Avoiding Blind Spots in Your Next Joint Venture
Joint ventures (JVs) often seem destined for success at the outset. Two companies come together in what seems to be an ideal match. Demand for the planned product or service is strong. The parent companies have complementary skills and assets. And together they can address a strategic need that neither could fill on its own. But in spite of such advantages, revenues decline, bitter disputes erupt, and irreconcilable differences emerge—and managers call it quits.
Insufficient Planning to Respond to Changes in Risk
At the beginning of any JV relationship, parent companies naturally have different risk profiles and appetites for risk, reflecting their unique backgrounds, experiences, and portfolios of initiatives, as well as their different exposures to market risk. Parent companies often neglect this aspect of planning, preferring to avoid conflict with their prospective partners and getting to mutually agreeable terms—even if those terms aren’t best for either the JV or its parents.
Certainly, some JVs must be rigidly defined to be effective and enforce the right behavior. But when that isn’t the case, JV planners too often leave contingency planning to the lawyers, focusing on legal protection and risk mitigation without the business sense, which shows up in the legalese of the arbitration process and exit provisions. Both tend to be adversarial processes that kick in after problems arise, when in fact contingency planning should just as often focus on the collaborative processes that anticipate changes and create mechanisms or agreements that enable parent companies to adapt with less dysfunction. Such mechanisms might include, for example, release valves in service-level agreements, partner-performance management, go/no-go triggers, or dynamic value-sharing arrangements and can allow a joint venture to maintain balance in spite of partners’ different or evolving priorities and risks.
One industrial JV launched in the mid-1990s used just such an adaptable approach to get through the financial crisis. While the JV had benefited both parents, its future was threatened when the crisis buffeted the majority owner. Rather than dissolve the partnership, the minority partner temporarily bought a larger stake in the JV, giving the majority owner some much-needed cash. Once it was back on its feet, the majority owner was able to buy back its full share and restore the ownership balance.
Even companies that rigorously follow the common best practices for JV planning will falter if the process lacks a comprehensive view of execution both within and in between stages of development. Maintaining vigilance and balancing these pressures is critical to the success of a JV.
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