Improving joint venture performance


Over the past 20 years, Joint Ventures (JV) have become a popular form of business structure.   There are many types of JVs but each share a basic premise: separate businesses agree to develop, for a finite time, a new entity and new assets through the contribution of equity and resources. The partners exercise control over the enterprise and consequently share revenues, expenses and assets.

Although difficult to get an accurate tally, there are likely more than 8,000 JVs in existence worldwide representing hundreds of billions of dollars in combined revenues. JVs have been the preferred strategy for North American and European companies to enter the rapidly growing BRIC (Brazil, Russia, India, China) markets.

When operating well, JVs deliver compelling benefits including simplifying entry into new markets, reducing business risk and conserving scarce capital. 

The operant phrase is, “when functioning well.”  JVs are not easy to form, operate and exit. A number of studies by KPMG, McKinsey and PWC have concluded that no more than 50% of all JVs were seen to be successful by their participants, with the average partnership lasting between 8 and 10 years. For those JVs that soldier on, they often suffer from strategic confusion, slow decision-making, and duplication of effort with the parents.

Two successful JVs provide some important lessons on creating and managing these unique relationships.  CIBC Mellon, a leader in the Canadian Asset Servicing industry, is a successful 14 year JV between the CIBC and Bank of New York Mellon.  Sony and Ericsson created a JV s in 2001 to manufacture mobile phones.  In 2009, Sony Ericsson was the 4th largest mobile phone manufacture in the World.

The following are some key lessons on creating and managing well-run JVs:

 Finding the right partner

  • Look for similar goal, and cultures – Not only must the firm’s culture and business practices be amenable to collaboration but it must have what Tom MacMillan, Chairman of CIBC Mellon, calls “the JV mindset…Some companies are good at working with others, some aren’t” 
  • Ensure a strategic fit – When prospective partners are identified, managers must evaluate the firm’s capabilities, management and financial health against the JV’s needs and their own gaps. In Sony Ericsson’s case, the JV combined Sony’s well-honed consumer electronics expertise with Ericsson’s leading technological knowledge in the communications sector.

 Reaching the right agreement

  • Get a strong business case – A winning JV combines a compelling business case with financially-strong partners.  “Two lousy businesses put together will not make one good business…they will give you one big lousy business.” Says Tom MacMillan.
  • Align around goals, commitments and mutual expectations – To avert conflict and ensure proper resource allocation, all parties must ensure their strategic and financial interests are in sync before commencing operations. To ensure strategic and financial alignment, both Sony and Ericsson agreed in the JV to stop making their own mobile phones.
  • Get the right equity and capital deal – Research says that a 50/50 equity split, with clear responsibilities and rights on both partners, has the greatest chance of success. 

Making the partnership flourish

  • Assign effective leaders – Senior management at both the parents and JV must be skilled at managing through differences in reward systems, cultures and organizational practices.   According to Tom MacMillan, strong Board-level leadership by the partners and day-to-day leadership in the JV may be the most critical factor in ensuring the JV’s success
  • Insist on mutual commitments –  Both partners must honour and maintain their financial and operational commitments even when results are less than ideal or the strategic circumstances of one party changes. This puts an onus on properly capitalizing the JV at the outset and dealing with future investment requirements.
  • Get the governance model right – The ideal governance structure provides sufficient controls to minimize risk without stifling operational flexibility and speed.
  • Anticipate and pre-empt conflict – According to a PWC study, the top 2 reasons why JVs fail are poor financial performance and a change in strategy.  To pre-empt surprises and illuminate important issues, JVs need regular strategic reviews and performance tracking.  Building in transparency and regular management communications will help foster trust and reinforce shared goals.

For more information on services and work, please visit the Quanta Consulting Inc. web site.

Advertisements

No comments yet

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: