Originally published by Ben Gomes-Casseres on Harvard Business Review
When I hear that two CEOs are striking a deal in part because they get along well personally, I cringe. Of course, good personal rapport can help you see opportunities in working together and can get a complex deal done. And when finding business partners, managing the inevitable unforeseen circumstances is essential. But, don’t rely on chemistry — particularly if that chemistry is between only a few of the principals involved — in deciding and managing a major deal. Even trust is an unreliable foundation when it is held by individuals and not supported by broader organizational interests.
One large research organization experienced the danger of CEO chemistry firsthand. I heard the story after the fact, when a key alliance had failed. The opening of the story was already ominous: the companies began talking and found common ground because a scientist from the would-be partner firm had joined the research organization. True, that is how the idea for a deal may first arise. But in this case, it was the main reason for the in-depth conversations that followed, with little if any analysis of alternative partners.
In these discussions, the CEOs indeed hit it off swimmingly. There were full-court-press visits to each other’s headquarters, and deal details were worked out rapidly. The research organization promised to invest in special research over several years to develop the technology needed to combine with that of the partner firm, which was to employ this technology in its own product line. And that product line was a top priority of the partner’s CEO.
Work started, investments were made . . . and then the partner firm’s CEO was replaced. Why the executive left is immaterial and unrelated to the project. But the new CEO had different ideas, and the former top-priority product line was scrapped. What’s worse, because the organizations had relied so much on the personal commitments of their leaders, their contract did not call for reimbursement or other arrangements should the product be dropped. The possibility of a divorce like this had just not occurred to anyone— the couple had been so much in love.
I’ve seen many variations on this story. One US industrial company worked well with its Japanese partner because of a key alliance leader who spanned the bridge. As an American living in Japan, he opened doors back home for the Japanese firm, smoothed conflicts, and put out brush fires on both sides. His success led him to a promotion up the ladder in the US firm, leaving the partnership without a full- time godfather. Again, the partners did not have a broad contractual or organizational process to manage their relationship, as it had depended mostly on the excellent personal touch of one man. After a few years, as new competitive stresses arose on both sides of the Pacific, the partners found themselves in conflict in China’s new market, and the alliance eventually disbanded.
How do you look beyond chemistry, trust, and the personal rapport of a few key players when finding business partners? Granted, finding business partners or an effective merger requires sensitive, personal effort on your part to select a business partner and maintain the relationship. But you also face difficult analytical, legal, and management work. You need to turn every stone and ask tough questions when finding business partners. This critical approach may seem like bad relationship manners in a strictly personal sphere. It’s not in business. It’s good practice.
Here are some ways to make sure that you make the right match and sign a productive contract:
- Ask yourself questions that might seem disloyal if raised at the actual negotiating table. How have the partners behaved previously with partners similar to you? What other options do they have or can they develop? What factions inside their organization may militate for or against your relationship?
- Evaluate carefully the partner’s true resources and capabilities. Your evaluation may include external analysis by independent parties. Legal clauses seldom protect against a partner simply not having what you thought they did.
- Explore options with alternative partners. Engaging in multiple negotiations may be touchy or ruled out by an agreement. But even then, you can evaluate those options in your internal analysis. The lack of a serious evaluation of alternatives is a sure sign of a poor partner search.
- Protect yourself through the legal terms of the deal by building in concrete mechanisms for joint governance. A personal touch, good intentions, and enthusiastic teams are never enough. These need to be supported by a clear division of rights and duties, effective communication channels, and good escalation procedures, just in case.
- Trust your partners, but only after you structure the relationship and set up good management practices. By itself, trust is not reliable, and too much trust can be counterproductive. Your trusted personal counterpart may leave, or circumstances may change to make commitments costly. But you can manage the relationship to ensure good communication and encourage mutual forbearance and reciprocity.
- After the deal is signed, expect your partners to pursue their interests and use their leverage. Their self- interest may drive them to do something surprising, no matter what is said in the courtship. You may be pleasantly surprised later by your partners’ forbearance in your favor, but you shouldn’t be surprised if they pursue their own strategic interests.
This kind of analysis is an antidote to blind-love syndrome. Acting in this way is not disloyal at all. It ensures that you will have a good understanding of your partner, which in turn enables you to negotiate and manage a more productive combination when finding business partners. Ultimately, serious business partners will respect your serious due diligence work. And you should expect it of them.