Strategic alliances: the silver bullet to recover and thrive in the new normal
Part 1: Four characteristics that make strategic alliances irresistible
The past 18 months have been unprecedented in many ways. The resilience of companies has been tested, while the pace of technological disruption and digitisation have accelerated. For example, Deloitte’s survey of insurance companies found that 79% of respondents believe the pandemic uncovered shortcomings in their company’s digital capabilities and transformation plans.
At the same time and in particular in financial services, digital customer engagement has been turbocharged with increasing digital adoption across products and demographic segments. Not surprisingly, many companies are looking to accelerate digital transformation to keep pace with changing customer preferences and to manage increased cost pressures through technology-enabled solutions. But how can they do this?
In interviews we conducted with Swiss-based financial services M&A and Corporate Strategy executives, a strong consensus emerged that strategic alliances, like joint ventures, will play an important role in accessing those capabilities. This view is supported by our recently published CFO survey. Almost half (46%) of the CFOs surveyed in Switzerland are thinking of pursuing strategic alliances with corporate peers and ecosystem start-ups.
In our two part series on ‘Strategic alliances: the silver bullet to recover and thrive in the new normal?’ our goal is to explore in part one how today’s business context influences the attractiveness of strategic alliances and in part two introduce our five success factors to harvest value from strategic alliances.
Part 1 - Four characteristics that make strategic alliances irresistible
Almost half of Swiss CFOs are thinking to pursue strategic alliances. Financial services executives we interviewed are similarly enthusiastic. But why and should you be as well?
Among the M&A and Corporate Strategy executives of Swiss-based financial services companies we talked to for this article, a strong consensus emerged that strategic alliances will gain in importance as an element of corporate strategy.
The executives highlighted that in a context of rapid digitisation, including the increasing importance of marketplaces, platforms and ecosystems in the distribution of products, strategic alliances can offer a fast and sometimes less risky access to assets and intellectual property compared to ‘build’ or ‘buy’ strategies.
In this first part of our series on ‘Strategic alliances: the silver bullet to recover and thrive in the new normal?’ we explore how in today's business context, strategic alliances (‘to partner’) have grown in attractiveness at the expense of organic growth (‘to build') and traditional M&A (‘to buy’). We find four characteristics that stand-out:
- Strategic alliances often provide fast and sometimes less risky access to assets and intellectual property, particularly in areas that fall outside an organisation's core competencies;
- In sub-sectors with high valuations, strategic alliances can be a way for acquirers to access capabilities and growth platforms without having to overpay for targets by allowing sellers to participate in future value creation;
- Strategic alliances allow to go beyond a simple supplier relationship with existing providers, to develop services or solutions in partnership. This is particularly important in areas where customer experience is key for success; and
- Strategic alliances lend themselves naturally to achieving the scale needed to create a viable marketplace or ecosystem.
These four characteristics will help Corporate Strategy and M&A departments better understand for which strategic ambitions strategic alliances offer an advantage over organic growth or traditional M&A.
The four characteristics
- Technological disruption is leading to the disaggregation of value chains in the financial services sector, by reducing barriers for new niche entrants. It is also blurring traditional industry boundaries, in particular between technology and financial players.
- This puts strong pressure on traditional financial services players to stay on or ahead of the curve of technological progress and innovation, while avoiding costly mistakes.
- Strategic alliances allow companies to make bets on multiple products and technologies rather than ‘putting all their eggs in one basket’, thereby reducing the risk of missing an important technological breakthrough.
- Sourcing solutions through strategic alliances often offers a faster deployment to the market compared to internally-developed solutions.
Our venture investment strategy focuses on start-ups that also have the potential to advance our digital offering. Furthermore, we want to bring some of that venture capital/portfolio mind-set with its ’fail fast’ philosophy into other parts of our organisation, to encourage innovation also in the core business.
– Insurance executive
- In certain industry sub-sectors with significant growth potential and scalability (like electronic payments or fund platforms) acquirers have difficulties finding suitable targets at reasonable valuations. Sellers, understandably, demand a high premium for such growth potential.
- In such instances, a strategic alliance can be the silver bullet, as it allows the acquirer to access capabilities and growth platforms and the seller to participate in future value creation. The transaction can be structured such that the purchase consideration is primarily paid in shares of the acquirer (so that the seller becomes a substantial minority shareholder in the acquirer’s business).
- Therefore, in fast-consolidating sub-sectors, the value of the acquirer’s shares as an ’acquisition currency’ has become a pre-requisite for being a credible consolidator. This puts diversified or non-listed corporates at a relative disadvantage compared to specialised listed players or private equity-backed companies when competing for acquisition targets. At the same time it creates strong incentives for diversified corporates to partner up with credible sub-sector consolidators.
Electronic payments and fund platforms are just some examples of sub-sectors that are fast growing but also fast consolidating, with high valuations. SIX Group’s disposal of its cards business to Worldline, and Credit Suisse’s disposal of CS Investlab to Allfunds, are both examples of partial exits by diversified FSI groups whilst retaining the ability to benefit financially from further consolidation. The fact that the seller ultimately remained a customer of the disposed business is likely to have further increased the attractiveness of ’paid in shares’ disposal proceeds.
– Indrek Luuk, Deloitte Partner
- With entire customer relationships taking place online, off-the-shelf solutions no longer provide the required differentiation. In particular, financial services providers need to adapt to changing customer preferences towards digital channels and close gaps in offerings in a cost-effective way.
- Particularly for areas where services and solutions are central to the entire customer experience, elevating an existing supplier relationship through an alliance and co-investing in tailored solutions may provide a competitive edge and be the basis further joint innovation.
We decided to create a strategic alliance with the provider of one of our trading platforms not only because we like the product but also because we believe in our partner’s ability to innovate. Having an equity stake in our partner sends a strong signal to the market about our commitment and secures us a seat at the table when strategic decisions are made.
– Bank executive
- Technology is enabling not only innovation around the functioning of existing markets, but is also creating new marketplaces for new asset classes.
- One of the manifestations of this trend is the increased importance of marketplace/ platform/ecosystems models in financial services that promise a more scalable and cost- effective client service and a better client experience.
- Strategic alliances lend themselves naturally to achieve the scale to create a viable marketplace, offer new value-adding services to customers, and create a better customer experience.
The B2B broker platform SOBRADO is a great example of a marketplace where insurance companies and brokers have partnered to digitise the value chain for the benefit of all market participants. The ownership of SOBRADO is open to its business users, so everybody can participate in the financial value.
– Insurance executive