Why Do Companies Invest in Business Development and Partnerships?

In my earlier post – Introducing the Guide to Business Development and Partnerships – I provided a curated list of articles written by “experts” on the topic of “Business Development”.  The first four sections of the guide are focused on the “What, Why, When and How” with regards to Biz Dev.  In my next post – WTF is Biz Dev? – I examined the “What”.  In this post, I tackle the “Why”.

The “Wrong” Way and the “Right” Way to do Biz Dev

In my experience, most companies do Biz Dev “wrong”.  Many companies ignore Biz Dev altogether, which is a mistake.  Other companies invest in lots of Biz Dev activities, but they do so without understanding why they are investing in Biz Dev in the first place, which creates problems.  On the flip side, companies that are doing Biz Dev “right” are: a) paying attention to and investing in Biz Dev, and b) have a clear understanding of why and how Biz Dev can help them achieve their goals.  In this post, I attempt to answer the question: “Why do companies invest in Business Development?”

Let’s start by examining in more detail how companies do Biz Dev “wrong”.

Why Companies Struggle with Biz Dev 

There are many ways that companies make mistakes with Biz Dev.  Here are 2 of the most common:

  • Mistake #1: Ignore – Many companies ignore and/or consciously avoid Biz Dev altogether.  Typically, the leaders at these companies stay away from partnerships because they want the company to “own” every function (Sales, Marketing, Product, etc.).  They don’t want to put their company in a position such that it relies on a partner, which (by definition) they do not control.  I understand this line of thinking – in an ideal world, every company controls their own destiny and does not rely on any partners.  And yes – there are examples of very successful companies that rarely or never partner with outside organizations.  But in most companies, every function (Sales, Marketing, Product, etc.) is resource constrained.  And invariably there are organizations outside of the company’s 4 walls (potential partners) that are in a position to help.  The wise CEO (or GM or VP) recognizes these opportunities and invests in Biz Dev with the goal of securing partnerships that will help each function achieve their respective goals.
  • Mistake #2: Confusion – Many companies invest in lots of Biz Dev activities, but they do so without a clear understanding of why they are doing so and/or what specific goals they are trying to achieve.  The Biz Dev team is “busy” – meaning they are actively engaged in a variety of discussions with potential partners and/or working on “strategic projects”.  But the rationale for pursuing these initiatives is unclear / flawed.  So most of these efforts are wasted – either the company can’t close partnerships (because the deals don’t make sense) or the company closes a bunch of partnerships but they all fail (again, because they don’t make sense).

A third common mistake is that the company does not staff the Biz Dev team with the right people for the task, but that is a discussion for a future post.

Now let’s take a closer look at companies who do Biz Dev “right”.

Why Companies Are Effective at Biz Dev

When a company does Biz Dev the “right” way, they do a couple of key things, including:

  • Get buy-in from leadership: Leadership commits to Biz Dev and treats it as a priority.  Per one former CEO who believes in partnerships: “The commitment (to partnering) must come from the C-Suite” such that “partnering…becomes a core competency”.
  • Start early: If a company ignores Biz Dev in the early days, and then one day decides it wants to close and launch a bunch of successful partnerships, it will be fighting an up-hill battle.  Over time, companies (like people) build habits that are hard to break, so if the company has developed a habit of working independently, it will be very hard for the company to suddenly become effective at Biz Dev.  I saw this first-hand when I was VP of Corp Dev at Gerson Lehrman Group, where I worked on several partnerships, each of which was a challenge for this very reason. (1)
  • Develop clarity on rationale for Biz Dev: Companies need to spend the time up-front to understand why they are investing in Biz Dev in the first place.  If a company does not have clarity on Biz Dev and/or has not gotten buy-in for Biz Dev initiatives from key stakeholders at the company, the company’s Biz Dev initiatives will fail. (2)  Alternatively, If a company is doing Biz Dev right, the company has a clear understanding of where their gaps are, and how Biz Dev can potentially plug these gaps.

This third idea – Develop Clarity – is key, but it is also complicated.  Let’s examine it in greater detail.

A Framework for Understanding Common Biz Dev Models

In my prior post, I identify the 9 most common Biz Dev models.  I group these 9 into 4 categories based on which function – 1) Sales, 2) Marketing, 3) Product, 4) CEO – each model is designed to support. (Per my definition (3) of Business Development, the Biz Dev function works closely with each of these 4 functions to help them achieve their respective goals.)  I discuss the rationale for each Biz Dev model using this framework, starting with the 3 models that I group with Sales.

Model #1: Re-seller

  • Category: Sales
  • Description: company sells its products to end customers via a 3rd party
  • Rationale: efficiently grow revenue and/or customer count
    • Companies build a re-seller channel to accelerate sales, often in specific markets which would be difficult to sell into directly.  A common scenario is that that company has had success selling in the US and wants to expand internationally, so rather than build out an international presence (offices), they develop re-seller relationships with partners that are based in specific countries of interest.  Likewise, if a company wants to enter a new vertical or move up or down market (from SMB to Enterprise or vice-versa), they may elect to develop a re-seller channel with partners that already have relationships in these markets.

Model #2: OEM

  • Category: Sales
  • Description: company licenses its product to a 3rd-party, which then bundles it in with its own products for re-sale
  • Rationale: efficiently grow revenue and/or customer count
    • For some companies, it is more natural for their product to be bundled in with another company’s offering as opposed to be sold stand-alone.  This model allows the company to focus 100% on building a great product, and off-load the Sales and Marketing functions / costs to OEM partners, who presumably have expertise / resources in these areas.  Michael Skok provides an example of an OEM partnership when he discusses Unidesk and Dell.

Model #3: “New” markets

  • Category: Sales
  • Description: BD takes the lead on opening up new markets – like a new customer segment or a new geography; eventually BD hands off the execution to Sales
  • Rationale: efficiently grow revenue and/or customer count
    • For some companies, the BD team is better equipped than Sales to do the initial work (market research, customer development, close initial customers, etc.) required to open up a new market (new country, vertical, etc.).

Model #4: Referral

  • Category: Marketing
  • Description: company develops close relationships with organizations that provide higher-quality leads in exchange for a fee
  • Rationale: efficiently grow the # and/or quality of leads
    • Companies build out Referral programs in order to augment their own Marketing resources.  Referral and re-seller models are close “cousins”, meaning that companies often pursue these types of deals when faced with similar challenges.  So just as a company would build out a re-seller channel in order to enter a new market, a company might instead build out a referral program for the same reasons.  Referral deals are easier to execute than re-seller deals, and for many companies, the referral arrangement makes more sense for both parties, at least initially.  In some cases, a referral deal is a pre-cursor to a re-seller deal – it allows both sides to “date before getting married”.

Model #5: Affiliate

  • Category: Marketing
  • Description: company develops arms-length relationships with organizations that provide lower-quality leads in exchange for a fee
  • Rationale: efficiently grow the # and/or quality of leads
    • For some companies, the Affiliate model can be an effective way for a company to scale its Marketing efforts.  Personally, I have not had much success with this model.  Lincoln Murphy writes extensively about this model here.

Model #6: Informal

  • Category: Marketing
  • Description: catch-all to describe variety of informal marketing initiatives that a company can pursue with other organizations; typically no money changes hands
  • Rationale: efficiently grow the # and/or quality of leads
    • If a company offers a product that is complementary with another vendor’s product (i.e., the products work well together and serve similar markets), then it may make sense to engage in some informal marketing initiatives, like hosting a joint webinar or creating some joint content.  These initiatives could lead to something more formal – like a referral deal or a joint go-to-market plan (i.e., a commitment to a series of joint webinars, white papers, events, etc.).  Mark Suster touches on the rationale for these initiatives here when he talks about how Invoca has partnered with Salesforce and Hubspot.

Model #7: Marketplace

  • Category: Product
  • Description: company creates and manages a program that allows 3rd-party developers to build applications that integrate with the company’s core product / platform
  • Rationale: improve the product and/or accelerate the product development process
    • For many companies, the primary motivation for building an apps market is to augment the company’s own Product development team.  In most companies, Product / Engineering is the primary bottleneck, so when the company builds an API that enables products built by 3rd party developers to integrate with the company’s product, the company has in effect accelerated its product development process (i.e., the company can “offer” products / features to its customers without incurring the costs associated with building these products / features).  In some cases, the company may charge 3rd party developers for access to the API, such that the apps marketplace is also a source of revenue, but this is typically of secondary importance.

Model #8: Integration

  • Category: Product
  • Description: the company’s business model is predicated on having the company’s product integrate with products offered by 3rd parties, so the company forms partnerships with these parties
  • Rationale: improve the product and/or accelerate the product development process
    • For some companies, product integrations are essential.  For example, data integration companies (like Bedrock Data), ad-tech companies (like DataXu), and analytics companies (like InsightSquared) offer products that are – for all intents and purposes – useless unless their product is integrated with those offered by other companies.  These types of companies pursue Integration deals out of necessity.  In some cases, the API offered by the partner company is “open”, such that the “partnership” is relatively simple / straightforward.  But in some cases, the API is “closed”, and a more complicated / formal partnership is required to support the integration.

Model #9: Strategic

  • Category: CEO
  • Description: company identifies and engages with potential partners who represent future investors in the business and/or acquirers of the business
  • Rationale: ensure that the company is well-capitalized and/or increase the odds of generating a great return for shareholders
    • For many companies, the most logical investors in the business and/or the most logical acquirers of the business are also potential business partners.  And a partnership is often the first step in securing an investment and/or an acquisition.  Per John O’Farrell, the wise CEO invests in strategic Biz Dev such that the company “always knows where the exits are”.

Whoa.  That took longer than I anticipated.  But if you have gotten this far, you should now understand how companies do Biz Dev “wrong”, how companies do Biz Dev “right”, and for those companies that do engage in Biz Dev, why they pursue each of the 9 most common Biz Dev models.

In my next post, I will examine the “When” of Biz Dev.

Notes

(1) During GLG’s first 10 years, the company was very successful (grew to $275+ million in revenue, 700+ employees, profitable), but it had done so largely on its own (i.e., without partners).  In 2008 – the year of the financial crisis – the company hit some headwinds for the first time in the company’s history.  In an effort to right the ship, the company started to invest in Biz Dev.  Unfortunately, it was a challenge – we struggled to close deals that we should have closed, and when we closed a deal, we struggled to execute.  I attribute this in large part to the fact that the company had not developed any partnership “muscles” – the only playbook that the company knew was to work independently.

(2) The person / team leading the Biz Dev effort at the company must develop a formal plan with specific goals, tactics, dates, etc.  They must share this plan with leadership at the company (Sales, Marketing, Product, CEO) and get their buy-in before starting to execute on the plan.  I will dive into this topic in a future post on the “How” of Biz Dev.

(3) Per my prior post, here is my definition of Business Development: “Business Development is the function at the company responsible for identifying, securing, and/or managing relationships with organizations outside of the company (excluding customers and suppliers) that helps other key functions at the company achieve their respective goals.”

Thanks to Nick Worswick for his input on this post.