Weaving webs of relationships

Delegates at Apple`s World Wide Developers` Conference this year were no doubt surprised when CEO Steve Jobs called Intel president and CEO Paul Otellini to the podium to confirm that Apple`s PCs would soon carry Intel CPUs inside.

Meanwhile, honchos from Sun Microsystems and Microsoft meet regularly in a bid to make a success of an alliance they established last year, when just 18 months ago they were trading barbs with each other.

These are but two examples of the sometimes-unlikely strategic alliances IT vendors are forging as they seek to remain competitive in an increasingly complex market.

A web of fragile and intricate relationships between interdependent IT vendors has replaced the business model of vertical integration that once held sway.

Most IT companies admit today they need a little help from their friends to address the complex and diverse needs of their customers.

Strategic alliances take a number of forms: from OEM contracts, joint R&D and technology licensing agreements through to joint sales, support, services and marketing deals, or any combination of these. Although such partnerships have been a mainstay of the technology industry for decades, they have evolved from a strategic option into a necessity over the past 15 years.

You co-operate one day and compete the next.

Wayne Furphy, country MD, Accenture SA

Most large multinational IT groups today have hundreds of people on their staff dedicated to managing their alliances with strategic business partners, which also often number in the hundreds. Key strategic alliances are often established and usually tracked at chief executive level, which is hardly surprising since partnerships have a significant impact on the corporate bottom line.

A 2004 study from International Data Corporation found that strategic alliances formed by the world`s largest software vendors accounted for more than 20% of their annual revenues. HP attributes around $10 billion of its 2004 turnover to alliances with software partners and a further $1 billion to relationships with systems integrators such as Accenture.

Strategic alliances help technology companies to improve product lines, access new technologies, source manufacturing capacity and extend their market reach while containing the risks of expansion and their investments into infrastructure and R&D.

Many companies regard partnering with other vendors as an attractive alternative to large-scale mergers and acquisitions that carries less risk and allows them more flexibility for strategic change should it be necessary. In a market that has become increasingly consolidated, many vendors count on partnerships to give them the bulk they need to compete with the breadth and depth that giants such as IBM offer.

"It is hard for any one company on its own to offer an end-to-end solution that encompasses components such as consulting and services, business applications, middleware and hardware," says Wayne Furphy, country MD of Accenture SA. "One of the reasons for many strategic alliances is straight financial muscle - between them, Accenture, HP and Microsoft are a $130 billion a year business."

Since there is no one supplier that can do everything, alliances are going to become more and more important.

AmVia`s Kevin Hurwitz

Customer demand for integrated solutions and for interoperability between the products they use from multiple vendors is one of the factors pushing vendors into forming strategic alliances.

"Customers are looking for one-stop shops, and as a result, we`re seeing our suppliers enter into more and more partnerships. Since there is no one supplier that can do everything, alliances are going to become more and more important," says Kevin Hurwitz, MD of value-added distributor, AmVia. AmVia is a local agent for companies such as Captaris, Verity, EMC and IronPort.

Customers who have complex environments like to have a single point of contact across multiple vendors who have joint accountability for their IT environments, says Martin Meltz, strategic alliance manager at HP SA. "When one multi-vendor team is working together, there is no finger-pointing when something goes wrong. The customer also has a clear understanding of the vision that the vendors in a strategic alliance share," he adds.

Many alliances stretch back over decades - such as HP`s partnerships with Oracle and Microsoft. Companies need to plan for the future by establishing alliances with emerging vendors that may become powerful players in the years to come, says Meltz.

For niche vendors such as BMC Software, a supplier of IT service management tools, and Citrix Systems, a provider of products that give users access to software applications and information from any device and network, partnerships are particularly important in ensuring the interoperability of their solutions and reaching the broader technology market.

"Our technology touches multiple applications and infrastructure components, which means we need formal partnerships with many vendors to manage the complexity of the environment we work in," says David Prosser, channels manager at Citrix SA. "In addition, the likes of Microsoft, HP and IBM have a strong presence in the same markets that we`re trying to reach."

BMC works closely with global alliance partners - among them Dell, Oracle, Microsoft, EMC, Sun, SAP and Siebel - to build management products that work on their solutions and to explore new dimensions in management solutions for customer needs, says Arjen Wiersma, country manager at BMC SA.

Another force driving vendors into each other`s arms is the rapid standardisation and commoditisation of key technology components such as processors and operating systems. In the 1980s, Microsoft and Intel (Wintel) teamed up to take on IBM by producing a set of building blocks (the operating system and CPU) that other companies could use to assemble PCs.

This cleared the way for lean and efficient manufacturers such as Dell and Compaq to enter the market with mass-produced products that could be sold at a fraction of the cost of the proprietary systems that dominated at the time.

"As the PC business has become more commoditised and competitive, it has freed manufacturers from the need to be involved in every part of the value chain," says Dave Drummond, country manager at Acer SA. "The most successful companies in this environment have not been the ones who duplicate every aspect of the value chain, but the ones who focus on certain core competencies like marketing and channel development."

Customers with complex environments prefer to deal with a single representative for multiple vendors

HP`s Martin Meltz

By working through an indirect channel, building its products on industry-standard building blocks and outsourcing processes such as manufacturing, Acer has managed to keep its overheads low and compete more effectively, he adds. Vendors who have long been married to a model of vertical integration have also needed to move into the world of commoditised computing. Sun Microsystems, for example, has long enjoyed a strong position in the mid to high range server and workstation market with its Sparc processors and Solaris operating system.

But Intel-, Linux- and Microsoft-based offerings from the likes of Dell and HP have encroached on more and more of Sun`s territory over the years, leaving it to defend only a patch of the high-end server market as its own. Sun is pushing back by establishing alliances with the likes of AMD and Microsoft so that it can build volume products of its own.

"The problem for Sun was that it was missing a huge market space in the X86 volume server space. The alliances with AMD and, later, Microsoft opened up new opportunities for Sun," says Nick Christodoulou, business unit manager at Workgroup division Horizon, a local Sun distributor.

For alliance partners and customers, Sun`s entry into the volume space is a welcome development, since it helps to restore a balance of power to the market following the merger of HP and Compaq into a single, powerful conglomerate, says Christodoulou.

Sun`s wide-ranging agreement with Microsoft encompasses more than the certification of its servers for Windows-based operating systems. It includes technical co-operation between the companies in areas such as Web services standards, browser authentication and Sun storage support for Windows Server.

Sun and Microsoft will work together to ensure interoperability between software products like Sun`s Java and Microsoft`s .Net technologies, for example.

Sun`s corporate strategy dictates that alliance agreements should be set for a lengthy period of time (usually around 10 years) to give organisations the assurance they will be buying into product lines that will be around in the longer term, says Jos Nickmans, channel and alliances manager for sub-Saharan Africa at Sun Microsystems. "This relationship was formed largely because of demands from our customers, the CIOs who told us that they wanted Sun and Microsoft to work together," he adds.

The gorillas of the tech world - the likes of Intel, IBM, Oracle, HP, SAP, Microsoft and Accenture - have their pick of countless suitors who line up to court them. Although such companies may list dozens, even hundreds of vendors, as alliance partners, they generally work closely with only a handful.

The reason for this is that alliances demand heavy commitment from both parties, including steep investments in R&D and skills. Companies that enter into alliances with each other often spend millions of dollars to set up labs where they develop products in co-operation, ensure their offerings work well together and showcase joint solutions to customers and prospects.

HP has more than 23 000 Microsoft-trained professionals in its global workforce, while close to a third of Accenture`s South African workforce have experience or qualifications on products from SAP.

In many cases, allies will use each other`s products for their own internal IT systems. HP, for example, represents the second largest Windows 2000 implementation in the world, while Microsoft does much of its development on HP hardware. Yet few of these relationships are exclusive in nature. "You co-operate one day and compete the next," says Furphy.

Accenture has around 150 global alliance partners, but it focuses most of its investment and R&D on a few select tier-one alliances, including the likes of Microsoft, SAP and HP. It expects no special favours from any of these partners. In return, it demands the flexibility as a consulting and services firm to put together solutions that match the needs of its clients when they don`t want to work with one of Accenture`s preferred alliances.

"All our alliance partners have to do what is right for them. As a partner, you dominate your partners` environments only by adding value and understanding the products they offer," says Furphy.

Even the tightest of business partnerships, such as that of Intel and Microsoft, are open marriages.

Exclusive alliances are not an option in most cases, because of:

* Demand from customers for choice.
* The need to drive and adopt industry standards.
* Reluctance among vendors to bet their futures on only one partner.

Microsoft has made room at its table for Intel`s rival, AMD, while Intel supports operating systems such as Linux that compete head-on with Microsoft. Meltz says simultaneous alliances with competing vendors - such as HP`s relationships with Oracle and Microsoft - can be managed provided that the parties concerned are open with each other and behave in an ethical manner. "You can`t use one partner to exploit another. We wouldn`t, for example, join with Oracle to run an anti-SQL Server campaign."

Nickmans from Sun says one of the keys is for each vendor to understand the strengths, weaknesses and strategies of each partner, and work with them as is appropriate.

Simultaneous competition and co-operation doesn`t always work. Taiwanese technology group, Acer, used to manufacture PCs on behalf of a number of top-tier brands even as it competed against them with branded PCs of its own.

The customers of the contract manufacturing business inevitably rebelled when the PC market started to go through lean times, prompting a major restructuring of Acer`s business that saw the group unbundle its contract manufacturing division. The branded PC business, now known as Acer, has also benefited from the move, since it now has the flexibility to work with other manufacturers and shop around for the best deals and technology, says Drummond.

The local operations of multinational vendors bring international alliances to SA by embarking on joint sales, marketing and support activities including joint customer engagements, road shows, promotions and training of each other`s people.

Country and alliance managers drive these relationships, which are often tight enough to include sharing of pipeline and joint financial planning. As important as formal agreements are, local implementations of global alliances also require trust, transparency and personal chemistry between the parties involved, says Furphy.

"Alliances are structured and formal at the global level, driven by top management and global alliance managers who define strategies, programmes and targets. These are all cascaded down to the local subsidiaries, but an alliance has to make sense at a country level to work," says Meltz.

"What makes a global alliance work is commitment at the level of the chief executives. The biggest challenge is driving that commitment down to operations and regional subsidiaries," agrees Furphy. "And if there aren`t measurements and rewards for success on both sides, the alliance won`t be successful at the lower levels of the business."

The channel plays an important role in making global alliances succeed in the local context. Workgroup, as a distributor for both Sun and Microsoft, has played an important role in facilitating the relationship between the two companies, says Christodoulou. The local Sun and Microsoft operations have been among the first in the world to embark on joint marketing activities.

On the flipside, existing channel relationships in SA can make it difficult or impossible for global companies to replicate their international relationships in SA. Distributors who act as the local representatives for global vendors often compete with international implementation and integration partners in the services arena, for example, and have little interest in forming relationships with companies they see as rivals, says Furphy.

One case in point is Siebel, which was represented in SA for several years by Dimension Data. Accenture`s relationship with Siebel in SA faltered during that time and only started to improve when the vendor opened a local office of its own.

Prosser points out South African resellers and distributors benefit when the vendors they represent work together on the sales, marketing and support front.

"One of the real challenges that our channel partners face is the disparate messaging of their suppliers. Understanding how the vendors they represent play a complementary role for one another helps resellers to integrate their suppliers` solutions for their customers more effectively," he says.

Strategic alliances have also assumed a great deal of importance for South African companies that develop technologies of their own. Multinational companies such as Progress Software have nurtured extensive communities of applications developers that work on their platforms.

"Very little of our technology is sold directly to the end-user," says Rick Parry, MD of Progress Software SA. "The business partners are our route to market."

"For many development communities, the biggest threat is that their platform partner will move into the applications space. They end up in a position where their main supplier is their main competitor, which is not the case with progress," says Richard Firth, CEO of MIP Holdings, a Progress partner of more than a decade.

Progress has around 42 business partners in SA, most of whom are local independent software vendors that write applications and offer services on the Progress platforms and application development environment. Parry estimates that a turnover of around R40 million for Progress`s South African business supports around R800 million of business for the company`s local business partners.

Creditpipe, a developer of e-commerce solutions, realised it would need a partner to help get its cellular credit card processing solution to the market, and decided to establish an alliance with MTN.

Under terms of their agreement, Creditpipe focuses on the development of the product while MTN handles most of the marketing. The two companies share the revenues they generate from the venture and have a relationship going back three years.

"For MTN, getting in the right skill set and developing the product themselves would have been far more expensive than partnering," says Deon Botes, director of sales and marketing at Creditpipe. "For Creditpipe, MTN has a far reach in terms of its marketing budget, its name carries a lot of weight in the market and it touches the companies we want to reach with our product."

Alliances remain a risky proposition for IT vendors as well for the companies that buy their products. According to a 2001 study by Accenture, only 20% of corporate alliances succeed. Another 30% fail outright and the balance drift into a "suspended state of underperformance". Cultural issues, a failure of one or both parties to deliver what was expected, or a change in strategic priorities are among that reasons that an alliance may fail.

Among those that have died in recent months include an alliance between Apple and IBM that saw the former use IBM`s PowerPC processors to power its computers.

The fallout of a failed alliance is by no means as messy as that of a disastrous merger or acquisition, but it can still leave the affected companies and their customers with headaches. Developers writing applications for Apple`s platforms face the challenge of porting their software from the PowerPC architecture to Intel, for example.

Although Apple has promised that it will make this transition as smooth as possible, end-users and software vendors, as well as Apple itself, are likely to feel some pain along the way. Many other alliances amount to little more than a joint press release and a logo proudly displayed on each partner`s Web page.

"Relationships spring up on a daily basis and die on a daily basis. Successful alliances, however, are not opportunistic in nature," says Meltz.