Organizational Partnering Model

How can I do business with other organizations? TIAS professor of Strategic Leadership Ron Meyer presents an insightful tool to kickstart your thinking: Organizational Partnering Model.

Key Definitions

Interorganizational relations are the connections that an organization has with other parties in the industry value chain, such as suppliers, contractors, distributors, buyers, and competitors, but also with other contextual actors such as unions, governments, universities, and the media.

In the value chain, relations have traditionally been characterized as transactional (market-based) or controlled (hierarchy-based) – the actors were either independent of each other (at arm’s length) or dependent on each other (fully integrated). Between these two extremes lay cooperative relationships (partnership-based), whereby the two parties are interdependent.

Conceptual Model

The Organizational Partnering Model is a framework outlining three types of partnering, between the two opposite poles of arm’s length relations and full integration. Distinguishing these three is important as partnering is often seen as only one option instead of three. In this model, each of the five types of organizational relationships is explained, making it a useful framework to determine the most appropriate way to do business with other organizations.

Key Elements

The five organizational relationship types are the following:

1. Arm’s Length Relations. The most common relationship is the transactional one, where organizations buy or sell products and/or services with no strings attached. This approach is most appropriate when transaction costs are low, switching is easy, and there is little need for a stable, reliable relationship. Organizations can then shop around for the best deal, without getting locked into one party and becoming more dependent. The relationship is fundamentally competitive, as conditions are determined based on negotiating power.

2. Operational Partnership. Where costs associated with each transaction are higher, switching is more difficult and/or costly, and there is a need for a more stable and reliable relationship, organizations can opt to sign contracts covering multiple transactions over a longer period. Such a framework agreement usually fixes prices and conditions to prevent opportunistic behavior. However, such deals are generally time-limited and non-exclusive to avoid lock-in, while the relationship is still largely competitive and negotiated.

3. Tactical Partnership. Where parties need to jointly invest and support each other to realize a specific common goal, their relationship will need to be tighter, more trusting and long-term. As switching will be more difficult, they will need to be more committed to the joint venture, but at the same time both will want to keep their options open and not become too dependent on the other. Such a relationship is a tactical halfway house between cooperation (winning together) and competition (winning at the expense of the other).

4. Strategic Partnership. Where both sides become indispensable to each other – either winning together or losing together – they often choose to fully commit to a long-term mutually beneficial relationship. Not only does this require aligning their operations, but they will also need to coordinate their strategies, thereby moving towards virtual integration. This level of cooperation demands a high level of commitment, trust and reciprocal support, which usually can only be maintained in an exclusive or nearly exclusive relationship.

5. Full Integration. When the level of dependence on each other is high, it can leave one or both sides feeling vulnerable to the other’s underperformance, or even worse, to potential misalignment, conflict and/or self-serving behavior. As partnering is based on voluntary cooperation, the exposed side can feel they have limited power to influence the other side’s behavior. Therefore, they often prefer to take ownership of the other, so they have formal control and can integrate them into the governance structure, thus “enforcing cooperation”.

Key Insights

• Partnering is found between bachelorship and marriage. Like committed bachelors, organizations can play the field, while keeping suitors at arm’s length and remaining independent, or they can tie the knot, committing to integrating their lives for the long run. Yet, between these two opposites, there is the possibility to build a partnership, balancing the need for self-determination and autonomy with the need for cooperation and stability.

• Partnering comes in three forms. An operational partnership is a loose form of cooperation, focused on medium-term stability and predictability, almost like dating. A tactical partnership is a tighter form of cooperation around an important joint interest, almost like living apart together. A strategic partnership is a very tight form of cooperation, focused on long-term integration, like living together but without getting formally married.

• Partnering balances competition & cooperation. Organizations need to be competitive – focused on winning themselves even when it is at the expense of others. Yet they also need to be cooperative – focused on working with others to win together even when it might be at their own expense. The three partnering forms find a different balance between both.

• Partnering is harder than the extremes. The invisible hand of the market (arm’s length relations) and the visible hand of management (integration) are easier than the continuous handshake, which requires mutual understanding, trust and ongoing coordination.

• Partnering is a strategic choice. For each organizational relationship in the value chain, all five alternative forms of doing business with each other need to be considered.