LUCRATIVE ALLIANCES

Handy tips for establishing a joint venture

BY Jayashantha Jayawardhana

No matter how promising a company may be, it can’t always seize every business opportunity it discovers or stumbles upon on its own. So the owner must weigh his or her options and decide whether to form a new subsidiary, merge with another business, acquire one, or launch a contractual alliance or joint venture (JV).

A JV entails two or more organisations combining their resources to pursue a specific set of goals. An equity JV is one where the partners contribute to create a new enterprise while in a contractual alliance, the partners collaborate without forming a new company.

Companies are aware that JVs and contractual alliances can be lucrative vehicles for developing new products, penetrating new markets and boosting revenue. The catch is that the success rate of JVs and alliances is on a par with that of mergers and acquisitions – and that’s not too good.

Why is JV success so elusive?

In their article titled Launching a World-Class Joint Venture, co-authors James Bamford, David Ernst and David Fubini wrote in the Harvard Business Review (HBR) that many joint ventures fail because their partnering companies overlook the launch and execution phases of the initiative.

They elaborate: “Although most companies are highly disciplined about integrating acquisitions, they rarely commit sufficient resources to launching similarly sized joint ventures or alliances. Mistakes made during the launch phase often erode up to half the potential value creation of a venture.”

The authors continue: “The launch phase – beginning with the signing of an MOU and continuing through the first 100 days of operations, is usually not managed closely. This lack of attention can result in strategic conflicts between the allied companies, governance gridlock and missed operational synergies.”

There are four types of JVs. The value of a consolidation JV stems from a deep combination of existing businesses. In the skills transfer joint venture, value comes from the transfer of some critical skills from one partner to the JV and sometimes even to the other partner.

Meanwhile, in a coordination joint venture, value stems from leveraging the complementary capabilities of both partners. And finally, a new business JV generates value through the combination of existing capabilities to create incremental growth.

The partnering companies must identify which type of JV to launch based on the specific business interests they intend to pursue.

A joint venture typically presents a unique set of challenges. When an organisation acquires another, only one entity exists following the deal – and this makes for unilateral decision making.

However, when two companies agree to form a JV, there are multiple parties (two parent companies and often, a new company) dealing with disparate interests. So the parent companies must pay close attention to overcome these challenges to the best possible extent during the launch and execution phases.

The parent companies should appoint launch leaders and identify deal champions who are typically senior executives from each parent company. These champions must be influential and respected across the organisation, and have a serious interest in the success of the joint venture.

Immediately upon signing a Memorandum Of Understanding, they need to put together a dedicated and experienced transition team. This team will be responsible for ensuring that the business is up and running, which encompasses drawing up a detailed business plan, creating the 100 day road map that orchestrates the activities of all work groups and intervening when the launch process veers off track.

Once this team is in place and a timeline has been set, the real work begins.

Successful joint ventures forestall failure by addressing inherent tensions early in the process. They move quickly from general road maps to detailed practical planning, and clarify strategy and governance. Moreover, the right incentives and processes must be established to secure top talent and critical resources from the parent companies.

The authors note that launching a world-class joint venture is both complex and demanding. Research shows that it can in fact be more resource intensive than post-merger integration or internal business startups. Best in class companies manage to do this because they execute the classic launch tasks (i.e. organisation building and project management) well.

They also maintain an intense focus on issues such as strategy, deal economics and governance, areas most companies assume have been discussed and resolved up front. When executives understand the unique demands of a joint venture, and invest in early planning, the rewards can be enormous.

As one manager sums up, “if you get the launch right, the rest almost takes care of itself.”