Strategic Alliance Magazine Q1 2021 - 52

FUNCTIONAL INEFFICIENCY

As in the story of Goldilocks and the Three Bears, the key is to
find a ratio of risk to inefficiency that is " just right. "

Relationship Between Inefficiency
and Risk
When an alliance is created, some of the risk held by each
party prior to signing an agreement is converted into three
basic (and manageable) categories: human risk, business risk,
and legal uncertainty. Reducing or increasing alliance inefficiency changes the risk profile of an alliance.
To illustrate the point, here is an example: It is possible to reduce
legal uncertainties by creating layers of process within the alliance. Extensive educational programs, testing, checklists, and
management approvals can be implemented at each level and in
every part of an alliance. While these processes would certainly
reduce risk, they would unnecessarily increase alliance inefficiencies. On the other extreme, one could hire smart employees
and provide absolutely no training or guidelines, thus producing a highly efficient but extremely risky alliance environment.

In many cases, value is squandered by allowing alliances to
become more inefficient than they need to be. Working with
someone else is always less efficient than working alone;
however, working with someone else can be much more effective. The key to keeping an alliance in a value-producing state
is to optimize risk and inefficiency at the places that produce
the most value for an alliance. The graphic to the right depicts
the FIT zone that represents an optimal balance of risk and
inefficiency in an alliance.
The best alliance managers locate inefficiencies by studying the
categories of human risk, business risk, and legal uncertainties associated with the contract. They focus their constrained
resources on the areas that have the potential to produce-or
destroy-the most value.

LEGAL UNCERTAINTY

BUSINESS RISK

HUMAN RISK

Uncertainty associated
with the legal requirements
and obligations from a
governmental, industry, or
company practice perspective
on each or between the
companies involved in the
alliance, including suppliers
and individuals responsible for
implementing the agreement.

Risk associated with the
business obligations, value
expected, and operational
execution of the contractual
terms between the companies.

Risk responsible for
implementing the agreement
associated with the
relationships between the
companies and the individuals.

3 Types of Risk
Total risk = (Business Risk + Legal Uncertainty)

52

Strategic Alliance QUARTERLY

| Q1 2021



Strategic Alliance Magazine Q1 2021

Table of Contents for the Digital Edition of Strategic Alliance Magazine Q1 2021

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