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Allocating Risks And Rewards In Collaborative Agreements Using The Financial Structure

By Matthew W. Sagal and Gene Slowinski

Open Innovation (“OI”) is a well-accepted methodology that allows two or more firms to combine technical and other resources to achieve their marketplace objectives. The OI relationship is called an “alliance.” The firms are often referred to as “partners,” although use of that term does not imply a partnership in a legal sense. The purpose of this paper is to provide background in the principles of risk allocation, as guidance to those who must plan and negotiate these complex relationships. As we will show, alliances carry risks beyond those found in in-house programs. In our experience, a major portion of the energy devoted to alliance negotiations is developing a mutually acceptable allocation of those risks. Reaching a satisfactory solution is essential to completing any alliance negotiation.

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