The research on alliance failure rates show a wide range of figures. Ranging on the best side from only a 20% failure rate to on the worst side a 75% failure rate. It is this high failure rate of 75% that has some unbelief to it. Would companies seriously invest in something they know will have a 3 out of 4 chance of failure? Last year at the ASAP Pharma Council in Basel Marc de Garidel, Chairman and CEO of Ipsen, indicated in his keynote that alliances are important for Ipsen. Over 40% of the Ipsen revenue is based on the alliances Ipsen has established. It would be a an impossible task for Ipsen to manage that all if the failure rate was indeed 75%.
At the same conference I discussed the general feeling that alliances have a high failure rate with Emmett Power of Silico Research. After our conversation Emmett did some research and came up with a new whitepaper on alliance failure rates. This paper indicates an estimate of a true failure rate of alliances between 25% and 30% whereas for companies with an established alliance management function the rate may be around 18-20%. These numbers seem more likely to be right for larger organizations.
The whitepaper of Silico Research does not really dive into the reasons alliances fail. It indicates that organizations with an established alliance management function have a better success rate due to more experience, greater resources and a longer term horizon. Earlier research indicates that alliances fail for a variety of reasons:
- Differences in culture
- Incompatible objectives
- Lack of executive commitment
- Ineffective governance structure
- Poor alliance leadership
- Overestimated market potential
Most of these reasons can be prevented by proper preparation, alliance management & communication. In other words as the report of Silico also indicates: establish an alliance management function in your organization.
In the next articles we will have a look at the alliance lifecycle and the tools that can be used when following an alliance lifecycle approach as part of establishing an alliance management function. First I would like you to think about the question “when is an alliance a failure?”
In 1991 Pixar established an alliance with Walt Disney Corporation. The alliance’s value proposition was a true triple-win: both partners and the customer enjoyed the benefits of the alliance. Pixar stayed in business, Walt Disney had access to the incredible creative talents of Pixar to deliver a new animated film segment to the market and the customer enjoyed the new products that were result of the partnership. Five animated films were made in the partnership, including Toy Story, Monsters Inc, and Finding Nemo. These films have earned more than USD 3 billion altogether and accounted for more than 25 per cent of Disney’s profits. From this perspective a highly successful alliance.
Still early 2004 the alliance was cancelled by Steve Jobs, the CEO of Pixar. It appears that Steve Jobs walked away from negotiations for extensions because he had enough of the way Disney’s CEO Michael Eisner did business. It is interesting to read the reasons for the breakdown in negotiations being among the first three bullet points of reasons for failing alliances: difference in cultures, lack of executive commitment and incompatible objectives. The end of the Disney-Pixar story is that in 2006 Disney acquired Pixar for USD 7,4 billion and with that safeguarding access to the creative talent of Pixar.
So when is an alliance a failure:
Does breaking off the negotiations for an alliance extension make the alliance a failure? Maybe the people who were at that time in the middle of it felt that the alliance indeed was a failure. Does an acquisition make an alliance a success or did the revenue generated as a result of the products created together make the alliance a success? In an earlier blog post I indicated that early opt-out can be successful, but does that make the alliance a failure?
Alliance success is not easily defined, in my opinion the Disney-Pixar alliance was a success with temporarily downsides in the relation. It will be interesting to read your opinion on alliance success and failure.