PLEDGING ALLIANCE:  Creating business alliances is no flight of fancy.  Even what may appear as the strangest of pairings may make for a solid business strategy.

Leader's Edge Magazine - December 2005
Author:  Robert J. Lieblein  

In the last few years, the insurance industry has heard much talk about synergy (a word that, in itself, represents a strategic alliance between synchronized and energy). The big brains have been telling us that, in this global village, it’s no longer possible to operate our businesses in a linear fashion. Every task must be a multi, our abilities need to scale and competencies had better be core. The unspoken part: or else. Without all these synergistic tactics (syntics?), we would not be unleashing our organization’s true potential. Which is to say, we could be leaving money on the table. Unless it’s a tip tucked under the coffee cup, what businessperson wants to do that?

Many agency owners and top managers feel that building an alliance is an excellent alternative to contemplating a merger or acquisition. Alliances are viewed as a less risky course to new markets and clients. While they may be the easy solution to market opportunities and threats, they don’t come without potential pitfalls. Let’s take a look at the economics and discuss a set of steps that will aim your firm in the right direction (and steer you around the open manholes) if you’re on the path toward a strategic alliance.

Portfolio Potential

For companies in the insurance industry, the benefits of a well-planned alliance are numerous, covering both revenue enhancements and cost savings.

On the revenue side, the biggest benefit comes in the blending of client bases and subsequent cross-selling. One example of a synergistic fit is the strategic alliance between Continuing Care Risk Retention Group (CCRRG), a South Carolina-licensed mutual insurance company that specializes in insuring long-term care facilities, and MyInnerView (MIV), a Wisconsin-based research company that collects and studies long-term care benchmark data for operating facilities and trade associations.

“We wanted to gather survey data like what MIV was doing, but it was problematic for us to implement on a nationwide scale,” explains Robert Bates, president of Magnolia LTC Management Services in Santa Rosa, Calif., and a board member of CCRRG. MIV already had been surveying long-term care facilities about their operations and they were using that data for improving quality of care. “They knew nothing about insurance. But when we saw their data, we saw a gold mine for insurance risk management,” Bates says. “The light bulb went on.” Cross-marketing and sales potentials were born.

As this example shows, it is valuable to look beyond traditional partners for creative products and solutions. When most people think of strategic alliances in the industry, the first thought that comes to mind is an alliance between a p-c agency and an employee benefits firm to provide additional cross-sell opportunities for both firms and to provide a “defensive” position against larger, multi-line agencies. However, most agencies have not tried this approach and are missing out on tremendous opportunities.

Many agencies have shied away from investing in developing personal lines as a true profit center. But with changes in technology and other operating efficiencies, personal lines can be extremely profitable, particularly when the focus is affluent clientele. So instead of building from the ground up, I often recommend that one consider whether aligning your services with a personal lines agency to offer home, auto or life insurance coverage to high net worth individuals makes sense.

An alliance might also provide revenue possibilities by giving both firms a broader geographic territory. A caveat here: don’t bite off too much at once. Perhaps it is wise to test your hunger for an alliance at the salad bar of your current clientele before turning the project into a four-course meal.

Behind-the-scenes benefits might accrue, too. Your agency could experience higher compensation through the aggregation of production. Your firm and your alliance partner might each gain greater leverage with the carriers you represent.

Revenues are only half the equation; you can also engineer some expense savings. For instance, economies of scale can be gained on operating costs such as human resources, accounting and administrative tasks.

Marketing and advertising can become more affordable and have greater reach when done jointly, and the alliance can open doors to new prospects. Continuing Care Risk Retention Group comes across people who are familiar with MIV’s product, “and it helps us to sell ours,” says Bates. “We point out that our strategic partner is endorsed by the American Health Care Association as a key element in their Quality First Initiative. On the other hand, MIV can claim that the sixth largest health care RRG in the nation—CCRRG—uses their product exclusively to improve quality within their membership.” 

Shared technology, or assigning tasks to each firm that already has the best technology in place, can ease the pain of upgrades and high-tech investments. In the case of CCRRG, the partnership with MIV brought a unique technological expertise to the table.

Alliance Pre-Nups

Fully formed relationships don’t just spring forth at the end of the first board meeting. It is wise to consider some guidelines for creating and operating a strategic alliance to help avoid the inevitable pitfalls. Here are seven steps to help your partnership minimize the risk while maximizing your leverage in the marketplace.

1. Do your homework. Just as in an M&A transaction, due diligence is an important early step in a strategic alliance. Each agency needs to fully understand what services or products would enhance its success and which firms in the market are in the best position to deliver them.

Further, both have to understand and sign on to the prospect of providing their services to the other firm, which is sometimes easier in concept than in execution. You have to realize that you’ll most likely be working with the competition or, to reluctantly spread the usage of a clunky recent MBA phrase, you’ll be engaging in “co-opetition.”

The alliance in our example took a lot of legwork. “We analyzed whether we could perform the function in-house before ever considering a strategic alliance,” Bates explains. “We then determined who the players were in the industry and prepared a feature matrix. We narrowed things down and conducted interviews with top management, specifying our desire to be a partner rather than a client. We created a general outline of goals and approaches and committed to holding regular conference calls to ensure success.” 

2. Avoid a culture clash. Review the field and determine which competing firm might be a good partner by considering whether there will be a cultural fit between your two companies. Are your two firms compatible? Do you think alike? Are your values, beliefs and management styles similar? If you’re too close to the business to view this clearly, bring in an outside party who can conduct an objective review. Again, as with an M&A transaction, cultural issues tend to be the ultimate drivers of success or failure. These intangibles become absolutely critical when business issues arise and tough decisions need to be made.

3. Agree on a set of benchmarks and metrics. Although each firm will undoubtedly use different internal benchmarks for success, and may structure their financial goals in different ways, the strategic alliance must operate under one common set of key items so that both parties can evaluate success in the same manner. If only one party achieves its goals, the alliance is on a death spiral. These benchmarks and metrics must be fair and reasonable for both sides so that everyone walks away feeling good about the deal.

The metrics must be well conceived and put to use. All your great brainstorms and grand schemes mean very little (except as evidence of wasted energy) if the plans are not well executed. The only way to determine that is to realistically track performance.

Consider the example of banks getting into the business of insurance. There are a number of reasons why a financial institution’s insurance efforts might under-perform, and one of them is often because the bank sets performance expectations that are too aggressive or unrealistic. (Of course, many banks have made outright purchases of insurance operations rather than pursue an alliance or joint venture, but the execution issues between purchases and alliances are similar.)

Benchmarks only serve as useful guideposts if they can be read, understood and followed. A sign in New York that points west and says “Los Angeles” won’t get you very far in the right direction. The first sign should be an achievable goal that gets you through New Jersey.

4. Set clear compensation guidelines. The vital issue of compensation must be addressed on both the company-to-company level and on a platform that is workable for individual performers. Company profit sharing should follow the amount of risk being accepted by each strategic partner. Revenues also should be apportioned commensurate to the proportion of customer base provided by each firm. Other elements make the equation more complex. For instance, if one firm brings a larger Rolodex but the other has a greater back-office capability, the revenue percentage could be equalized.

Include in your plan the expectation that the revenue equation will be revisited periodically because the capabilities of each side, and an understanding of how the firms are working as a team, will become clearer after the alliance has been operational for some time.

For individual producers, incentives must be structured in a way to align interests and motivate those who are working on the strategic alliance. For instance, there must be sufficient value in “upselling” to the other firm’s services to make a salesperson commit to fully understanding how the alliance works.

5. Address the decision-making process. How will alliance decisions be made? What happens if you cannot agree and become deadlocked on a key business issue? Those questions should be addressed openly as the alliance is structured, so solutions present themselves in the regular course of business. “A lot can be gained just by looking in the eyes of your strategic partner,” says Bates. “We have semi-annual meetings with our partner—one at their offices and one at ours—to discuss where we’re at, where we’re going, and how we’ll get there. An alliance is a relationship in the true sense of the word.”

A well-drafted alliance agreement will have a mechanism for dealing with problem issues. Solutions might include utilizing a neutral party or agreeing to resolve deadlocks by involving a high-level decision-making team (such as a board) that is not active in the day-to-day operations.

6. Create performance standards. Once benchmarks and metrics have been established, each party must do regular performance evaluations. The strategic alliance needs to be monitored because, if it is underperforming or not working, steps need to be taken to improve it or dissolve it. As Bates says to emphasize this point, “We regularly check their Web site, survey our own membership on MIV’s product and service, and randomly inquire with for-profit and non-profit associations in various states.”

Common signs that an alliance is not working include one party not providing enough resources to the alliance or evidence that the goals and objectives of one of the partners are changing. The latter is particularly concerning if the revised goals of your partner show that he does not value the alliance as critical to his success. A third warning sign would be the inability to define success or how results should be measured. A common set of performance standards will give each party an objective way to call a halt to a failed attempt at synergy.

7. Include termination provisions. If an underperforming alliance must be dissolved, issues may arise as to the disposition of clients, relationships and assets. It might be unclear what would happen if one of the alliance partners is acquired by another firm.

“If either one of us blows up, it would certainly be a black eye for the other,” says Bates. “The alliance between CCRRG and MIV is especially complicated because MIV is providing ongoing survey services to the insureds within our RRG. If we terminate our strategic alliance, there are a lot of other parties who would be affected, and our members’ pricing might change.”

Hopefully, the advance agreement signed by both parties will anticipate potential issues and properly spell out the terms of termination. If not, you will likely be headed for litigation.

Taking the Leap

Whether your strategic plans call for taking a cross-country leap or just trying to spread out from Charlotte to Charleston, an alliance can put some wind under your wings.

Think creatively about potential partners and services. An effective, well-structured alliance can help you achieve advantages of scale, scope and speed. Besides enhancing product development and competitiveness, trying this team effort can help you tackle market penetration, new markets and entirely new business. Follow the seven cautions to effectively plan and execute a new alliance.

In our industry’s atmosphere of intense competition and ever-changing marketplace conditions, such nimble steps are not entirely optional. Stretch your boundaries by creating a dynamic strategic alliance or risk becoming the example of the company that got left on the ground as allied competitors were venturing bravely into the not-so-friendly skies.

Lieblein is a contributing writer and managing principal of WFG Capital Advisors. rlieblein@wfgca.com