Monday, March 11, 2013

Partnerships are Inefficient… And That’s OK.

I recently had the opportunity to travel to Brazil with other credit union leaders to study the SiCredi cooperative financial system (what we in the U.S. would call a credit union or credit union system). They have a federated model much like Quebec-based Desjardins caisse popular (also a credit union system) with a centralized “home office” that can build expertise and scale, but is owned and governed by individual financial cooperatives each with their own individual governance models. In a sense it is like a super-franchise – a common brand but the “franchisees” own the entire system rather than the home office.

SiCredi's president is a gracious man named Ademar Schardong who was instrumental in building the federated model in the 1980s as Brazil re-emerged from the military dictatorship that ruled the country since the 1960s. He spent a great deal of time with our study group explaining how their model works and their impressive growth trajectory in the last decade.

Frankly, I believe their model is genius not only for financial cooperatives but other types of businesses.

It leverages a single brand recognizable to the consumer with local governance of the financial cooperatives spread throughout the southern part of the country. It is very different than the United States where we have 7,000 credit unions and nearly 100 million members but have historically been an afterthought in the larger banking world. This type of federated model is clearly a best practice for cooperatives across the globe.

One of Sicredi’s strongly-held beliefs is that it is their governance model makes the real difference, not the brand or expertise or scale. But it is exactly that governance model that seemed inefficient to me. Each of the 112 cooperatives gets an ongoing say in key operating issues of the system through an assembly process. In some cases, two-thirds of the cooperatives must vote yes for a decision to move forward. Sicredi management explained that these decisions could take multiple years to work through the process. That struck me as out of place. After all, in today’s world, isn't it the fast that eat the slow? In the fast pace of the global economy, is it at all reasonable that a partnership would allow decisions to take that long just so everyone could have their say?

I think, yes.

Partnerships – whether in the form of a true cooperative, a federation, a joint venture, a marketing alliance or some other form – are inherently inefficient. The most efficient form of management is command and control. The old military and factory model is very efficient. One person decides, everyone else implements. “Ours is not to wonder why, ours is to do and die.” Clear. Concise. Easy. And yet, discredited in many ways.  Dictators and autocratic governments have been mostly disbanded or are on the ropes (see Venezuela). Even militaries and factories have moved to more collaborative models. It is possible that the only command and control systems left in operation are public schools, but that is another topic…

Today partnerships are the rage. Collaboration is the word of the day. Books are written and speaking tours engaged on the topic. But why is an inefficient partnership or collaboration better than consolidation and acquisition – thus ensuring one voice and one direction?

In 2001, we recast the mission of The Members Group to “Creating Successful Partnerships.” It was not so much a new concept but an articulation of what our cultural DNA was about. We endeavored to create successful partnerships with our clients, our employees, our business partners and our owners. When we rolled this new mission statement out to our staff, some responded with positive comments. Others said, every company says partnership are important. It was perceived by some as trite. “That's what you put on a trade show booth, not a mission of a company,” someone told me. Yet, in today’s marketplace, I believe a competency of partnership is critical to success.


Because no organization – not the largest company on the planet – can do it all alone. The days of complete integration, the Standard Oil model, are over in the global, technology-driven economy. If I need a data center I can build out one at great expense or leverage the Amazon cloud to be up in a day. If I outgrow that, there are many partners – many specialized in fields like financial services – that can take my business to the next level. I can leverage marketing distribution networks, outsourced manufacturing agreements, application programming interfaces (APIs), management agreements and the like to build a virtual company with real world assets in a fraction of the time it might take many years ago. Some of these are just vendor agreement. But others are much more than vendor relationships, over time they become important strategic assets of the company.

But they aren't efficient. So the question becomes: What level of inefficiency are you willing to live with to gain the advantages of a partnership? Partners have different priorities – often they are managing multiple partnerships. You are always not the biggest fish in the pond. Alignment becomes one of the most important things. We need to have “partnership meetings” or “steering committee meetings” to gain alignment. We create structures to navigate difficulties. And inevitably the cultures between partners are not the same. Strategic decisions take longer, more face-to-face communication is needed, and my way doesn't always win.

The funny thing about collaboration and partnership is this: If you want to partner with me, agree to all my ideas and help fund a portion of the development, THAT’S AWESOME! But usually decisions are a give and take, my ideas meshing with yours. Building on top each other’s ideas to find something that of can work in the market. A meritocracy of ideas where titles matter less and ideas matter more. Those are the successful partnerships.

And one other thing I have noticed. Partnerships are initially built on relationship. My experience is that a few people from each side open the dialogue based on mutual respect (but not always initially on mutual likeability). Without champions on each side, there are always reasons to say no. Someone must want the partnership to succeed. It is another case where it is easier to say no than yes. Without a champion, it is hard to break through the inertia of every day.

But once the partnership is formalized, it has to move beyond the personal relationship. It needs to become a competency of the organization – some companies are good at partnering, others are simply not. In the credit union industry, we are watching many partnerships formed many years ago on personal relationships disintegrate because the next generation of leadership never bought in the way the first one did and there was not a formalization of this competency within the broader organization.

Partnerships are a cultural issue. Are you good at it building them or not? Do you see partnerships as legal agreements and alliances or living, breathing organisms that need care and feeding. The vast majority of partnerships fail and it is rarely because the economic reasons weren't as strong as the day they were formed. Remember OS/2? Probably not. Microsoft and IBM tried to come together to build the next generation of computer operating systems in the late 1980s. But they never trusted each other and couldn't get past years of a distrustful, d├ętente-based relationship. In the payments industry, this type of relationship is being formed in McX, the merchant-based payment network. WalMart is in the same room as Target, with Best Buy and others in the mix. Maybe it will be successful, but to get there they will have to overcome decades of competition and distrust.

So how do you identify whether you will be able to build a successful partnership? Here is my (surely incomplete) list.

Jeff’s key attributes of a partnerships:
  • A win-win – economically and strategically. Do you agree what the definition of success is for the long-term? Can you both articulate using the same language?
  • A history of successful partnerships within the organization. Can your culture accept a minority role as well as a majority role? Can you lead as well as follow? Can you do both within the same partnership?
  • The ability to accept another way of doing something. Do you REALLY believe that your way is not the only way to do it? Does your partner believe the same?
  • The ability to build relationships and navigate through difficult issues. Are you willing to discuss the brutal realities about the good and the bad? Are there people on either side who can mediate issues with the key points of the partnership in mind?
  • A willingness to look to others for new ideas. Do you suffer from not-invented-here (NIH) syndrome, where ideas from the outside are looked at skeptically or does the best idea win, even if from another party?

Near the end of our visit to SiCredi, I said to Mr. Schardong that their governance model seemed inefficient to me. He was nearly offended at the suggestion. He defended the nature of their model as critical to their success. The culture of partnering and this cooperative governance model was ingrained so deeply in the organization that the benefits so outweighed whatever inefficiency might be associated with the process. It was basically a rounding error to him.

He said that “the only reason for the organization (the home office) to exist was to support the system.” Their model of partnership was beyond symbiotic – in that it helped each organism live and grow. It was more like a host-based system – if one part was removed, both would die. It was like saying that your liver really isn't very efficient, so you are going to go a different direction. To survive, it is critical. I left the conversation with a new thought to ponder - is the inefficiency I saw actually a strategic asset? As I have thought about this I believe the next challenge for a fast-growing organization like SiCredi is whether they can institutionalize that core belief beyond a “founder?” Time will tell but my bet is yes. It does seem a part of their culture.

So I turn the question to you: What is your definition of partnership? Does your organization really know what partnerships are about? Are you willing to fight for them, like you would a part of your own organization? Are they a strategic asset?

In a new connected world, I believe partnerships are vitally important. And hard. And most of us aren't very good at them. But with practice, we will be. And if we get better, we will be able to grow and succeed in ways that we might not have imagined.