Making Revenue Sharing And Cost Savings Deals Work – Sharing Means Caring

Barney During the height of the dotbomb bubble, numerous companies struck Barney deals. These spurious partnerships had no substance and were initiated for the sole purpose of sending out a press release. They were dubbed Barney deals because the structure of such relationships was so lightweight that the underlying agreements merely affirmed the companies’ mutual affection, as articulated in Barney’s theme song, “I love you, you love me. We’re a great big family.”

Despite the pathetic nature of Barney deals, the big purple dinosaur offered sound business advice to entrepreneurs in a TV episode entitled, “Sharing means caring.” Barney realized that caring entails a willingness to share the risks and rewards associated with a mutually advantageous relationship. Leverage the purple dinosaur’s wisdom and seek business partnerships which are based upon sharing the results, as opposed to deals in which one party trades their money for promises.

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Hotcakes

Sharing changes the dynamic of the sales process. Instead of convincing someone that they should give you their money based upon your promises, sharing relationships directly align both parties’ interests. This congruence greatly reduces the friction of the sales process while strengthening the integrity of the relationship.

When you pitch a sharing relationship, it is not in your best interest to make promises that you cannot fulfill. A sharing relationship requires both parties to carefully vet the potential value of the partnership up-front.  It allows them to avoid the opportunity costs of entering into an agreement that does not yield adequate revenue or cost savings to justify the time and resource investment.

When Sharing Works

“Trust, but verify” - Ronald Reagan, Former US President

The following characteristics are generally present in effective sharing relationships.

Measurable – If you cannot measure the results of your efforts, you will be unable to determine the appropriate amount of revenue or cost savings to be shared. Establishing mutually agreed upon and readily measurable metrics up-front are essential to creating viable sharing relationships.

Significant – In order to justify the opportunity costs associated with entering a sharing relationship, each deal must have the potential to make a material impact on both parties. If only one party is benefiting in a meaningful way, it is unlikely the relationship will be self-sustaining.

Joint Skin – Both parties must commit resources (e.g., personnel, money, management focus, etc.) to the partnership. If one party does not make a meaningful investment in the relationship, there is a risk that they will not apply the resources necessary to optimize the outcome.

Baseline – In most cases, a baseline must be established from which future improvements are measured. If you intend to grow an existing revenue stream or reduce existing cash outflows, a mutually agreed upon point from which the improvements can be measured is paramount. Obviously, if the incremental revenue is derived from an entirely new source, there is no need to establish a baseline.

Controllable – You must control the processes by which revenue will be generated or costs will be saved. If the results are primarily contingent on your partner’s performance, you should consider structuring a conventional, non-sharing relationship.

Trust – Companies which have a distrusting nature are generally poor candidates for sharing relationships. Even if you are able to convince the distrustful partner that sharing costs savings and/or incremental revenue makes sense, their distrusting nature will likely sabotage the relationship in the long term.

Creativity– Some Big Dumb Companies struggle with sharing relationships. The reporting requirements and unpredictability of such arrangements can overwhelm companies which lack creative thought. Rather than trying to shoehorn creatively-challenged companies into sharing deals, offer them a substantial flat fee. If they accept, you will be rewarded. If they reject a flat fee offer, then you are probably better off seeking sharing relationships with more inventive companies.

Revving Up Shared Revenue

At RevUpNet, an online marketing agency which I co-founded and at which I currently act as an Advisor, we partner with our clients and share the revenue which we help generate via affiliate network management, keyword search and performance-based ad purchases. We are closely in sync with our clients as both parties are rewarded based upon the results we jointly achieve.

As discussed in Beware The Consultant, startups cannot afford to trade their money for promises. If a consultant really believes that they can make a meaningful impact on your business, they should be willing to share in that impact, rather than requesting that you pay them, irrespective of their results.

Share The Pain And The Gain

Sharing relationships are not exclusive to sharing revenue. You can also establish highly lucrative, performance-based relationships by sharing costs savings as well. In some cases, you can share both the pain and the gain.

In the mid-1990s, Imagitas approached the US Postal Service with a unique proposition. They offered to manage the printing and distribution of the change of address forms distributed by the Postal Service in exchange for including ads relevant to people in the process of relocating. Although it took years to convince the Post Office bureaucrats to enter into this novel arrangement, it ultimately saved the Postal Service millions in printing and distribution costs, while generating tens of millions of dollars in incremental revenue.

Love is NOT All You Need
No Love
As everyone who has ever consummated a meaningful, mutually advantageous relationship knows, it takes more than love to sustain the parties over the long term.

Use The Bro Factor to establish professionally intimate relationships with your partners. However, never allow your Bro-based sharing deals to become Barney deals. I may love you and you may love me, but we ain’t no family if we are not sharing the results of our collaboration.

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John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses.
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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.


Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.





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