Why Partner in the Cloud?

The Cloud is all about flexibility, and so is partnering. Of the three ways to enter a new market, organic growth, acquisition and partnering, partnering has the advantages of being fastest to market and requiring the least capital. Assume, for example, that Software Co. has big data technology that it wants to deploy as a Big Data Service. Software Co. has some critical decisions to make: What platform should they use to develop the Big Data Service? Should they market the Big Data Service to service providers or end users? And most importantly, how will Software Co. execute?  

Software Co. could decide to do this organically and develop their own platform, or they could do it through acquisition by either licensing the technology from Platform Co., or even acquiring Platform Co. outright. The advantage would be that Software Co. would control the platform, but the disadvantages would be (i) Software Co. needs a significant amount of capital to do this, (ii) the increased time to market— Software Co. must develop or acquire a platform before they can start development, (iii) Software Co. must make a big capital bet on a single new service and (iv) Software Co. still has not solved the go-to-market problem.  

Partnering with one or more platform companies solves these problems. But Software Co. must weigh the disadvantages of this strategy, namely (i) the loss of control of the platform, (ii) the additional management effort that Software Co. will expend to deal with partners and (iii) adding partner execution risk to the equation.  

What about Partner Selection and Alignment?

Software Co.’s objective will be to leverage the technology, capital and sales channels of its partner in order to get to market quickly, at lower cost and with less risk. The choice of partner is critical—Software Co. must select a qualified, trustworthy partner because Software Co. cannot foresee every obstacle it will encounter when it develops and deploys the new Big Data Service. Software Co. will be depending on its partner to help overcome these obstacles. And Software Co. must be attuned to the objectives of its partner. If the alliance does not meet the partner’s objectives over the life of the alliance, the partner will lose interest. 

How Would a Strategic Partnership Be Structured?

Innumerable structures are possible. A Strategic Alliance Agreement between Software Co. and Platform Co. could be structured as follows:  

  • Economic Alignment. Software Co. and Platform Co. will develop a joint platform/ software solution for the Big Data Service. Software Co. will sell the service to end users, and Platform Co. will sell the joint solution to service providers. Each party will bear its own development costs; however, proceeds from the alliance will first go to repay these development costs plus the partners’ normal expected return for R&D expenditures. After that, Software Co. will pay a royalty to Platform Co. based on service revenues, and Platform Co. will pay a royalty to Software Co. based on revenues from platform sales .  
  • Operational Alignment. The parties will agree on a joint development plan, budget and deployment date. Once deployed, Software Co. will require that Platform Co. spend a set amount for sales and marketing, and achieve a certain level of market penetration, in order to justify Software Co.’s continued support of the joint solution, and visa versa
  • Market Alignment. Software Co. wants broad adoption, so Software wants to enter into similar alliances with other platform companies. Platform Co. would prefer exclusivity—is Platform Co. willing to invest in the alliance on a non-exclusive basis? Maybe the parties can address this concern by making the royalty structure more favorable to Platform Co., or agreeing that Platform Co.’s development costs will be repaid ahead of Software Co.’s.  
  • IP Ownership. In order to pursue its multi-partner strategy, Software Co. needs ownership of all jointly developed IP. Platform Co. could either request a royalty when Software Co. deploys the joint IP elsewhere, or request the right to use the joint IP too, for example, with competing big data services.