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The Scary Business of Partner Due Diligence

Written by: Sarah Gerdes

Article Overview: If you were buying a car, you would expect two things. First, the car would be fully functional and second, the car dealer would run a credit check before financing a loan. This is a simple example of the bi-directional due diligence process that most individuals encounter many times throughout their life. It is nearly identical to the due diligence that takes place between companies considering the formation of a partnership, up to and including the credit report! But be it a car or a partnership, the point of conducting Due Diligence is to protect both parties from making a potential mistake. This article identifies why due diligence is necessary and get the most out of the necessary process.

The Scary Business of Partner Due Diligence

Enter the Technical Team
Small, unproven firms or new business units of a large, multinational share the common challenge of proving a product is works. Due diligence starts when a product manager from the Potential Partner Organization (PPO) has agreed to the market and business opportunity that has been presented. Now its time to verify that what has been presented can in fact, be accomplished. Once done, an opinion will be offered to the business team that is more like a verdict about moving to the contractual phase.

The product team will first want to have a technical discussion or meeting. The purpose of the first meeting is to descend into a structural conversation about the how’s, why’s and what it’s of a product. During this first meeting, attendees will usually play out what if scenarios. This is known as white board sessions, and woe be to the team that is not equipped with the personnel to have a dynamic (read boisterous, and sometimes confrontational) conversation.

It is during this first meeting that any short-term changes required to either organizations product(s) necessary for the partnership to occur are typically raised. This can be as simple as the requirement to complete and gain product certification, or as complex as a complete recreate of your (or their) product lines. Most technical due diligence sessions for strategic partnership have outcomes somewhere in the middle—the product neither has to be entirely recreated, but it wasn’t a slam-dunk in an out session.

Product Collaboration and Proposals
Assuming changes to the product need to be made, the second step in the process is to develop a plan that addresses the requirements. This is usually done in a collaborative fashion with the potential partner. Imagine sit-down meetings where you brainstorm about product futures, list pros and cons, and then return to your own internal group for input and consensus. This gives supporting players on your own team a stake in the outcome. If they feel included in the process, they will likely feel obligated to make the outcome a success.

While the internal team reviews the objectives and potential paths for delivering the necessary changes required by the PPO, the product manager (or yourself) sets out to unearth the specific costs associated with the effort. By monetizing the ‘cost of the partnership’ at this early stage, two things happen. First, the partner manager becomes familiar with attaching dollars to every aspect of the potential partnership. Second, the effort sets the stage to negotiate a joint development agreement when the final proposal is accepted.

The Home Stretch
The final part of the technical due diligence is the kick off the product development work as a formal ‘track’. As soon as the product development track is underway, the promotional machine kicks into gear. The best way to ease into a marketing effort is begin with the essentials. Construct either a third party or a joint press release, the first which is more common than the second in an early-stage partnership. A third party is easy to write and get through the system, since the cost is low as are the requirements on the partner—usually only a quote. Unfortunately, thousands of these are posted a day, and the resulting publicity can be a whimper. Joint press releases are more involved, usually taking more time, money ($2,500 is the average cost to a large company), but have a much more significant impact on the community. In support of either activity, the firms can engage in joint press campaigns via phone or in person, joint customer briefings, or holding and speaking at each others’ internal sales and marketing training events.

Tips for Accelerating the Process

One way to eliminate speed up the Due Diligence process is by reviewing any testing and certification site of the intended partner before the discussions occur. Most large firms post requirements listed for the basic types of partnerships. Doing this will save lots of time up front if it’s confirmed that the requirements are too far out of reach for your present state.

Another way to accelerate the process is to anticipate the list of desired features before the first meeting. Expect that both parties will have suggestions for changes to the other companies’ product. This is the mating dance played to come closer to the middle. Some may be ‘wants’ while others are ‘musts’. Be sure to:
? Request a ranking of the wish list so it can be prioritized against your own product and partnership objectives and considerations
? Understand the logic behind the request. What are they really trying to accomplish? This will help you understand if an easier, less costly way of achieving the same thing can be managed

More information on Technical Due Diligence can be found in Chapter 5 of Navigating the Partnership Maze: Creating Alliances that Work (McGraw-Hill 2002).

* Originally printed in Software Association Magazine of Oregon.

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