The Rules of Alliance

The news last week that Intel (INTC) is buying security software maker McAfee (MFE) for $7.68 billion has people buzzing from Silicon Valley to Wall Street. But another Intel deal, announced earlier this month, is what would have likely captured Peter Drucker's attention.

In that one, the Santa Clara (Calif.) chipmaker said it is forming a jointly owned company with General Electric (GE) to serve the home health-care market—the kind of arrangement that Drucker believed, even more than mergers and acquisitions, would increasingly become a recipe for "business growth and business expansion."

Drucker held that such partnerships are a smart vehicle for small and midsize businesses "to go international." As for bigger companies, he added, "they are the way to become multi-technological." Nevertheless, creating an alliance that will last for the long term is far from easy.

Tug-of-war over the Child

"These are all dangerous liaisons," Drucker warned in his 1992 book Managing for the Future. "While their failure rate in the early years is no higher than that of new ventures or acquisitions, they tend to get into serious—sometimes fatal—trouble when they succeed. Often when an alliance does well, it becomes apparent that the goals and objectives of the partners are not compatible. Each partner may want the 'child' to behave differently now that it is 'growing up.' … What makes it worse is there usually is no mechanism to resolve these disagreements. By that time it is usually too late to restore the joint enterprise to health."

The trick to making the marriage work is to abide by a handful of rules that Drucker spelled out. And by the early sound of things, Intel and GE are, consciously or not, closely following these principles. (This isn't surprising; both companies have Drucker in their blood. He advised Andy Grove, Intel's co-founder, and counseled a series of GE chief executives, beginning in the 1950s with Ralph Cordiner.)

The first two rules: "Before the alliance is completed," Drucker wrote, "all parties must think through their objectives and the objectives of the 'child.'" Just as important, he said, "is advance agreement on how the joint enterprise should be run."

Hormones in Command

These may seem like stunningly simple notions. But there is a powerful temptation for two companies that are strongly attracted to each other to rush things along, like teenagers with hormones raging. "You get impatient. You want to get moving. You're excited," says Louis Burns, vice-president and general manager of Intel's Digital Health Group, who is set to become CEO of the as-yet-unnamed new venture, which will be owned 50-50.

Often during negotiations, Burns notes, if two sides agree on nine points and are stuck on the 10th, they'll let the 10th one slide and agree to revisit it down the line, if need be. But for joint ventures, he warns, "the problem is that the 10th point will come and bite you in the backside later." According to Burns, the worst thing that Intel and GE could possibly have said to each other was, "Let's decide that after we form."

Instead, the two corporate giants hashed things out for the better part of a year to make sure everyone involved agreed on specific goals. "You don't want a Las Vegas wedding," Burns says. The companies, which had struck a looser alliance last year, even drafted a pre-nup of sorts—an accord that, in fewer than 20 pages, lays out the basic structure and governance of the new venture, provides a product road map, and identifies target markets. Even though it is not legally binding, the document has become a much-referred-to guide for both companies, helping the partners stay focused on what matters.

Only One Steering Wheel

Drucker's third rule: "There has to be careful thinking about who will manage the alliance." In particular, Drucker said, "it cannot be managed by committee." In the case of Intel and GE, there is no doubt that Burns is in charge. Everyone at both companies recognizes that "there are not two steering wheels in the front of the bus," he says. At the same time, Burns is unequivocal that his individual responsibility has to be, as Drucker put it, "to the joint enterprise, not to one of the parents."

Drucker's fourth rule is that "each partner needs to make provisions in its own structure for the relationship to the joint enterprise and the other partner." Most critical, he said, is for those in the alliance to "have access to someone in the parent organization who can say 'yes' or 'no' without having to go through channels." Burns stresses that both he and his GE counterpart, Omar Ishrak, have close ties to the highest levels of their respective corporations—but that, again, the two companies have also codified how these open lines will "survive past the personal relationships."

Drucker's final rule was that "there has to be prior agreement on how to resolve disagreements." At Intel and GE, "we weren't naive enough to think" that occasional disputes won't erupt, Burns says. So the companies have been "crystal clear" on what happens "if there are deadlocks," with certain calls in Burns's hands as the CEO and others to be made by the joint venture's board, which will be composed of equal numbers of Intel and GE representatives and be chaired by Ishrak.

In the end, Intel and GE are confident that by coming together, they can speed along the delivery of innovations that will help the elderly and those with chronic diseases manage their medical conditions from home. Yet plenty of challenges remain. The companies are not the market leaders. And neither Medicare nor private insurers in the U.S. currently offer reimbursement for home health-monitoring systems, raising questions about revenue generation.

Still, should success be realized, Burns and his new colleagues will find themselves with a huge advantage: Through thoughtful up-front planning, they've taken the danger out of their liaison.

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