What Makes a Successful Joint Venture?
Joint ventures can be a useful route to combine resources and skills, to secure greater market power or better access to markets for SMEs, charities and social enterprises.
A new corporate entity can be used to ring-fence more risky trading activities or to develop a distinct brand or business culture outside the strictures of the host participants (such as borrowing controls, pay scales or corporate overheads).
Partnering with an outside organisation may bring access to new technology, lean business processes and technical know-how. A joint venture arrangement in which partners each hold a shareholding provides an opportunity for ‘value capture’: as the business takes off their shareholding should increase in value. A shareholding and directors on the board provide a ‘seat at the table’, visibility and transparency on the money flows and activities of the business: areas of obscurity, which have been frequently criticised in more arm’s length outsourcing and licensing arrangements.
A joint venture is ‘an arrangement between two or more parties who pool their resources and collaborate in carrying on a business activity with a shared vision and a view to mutual profit’.
Analysing the elements of this, we find several main ingredients:
- There is a contribution of resources, assets and skills from both parties. Participants need to consider carefully the terms on which they make their staff and assets (land, equipment, brand, intellectual property rights etc) available to the new venture. Do the partners have the necessary powers and approvals to set up the arrangements?
- A joint venture is usually about starting a new business. There must be clarity about the business plan and risks, whether there is a demand for services or products supplied by that new business. Is there a wider market beyond the hosts’ areas that can be exploited to generate more revenue?In many cases, the joint venture will involve establishing a new limited company in which the partners each take a stake. The terms of the joint venture agreement are very important. Important areas to consider will be the agreed strategy and business plan for the venture, relative shareholdings and capital contributions, policies on reinvestment of profits vs. distributing them as dividends, decisions for which unanimity is required vs. decisions taken by majority and, crucially, what are the exit provisions if things don’t go according to plan or if one party wants to leave and sell its stake? Some enterprises with long-standing joint ventures have recently found it difficult to extricate themselves from arrangements which are no longer fit for purpose or perceived as too expensive. For example, Liverpool City Council had a long-standing JV with BT plc. It to come to an end after it was reported that BT would not agree to cutting the cost of the £70m-a-year deal any further than the £5m a year over three years they had negotiated so far.
- There must be genuine joint working around a shared vision. A lot of joint ventures have come unstuck because the partners have not invested enough time at the outset in considering explicitly what both parties’ objectives are from the arrangement. For one partner, the objective may be to achieve a step change in products or service levels by levering in new investment, technology and improved business processes; for another, the objective may be to achieve a defined level of profit and to use the contract as a springboard to capture more market share and new distribution channels. Open conversations about how each partner can help the other achieve these goals are important.
- A good joint venture has an appropriate balance of shared risks and rewards. The parties should ensure that they negotiate an appropriate share of future rewards, but equally it must expect to shoulder its share of the risks of making the business successful
Joint Ventures with the Public Sector?
Joint Ventures are increasingly of interest to public bodies too. They are experiencing a paradigm shift as they move to become smaller enablers and commissioners of services, rather than direct providers. They are looking for new ways to work with private and third sector organisations to ‘do more for less’. Over time this is leading to a diverse landscape of provider organisations, such as joint ventures, spin outs, arms length trading companies. Participants need to think carefully about the governance and accountability arrangements over these more exotic arrangements. All participants need to have appropriate mechanisms to monitor the performance and risks of joint ventures. Are they provided with timely financial information, performance reports against defined KPIs and, the figures for staff turnover, (always an interesting barometer of internal culture)?
So What Makes a Successful Joint Venture?
Here are my top tips for success.
- Establish the commercial rationale for the arrangements – capture it succinctly in writing and then share and obtain buy-in from all your stakeholders.
- Set clear objectives for the joint venture – what are the expected benefits and what contribution needs to be made by each partner? Set out the assumptions clearly.
- Identify the possible partner(s) and select the most appropriate using clear selection criteria – remember cultural and behavioural factors can be just as important as infrastructure and know-how.
- Carry out a due diligence process – each partner should share key information (under a confidentiality agreement) and introduce their team members.
- Establish an appropriate legal format for the joint venture – this could range from a contractual arrangement, through to a full-blown new limited company in which each partner takes a stake.
- Negotiate an agreement that reflects the goals of all partners, but at the same time includes a clear exit strategy (which describes the consequences of leaving), and clear agreed strategies for resolving disputes.
- Create an appropriate structure for the management and ownership of the JV. Ideally, the principals shouldn’t get involved in the day-to-day issues and decisions, but leave it to a dedicated management with the capability and freedom to get on with the job. The JV management team should have clear control parameters and reporting lines.
- Put in place proper project management arrangements and get the back-office infrastructure, systems and processes working well.
- Make time to manage cultural issues – make sure that key personnel get to know each other on a social and professional level – teams that play together, stay together!
- Be aware of the likely tension points– these include a perceived loss of control by one partner, a change of regime in one partner brings in new personalities, or the external environment changes and the reasons for the joint venture become less compelling.
Joint ventures can be a powerful medium to achieve growth, enter new markets, share and ring-fence risks. However, they need to be properly tended to bear fruit. Leaders need to make time and resources available to promote and defend the partnership, if it is to succeed. Cultural and behavioural factors can often be the most difficult issues to get right. The documentation needs a clear exit plan in case things don’t work out.