Risky Business: Getting Payback on Partnerships
Imagine getting a hot tip on a horse. After checking track conditions, visiting the paddock and reviewing past performances, you're pretty confident it's a sure thing. Now, as you go to place your bet, imagine learning the odds are 50 to one. You'd probably recheck track conditions, revisit the paddock and re-review past performances to be certain your assessments are correct.
The same should be true when forming a business alliance, which, surprisingly, isn't a much safer bet. Of every 100 alliance negotiations studied by Chicago-based Accenture's Merger, Acquisition and Alliance Strategy Center of Excellence, 90 fail to reach agreements, and only two survive more than four years.
These figures may seem daunting, but, much like hitting a horse with 50-to-one odds, a successful alliance or partnership can produce dramatic returns on investment. Accenture's study, "Grasping the Capability, Successful Alliance Creation and Governance through the Connected Corporation," estimates that 25 percent of all companies will derive more than 40 percent of their total market value from alliance-related activities by 2004.
Despite the considerable pay-off, success is uncertain. So why does it seem that partnerships become more popular as the economy gets worse? Companies may partner and form alliances in poor economic times to reduce product development costs through distribution of a partner's product to its customer base, suggests Steven Etzler, managing partner, Business Development Institute (Red Bank, NJ). In addition to providing customers with access to new or best-in-class products, another typical alliance goal is reducing marketing costs by penetrating a partner's customer base.
Given those aims, it might seem that banks and securities firms would appear to be ideal partner candidates for insurers. But carriers—wary of the difficulties of cross-selling products, especially after Citigroup's (New York) announcement it would spin-off its Travelers (Hartford) P&C operation (see related article, Transformation Series)—are opting to partner with other insurance companies in order to manage the risk. Banks and insurers "have different modes of management and distribution," says Ted A. Johnson, director of marketing, client services group, LIMRA International, a Windsor, CT-based insurance finance research organization. Disparity between the fundamental cultures of banks and carriers—which are typically more risk averse, says Johnson—are reflected in areas such as capital use and are obstacles to bank/insurance partnership success.
However, an alliance model that is gaining popularity, especially among large insurers, is the multi-carrier venture. "Alliances that have a lot of promise are those that are performing a function that no one company can do on its own," says Dave Roushe, CEO, Comparison Markets (Solon, OH), a provider of technology that enables real-time quote comparison to online insurance marketplaces such as Insurance.com (Newton, MA). Comparison Markets was created by a partnership among Liberty Mutual (Boston), Travelers, The Hartford, Allmerica (Worcester, MA), Kemper Insurance (Long Grove, IL) and by Roushe, a former Progressive Insurance (Mayfield Heights, OH) executive.
What's the ROI?
Regardless of the alliance model, the required investment in a partnership can be substantial (as is true for any type of business venture). "The real question should be, What is the return on investment?" stresses Business Development Institute's Etzler. "When alliances are implemented and managed properly the return on investment is higher than for non-alliance activities." In fact, today anywhere from 10 to 30 percent of a company's total revenue comes from strategic alliances, he says.
Still, although the returns can be impressive, many insurers approach such risk-intensive deals with trepidation. Etzler suggests a more practical approach. "Insurers shouldn't be dissuaded by the fact that many alliances fail," he advises. Instead, he contends, "they should address why they fail."
In order to be successful, stresses Mark Parsells, chairman, CEO and president of Fusura—an online insurance marketplace formed last year by AIG (New York), Kemper Insurance and Prudential Financial (Newark, NJ)—"a partnership has to have vision and a firm grip of reality. Partners need to see the world as it is rather than what they wish it to be."
Similarly, MedUnite, a venture formed in 2000 by the country's seven largest health insurers—Aetna (Hartford), Anthem (Indianapolis), Cigna (Philadelphia), Health Net Inc. (Kansas City), Oxford (Trumbull, CT), PacifiCare (Santa Ana, CA) and WellPoint Health Networks (Thousand Oaks, CA)—was born out of a shared desire to address a "real world" problem. During meetings of the Council for Affordable Quality Healthcare the CEOs of what became MedUnite's founding members began discussions about how to capitalize on a common industry problem, according to Dave Cox, CEO, MedUnite (San Diego). "Insurers were creating Web page capabilities for physician groups or hospitals to get claims information," explains Cox. "The typical physician response was, 'I do business with 10 different insurance companies, I have to fill out 10 different forms. I am not inclined to have 10 automated systems that I do business with, as well.'" Physicians, according to Cox, want to access one Web site where they can sign on, submit claims to all insurers, check availability, get referrals approved, and get paid electronically in a standard way.
Currently, MedUnite—which operates as an independent technology firm—offers both an EDI and real-time solution. "It's flexible enough to work with physicians' current billing systems and large claims processing systems that insurance companies have had in place for years," says Cox. The system uses standard application interfaces to connect physicians and insurers to its application. The service is free for physicians. Set-up for insurers is also free, but insurers must incur the cost of individual transactions once on the system.
The founding firms are reaping the benefits of their investment in two ways, explains Cox. "Every claim that is processed, referral-handled or eligibility-checked that comes over the phone today costs between $5 and$10 for insurers," says Cox. "If done electronically, that cost can be cut in half." The founding members, which are also set up on the system, will not only reduce their processing costs but also receive part of the transaction fees that the for-profit company collects from other insurers.
Besides their original cash investment, MedUnite's founders dedicated human capital to the venture. Each of the companies originally provided personnel to build the necessary interfaces from MedUnite's system into their respective computer systems. Although it is currently run by Cox—the former president of a privately held technology company—the individual founding CEOs "contribute" a senior member from their companies to be part of MedUnite's leadership group. These executives are in charge of making sure that things move smoothly through each of the organizations. Also, CEOs of the founding members are on MedUnite's board of directors with Cox.
The use of dedicated resources—the largest contributor to the success of an alliance, according to Business Development Institute's Etzler—continues to contribute to MedUnite's success. Unfortunately, most insurers don't have an established alliance resource in-house. And, when a company does have an established team, the team members' alliance responsibilities are in addition to their actual full-time job responsibilities. "Many times the alliance isn't their only job," according to Etzler. "It tends to become their night job."
For insurers that don't have an established alliance resource, Etzler recommends establishing a group that acts as the proverbial glue among product groups. This team's focus should be on the alliance, and it should be composed of individuals with knowledge of products, marketing or distribution channels, depending on the type of partnership. These kinds of dedicated resources, says Fusura's Parsells, also need to have intellectual self-assurance in order for the alliance to be successful. In general, dedicated human capital should be prepared for three to nine months of intense focus on a partnership for the venture to get off the ground and succeed.
Once an alliance team and vision have been established, a comprehensive analysis of the companies, based on a number of criteria, is essential. Etzler suggests creating a scorecard and rating potential partners on everything from their financial stability to experience with successful partnership execution to cultural fit. "Often members of the senior executive level of a company know leaders within companies they'd like to work with," says Etzler. "It shouldn't just be about 'Who do I know in my Rolodex who can makes things happen?' It's important to put time into the partner qualification strategy process." Only after a firm has gone through this process should executives actually get out their Rolodexes and contact employees of qualified companies.
AIG's partner qualification process was born out of a need for competitive cooperation after it developed the idea for Fusura. The carrier internally established the vision for an online insurance marketplace with comparative rates, in response to the needs of a group of customers that it believed was being under-serviced. "AIG was careful about who it chose to partner with," says Parsells. "It wanted to choose companies that had a similar vision." The carrier eventually brought Kemper and Prudential onboard.
Fusura's founders believe there are customers in the insurance marketplace who prefer to compare rates and purchase insurance either online or on the phone. Although research shows that, at this stage, customers are more likely to service rather than purchase policies online, Parsells, along with his partners, disagrees. He predicts that purchasing insurance online will only become more popular as people become more comfortable with the Web.
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