Partnerships Between Online Companies and Brick-and-Mortar Companies Can Benefit Both

When Elliot Klein conceived his version of the dotcom dream, to create a lost-and-found service for laptop and handheld computer users, he believed he was filling an important market niche. And to his credit,

Klein knew he needed some big-time help.

Returnme.com?which was inspired by Klein’s losing his address book in a New York City taxi in 1998?would need capabilities such as shipping, reverse logistics and customer support. Rather than seek the capital to build all of those capabilities from scratch, the entrepreneur sought out partners that could make it happen. He formed marketing and development relationships with handheld makers Palm and Handspring to make his company’s “eTagit” retrieval service available to device buyers. And Klein struck a key deal with FedEx: Returnme.com would use FedEx’s established NetReturn delivery network to ship found articles back to customers.

After the dotcom shakeout, companies are relying on traditional business practices and focusing on actions directly tied to customer value. Executing successful partnerships represents one of those core competencies. The staying power of Returnme.com, a Web Business 50 award winner for its innovative service, is attributable in large part to its partnerships with players like FedEx that help it serve customers. Other Web Business 50 winners highlighted in this article?Lands’ End, Drugstore.com and Bid4Assets?created partnerships that support their business models while improving customer service and contributing to growth.

Partnerships are not a new strategy, but the development of the Internet created a potential for connectivity that didn’t exist before. The Web has also spawned new kinds of partnerships, such as industry consortia and online exchanges. During the dotcom boom, companies partnered constantly and often in shark-like feeding frenzies in an effort to stay competitive. In a 1999 study of deals among dotcoms and bricks-and-clicks companies, McKinsey & Co. found announcements for 13,000 e-commerce alliances. Then, partnerships were a way for companies to generate press releases and (attempt to) boost their stock prices, says David Ernst, a principal at McKinsey & Co. in Washington, D.C., and coauthor of a report titled “A Future for E-Alliances.” Partnerships were great to talk about, but talking and successfully executing are two different things. “It used to be that you could get great buzz by announcing a partnership, and companies looking to do an IPO were advised to partner with a major portal, an IT platform provider and a major e-commerce site,” he says. “Now companies have to focus on partnerships that create value.”

With a changed economic climate, partnerships have emerged as a survival tactic. In April when the Borders book chain realized its e-commerce efforts were falling flat, it partnered with Amazon.com, whose ordering and distribution channels were established. “Partnerships are Amazon’s only real life raft,” says Carrie Johnson, an analyst at Forrester Research in Cambridge, Mass. “Sales are slowing, retail is reaching saturation in many categories, and so partnerships are their saving grace.”

The Skinny on Partnerships

Partnerships can be an effective way of gaining access to customers, brands and markets that you didn’t have before. For e-commerce endeavors, they can provide a cash infusion without taking the venture capital path. But they are not a panacea.

“Partnerships can help you survive and grow and acquire new skills,” says Benjamin Gomes-Casseres, associate professor of international business at Brandeis University in Waltham, Mass., and author of The Alliance Revolution: The New Shape of Business Rivalry. “But they are not a cure-all. You cannot assume that you’ll get results just because you have partners.”

These relationships fail often and for a variety of reasons. One party may try to dominate the relationship, goals and priorities may change over time, and arguments can arise over finances. In September, Cox Communications said it would end its partnership with Excite@home, a broadband access provider, because of Excite’s financial difficulties. Ending the partnership was a “protective measure that allowed us take back control of our network and ensure quality and customer service,” says Laura Oberhelman, a Cox spokeswoman.

To launch a partnership, a CIO must first have a clear understanding of his own organization’s strengths and weaknesses, says Stephen Spalding, a San Francisco-based principal in the management solutions group at consultancy Deloitte & Touche. “You have to look at your core capabilities and focus your efforts on those,” Spalding says. “Partnerships must start with both partners knowing the other will commit resources, blood and muscle to make it work. That way, if someone messes up, they will work together to make it better.”

Collaboration Incentives

When Lands’ End launched Landsend.com in 1995, executives weren’t concerned about going public or buying Super Bowl ads. After all, the Dodgeville, Wis., company had 38 years of mail order success under its belt, and a business model focused on strong customer service. The site had revenues of $218 million in fiscal 2001, or about 16 percent of Lands’ End’s total revenues of $1.35 billion. But the Web project was more of an experiment than a strategic initiative, says Bill Bass, senior vice president of e-commerce. “We didn’t bet the farm on a big deal with Yahoo, like some companies did,” Bass says. “The business model is very important to us. The site’s growth was purely organic?we got it running, learned as we went and watched what paid off.”

What paid off were noticeable improvements to customer service. Bass says his online team is small (though he declined to say how small). So when he decided to add more features, like personalization and a product search engine to the website, he looked for help. “It’s hard for us to both come up with new concepts for the site and do it ourselves. We always need outside help,” Bass says.

In October 1998, Lands’ End partnered with My Virtual Model, a Montreal-based software company whose “virtual modeling” engine gave Lands’ End visitors a chance to try on clothes without having to order them first. The equity and affiliate marketing partnership is indicative of the company’s approach to its online strategy, Bass says. “We saw an opportunity to provide a new service to customers,” he says. “Partnerships are important to any business, but they have to be based on solid business models.” Bass’s development team worked in concert with My Virtual Model’s developers to make sure the modeling technology was placed conveniently?but not prominently?on the Lands’ End site. “At the end of the day, people come to our site to buy our clothes, not play with our partner’s technology,” he says.

Creating and nurturing a close relationship with a partner like My Virtual Model is imperative, Bass says, because such relationships are more beneficial for customer service. As a result, the company’s online partners often move in to Lands’ End offices for months at a time to ensure good communication.

The partnership is equally important for My Virtual Model, which started the relationship as a provider of custom-built Web designs. With the support and urging of Lands’ End, My Virtual Model changed its business model and became a software provider. Lands’ End executives “are true partners on many levels,” says Yona Shtern, chief marketing officer for My Virtual Model. “We know their outstanding commitment is to customer service, and our solution has to be complementary. That doesn’t happen with memos; it happens when both teams work together in unison.”

One reason the Lands’ End site has been profitable since 1997 is that company executives don’t treat the site as a new business, Bass says. “We never say that traditional business rules don’t apply, because they absolutely do,” he says.

Bass says he shoots for one major partnership a year whose contribution to the site will reset the bar on how people shop online. So far, the site as partnered with Quickdog, a provider of personalization software, and EasyAsk, a search engine. Lands’ End beta tests the new technology, and if it works, the new feature gets promoted online and in the Lands’ End catalogs. But the deal isn’t free. “We’ve made our partners successful, and we’ve given them a lot of free PR. And in return we ask for a period of exclusivity on their technology and an equity investment in our company,” Bass says.

Build A Relationship

Drugstore.com President and CEO Kal Raman puts it bluntly: “If we didn’t have partnerships, we wouldn’t exist.” When Raman wanted to know how to make the online shopping experience better for his customers, he went to a local drugstore to ask shoppers how an online version of the shop could make life easier for them. “Customers came and said they wanted the option of picking up prescriptions in-store around the country,” Raman says. “We knew we couldn’t do everything on our own, so we looked for a retail partner that could help us do that.”

In vetting potential partners, Raman (Drugstore.com’s former CTO) and his team looked for retailers that shared his company’s values and view of the industry. Prospective partners had to be obsessed with customer service. “You have to make the relationship successful for you, your partner and your customers, and you can do that only if you share a common goal, like customer service,” Raman says.

In June 1999, after scoping out the business plans, internal operations and strategies of several nationwide chains, Raman chose Rite Aid. A partnership with General Nutrition Centers (GNC) was generated at the same time.

Drugstore.com was founded on partnerships. Amazon.com, an initial investor, still owns 20 percent of the Bellevue, Wash.-based company; CEO Jeff Bezos is on the board of directors. As part of the deal, Drugstore.com gets 10 years of unlimited access to Amazon.com’s technology and distribution network. Rite Aid and GNC own 14 percent and 5 percent interest in the company, respectively. In return, Drugstore.com acts as their online pharmacy. The equity and exchange partnerships also give Drugstore.com the exclusive online rights to sell all GNC brand products. GNC and Rite Aid later formed a partnership, and Drugstore.com now has the rights to sell the Rite Aid/GNC PharmAssure brand of vitamins and nutritional supplements. Rite Aid and GNC purchased 12.3 million shares in Drugstore.com for $10 million in cash. These exclusive deals also called for Drugstore.com to share access to its customer base for resales.

By teaming up with Drugstore.com and Rite Aid, GNC was able to extend its retail channel beyond the more than 4,500 stores it operates nationwide, says Archie Isherwood, director of Internet initiatives at GNC. “These partnerships expand GNC’s customer reach and lets us offer consumers a number of options for buying our products,” Isherwood says.

These deals helped Drugstore.com stack the odds in its favor, says Rob Leathern, an analyst at Jupiter Media Metrix in San Francisco. They helped Drugstore.com overcome issues of trust and name recognition that contributed to the fall of rivals like Mothernature.com and PlanetRX.com, he adds. “You can’t just expect people to come to your website and know your brand,” Leathern says. “The problem with the Web is that it’s very difficult to get the customer to the provider. A user may look for information in a particular context online?say, for a book or a gadget?and the ideal provider will have no idea that the consumer is there reaching out to them.”

Focus On Quality

Bid4Assets, founded in November 1999, auctions the assets it gets from surplus government properties and bankruptcies, ranging from office furniture to buildings to financial instruments. The company, which expects to be profitable by mid-2002, has only 35 employees, and its network of contacts is small. Standing alone, the company’s chance for success was slim, says Executive Vice President David Marchick.

Marchick made a list of auction leaders in the markets Bid4Assets wanted to penetrate: real estate, financial, bankruptcy, liquidation and food services. His criteria were multilayered. He looked for leaders whose network of contacts, service capabilities and sales staff would benefit Bid4Assets without incurring added overhead. In addition, he wanted companies whose culture and mission fit his company’s mix of traditional and entrepreneurial endeavors. In exchange, Bid4Assets offered ties to a Web front-end and the technology supporting it.

“We wanted to partner with a leader that was more established than us and who was interested in using auction technology, but one that didn’t want to develop it themselves,” Marchick says.

The result was a partnership with Trumbull Services, a subsidiary of The Hartford Insurance Co. Trumbull handled the administrative side of bankruptcy court claims and had a vast network of contacts in the bankruptcy field. In August, The Hartford invested $4 million in Bid4Assets. Trumbull gave the Silver Spring, Md.-based company access to its contacts, and now the two companies sell bankruptcy claims on Bid4Assets’ auction site. They also partnered with SB Capital of Dallas, a leading liquidator whose sales and inventory force let Bid4Assets expand its sales capabilities.

For Trumbull, the partnership offered a way to get on the Internet without hiring a staff to develop a site. Bid4Assets had a business model that differed from every other startup Trumbull interviewed, says Lorenzo Mendizabal, vice president of the Windsor, Conn.-based company. “We looked at five or six other companies, none of which are still in business,” Mendizabal says. “There was an enthusiasm, vision and strategy that attracted us to Bid4Assets, and that energy helps us be more entrepreneurial.”

“We had done only online auctions, and we knew a large part of the liquidation business is more amenable to offline auctions,” Marchick says. “Someone in California is not going to fly to Washington, D.C., to buy 10 cubicles. Since we have only 35 people, sending 10 of them around the country to round up material made no sense. SB Capital had people all over the country who could handle inventory, live auctions and equipment removal.”

Choosing a partner based on set criteria can be difficult, Brandeis’s Gomes-Casseres says. The key is to find a partner with capabilities that match your needs and the incentive to contribute those capabilities to the union. Having more than one partnership is fine, but too many can spread a company thin and create competing interests that can distract from the business plan, he says. “Polygamy is OK, but promiscuity is not,” he says. “It’s hard enough to run one alliance well, but it gets exponentially harder as you add more partnerships to the equation.”