Situation: A company was created from IP originally developed by the founder at a large corporation that was not interested in commercializing it. The new company has now become successful and visible, with the large corporation as an important partner. The CEO wants to make sure that she has all bases covered to secure the future of the new company. How do you manage a key partner relationship?
Advice from the CEOs:
There must be clear agreement between the company and partner on ownership of the original IP – a legal document signed by both parties. You can bet that should a conflict arise, the lawyers representing the larger company will argue that their client owns the IP. Once this is secured, focus on developing and licensing software that you clearly own.
Develop contingency plans should the key partner decide to exit the business on which your relationship is based. Identify what other companies could replace lost revenue. Start to build these relationships.
If the partner helps to fund current development, take the money that you save and develop your own IP, independent of the partner relationship. As an alternative, at least develop critical components of the software as your own IP, without using the partner’s funding.
This will free you to develop other customer segments to broaden your business base.
What concerns does the partner have? Strategically, large corporations can be uncomfortable if they feel dependent upon a much smaller company. There are two things that you do:
Makes a concerted effort to assure that you are essential to the large corporation’s overall business.
Make change as painful as possible.
How would you get paid if the large partner exited the relationship?
Negotiate a contract with a 2-year window to any change that partner wants to make. This will provide you with the room to develop new clientele should the partner exit.
Have contingency plans to rebuild capabilities that might be lost and sell it to other clients.
Customize your software by client. In the process, you will develop new methods to keep your edge over competitors.
Keep critical parts of your processes “manual” so that they are essentially trade secrets and not easily replicable if the partner were to try to take over the IP.
Situation: A company wants to add off-shore manufactures to its supply chain. This is a new experience and the CEO seeks guidance on how to negotiate supply agreements. They want win-win agreements with their new suppliers. How do you optimize supply agreements?
Advice from the CEOs:
No supplier relationship is risk-free, especially if you are a small company. Be sure to cover ownership of new IP developed during the relationship. For example, assure that the supplier adds no new developments without communicating these to you in writing. You may want to fund new developments selectively to assure protection of your IP. This is essential if you need to switch or add suppliers rapidly to maintain adequate supply.
A service agreement is not always about cost. It’s about deliverables, and quid pro quo is important.
Manage your key supplier relationships as diligently as you manage your key client relationships. They are equally critical.
In a contract negotiation between supplier and OEM or customer, both sides need to clarify customer needs and supplier capabilities. The greater the transparency on expectations, deliverables, and contingencies, the better the agreement and contract.
In negotiating an agreement with a Chinese company, make the enforcement jurisdiction either Hong Kong or Macao. Why? So that courts can enforce terms of the agreement on the Chinese party in the case of a dispute.
Post-termination obligations are a key to any negotiation – you want this clarified in advance.
Contracts serve two purposes: a legal tool, and a way to drive behavior. They provide an opportunity to assure that both parties are on the same page and, under the best circumstances, serve as process documents.
Special thanks to Bijan Dastmalchi of Symphony Consulting for his contribution to this discussion.
Interview with Kelly Masood, President, Intilop, Inc.
Situation: An emerging company is gaining traction as it moves from early adopters to mainstream. They need to continue to develop new technologies, while bringing down the cost of existing products. This is a delicate balancing act for a small company. How do you grow without losing control?
Advice from Kelly Masood:
It’s important to maintain momentum and continuous improvement. From a practical standpoint, we do this by applying common sense to our technical discipline. Common sense, here, is a relative term. It isn’t really taught in school at any level, but is gained through experience. This is the true expertise of the CEO.
The delicate part of the balancing act is the mix between developing new technologies and building an effective business model. An effective business model is built on innovative and cost effective products and sustainable profitability. Since new technologies go through development stages, it is important to create break points where you transition from development to productization to marketing and sales. Continuous improvement in existing products based upon customer feedback and new product ideas for future developments are crucial aspects of a successful business model.
If you want to minimize outside funding and investment you have to watch cash flow and development expenses. Revenue from existing products is the key. When you don’t have resources, you become resourceful. If the team is dedicated to producing innovative and good products that make business sense, they figure out how to accomplish it without cutting corners.
To mature your team over time you must keep them motivated, occupied and adequately compensated today while inspiring them to make it big in the future.
You maintain interest through the pursuit of new technology and the learning associated with it. Engineers like to see their designs work and turned into a product that creates value, is used and is appreciated.
Keeping the team occupied and challenged starts with choosing the right talent in the first place and then getting them to focus on building great products.
Compensating them with a fair salary means locally competitive rates, sweetened with stock options to provide great upside potential.
For us, retaining great employees is about enabling them to innovate products that will find broad market acceptance.
Key Words: Early Adopter, Mainstream, Develop, Cost, Continuous, Improvement, Common Sense, Business Model, Cash Flow, Expense, Price, Retain, Employees, Off-shoring