Build, buy, or partner—what’s the best strategy for profitable growth?
Many companies view partnerships simply as a marketing or product development strategy without fully considering either the financial impact or the broader advantages in promoting profitable growth. In fact, partnerships can be an essential element of a company’s growth strategy. The CFO should not only be involved in partnership decisions, but approach them in with the same considerations as building or buying to seize a market opportunity.
Adding Value to the Decision Process
Partnerships require an investment. Whether the partnership is strategic, tactical, or technical, your business either deploys capital, shares synergies with a third party, or defers some piece of profitability in the deal. A CFO can add value to the partnership discussion by evaluating the financial potential in pursuing the relationship. If the potential return is viable, then the CFO can help determine if the amount of revenue projected justifies splitting the return with a third party.
Does Partnering Support your Business Goals?
Adequately determining if a partnership makes financial sense is tied into how well the deal supports the company’s business goals. A lot of companies approach this situation from a silo. The thinking may be, “We need to build this product or penetrate this market, but we’re out of time and don’t have any more resources. I don’t know where to go for the budget and I don’t want to ask the CFO. Let’s just go partner with somebody.”
The CFO helps the business determine if partnering is the best means to support the company’s goals, whether those goals entail capturing market share, generating profits, or maintaining control of intellectual property. The CFO helps by asking questions such as:
- Is it advantageous to engage a partner in exchange for some percentage of revenue or profitability?
- Does it make economic sense for our salespeople to carry the products or would channel partners be more effective?
- Does it make economic sense to build extensions to our products or services or would it be more lucrative to have a third party take this on?
- Is it more cost-effective to expand geographically or to have a third party sell our products or services?
The following example illustrates the last point. Early in the history of SAP, the company wanted to expand in the Middle East but didn’t have the resources to deploy in that region. The founders of the company opted to work with third-party agents who ran businesses within designated regions. Over time, SAP has bought those businesses. Partnering supported the company’s goals to penetrate the market when it lacked the resources to expand, just as acquiring those businesses in later years has supported the company’s strategy for growth.
Does Partnering Support Your Business Model?
Electing to pursue a partnership requires a broad understanding of the impact the decision will have on your business model and profitability. It is important to understand short-, mid-, and long-term impacts of these decisions. For example, inbound licensing of technology components may greatly accelerate time to market for a new software product. However, the royalty structure, product pricing, support, and service costs may have a material impact on your overall profitability. Stress testing and evaluating your pricing model, discount structure, and revenue projections can have a major impact on how you might structure a partnership (such as a short-term test-the-market approach versus a longer-term relationship).
Assessing the impact of a potential partnership on the company’s profit and loss statement requires an examination of the company’s distribution strategy and an assessment of how partners fit in. It means determining if products are going to be distributed directly or through partners. Should the company hire 100 sales reps or can 5 reps support 100 partners? These are fundamentally different go-to-market strategies.
Consider the automobile industry. Some automobile manufacturers employ a franchise model to go to market. That’s a fundamental decision that the manufacturer had made about how it gets its products to market, and how it interacts with customers. Ford, General Motors, or Toyota – they have a dealer network where services are provided by a third party, and they’re supported by OEMs.
Other manufacturers, Tesla for example, have a fundamentally different business model. They design and manufacture premium electric vehicles and sell them directly to consumers. There are no dealers involved. These are fundamentally different distribution models, so the value of a channel partnership will be measured by how well it upholds the manufacturer’s go-to-market strategy.
Asking the Right Question
A lot of companies approach the need for growth by asking, “What’s the best way for me to go to market?” Our role as CFO is to steer the business to instead ask “What’s the most financially rewarding way?” – and then provide the answer.
To learn more about how finance executives can empower themselves with the right tools and play a vital role in business innovation and the value chain, review the SAP finance content hub, which offers additional research and valuable insights.
Arlen Shenkman is the CFO for SAP North America, overseeing the financial activities of Canada and the United States, including forecasting and planning, driving efficiencies, and ensuring the overall financial health of the region.