When Elliot Klein conceived his version of the dotcom dream, to createa lost-and-found service for laptop and handheld computer users, hebelieved he was filling an important market niche. And to his credit,Klein knew he needed some big-time help.
Returnme.com - which was inspired by Klein's losing his address book ina New York City taxi in 1998 - would need capabilities such asshipping, reverse logistics and customer support. Rather than seek thecapital to build all of those capabilities from scratch, theentrepreneur sought out partners that could make it happen. He formedmarketing and development relationships with handheld makers Palm andHandspring to make his company's "eTagit" retrieval service availableto device buyers. And Klein struck a key deal with FedEx: Returnme.comwould use FedEx's established NetReturn delivery network to ship foundarticles back to customers.
After the dotcom shakeout, companies are relying on traditionalbusiness practices and focusing on actions directly tied to customervalue. Executing successful partnerships represents one of those corecompetencies. The staying power of Returnme.com, a Web Business 50award winner for its innovative service, is attributable in large partto its partnerships with players like FedEx that help it servecustomers. Other Web Business 50 winners highlighted in thisarticle - Lands' End, Drugstore.com and Bid4Assets - createdpartnerships that support their business models while improvingcustomer service and contributing to growth.
Partnerships are not a new strategy, but the development of theInternet created a potential for connectivity that didn't existbefore. The Web has also spawned new kinds of partnerships, such asindustry consortia and online exchanges. During the dotcom boom,companies partnered constantly and often in shark-like feedingfrenzies in an effort to stay competitive. In a 1999 study of dealsamong dotcoms and bricks-and-clicks companies, McKinsey & Co. foundannouncements for 13,000 e-commerce alliances. Then, partnerships werea way for companies to generate press releases and (attempt to) boosttheir stock prices, says David Ernst, a principal at McKinsey & Co. inWashington, D.C., and coauthor of a report titled "A Future forE-Alliances." Partnerships were great to talk about, but talking andsuccessfully executing are two different things. "It used to be thatyou could get great buzz by announcing a partnership, and companieslooking to do an IPO were advised to partner with a major portal, anIT platform provider and a major e-commerce site," he says. "Nowcompanies have to focus on partnerships that create value."
With a changed economic climate, partnerships have emerged as asurvival tactic. In April when the Borders book chain realized itse-commerce efforts were falling flat, it partnered with Amazon.com,whose ordering and distribution channels were established."Partnerships are Amazon's only real life raft," says Carrie Johnson,an analyst at Forrester Research in Cambridge, Mass. "Sales areslowing, retail is reaching saturation in many categories, and sopartnerships are their saving grace."
The Skinny on Partnerships
Partnerships can be an effective way of gaining access to customers,brands and markets that you didn't have before. For e-commerceendeavors, they can provide a cash infusion without taking the venturecapital path. But they are not a panacea.
"Partnerships can help you survive and grow and acquire new skills,"says Benjamin Gomes-Casseres, associate professor of internationalbusiness at Brandeis University in Waltham, Mass., and author of TheAlliance Revolution: The New Shape of Business Rivalry. "But they arenot a cure-all. You cannot assume that you'll get results just becauseyou have partners."
These relationships fail often and for a variety of reasons. One partymay try to dominate the relationship, goals and priorities may changeover time, and arguments can arise over finances. In September, CoxCommunications said it would end its partnership with Excite@home, abroadband access provider, because of Excite's financial difficulties.Ending the partnership was a "protective measure that allowed us takeback control of our network and ensure quality and customer service,"says Laura Oberhelman, a Cox spokeswoman.
To launch a partnership, a CIO must first have a clear understandingof his own organization's strengths and weaknesses, says StephenSpalding, a San Francisco-based principal in the management solutionsgroup at consultancy Deloitte & Touche. "You have to look at your corecapabilities and focus your efforts on those," Spalding says."Partnerships must start with both partners knowing the other willcommit resources, blood and muscle to make it work. That way, ifsomeone messes up, they will work together to make it better."
Collaboration Incentives
When Lands' End launched Landsend.com in 1995, executives weren'tconcerned about going public or buying Super Bowl ads. After all, theDodgeville, Wis., company had 38 years of mail order success under itsbelt, and a business model focused on strong customer service. Thesite had revenues of $218 million in fiscal 2001, or about 16 percentof Lands' End's total revenues of $1.35 billion. But the Web projectwas more of an experiment than a strategic initiative, says Bill Bass,senior vice president of e-commerce. "We didn't bet the farm on a bigdeal with Yahoo, like some companies did," Bass says. "The businessmodel is very important to us. The site's growth was purelyorganic - we got it running, learned as we went and watched what paidoff."
What paid off were noticeable improvements to customer service. Basssays his online team is small (though he declined to say how small).So when he decided to add more features, like personalization and aproduct search engine to the website, he looked for help. "It's hardfor us to both come up with new concepts for the site and do itourselves. We always need outside help," Bass says.
In October 1998, Lands' End partnered with My Virtual Model, aMontreal-based software company whose "virtual modeling" engine gaveLands' End visitors a chance to try on clothes without having to orderthem first. The equity and affiliate marketing partnership isindicative of the company's approach to its online strategy, Basssays. "We saw an opportunity to provide a new service to customers,"he says. "Partnerships are important to any business, but they have tobe based on solid business models." Bass's development team worked inconcert with My Virtual Model's developers to make sure the modelingtechnology was placed conveniently - but not prominently - on the Lands'End site. "At the end of the day, people come to our site to buy ourclothes, not play with our partner's technology," he says.
Creating and nurturing a close relationship with a partner like MyVirtual Model is imperative, Bass says, because such relationships aremore beneficial for customer service. As a result, the company'sonline partners often move in to Lands' End offices for months at atime to ensure good communication.
The partnership is equally important for My Virtual Model, whichstarted the relationship as a provider of custom-built Web designs.With the support and urging of Lands' End, My Virtual Model changedits business model and became a software provider. Lands' Endexecutives "are true partners on many levels," says Yona Shtern, chiefmarketing officer for My Virtual Model. "We know their outstandingcommitment is to customer service, and our solution has to becomplementary. That doesn't happen with memos; it happens when bothteams work together in unison."
One reason the Lands' End site has been profitable since 1997 is thatcompany executives don't treat the site as a new business, Bass says."We never say that traditional business rules don't apply, becausethey absolutely do," he says.
Bass says he shoots for one major partnership a year whosecontribution to the site will reset the bar on how people shop online.So far, the site as partnered with Quickdog, a provider ofpersonalization software, and EasyAsk, a search engine. Lands' Endbeta tests the new technology, and if it works, the new feature getspromoted online and in the Lands' End catalogs. But the deal isn'tfree. "We've made our partners successful, and we've given them a lotof free PR. And in return we ask for a period of exclusivity on theirtechnology and an equity investment in our company," Basssays.
Build A Relationship
Drugstore.com President and CEO Kal Raman puts it bluntly: "If wedidn't have partnerships, we wouldn't exist." When Raman wanted toknow how to make the online shopping experience better for hiscustomers, he went to a local drugstore to ask shoppers how an onlineversion of the shop could make life easier for them. "Customers cameand said they wanted the option of picking up prescriptions in-storearound the country," Raman says. "We knew we couldn't do everything onour own, so we looked for a retail partner that could help us dothat."
In vetting potential partners, Raman (Drugstore.com's former CTO) andhis team looked for retailers that shared his company's values andview of the industry. Prospective partners had to be obsessed withcustomer service. "You have to make the relationship successful foryou, your partner and your customers, and you can do that only if youshare a common goal, like customer service," Raman says.
In June 1999, after scoping out the business plans, internaloperations and strategies of several nationwide chains, Raman choseRite Aid. A partnership with General Nutrition Centers (GNC) wasgenerated at the same time.
Drugstore.com was founded on partnerships. Amazon.com, an initialinvestor, still owns 20 percent of the Bellevue, Wash.-based company;CEO Jeff Bezos is on the board of directors. As part of the deal,Drugstore.com gets 10 years of unlimited access to Amazon.com'stechnology and distribution network. Rite Aid and GNC own 14 percentand 5 percent interest in the company, respectively. In return,Drugstore.com acts as their online pharmacy. The equity and exchangepartnerships also give Drugstore.com the exclusive online rights tosell all GNC brand products. GNC and Rite Aid later formed apartnership, and Drugstore.com now has the rights to sell the RiteAid/GNC PharmAssure brand of vitamins and nutritional supplements.Rite Aid and GNC purchased 12.3 million shares in Drugstore.com for$10 million in cash. These exclusive deals also called forDrugstore.com to share access to its customer base forresales.
By teaming up with Drugstore.com and Rite Aid, GNC was able to extendits retail channel beyond the more than 4,500 stores it operatesnationwide, says Archie Isherwood, director of Internet initiatives atGNC. "These partnerships expand GNC's customer reach and lets us offerconsumers a number of options for buying our products," Isherwoodsays.
These deals helped Drugstore.com stack the odds in its favor, says RobLeathern, an analyst at Jupiter Media Metrix in San Francisco. Theyhelped Drugstore.com overcome issues of trust and name recognitionthat contributed to the fall of rivals like Mothernature.com andPlanetRX.com, he adds. "You can't just expect people to come to yourwebsite and know your brand," Leathern says. "The problem with the Webis that it's very difficult to get the customer to the provider. Auser may look for information in a particular context online - say, fora book or a gadget - and the ideal provider will have no idea that theconsumer is there reaching out to them."
Focus On Quality
Bid4Assets, founded in November 1999, auctions the assets it gets fromsurplus government properties and bankruptcies, ranging from officefurniture to buildings to financial instruments. The company, whichexpects to be profitable by mid-2002, has only 35 employees, and itsnetwork of contacts is small. Standing alone, the company's chance forsuccess was slim, says Executive Vice President DavidMarchick.
Marchick made a list of auction leaders in the markets Bid4Assetswanted to penetrate: real estate, financial, bankruptcy, liquidationand food services. His criteria were multilayered. He looked forleaders whose network of contacts, service capabilities and salesstaff would benefit Bid4Assets without incurring added overhead. Inaddition, he wanted companies whose culture and mission fit hiscompany's mix of traditional and entrepreneurial endeavors. Inexchange, Bid4Assets offered ties to a Web front-end and thetechnology supporting it.
"We wanted to partner with a leader that was more established than usand who was interested in using auction technology, but one thatdidn't want to develop it themselves," Marchick says.
The result was a partnership with Trumbull Services, a subsidiary ofThe Hartford Insurance Co. Trumbull handled the administrative side ofbankruptcy court claims and had a vast network of contacts in thebankruptcy field. In August, The Hartford invested $4 million inBid4Assets. Trumbull gave the Silver Spring, Md.-based company accessto its contacts, and now the two companies sell bankruptcy claims onBid4Assets' auction site. They also partnered with SB Capital ofDallas, a leading liquidator whose sales and inventory force letBid4Assets expand its sales capabilities.
For Trumbull, the partnership offered a way to get on the Internetwithout hiring a staff to develop a site. Bid4Assets had a businessmodel that differed from every other startup Trumbull interviewed,says Lorenzo Mendizabal, vice president of the Windsor, Conn.-basedcompany. "We looked at five or six other companies, none of which arestill in business," Mendizabal says. "There was an enthusiasm, visionand strategy that attracted us to Bid4Assets, and that energy helps usbe more entrepreneurial."
"We had done only online auctions, and we knew a large part of theliquidation business is more amenable to offline auctions," Marchicksays. "Someone in California is not going to fly to Washington, D.C.,to buy 10 cubicles. Since we have only 35 people, sending 10 of themaround the country to round up material made no sense. SB Capital hadpeople all over the country who could handle inventory, live auctionsand equipment removal."
Choosing a partner based on set criteria can be difficult, Brandeis'sGomes-Casseres says. The key is to find a partner with capabilitiesthat match your needs and the incentive to contribute thosecapabilities to the union. Having more than one partnership is fine,but too many can spread a company thin and create competing intereststhat can distract from the business plan, he says. "Polygamy is OK,but promiscuity is not," he says. "It's hard enough to run onealliance well, but it gets exponentially harder as you add morepartnerships to the equation."