Think IT Before Engaging in Strategic Alliances

Research by Sunil Mithas

IT Flexibility Increasingly Drives Effective B2B Partnerships in Era of Cloud Computing and Big Data

Major deals can fall apart when IT systems are inflexible, and the implications are significant for firms' strategies and competitive performance.

IT-incompatibility contributed to Santander Bank of Spain canceling a deal in 2012 to buy 316 retail-banking branches from the Royal Bank of Scotland. Years earlier, Amtrak’s mainframe system proved inadequate to integrate with, and tap into, third-party booking websites.

Such lessons now are magnified by the emergence of service oriented (software) architecture (SOA), and subsequently, cloud computing with its fast track to lucrative, strategic alliances. “In this highly digital age, organizations rely increasingly on Internet-based or computerized products and services that require the simultaneous cooperation of multiple organizations,” says Sunil Mithas, associate professor of Information Systems, whose new research confirms flexible IT systems are increasingly vital to strategic alliances between companies.

“Broadly speaking, flexibility in IT architecture matters for a firm's corporate and competitive strategies,” he says. “Amtrak learned this lesson the hard way, and Mohawk Fine Papers Inc., leveraged it to quickly form hundreds of digital business-to-business partnerships. Lufthansa, for its part, created a common platform with Star Alliance partners, something that would have been impossible with Lufthansa’s old legacy systems.”

Moreover, an organization can flourish in any type of partnership if the firm is functional in three distinct dimensions of IT flexibility, as identified in Mithas’ findings.

Mithas and co-authors Ali Tafti (University of Illinois) and M.S. Krishnan (University of Michigan) studied the structures and market-to-book ratio values of firms in 3,129 strategic alliances over seven years (2000-2006). These partnerships involved 169 U.S. manufacturing and servicing firms in the Fortune 500 and Fortune 1,000. The results demonstrate IT-enabled flexibility in the context of three optimal system-partnership combinations:

• “Open communication standards" with “arm’s-length” alliances
• “Cross-functional transparency” with “collaborative” alliances
• “Modularity of IT architecture” with “joint-venture” alliances

Lowes-Formica, BioProgress-Wyeth and Quest Diagnostics-Enterix exemplify effective arm’s-length alliances, essentially agreements to sell or exchange services to the extent of sharing information or license rights. These companies utilize open communications standards – typically XML language – and take advantage of minimal need to invest in their information systems. This allows for greater freedom to quickly form and disband partnerships as the market dictates.

Such freedom doesn’t apply in the more complex “collaborative alliance” between Sprint and Sun Microsystems to capitalize on the smartphone-Internet evolution. Through this partnership – characterized by cross-functional transparency of joint design-development and-or recombining products and services – Sun has sought to function as a preferred technology provider within the Sprint E. Solutions Internet Center infrastructure to help drive sales.

The third combination, “modularity in joint-venture alliances,” encompasses “arms-length” and “collaborative” elements while hinging on substantial integration and reconfiguration to meld both firms into a single, new entity. Therefore, “operating your information system with modularity – in other words, independently functional components – is a cost-saver to the process,” says Mithas.

The 2002 Hewlett Packard-Compaq merger was pioneering for the IT world, but also flawed and a lesson for using IT flexibility to explore strategic synergies before closing a merger. “The HP and Compaq managers struggled to integrate their operations mostly due to their complex and disparate IT environments,” Mithas says. “Ultimately, they were unable to generate synergies on a strategic level.” The merger, he adds, “could have been more effective had they first explored and tested their strategic synergies as alliance partners.”

Summarizing his findings, Mithas says service-oriented view of IT services and cloud computing are revolutionizing the traditional approach to strategic alliances between businesses. “Partner-seeking companies traditionally have prioritized the cultural and management structure compatibility of a prospective counterpart ahead of explicitly weighing whether they can integrate their IT systems –– a factor now more critical than ever as customer-facing applications often and simultaneously draw real-time information from several companies.”

“The Effect of Information Technology-Enabled Flexibility on Formation and Market Value of Alliances” is published in the January 2013 issue of Management Science. For more information, contact smithas@rhsmith.umd.edu.