Sleeping With The Enemy

More companies are finding that co-opetition, or learning to work with rivals on certain projects, may be the best strategy

There's one Shai Agassi who harbors violent visions of defeating Microsoft Corp. (MSFT ) "We're both going in with swords drawn, and we're going to do battle until we win. And there's not going to be any other result. We'll do everything possible to draw blood," vows this Agassi, the top technology strategist of German software titan SAP.

Another Shai Agassi considers Microsoft his company's closest partner. This kinder and gentler Agassi fancifully traded bags of green M&M's last year with his Microsoft counterpart, Jeff Raikes, to seal a deal to jointly develop a piece of software called Duet.

Both these Shai Agassis are two sides of the same person: a U.S.-based member of SAP's executive board who oversees the complex relationship with Microsoft. "This is the beauty of being human," he says. "You can have two conflicting thoughts at the same time and not go crazy."

Finding the right formula for this kind of "co-opetition" has never been more important. Many new products, from video to financial services, can be provided only in complex packages of hardware, software, and services. By working together, such as agreeing on the Wi-Fi standard for high-speed wireless, competitors can expand the market so everyone wins. "The traditional model says you have a fixed-size pie and you kill each other for a slice of it," says Navi Radjou, a vice-president at Forrester Research Inc. (FORR ) in Cambridge, Mass. "This new vision calls for collaboration to increase the size of the pie."

Putting aside narrow self-interest for the common good sounds easier than it is. Most companies hate to yield a millimeter to archrivals. Witness the war over a standard for high-definition DVDs between camps led by Toshiba Corp. (TOSBF ) and Sony Corp. (SNE )Neither side will back down. Customers are hesitating to buy for fear of picking the standard that becomes obsolete. Everyone loses.

The trick to getting deals done is to remember the real objective, which is bigger sales and profits. That's what SAP and Microsoft did. The companies vie for sales to midsize businesses, but elsewhere they're natural partners, since each dominates a different part of the software world. Duet, their jointly developed product, allows a Microsoft spreadsheet to pull in data from an SAP accounting program. Agassi said he had to assuage concerns of SAP's reps that working behind Microsoft's user interface would undercut SAP's sales efforts. Says Agassi: "The customer base wants us to stay gentlemen, so that's what we do. We keep the competition inside a fence and don't let the blood leak out."


A simple but effective strategy for cooperating with a rival was worked out by University of Michigan political scientist Robert Axelrod. In a computer experiment, he found that the best approach is tit for tat. Start by cooperating. After that, copy the other person. If he keeps cooperating, you do too. If he defects, retaliate. To stave off a breakdown of trust, be somewhat forgiving of mistakes by the other side. Axelrod showed that by following these rules, even if the other person doesn't initially cooperate, you will guide the relationship toward consistent cooperation with a minimum of cheating. According to Axelrod, the strategy has been used by "nations, bats, birds, and monkeys."

Of course, fraternizing with the enemy is a fire-able offense if it's initiated by anyone outside the C-suite. That's why the top boss has to be 100% behind the arrangement. Engineers tend to adapt quickly and view the deal as just another technical problem to solve, but salespeople are often harder to bring around. Microsoft's Raikes says that when the deal with SAP was announced, "the salesforce said: 'How can that be? You're now partners with a company that we compete with. Does that mean we're going to back away?"' His response was that Microsoft had no intention of going easy on SAP. "People have had a hard time parsing that," Raikes says. "[CEO] Steve Ballmer and I had to step up at the sales meeting last year and take them through the idea." Red Hat (RHAT ) CEO Matthew J. Szulik had similar difficulties this summer explaining to interns why his Linux software company considered IBM (IBM ) a partner, even though IBM sells competing software and partners with Red Hat rival Novell Inc. (NOVL ) "It was an hour discussion," he says with a sigh.

Get ready to have plenty of those conversations. The power of co-opetition will only grow as products become more complex and as competition widens globally. Says SAP CEO Henning Kagermann: "Our larger customers don't tolerate vendors acting like children and fighting among themselves. There's a point where you step back from being too competitive." In other words, it's not just about bashing the other guy. "This is a different type of competition," he adds. "You focus on what you can do for the customer."

By Peter Coy

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