana. Comment on this article at http://sloanreview.mit.edu/x/ 55221, or contact the author at [email protected].

REFERENCES

1. Those two streams of organizational economics are Williamsons transaction cost economics and Harts prop-erty rights theory. See O.E. Williamson, Transaction-Cost Economics: The Governance of Contractual Relations, Journal of Law and Economics 22, no. 2 (October 1979): 233-262; and O. Hart, Firms, Contracts and Financial Structure (Oxford, United Kingdom: Oxford University Press, 1995).

2. C.M. Christensen and M.E. Raynor, The Innovators Solution: Creating and Sustaining Successful Growth (Boston: Harvard Business School Press, 2003), 137.

3. The compound annual growth rate of Bharti Airtels rev-enues in Indian rupees for the 2004-2013 period was 36%. The growth rate in U.S. dollars for the same period was 33%, reflecting a 20% devaluation of the Indian rupee against the U.S. dollar in 2013.

4. An excellent overview of the related organizational eco-nomics literature is R. Gibbons and J. Roberts, eds., The Handbook of Organizational Economics (Princeton, New Jersey: Princeton University Press, 2012). See also J. Oxley, Appropriability Hazards and Governance in Strate-gic Alliances: A Transaction Cost Approach, Journal of Law, Economics & Organization 13, no. 2 (October 1997): 387-409, which discusses how the degree of appropriabil-ity hazard leads to a continuum of relationships that go from the arms-length transaction to vertical integration; J.H. Dyer and H. Singh, The Relational View: Coopera-tive Strategy and Sources of Interorganizational Competitive Advantage, Academy of Management Re-view 23, no. 4 (October 1998): 660-679; and J.H. Dyer, P. Kale and H. Singh, How to Make Strategic Alliances Work, MIT Sloan Management Review 42, no. 4 (sum-mer 2001): 37-43. The latter articles view the capability to develop strategic alliances as a difficult-to-replicate core competency and a main source of competitive advantage. Finally, R. Gulati, Social Structure and Alliance Formation Patterns: A Longitudinal Analysis, Administrative Sci-ence Quarterly 40, no. 4 (December 1995): 619-652, presents the sociological view of strategic alliances.

5. O.E. Williamson, The Economic Institutions of Capital-ism: Firms, Markets, Relational Contracting (New York: Free Press, 1985).

6. S. Kerr, On the Folly of Rewarding A, While Hoping for B, Academy of Management Journal 18, no. 4 (Decem-ber 1975): 769-783.

7. P. Casas-Arce and T. Kittsteiner, Opportunism and Incomplete Contracts, working paper, Arizona State University, 2010.

8. S. Purohit, interview with author, July 21, 2010.

9. T. Aeppel, C. Ansberry, M. Geyelin and R.L. Simison, Road Signs: How Ford, Firestone Let the Warnings Slide by as Debacle Developed, Wall Street Journal, Sept. 6, 2000.

10. V.G. Narayanan and L. Brem, Supply Chain Partners: Virginia Mason and Owens & Minor (A), Harvard Busi-ness School case no. 109-076 (Boston: Harvard Business School Publishing, 2009).

11. D. Boskovic and S. Hariramasamy, Next Generation IT ADM O&O (presented at the Seventh Annual Conference on Outsourcing and Offshoring, McKinsey & Co., New York, Nov. 13, 2008). In a comparative study of two applica-tion-development relationships in the financial services sector that had met with widely different success, Bos-kovic and Hariramasamy found that one of the critical differences between successful and unsuccessful relation-ships was the concentration of quality assurance on only four points of the life cycle versus in all the deliverables.

12. M.D. Ryall and R.C. Sampson, Formal Contracts in the Presence of Relational Enforcement Mechanisms: Evidence from Technology Development Projects, Management Science 55, no. 6 (June 2009): 906-925.

13. O. Hart and J. Moore, Contracts as Reference Points, Quarterly Journal of Economics 123, no. 1 (Feb-ruary 2008): 1-48; and E. Fehr, O. Hart and C. Zehnder, Contracts as Reference Points Experimental Evi-dence, American Economic Review 101, no. 2 (April 2011): 493-525.

14. K. Miller, R.S. Kaplan and F.A. Martnez-Jerez, Info-sys Relationship Scorecard: Measuring Transformational Partnerships, Harvard Business School case no. 109-006 (Boston: Harvard Business School Publishing, 2008).

15. V.G. Narayanan, S. Kulp and R.L. Verkleeren, Met-alcraft Supplier Scorecard, Harvard Business School case no. 102-047 (Boston: Harvard Business School Pub-lishing, 2002).

16. G. Grover, E. Lau and V. Sharma, Building Better Links in High-Tech Supply Chains, McKinsey Quarterly 14 (winter 2008): 14-19.

17. Hart and Moore, Contracts as Reference Points.

18. A. Gupta, interview with author, Jan. 2, 2009.

19. B.R. Klein, G. Crawford and A.A. Alchian, Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, Journal of Law and Economics 21, no. 2 (October 1978): 297-326.

20. S. Samila and O. Sorenson, Noncompete Covenants: Incentives to Innovate or Impediments to Growth, Man-agement Science 57, no. 3 (March 2011): 425-438. Samila and Sorenson show that in states where noncompete clauses are enforced, there is less innovation, as well as fewer startups and lower employment growth.

Reprint 55221. Copyright Massachusetts Institute of Technology, 2014. All rights reserved.

PDFs Reprints Permission to Copy Back IssuesArticles published in MIT Sloan Management Review arecopyrighted by the Massachusetts Institute of Technology unless otherwise specified at the end of an article.MIT Sloan Management Review articles, permissions, and back issues can be purchased on our Web site: sloanreview.mit.edu or you may order through our Business Service Center (9 a.m.-5 p.m. ET) at the phone numbers listed below. Paper reprints are available in quantities of 250 or more.To reproduce or transmit one or more MIT Sloan Management Review articles by electronic or mechanical means (including photocopying or archiving in any information storage or retrieval system) requires written permission. To request permission, use our Web site: sloanreview.mit.edu),or E-mail: [email protected] Call (US and International):617-253-7170Fax: 617-258-9739Posting of full-text SMR articles on publicly accessibleInternet sites is prohibited. To obtain permission to postarticles on secure and/or password-protected intranet sites, e-mail your request to [email protected].

Reproduced with permission of the copyright owner. Further reproduction prohibited withoutpermission.

Documents

Corporate Partnerships