ANALYSIS: Collaborations offer major gains beyond big income

The tough economy aside, many reasons exist as to why firms are sidestepping the traditional M&A route to instead explore strategic alliances.

The tough economy aside, many reasons exist as to why firms are sidestepping the traditional M&A route to instead explore strategic alliances.

Somewhere between an all-out merger and a casual promise to "work together sometime" lies the "strategic alliance," a phenomenon on the rise. What is it? Well, that depends on whom you ask and to which alliance you are referring. A straw poll of a dozen participating executives reveals that it's definitely more than a casual commitment, but much less than a real partnership. It's a marriage without the emotional or financial baggage. It's a handshake in place of a bear hug. Picture this: You own a small PR agency, and you've decided that in order to grow your business, you need a new capability. Maybe you need to offer publishing or lobbying services, or you want to be able to conduct national or even global campaigns despite having only one office. What are your options? You can start from scratch, which means investing a ton of cash with no guarantee of success. You'll need new office space, new hires, new training, and a new marketing campaign. And at the end of the year or two it takes to do all that, you'll either be a success, or you'll need a shovel to dig yourself out of the financial hole you're in. You can find an established company that already performs the capability you need, then merge with it or buy it. Of course, that requires all sorts of sensitive intimacies, opening your books to one another, getting in bed with an essentially unknown entity, tying your fate to another's performance, and, in the case of an actual purchase, laying out another ton of cash. Or you can find a firm that fits the bill and sign an agreement to conduct and pursue business as a team. You can freely offer their services to your clients and they can do the same. Exchange no equity, reveal no secrets, and reserve the right to go outside the partnership if necessary. In other words, meld strengths but maintain separate fates. In the current economy, it's little wonder that the strategic alliance is increasingly the option of choice. Traditionally, it would seem to be a choice more commonly made by boutiques - shops that have more ambition than capital. But already this month, two of Washington DC's largest agencies announced such alliances, suggesting they're even more attractive when cash flow is an issue. Fleishman-Hillard has allied itself with Wirthlin Worldwide, a research group, and Ogilvy PR got together with the Dutko Group, a government-relations firm. Ogilvy executives felt they needed a lobbying capability to stay competitive and attract new business, but they didn't want to start from scratch. Fleishman, on the other hand, simply wanted to complement its current capacity for conducting research. A marriage for all reasons The lesson here, aside from the fact that lousy economies make for more willing bedfellows, is that there are as many reasons for forming an alliance as there are alliances. "In our case, it's the marriage of two world-class capabilities," says Robert Mathias, MD of Ogilvy's Washington office. "What this does is enable a client, whether they enter through Ogilvy's or Dutko's door, to have immediate access to a total communications/ government-relations package." But what it does for Ogilvy and Dutko is even better. Over the past few years, the "campaign style" approach to issues management has taken hold in Washington, requiring lobbyists to push the issue on the ground while PR and grassroots folks provide "air cover." Firms who are still unable to provide both services do so at their own risk. It's why Ketchum recently bought lobbyist The Washington Group for a reported $15 million, and why Omnicom spent several fruitless months trying to acquire Quinn Gillespie for Fleishman (which already has one lobbying arm, FH/GPC). But Ogilvy says it can now offer its clients nearly the same capabilities as Ketchum or Fleishman, and they can do it all for the cost of a handshake and a press release. Such alliances offer advantages beyond the immediate increase in reach and capabilities, as well. Some suggest that they're the perfect way to test the waters, to discover, at minimal risk, whether adding a new element to your agency is something you truly want to do. "It allows us to dip our toe in the water in a particular area to see if we want to make a bigger investment down the road," says Hill & Knowlton COO Gene Reineke. "Instead of hiring more senior public affairs consultants or more sports-marketing experts, rather than making that full investment now, it allows us to see if we can be more active in an area later on." Reineke, also GM of H&K's Chicago office, has already overseen the forging of two alliances: one with a local public affairs firm, and one with a sports marketing shop. The drawback to most low-risk ventures, of course, is the limited potential for gain - and strategic alliances are no exception. What you gain in capabilities, you sacrifice in fees. Unlike a public affairs agency that buys a lobbying firm, one that goes with an alliance sees none of the increased revenue. Indeed, most everyone involved in such arrangements cites fee concerns as the major drawback. David Petrou, president and COO of EisnerPetrou & Associates, a midsize firm with offices in Baltimore and Washington, has been part of a six-agency alliance for several years. Unlike the Ogilvy or Fleishman situations, EisnerPetrou's is more about adding reach than capabilities. It's hard to run a national or global campaign when your only two offices are 50 miles apart, but Petrou can now promise national capabilities. If clients take him up on it, however, he must share the rewards. "The only downside is that the money doesn't go into one coffer," he concedes. "But what I can give without any cost to EisnerPetrou is a tremendous value-add to my client." Dividing fees Potentially more troublesome than the surrendering of fees is the negotiation between partners on how to divide them. When clients pay by the hour, the work is appropriately calculated. But that model hardly applies to every situation. "How we do it depends on whether it's an hourly client," says David Fuscus, president of Xenophon Strategies, a midsize crisis firm that specializes in the airline industry. With all the activity in that sector over the past few years, Xenophon is hardly struggling, yet in that time it has forged multiple alliances. "We had a client last year where we worked with two lobbying firms and a law firm," he recalls. "With four firms involved, when it came to fees, it was a matter of sitting down and negotiating." While most agreements set guidelines for the division of fees up front, often those guidelines leave the details to be worked out after the work is found. "It's done case by case, which is part of the willingness to do an alliance," says Mathias. "We're going to commit to each other in a formal way that we will work through the fee question." But ultimately, nearly all those involved in a strategic alliance of some kind consider the fee question to be a small trade-off for what they receive. And as long as the economy forces companies to aggressively pursue business while aggressively saving money, more and more are likely to be seen.


Firms                       Capabilities                  Date Formed
Wirthlin Group              Full-service PR/Research      January 2003
Ogilvy PR/Dutko Group       Full-service PR/
                           Government relations          January 2003
Merritt Group/
American Technology
Services                    Tech PR/IT solutions          January 2003
FM Strategic
Communications/FIPRA Intl   Public affairs/
                           Antitrust consultants         September 2002
Xenophon Strategies/
Restaurant Association      Crisis communications/
                           Trade group                   June 2002
Schwartz Communications/
AxiCom                      Tech and medical PR/Tech PR   May 2002

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