Small Business Alliances and the Virtual Company
by Ron Kurtus (revised 20 November 2011)
A small business often needs to form alliances with other small businesses in order to obtain contracts with large companies and corporations. This project-by-project team is often called a virtual company. The business entity that markets to the customer is the one that usually forms the team. The reason alliances are made is to give the perception of being big enough to do the job, as well as to gather together sufficient resources for a larger project.
Questions you may have about this are:
- What are the obstacles for a small business to get contracts?
- How are alliances the solution?
- How are alliances managed?
This lesson will answer those questions.
Obstacles to contract
In order to get a chance to bid on a project, a small business--one consisting of a few people or even a single person--must give the potential client the impression that it is capable of handling the job. It must also be able to actually do the job, once the contract is obtained.
Companies have concerns
Companies often have concerns about dealing with small businesses.
Against one-person businesses
Because of Internal Revenue Service (IRS) considerations, companies often do not like to deal with one-person businesses for fear of having the person considered as an employee, even if the job requires only one person to do the work. They often prefer to deal through consulting firms and job shops, despite the fact that the fee may be much greater. This is often called outsourcing.
Concerns about small business
Another concern of the larger company or corporation is if the business has the resources and manpower to handle the project. Also, they usually want to have an indication of a track record to assume the job will be completed on time.
Concern by small business
Besides concerns from the corporation, there also is the concern by the small business itself on whether it has the resources to complete the job. It might bite off more than it can chew and take a severe financial loss, if it can't deliver what is promised.
The small business needs to impress the potential client on its capabilities, as well as to have sufficient resources.
A good method to work around these concerns is for the small business to form a virtual company on a project-by-project basis. What this means is that the business enterprise that finds the work and is making the proposal will gather a team of other small businesses to work together on the project.
Appears as larger company
This virtual company will consist of the business that found the customer, plus the team of other businesses or independent contractors. In essence, these people are listed as working for the bidding company. Often their work is listed as part of the overall portfolio.
Sometimes office space is rented to make it look like the virtual company is a more viable enterprise. That is really only necessary if everyone must work in close contact or if client meetings are to be held in that location.
Each member of the alliance works on a proposal, giving estimates of time and cost of their individual parts of the project. The head of the virtual company then places a bid and subcontracts to the other businesses.
Having the capabilities
The formation of the team will assure everyone that the virtual company has the capability to complete the job. Certainly, schedules and other obligations of the team members must be taken into consideration, and each should make a commitment to fulfill his obligations.
Obviously, trust is important. One bad apple can affect all of the other businesses, especially the organizing firm.
Just as finding companies to do business with is often based on personal contacts, so too is getting partners you can trust to form an alliance or virtual company in which to bid on a project and then complete it.
Look to trusted resources
The way an alliance should be formed is that first the prime contractor sees an opportunity to submit a proposal to another company. The contractor or small businessman looks at what is required and uses some creativity to form a team that can do the job. The contractor may do this before entering the marketplace.
One thing the leader needs to do is to determine what jobs are necessary. For example, a company developing Web-Based Training might need:
- Sales and marketing manager
- Project manager
- Proposal writer
- Subject matter expert
- Instructional designer
- Web developer
- Graphics designer
- Animation specialist
- Audio specialist
- Video specialist
No one person can take on all those jobs. You may have several companies to fill all the needs.
Contracts and agreements
The various alliance businesses, partners or subcontractors often may need some sort of non-compete agreement, especially with the contractor who gets the business. Although trust is important, it is still worthwhile to have legal contracts.
Large companies have concerns about dealing with one-person or very small businesses. The solution is for the business bidding on a contract to form an alliance with other small businesses and form a virtual company that not only gives the impression of being large, but also has the capabilities to do the job. Although the partners should be trusted, formal non-compete agreements are worthwhile to prevent one from taking another's client.
A good team can help everyone
Resources and references
The following are resources on this subject:
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