Risk-Reward Partnership – Some Key Attributes

Risk-Reward Partnership – Some Key Attributes

Risk-Reward (R2) partnership has caught on to be among the key discussions in the Global IT services business – more so in the Engineering and R&D services wrt technology and product companies. Having implemented this over the last couple of years with several companies across many products, there are certain key attributes of this model for it to be strategically successful for both – the customers and the Service Providers (SP).

R2 is led from a business alignment perspective between both parties. It is about pushing the envelope on accountability, maturity and trust. It involves much higher level of business, operations, program, governance and product accountability from all stakeholders, as the only win-win side is to improve the market position of the product thereby increasing revenue / profit for the customers and reward for the SPs. It also needs significantly higher level of maturity and trust. Its not a typical vendor-supplier relationship. R2 has the ability to drive true business partnership.

For SPs, its about taking the upstream journey to move away from low hanging fruits of pure-play services to delivering a product(s) that creates new opportunities for customers, expand their business, create avenues for expanding market share etc. Increased value is another key attribute that’s critical to the success of this model. SPs should only engage in R2, if the market, Industry and products are core to their technical competencies and they can increase the value of the products. R2 is not only a financial business model, its about expanding the eco-system thru effective product management and improved solutions.

R2 is about leveraging the balance sheet to create investment strategies and ensuring that there is a good match between both parties on a long term basis. Since this model requires upfront investment from SPs – the duration of these relationships are much longer than the traditional services contracts. It also need alignment to the strategic goals of both the companies with appropriate returns on investments which needs to be substantially higher, in light of the nature of R2 based relationship.

It’s also about strong cultural, ways of working and executive alignment (right upto Board and C level)  to ensure that there is enough openness, trust and faith among the stakeholders that can deal with changing business conditions. As in real world, they do change.

It’s about change management for both parties. It’s no longer an input based relationship, where SPs get paid based on a capacity deployed. It’s not only about delivering to specs but about the success of the products in the market place. True R2 would mean that compensation is linked to the success of product and sharing revenue / profit based on the same. SPs need to manage their own internal processes to adapt to R2 model. You cant run this model with a mindset or tools that’s used to deliver routine services engagement. At the same time change management is equally applicable for the customers as well, they cant be micro-managing the projects, they have to share product roadmaps, discuss product strategies, talk about new market potential. R2 has the potential to scale up the relationship maturity many times over thru increased collaboration, contribution and governance.

Not every opportunity would lend itself into an R2 model. Remember there are two Rs – risk and reward, and they go must always go together. True and long term win-win partnerships are created only if both parties realize and practice ways to grow the business thru R2 ; as that’s where the synergies are higher to succeed. If the opportunity is predominantly about cost containment, R2 is not the right model as eventually it will go into a win-lose quadrant and business alignment will not match.

There is a natural alignment for R2 as a model towards products that generate hard dollars, which can be un-ambiguously measured (audited) and if implemented correctly it has the potential to create a solid foundation for a long term business partnership.