These days, a tough competitor could end up being a good partner.
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With companies under tremendous pressure, some small businesses are deciding that it can be in their best interest to join forces with industry rivalsâwhether it’s subcontracting jobs, trading leads and information about the industry, or teaming up to win a contract they couldn’t land on their own.
But the practice comes with plenty of caveats. It can be tough to build trust with rivals. When you do form a relationship, you must be careful not to give away too much inside information about your business. And if a rival does a shoddy job on a mutual project, you could end up losing face with customers.
“During tough economic times, it may be the only way to get workâbut it is a risky way to get work,” says Dennis Ceru, an adjunct professor of entrepreneurship at Babson College.
Taking on Jobs
One of the most common ways to join forces is a subcontractor setup. Companies don’t want to turn away work these days but often can’t handle it all themselves without investing in staff or equipment. Farming the work out to a rival can be a good way to keep the customerâand get referrals in return.
Walker Lunn, chief executive of EnviRelation LLC, a food-waste composting company based in Washington, D.C., says he works with competitors in a number of these situations.
Sometimes they come to him with jobs that are outside their service area but inside his. Other times, they turn to him because he provides less-expensive service, and they want to give customers a discount. He might also take on work for competitors if they’re having trouble finishing a job for a mutual contractor, “because everyone wants the client to maintain a perfect service record, since it benefits all of us.”
Likewise, if Mr. Lunn’s business is growing faster than he can get equipment, he might pay to use his competitors’ facilities or farm out work to them.
Still, “the competitor has their own priorities, objectives and things going on,” he says. “The opportunity to do a little bit of work to help with [our] growing pains may not appear like a good use of their time; they may prefer to spend the time getting permanent work or trying to snatch the customer from us.”
So, he says, it’s important to present the work in a way that motivates competitorsâshowing, for instance, that it could be an opportunity for them.
Other times, small companies don’t hand off workâthey join together to get something done. Businesses might team up to negotiate a volume discount, lobby for regulatory changes or land contracts neither would be big enough to get independently, says Gregory Fairchild, E. Thayer Bigelow associate professor of business administration at the University of Virginia’s Darden Graduate School of Business.
But the terms of these partnerships should be spelled out in advance, he warns. Among other things, he says, companies should agree on how to divide up work, who will lead and how the compensation will be split. If those issues aren’t addressed, they could derail the job.
Also bear in mind that if you are the prime contractor, you face increased exposure or liability and potential damage to your reputation or brand if anything goes wrong, Dr. Ceru says.
Exploring a Niche
There’s also the matter of sharing too much. While the project is going on, Dr. Fairchild says, the other party gets a look at your technique, your technology, your customers and your people.
In some cases, though, a relationship between rivals is based on sharing informationâsometimes formally, sometimes not.
Joe Giacalone, owner of Arch Painting Inc., Woburn, Mass., started a dialogue with a competitor by warning him of a subcontractor who didn’t live up to expectations. “This began some dialogue, which led to us having lunch and striking up a relationship,” says Mr. Giacalone.
The two entrepreneurs started to discuss their operations and get an idea of each other’s industry niche. Eventually, both decided to branch out into the other’s specialty.
“We both realize the market is open, and we try to take the high road,” Mr. Giacalone says. “I am sure in time as we get more of the same clients, we may not be as free sharing of information, but to date our relationship hasn’t changed.”
R.J. Lewis, founder of eHealthcare Solutions LLC, Ewing, N.J., which sells ads for health websites, struck up a relationship with a rival to explore a new niche: mobile devices.
“We found a competitive but complementary business in that space who works with the same kinds of customers that we do,” he says. “Until we have an offering in that space, we’ve struck a relationship by which we can get a referral fee if we introduce them to an opportunity.”
Doing so lets eHealthcare see the size of the market and what customers like and don’t like. The company also gets a look at who the decision makers are at client companies.
“This may be a long-term solution, or it may go away and we may compete more head-on as we launch our own offerings. Either way, we learn a lot through the process,” he says.
Ms. Haislip is a writer in Chatham, N.J. She can be reached at email@example.com.
A version of this article appeared April 29, 2013, on page R6 in the U.S. edition of The Wall Street Journal, with the headline: If You Want to Beat ‘Em, You Might Try Joining ‘Em.