Situation: A company has built a very successful specialty manufacturing business in the US. Their manufacturing operations are labor intensive, with manufacturing practices optimized using motion studies and sharing best practices developed on the production floor. The CEO is evaluating whether it makes more sense to expand production in the US or to explore international options. Do you produce domestically or internationally?
Advice from the CEOs:
There are trade-offs between domestic and international production. Quality labor is available internationally at lower costs than in the US. However, risks include potential loss of quality control and higher levels of waste.
While investigating international production options, focus first on less critical operations where savings from lower labor costs outweigh the potential cost of wasted material.
Do not try to move highly controlled operations. These will include critical operations which require both an elevated level of operator skill and close supervision.
Before evaluating international options, break down the steps of manufacturing or processing to identify specific subcomponents or subprocesses that could be outsourced at reasonable risk.
For example, look at high volume parts where quality and variation in tolerances is less critical. These will be the best candidates for production in a lower cost, potentially lower quality environment.
How critical are trade secrets or patented IP to production? In the US and Europe there are strong protections for IP. However, these protections are not as strong in all countries. If production is outsourced to countries with poor IP protection, this may enable IP theft and create future low-cost competition.
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.