It may be a good idea to enter into a partnership, but how to estimate the value of this arrangement?
Financial valuation changes
The value of a company is strongly dependent on its position in the value chain. 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.
Creating exclusive partnerships sets an incentive on information sharing. Information sharing takes time of key employee. 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. This is an important element of engaging in a partnership.
What is the value of a partnership?
The most obvious way of determining the value of a partnership is by means of accounting rules, and then in particular IFRS standard 11 on 'Joint Arrangements'. However, this approach mainly focuses on the control over the collaboration, rather than the profit potential
A better way is to use the familiar Net Cash Value method. The illustration on the right shows how it is applied to partnerships. Compared to ‘normal’ valuations, there are four distinctive differences involved:
- The lifespan of the alliance is usually limited
- The initial investment is generally lower, by using the resources and scale advantages provided by the partners.
- The risk factor is higher, since the flexibility is lower and the partner may show opportunistic behaviour.
- The financial result per partner is strongly influenced by the share that each partner holds in the collaboration.
Each of these factors can be influenced by the right approach.
Network orchestration helps to create value
Hinterhuber (2002) distinguishes four types of network orchestrator roles. These are displayed below. We have added to this model the way that each of the roles influences the parameters in the formula as described above.
–Defines the objectives of the network
–Decides who becomes a member of the network
–Has influence on who gets which share in the alliance
–Defines and maintains performance standards
–Influences the investments of each party
–Creates new concepts and intellectual assets
–Influences the life span of the alliance
–Motivates partner firms and creates network identity
–Mitigates risks by keeping everybody motivated and on board
The complete presentation of this work by Alfred Griffioen can be found here. Alliance experts develops knowledge on this matter and uses this knowledge in its advisory work.