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Negotiating the Deal
This is the third part in the series of four articles on some of the major issues in choosing and selecting the appropriate partner both domestically and internationally.
In the first issue we examined the types of partnerships and why some succeed and others fail because of the misalignment of business models pertinent to the relevant technology life cycle. In the second issue we addressed the processes of finding the right partners and the necessary steps that should be taken to avoid risks, but yet give yourself plenty of choice based on accurately profiling a market.
Despite this, many partnerships fail to live up to expectations mainly because the expectations were wrong in the first place. This article is about getting the expectations in alignment in order to get the best deal for both parties.
Sizing a market
How many of us have read analysts' reports saying that this "is going to be a $xx billion market in three years"? The Venture Capital industry is fuelled by the desire to invest in companies with high growth potential in a booming market. Yet how often do these promises of unbelievable growth become reality and in the time stated? Very few. Why is this?
Most financial analysts have never run a software business and many assumptions are fundamentally flawed because of their assumption that ALL technologies operate in mainstream markets. Those who have will have often experienced early growth a plateau period (crossing the chasm) and then rapid growth if the market has taken off. Of course these changes in the BUYING market are not always simultaneous globally.
Sizing a Market - A Case Study
Let me take an example of how you might size a market with newer technology based on one of our experiences with a financial services company. The company had set up a partnership with a respected integrator in the banking community. It was failing miserably with 0 sales.
We ascertained that there were 360 Merchant, Investment and Commercial Banks that represented the TOTAL market (UK).
Of these the client estimated that there were approximately 80 that would never use third party software because they were either too small or had large in-house development departments.
Applying the spread of potential Technology buyers, Early adopters and Mainsteam buyers established a very different picture to the potential market and the likely sales in the first second and third years.
Even in an early adopter market there are inavariably competing products. There is also inertia. So calculating potential market share for the market your technology is in can be a sobering experience. As illustrated above if you got 20% of the early market that would amount to five sales!
Now if you start to apply this model to third parties where your influence and control is lessened, you can see how expectations and revenue goals can be misaligned from the outset.
Starting the Negotiations
Clearly an understanding of your positioning in the market and the value that your partner brings to the table is essential . You both need to agree the timescales by which you can create your initial customers and the processes to do so. You also need to clearly understand the "how" "if" and "when" the partner starts to make money. Remember your partner may get significant value added revenues from services from your products.
In our experience many companies start the "contract " negotiations too soon without having understood the business basis first.
The Business Plan
Start with a business plan that defines the marketing goals and sales processes before the first sale. That way you can both monitor and discover whether your initial assumptions are correct. Keep this plan brief. Two pages plus a simple spreadsheet should be fine.
The Agreement
Options here range from "Letter of Intent" "Term Agreement" through to full Reseller/Partner/Distribution agreements. In our experience there are five major issues:
- Quotas
- Term
- Termination
- Liability
- X-selling and transborder sales
Quotas
We have already highlighted that these need to be realistic but above all the quota should be the minimum commitment agreed by both parties. In the first instance review these after six months to see if they are feasible but in ALL instances quotas ultimately should be linked to TERM and TERMINATION.
Term
For large integration projects a Term agreement can provide a proof of concept as well as demonstrating the ability to work together. However, most partners want a reasonable period to get a return on their investment, particularly if they are in an early adopter stage. You must weigh up "exclusivity" versus "non performance". In our experience "exclusivity" should be earned or bought but never given away.
Termination
Clearly linked to term. The major reason for termination is lack of performance. Unfortunately this is often caused because no one is managing the relationship, which will be the topic of the next newsletter. It is always better to admit to a mistake early than both live in the naive belief that problems will correct themselves. THEY WILL NOT. Both parties need to want to make it work, or it will fail.
Liability
If you allow third parties to licence your software in their name you may have problems assigning these licences later. GET LEGAL advice on this for each market.
Local law sometimes means that translated versions of software become the INTELLECTUAL PROPERTY of the translator.
Do you own all intellectual property rights? If not check out your liabilities if the third party software that you use fails. YOU COULD BE LIABLE for consequential damages. Again, get LEGAL advice.
X-Selling and Transborder
If you pursue a multiple reseller policy or have both direct and indirect operations be mindful that your customers could play one reseller against another. We would always recommend clearly defined market segmentation to avoid this scenario.
In a multi-national environment it is always wise to anticipate the global deal. Make sure you allow for this eventuality.
For further advice on any or all of these issues contact any of our consultants.
Next Month. Managing the Channel
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