The extended enterprise: harnessing and managing alliances in the network economy

Citation

Lukeman, D. (2003), "The extended enterprise: harnessing and managing alliances in the network economy", Balance Sheet, Vol. 11 No. 1. https://doi.org/10.1108/bs.2003.26511aab.002

The extended enterprise: harnessing and managing alliances in the network economy

David Lukeman

David Lukeman is a director with Deloitte & Touche Enterprise Risk Services

Around the globe, more and more companies are partnering with other companies in alliances. Targeted on value, the scope of these relationships is as wide as the business world itself: they can encompass anything from process outsourcing to joint ventures. A key feature of alliances – relationships that extend far beyond traditional corporate boundaries – is the collaboration and interdependence which exists between one or more separate organizations. As the interdependencies become increasingly complex, they create what we call "Extended Enterprises".

Deloitte & Touche research shows that there has been an explosion in the growth of alliances between companies in the last five years, with partnerships and joint ventures featuring in the strategy of companies across all sectors and revenues. In 1990, only 3-5 percent of the total amount of business conducted involved alliances. By 2000, that figure rose to 20 percent and is expected to double by 2010. While most companies would not consider embarking on a merger or acquisition without performing due diligence, companies are increasingly entering into ventures without the appropriate evaluation of the implications for the bottom line.

Managing the risks in alliances

These alliances connect companies into complex, often very viable value chains and have demonstrated particular in the banking and financial services sectors. Close interdependency between these parties necessitates that the original barriers to doing business are lowered – but what risks does this bring and what deterrent measures can be installed? In this article I want to discuss the first steps to comprehensive risk management in an increasingly collaborative, networked business environment.

With the rise in costs associated with bringing new products into market, new business models are emerging in the banking and financial services with greater focus on collaborations across core and non-core activities. Barclays, for example, closed its in-house life and pensions business and set up a strategic joint venture to sell Legal & General products. Developing product offerings, valuations and technology are all interdependent: the success of each is more or less dependent on the performance of the other. For management, this interdependence means that the boundaries of the enterprise cannot be defined by what is owned and controlled – it has been extended to include the businesses of its collaborative partners.

Extending the enterprise is becoming a more popular corporate strategy than M&A in the financial sector. The attraction is simple: alliances comprise a more efficient use of capital. Whether a joint venture or a simple outsourcing arrangement, it is much less expensive than a merger and much easier to terminate if it does not achieve goals.

The incentives behind alliances

The incentives for forming alliance relationships are significant. Deloitte has found that the most active alliance companies generate returns 50 percent greater, on average, than the Fortune 500. The markets rate alliances highly as well: MIT's Sloan School of Management found that corporations saw their stock price jump by around 1 percent with each announcement of a new alliance. Outsourcing core business processes means companies can build critical mass and extend their capabilities more quickly. In areas where companies are not aligned, they are likely to be competitors. Consequently, alliance partners depend on each other for essential tasks and surrender some of their control over what may be a key component to future business.

But lowering those barriers to new business ventures brings new and challenging risks to these organizations. Problems in your ally's business can quickly become problems for your business. And you are unlikely to have just one ally. One of Deloitte's major clients, a leading UK financial institution, recently reviewed its third party alliances and was surprised to discover it was involved in 400 alliances – its business units were entering into new alliances every week. Worryingly, high level management had not been aware of most of these alliances, or the significant regulatory, technical and reputational risks they entailed.

Discussing risk in the board room

Successful alliances can only be achieved if management teams break out of the acquisition mindset. Alliances combine the challenges of M&A activity with those of establishing an entirely new business. What must be discussed and decided at the boardroom level is the rationale for entering into alliances and the most pertinent issues to be considered before embarking upon them.

Companies are not allocating the necessary resources to manage alliance partnerships. A merger or acquisition would have a member of the senior management team assigned to over see it, but this is less the case in alliances. Companies must treat their multiple alliances as a portfolio that is periodically reviewed and updated. An alliance manager should be devoted to identifying and eliminating areas of duplication, uncoordinated alliance initiation or inconsistent management practice signals so that the company can cut down the sources of risk and increase overall efficiency.

Electronic networks make the extended enterprise a reality and are the force behind the new Network Economy. These are the forums through which wealth is generated, exchanged and stored. Of utmost concern are now critical information security questions concerning the risk implications of the latest technological innovation – wireless networks.

Reputation issues: companies placing core business processes outside of their control. Companies must ensure that an alliance partner's systems are safe from competitors' eyes. There is always a danger that a competitor may be able to achieve a competitive advantage by picking up on slack procedures when dealing with a common partner.

Setting up a comprehensive risk management regime, encompassing an entire network of alliance partners, is certainly daunting. But to bury your head in the sand cannot be an option. Addressing exposures may not today be a priority for your company's leadership-but it is certain to be a growing concern for your shareholders.