Setting the ground rules for engagement in business collaborations

The traditional business strategy is the competition strategy whereby competitors try to outdo one another.

However, there is a growing trend where businesses opt to partner instead of competing to reap the benefits derived from mutual collaboration.

One way of collaboration is through a memorandum of understanding (MoU) — an agreement between two competitors setting the ground rules of how they will collaborate.

It sets out the objectives and the intentions of the two partnering competitors. An MoU is important because it helps the parties have a mutual understanding of the collaboration relationship.

Informal collaboration occurs frequently between competitors.

However, there are a lot of risks that both parties face in the absence of legal documentation to guide the relationship.

Most of the disputes occur due to relational when roles and responsibilities are not set out. They may also be attributed to a lack of clarity.

An MoU is one of the documents collaborating competitors can consider to minimise risk.

For the MoU to work, the collaboration areas ought to be clearly defined. This will minimise misunderstandings and disputes as a result of a lack of clarity.

This will help the parties to avoid overstepping the set boundaries. An MoU will also help define the roles and responsibilities of each competitor in the arrangement.

There are many types of MoUs. Here I give a few common examples I have come across.

One type is a collaboration between competitors that occurs when jointly purchasing raw materials or other goods from suppliers.

This is especially so where the competitors are importing goods from the same supplier. At times, it may be worthwhile to collaborate with your competitor to reduce importation and other attendant costs.

The advantage of such an arrangement is that the competitors benefit from economies of scale and have greater bargaining power.

A second type is where competitors jointly seek to target a certain market.

They may collaborate to jointly serve the same market. In professional services, many competing firms partner to jointly bid for work in the same market.

Doing so, helps them to attain a competitive advantage. For example, two small professional firms can submit a joint bid to provide services to an entity.

The two firms will enjoy benefits from the collaboration that are not available if they opted for individual bids. One is that they will have increased capacity in terms of human resources and experience.

Two is that they will compete collectively against bigger firms, a benefit that is difficult to enjoy if they went solo.

Thirdly, they will be able to provide better services to their clients as a result of increased capacity.

Inasmuch as collaboration may lead to diluted decision-making and shared revenues, it is a strategy to help competitors attain a win-win solution.

Some competitors collaborate on corporate social responsibility activities, for example, charitable giving, environmental conservation and even legislative lobbying.

An MoU is a fairly simple document that the parties can either draft or they can opt to hire a lawyer to do for them.

The main purpose of the MoU is to provide clarity while defining the parties’ goals and objectives for entering such an agreement.

It is best considered where the parties wish to collaborate on limited activities while maintaining their independence.