Working with Customers on Joint Development Projects

Manufacturers engaged in intense competition with other firms for customer business are well advised to look for ways to become true development partners with their prospects as opposed to simply being just one of several potential vendors.  Rather than approaching customers with a standardized sales pitch to buy generic products and services manufacturers should seriously consider opening with a serious and sincere proposal to collaborate directly with the customer to create new products and services that are unique and specifically suited to that customer’s requirements and sales and marketing objectives.  If there is interest the parties can move forward with a joint research and product development project that involves the contribution of ideas, feedback and financial and technical resources from the customer to support the manufacturer’s efforts to create new products and technologies in which both parties will have an ownership interest of some sort at the end of the initial collaboration. 

Working with customers on joint development projects can be advantageous for several reasons.  First, assuming that the customer is willing to contribute toward some of the costs of developing new products and technologies a manufacturer can use these types of relationships to maintain and even enhance core competencies in the research and development function without diverting budgeted funds from other functions or attempting to obtain new capital that might dilute ownership stakes and management control.  Second, the manufacturer will be given a valuable opportunity to learn about how the customer operates and the way in which customer views its relationships with vendors and the needs of its own customers.  This type of information has value beyond the specific customer relationship since it provides the manufacturer with greater insight into the overall business environment in which it is operating.  Third, while the manufacturer’s main challenge is demonstrating its expertise in product development to the customer the relationship should also be a platform for the manufacturer to showcase its skills in other operational areas such as logistics and marketing with an eye toward the possibility of an expanded alliance at some point in the future.  Finally, if the customer is willing and required to invest significant time and other resources in the development phase there is likely to be a much higher level of commitment from the customer to make the finished product commercially successful and this will hopefully translate into a stronger long-term revenue stream for the manufacturer.

There are, however, corresponding risks and disadvantages that also need to be considered by manufacturers before joining forces with a customer.  For example, smaller manufacturers need to safeguard their core technology and bargain for reasonable rights to use and exploit intellectual property that is created during the joint development relationship.  If care is not taken in this area a larger customer will simply appropriate whatever technical know-how is available from the manufacturer and let the relationship lapse.  The manufacturer should also be sure that the customer is able and willing to fulfill commitments made by the customer to support the development work.  If promised funding does not appear or the customer withdraws personnel and other resources during the project the chances of success diminish and the burden on the manufacturer will suddenly increase.  Another challenge for the manufacturer is making sure that its functional resources, including personnel and equipment, are strong enough to withstand the scrutiny that will come from attempting to work closely with a customer and give the customer open access to the day-to-day operational activities.  If the customer uncovers weaknesses in important areas, such as quality control, it may abandon the project and remove the manufacturer from its vendor list even for generic items.

In my next post I’ll try and provide some simple suggestions for increasing the chances of successfully completing joint development projects with customers.

The content in this post has been adapted from material that will appear in Joint Ventures and Strategic Alliances (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

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