The Importance of IT-Enabled Flexibility in Alliances

Though strategic alliances have always been important, they are arguably more critical now than ever before. In this highly digital age, organizations rely increasingly on Internet-based or computerized products and services that require the simultaneous cooperation of multiple organizations. Customer-facing applications often draw real-time information from several companies at the same time. Research and development (R&D) collaborations often require integration of data across organizational boundaries. And inventory-management systems frequently link multiple companies in a supply chain.

Through strategic alliances, companies often codevelop products, jointly develop new information systems and share technical or managerial expertise. While managers give significant attention to cultural, marketing or product synergies in strategic alliances, information technology (IT) usually receives much less attention. This is myopic, since, according to our research, IT can play a significant role in determining whether a partnership will be fruitful.

More specifically, our research has shown that flexible IT systems can serve as enablers to successful partnerships. On the flip side, when IT systems are inflexible, they can create serious obstacles to beneficial partnerships. For example, several years ago, Amtrak intended to make online reservations and tickets available to third-party travel sites. But setting up connections to its old mainframe systems proved to be too difficult for its partners. Eventually, Amtrak modernized its systems with a service-oriented architecture (SOA), which can be accessed through open communication protocols over the Internet.

More recently, Santander Bank of Spain cancelled its deal to buy 316 retail-banking branches from the Royal Bank of Scotland (RBS), in part because of incompatibilities between their IT systems. The lesson: Major deals can fall apart when IT systems are inflexible.

One key to making IT infrastructures more flexible — as Amtrak found out — is SOA adoption. And Amtrak is not the only example. Lufthansa, for its part, leveraged SOA to create a common platform with Star Alliance partners, something that would have been impossible with Lufthansa’s old legacy systems. Mohawk Fine Papers Inc. (MFP) used SOA to quickly form hundreds of digital business-to-business (B2B) partnerships; the SOA adoption allows pricing information from multiple suppliers to appear instantly whenever MFP clients wish to place an order.

Dimensions of IT-Enabled Flexibility

Broadly speaking, SOA is what matters. In our research, we attempted to drill down even further: We identified three dimensions of IT flexibility, all of which enable SOA and will, we believe, play a vital role in the adoption of cloud-based information systems. In short, if you want your IT systems to be flexible enough to foster a wide array of strategic alliances, then the following three dimensions must be integral to your IT infrastructure.

1. Open communication standards, which are based upon common understanding of the format and structure of information to be exchanged among business partners. Extensible Markup Language (XML) falls under this category, because it is widely adopted and well documented and is the basis for many open industry standards.
2. Cross-functional transparency, which ensures that capabilities are widely deployable, visible and accessible across different functions of the organization.
3. Modularity, which enables the company to define atomic, fine-grained units of functionality that can be easily disaggregated and recombined into new combinations of services or business processes. Can potential partners seamlessly mesh one or multiple parts of your IT infrastructure into their systems? If so, then your system possesses modularity.

How IT-Enabled Flexibility Affects Alliance Formation and Value

Our identification of these three dimensions comes from a study of 3,129 strategic alliances — formed by 169 companies that are publicly listed in the United States — over a seven-year period (2000-2006). We focused on three types of strategic alliances and examined the role of IT-enabled flexibility in the formation of these alliances. (The detailed results of our study were published in the January 2013 issue of Management Science.)

Why did we focus on three types of strategic alliances? Mainly because not all partnerships are created equal. Some partnerships involve bilateral investments. Other partnerships involve only the sharing of information. So it was our aim to compare the effects of IT flexibility on different types of alliances: arm’s-length, collaborative and joint-venture alliances. In addition to examining qualitative insights in these three types of strategic alliances and how IT flexibility can ease alliance formation, we also looked at the issue of company performance quantitatively: We studied how flexible IT architecture enhances the effect of the alliances on company value, which we measured as the ratio of market value over book value (also known as Tobin’s q). Here’s what we learned.

1. Arm’s-length alliances involve an agreement to provide, sell or exchange a service. Companies might share information or license rights to a product, but arm’s-length partners do not jointly develop, integrate or recombine their processes or capabilities. We found that the adoption of open communication standards helps with the formation of these loosely coupled alliances. Moreover, open communication standards have a positive effect on the value that companies derive from arm’s-length alliances. Open standards reduce the need for investing in information systems that tie alliance partners down into long-term investments, freeing them to form new alliances with the knowledge that an alliance can be disbanded quickly when it has run its course.
2. Collaborative alliances involve the sharing of company-specific or tacit knowledge, such as in joint design or development, or recombining products and services. We found that cross-functional transparency has a positive effect on the value that companies derive from collaborative alliances. Collaborative alliances involve greater sharing of tacit knowledge and coupling of business processes, which makes them more difficult to form than arm’s-length alliances. They also present a greater challenge in detecting new opportunities for value creation, which is where cross-functional transparency can be particularly helpful.
3. Joint ventures share features of both arm’s-length and collaborative alliances. They resemble collaborative alliances in that they involve bilateral investments in capital, technology and company-specific assets. However, they are distinguished by their basis in joint equity, or joint ownership, in the formation of a new business entity. We found that modularity reduces the cost of reconfiguring business processes, which is important in joint ventures, since their creation of new business entities requires substantial integration and reconfiguration of processes.

Overall IT-Enabled Flexibility and Company Value

We also studied the effects of overall IT-enabled flexibility, as a combination of open standards, cross-functional transparency and modularity. Our results show that overall IT-enabled flexibility leads to greater value derived from all three types of alliances, whether arm’s-length, collaborative or joint-venture.

One surprising finding was that flexible IT shows a greater role in deriving value in collaborative alliances than it does in arm’s-length alliances. To be sure, arm’s length alliances require flexibility to create inter-company linkages. But flexibility is even more important in collaborative alliances. As company operations become increasingly digitized, overall flexibility of IT infrastructure can enhance the sharing of complex and tacit knowledge, or enable the reconfiguration of products and services — all of which are the bases of collaborative alliances.

In summary, our research suggests that IT-enabled flexibility is a critical capability in navigating a wide range of partnerships. And it is our belief that the emergence of cloud computing as an option for enterprise IT can enable new levels of flexibility in the context of interorganizational partnerships. Historically speaking, companies have often been restricted to the silo systems within their enterprise. This was certainly true for the strategic alliances during the seven-year period (2000-2006) that we studied. In the current era, however, we believe that companies will be better able to leverage cloud-computing resources, particularly in the context of interorganizational partnerships, if they have sufficient flexibility in their own IT infrastructures.