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Managing risks in strategic alliances

By Michael Roch, Chief Commercial Officer, allianceboard

Proactive risk management is a core element of strategic alliance management. Many alliance leaders consider alliance risk management a dark art. Yet it is simpler than you might think. In this post, we explain the basics and show how to get started with minimal effort.

Why risk management is different in strategic alliances

A strategic alliance risk is any instance, event or issue with some probability, that the intended outcomes of the strategic alliance won’t be realized within the time and investment that was first contemplated when the alliance formed.

Managing risk in strategic alliances is somewhat different from risk management generally. Most business risks are managed depending on the risk appetite, preferences and political realities of your organization. Yet in strategic alliances, how a risk is viewed and managed also depends on the risk appetite, preferences and political realities of the partner organization. For that reason, some risks are best managed jointly with the partner (for example via the steering committee mechanism).

Our clients often struggle finding a common risk management language with a partner – sometimes because their own organization’s risk management approach isn’t well suited to strategic alliances. The following areas are worthy of reflection, not only for your own strategic alliance function, but for alignment with your strategic partners: defining risks, assessing their probability and impact, deciding what to do with each risk, and reviewing all risks periodically.

Our five main types of risks in strategic alliances

While the ASAP Handbook on Strategic Alliance Management defines eight risks deserving a risk-and-reward analysis when selecting strategic alliance partners (market, competitive technology, cooperative environment, management, political, resources, capital and partner risks), each organization will define risks differently. For example, in the life-sciences sector Eli Lilly’s classification of alliance risk into business risk, human risk and legal uncertainties, is well known.

Other approaches look at the impact on strategic alliance outcomes from three perspectives of where risk can come from or their impact on alliance outcomes.

allianceboard’s own starting point defines five broad types of strategic alliance risk:

- Internal – risks that relate to your own organization’s ability to deliver on alliance outcomes (such as a new operational priority)

- Partner – risks that relate to the strategic alliance partner’s ability to deliver on alliance outcomes (such as a restructuring within a partner) or resulting from alliance activity that impact on the partner

- Asset – risks that relate to the most important strategic alliance outcome. For example, in co-development alliances this could relate to the inability to achieve a milestone when developing a new piece of technology; in a co-sales alliance this could relate to the failure to achieve required growth in the number of channel partners

- Governance – risks related to a contractual uncertainty or ineffective decision-making at steering committee level (such as the inability to affect a timely escalation for a sponsor’s decision)

- Environmental – risks that are external to both parties (such as political, economic, social, technological, and regulatory uncertainties)

The key is to keep it simple: any typification of strategic alliance risks needs to make sense to your organization given the vertical in which it operates and needs to align with the risk management approach to which your senior management has grown accustomed.

Assessing strategic alliance risks

Once risks are identified, strategic alliance management needs to lead the discussion around two aspects:

- Probability – the probability that a risk will materialize

- Impact – the impact that a risk, once materialized, will have on the strategic alliance achieving its intended outcomes.

Usually this involves several internal alignment meetings. Involving the strategic alliance partner in the assessment process will lead to a better, more realistic assessment of each risk.

The five ways of managing strategic alliance risks

The risk management profession advocates five principal ways in which an alliance risk can be mitigated, of which the first two are the most obvious but the least useful:

- Avoid – this means not entering into the alliance at all or, in existing alliances, not to pursue an additional opportunity with that same partner

- Accept – accept the risk in light of potential returns

Both the “avoid” and “accept” ways of managing risk appear unsatisfactory because of their apparent inevitability. Most alliance leaders view the remaining three approaches as more practical:

- Transfer – offload the risk to a third party, such as an insurance carrier

- Reduce – minimize losses (impact) or probabilities for the risk to realize

- Share – share the risk with the alliance partner as part of the risk-return equation

The implication of shared risk management is that risks are known and defined at the time the strategic alliance is entered into. Yet strategic alliances are long-term in nature, and risks appear and disappear constantly.

Conducting periodic risk reviews

For this reason, it is important that each risk has a review date and that strategic alliance leaders conduct comprehensive risk reviews periodically. These need to happen with internal stakeholders and together with the strategic partner.

A possible agenda for risk reviews could simply be the following:

- Describe – do we still agree with how each risk is defined?

- Probability - setting prior assessments aside, what is the probability that this risk will come to pass?

- Impact - what will be the economic and non-economic impact on (a) our organization, (b) our partner and (c) on this strategic alliance with this risk materializes?

- Mitigation - what adjustments do we need to make to our risk mitigation planning in light of the above?

- Next review – when should we review this risk again?

Keep it simple

Many alliance managers don’t conduct regular risk assessments – or try to do it perfectly. Remember that less is more: keep your risk assessments simple and focus on the main risks only.

Risk management is a core part of alliance management. Yet alliance leaders are busy, and so are their stakeholders. Ensuring that risk reviews happen at all is much more important than if they happen to perfection.

How allianceboard helps you manage strategic alliance risks

allianceboard makes risk management in strategic alliances very easy.

- Classifying risks – allianceboard allows you to classify your alliance risks in any way that makes sense to you and your organization.

- Assessing probability and impact – Probability and impact are visualized for each risk – and are aggregated for each alliance, for each partner and across the entire portfolio for engaging discussions with stakeholders.

- Mitigation planning – mitigation plans are maintained directly in allianceboard, and compliance with risk policies are visualized for each alliance, partner and portfolio.

- Sharing risk information – risk information is shared easily with strategic alliance partners

- Risk reviews – conduct risk reviews internally and with each partner with ease using our intuitive platform.

What does risk management look like for your strategic alliances? We look forward to learning about what has worked well for you.

allianceboard extends special thanks to Jan Twombly, President, The Rhythm of Business, Inc., for review and contribution to this article

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