"If you do not seek out allies and helpers, then you will be isolated and weak." —Sun Tzu, The Art of War

Regardless of the industry in which it operates, every business will encounter gaps: gaps in knowledge, gaps in technology, gaps in financial resources, gaps in market presence, gaps in distribution channels, gaps in expertise and experience among its employees, etc. Businesses come together to bridge those gaps in a variety of ways, each of which can be described as a form of collaboration. If structured properly, collaboration is an effective and efficient way to bridge those gaps.

Collaboration is rarely an orderly process. In fact, it is often a bit chaotic, as the participants attempt to design and implement a framework for working together. Sometimes, participants are cautious, while at other times they are bold. Sometimes, participants demonstrate selfless behavior, while at other times they behave selfishly. Sometimes, the parties are well organized and work toward a common purpose, while at other times they work at cross purposes, either intentionally or unintentionally.

Despite these difficulties, however, collaboration is necessary, because it enables parties to bridge the gaps that they will inevitably encounter. The ancient Chinese warrior, Sun Tzu understood that alliances—a form of collaboration—were necessary for success in war. The same thing is true for business.

EXAMPLES OF COLLABORATION IN THE HEALTHCARE INDUSTRY.

Collaboration is particularly prevalent in the healthcare industry. Here are some examples:

Joint Development. Two years ago, Cerner Corp., a leading provider of healthcare IT, and Hill-Rom Inc., a leading medical equipment supplier, teamed up to connect intelligent hospital beds to electronic medical records. That strategic relationship was designed to improve and coordinate healthcare delivery by enabling the intelligent hospital beds manufactured by Hill-Rom to communicate with the software provided by Cerner.

Joint Marketing. A year ago, GE and Intel formed an alliance to market and develop home-based health technologies that remotely monitor seniors and patients with chronic conditions. GE Healthcare will sell and market the Intel Health Guide, a care-management tool designed for healthcare professionals who manage patients with chronic conditions. Also last year, CVS pharmacy teamed up with Google Health to create a system that allows CVS customers to import their prescription records directly into a Google Health account.

Acquisition. Last December, Microsoft announced that it intended to acquire Sentillion Inc., a privately held company that specializes in software for the healthcare industry. Microsoft believes that combining Sentillion's products with Microsoft Amalga Unified Intelligence System will make it easier for healthcare professionals to deliver better patient care by streamlining access to multiple IT applications and patient data. Recently, IBM announced that it had signed a definitive agreement to acquire Initiate Systems, a provider of customer data integration and enterprise master patient index technology. IBM has described Initiate as "a market leader in data integrity software for information sharing among healthcare and government organizations." IBM said that "Initiate's software helps healthcare clients work more intelligently and efficiently with timely access to patient and clinical data. It also enables governments to share information across multiple agencies to better serve citizens."

WHAT ARE THE WAYS THAT PARTIES COLLABORATE?

Each of the collaborations briefly discussed above represents an effort to bridge a gap in knowledge, ability, resources, or some other factor that the parties felt was necessary for success. That raises the question, however, of how parties should collaborate. The array of choices that extends from the simple to the complex is set forth in Figure 1. The remainder of this article will provide an overview of the various types of collaboration.  

Licensing. Licensing has long been a way to commercialize technology. Thomas A. Edison said: "An inevitable outcome of doing world-class science and technology is that commercial opportunities will arise."

Licenses are used by property owners to grant another party permission to use the property for a specified period, pursuant to certain terms and conditions. Nevertheless, the owner continues to retain ownership of the property. From the licensee's perspective, a license of another party's intellectual property (i.e., patents, copyrights, trademarks, know-how) can be used to enable the licensee to bridge a gap in its knowledge or ability. Licenses are the simplest form of collaboration and normally involve little interaction between the parties. Therefore, they are best suited to "packaged solutions," where the need for coordination between the parties is low.

Marketing & Distribution Agreements. The company that Thomas Edison founded, General Electric, is an active co-marketer.

This form of collaboration involves more coordination than licensing does and is, therefore, more complex. The parties must exchange more information than they do in a licensing scenario, because the party doing the marketing needs to understand the other party's product in detail, while the other party wants to ensure that the party doing the marketing has the ability and resources to do it effectively.

The factors that are essential for maintaining an effective co-marketing relationship are:

  • structuring the collaboration only after the parties have carefully reviewed their respective needs and abilities,
  • having a clear definition of the objectives,
  • ensuring the parties are organizationally compatible, and
  • having frequent interactions between the parties at all levels.

Production & Development Agreements. This type of collaboration is used when parties want to collaborate to produce or modify a product such as software. Teams of people operating all over the world might be involved in creating new technologies. Instead of a mere transfer of knowledge, however, these arrangements involve a collaborative exchange of knowledge and a sort of fusion of knowledge.

Upon entering into a series of semiconductor process development and manufacturing agreements with several corporations, Michael Cadigan, the general manager of semiconductor solutions for IBM, stated: "IBM remains convinced that collaborative innovation in an open ecosystem of partners is the key to technology leadership, both now and in the years to come." And IBM's collaborators agree. "The industry has recognized the value and importance of the collaborative model in driving robust, cost-effective solutions," said Chia Song Hwee, president and CEO of Chartered. "[W]e have seen how each company brings unique strengths and expertise to drive a customer-centric offering. The results of our collaboration have served as a platform for providing customers with world-class, flexible sourcing solutions."

Although collaborating in the development of new technology might be the wave of the future, parties must understand that careful planning is required. In particular, it is important to be clear about who owns the intellectual property created by such arrangements.

Minority Equity Investments. Minority Equity Investments ("MEIs") are, as the name implies, investments by one party in another. They allow the investor to obtain access to the knowledge of the target without taking the risks or committing the resources necessary to buy the target completely. The target, on the other hand, gets additional capital that it might need for product development or growth.

MEIs are normally viewed as a stepping-stone toward a more complex equity-based collaborative relationship, such as a joint venture or a merger/acquisition. As such, they provide the organization with a testing ground to analyze the potential of the investment before entering into a more complex collaboration. MEIs are ideal when an organization has an interest in the technology of a target, but wants to take a closer look at the target before purchasing it outright.

Joint Ventures. Joint Ventures are often what come to mind when parties think of collaboration. They involve the creation of a separate entity to which each of the parties commits resources. This separate entity has its own identity, owns its own property, and has a relationship with each of its constituent owners. It is, in effect, an interconnected relationship defined by the rights and responsibilities of the parties. The rights of one party are often based on the responsibilities of the other.

Joint ventures are particularly appropriate where parties want to enter a new market or undertake a new challenge and want to share the risks involved. When it is difficult to specify the desired end state, joint ventures allow parties to collaborate by focusing on the processes and procedures of their relationship, rather than on specific deliverables.

Because the joint venture has its own identity, its relationship with its constituent owners can be complicated. For example, will the parties allow the owners to compete with the JV? If so, it should be so stated in the formation documents.

What information and assistance will the JV provide to the owners and under what terms? Note that the owners do not automatically get valuable services or technology for free or at discounted rates from the JV. Commercially, their relationship is at "arm's length."

Acquisitions. The most complex way of collaborating is for one party to purchase the other. Although one party gets all of the technology and knowledge that the target has, it must also commit greater resources and take greater risks to buy the company.

Acquisitions require the purchaser to determine a proper value, arrange financing for the purchase price, structure a transaction that the seller finds acceptable, close the deal, and integrate the target company into its operations. In undertaking an acquisition, a buyer faces all the risks of the marketplace, as well as the risks that are inherent in the business being acquired and the challenges of integrating it into its existing operations.

Although the buyer obtains control of the target, it must confront numerous issues that often do not have clear answers.

In the examples cited above, Microsoft and IBM decided to purchase a target as a way of collaborating. In effect, these large companies find that it is easier to buy an intact team and set of knowledge or technology than it is to create them organically. Given the size of these buyers, the risks involved are deemed to be insignificant. Smaller buyers, on the other hand, will normally want to structure the transaction in a way that protects them from some of the risks that are always present in a purchase transaction. In acquisitions both large and small, the parties often grossly underestimate the challenges associated with integrating the target. Unfortunately, if the integration fails, then for all intents and purposes the transaction fails.

GENERAL COMMENTS.

Where a particular situation fits along the collaboration continuum is a function of:

  • the resources of time and money that the parties want to commit,
  • the risks they are willing to take, and
  • most important, the goal of the collaboration; that is, what they are trying to accomplish together that they cannot accomplish separately.

Proper Design and Implementation. It is very important to understand that these relationships must be carefully designed in order to achieve the goals of the parties. Proper collaboration involves much more than selecting the type of collaboration and then completing a form document to put that arrangement into effect. Although there will be some common characteristics and provisions in these structures, each collaboration must be carefully designed to address the particular situation at hand, with respect to various issues.

Management. Most important, the parties must understand how the endeavor will be managed. Collaborative efforts rarely "run on auto pilot." As with any other endeavor, collaborative activities must be planned, organized, directed, and controlled. Some collaborations require more management than others. The more complex the collaboration, the more it must be managed.

Resource Allocation and Returns. In addition to management issues, the parties must address resource allocation issues. What are the parties expected to contribute to the effort? And, when are they expected to contribute it? How often will they be called upon to contribute?

Contributions to a collaborative effort can take a variety of forms:

  • money
  • technology, know-how, etc.
  • other assets

When and how much of a return, if any, can the parties expect to get from the effort?

Will the collaborative effort be a net consumer or net producer of resources?

Most collaborations produce intellectual property. Who has rights to it and what are those rights? Will the parties receive the benefit of any of the intellectual property that is developed by the collaborative effort? If so, on what terms?

Other Questions / Issues. There are a number of issues that the parties should consider:

  • May a party compete with the collaborative effort?
  • May a party sell goods or services to the collaborative effort? If so, on what terms?
  • May a party purchase goods or services from the collaborative effort? On "sweetheart" terms?
  • Can a party get out of the collaborative effort? If so, how and on what terms?

Who's Your Collaboration Partner? In the three forms of collaboration involving an equity interest (i.e., minority investments, joint ventures, and acquisitions), the parties should decide under what conditions a party may sell or assign its interest to a third party. The parties will probably want to restrict that ability, because they intended to collaborate with a particular party. Even with an M&A transaction, an acquired party had certain expectations about who would own it.

In the forms of collaboration that do not involve an equity interest, the parties should also be concerned about transfers. Most collaboration agreements include an anti-assignment provision that requires the other party to consent to any assignment of the agreement. But, what about a change-of-control provision? Although a change of control of an entity changes the identity of the party with whom they were collaborating, most parties are reluctant to agree to such restrictions if they are bilateral for fear they could interfere with a strategic transaction of their own, such as a sale of the company.

There are many other issues to address, such as dispute resolution, that are beyond the scope of this article. The discussion above makes it clear, however, that collaboration, though valuable as a means to bridge gaps, has its own set of issues that must be addressed in order to make it an effective tool for businesses