IT’S A LESSON COWBOYS LEARNED a long time ago: If you don’t want a group of horses to escape, don’t tie them to a tree – simply tie them to each other and they’re incapable of collectively making progress in any direction.
So it seems with joint ventures, especially consortia, shared utilities and other shared-ownership entities with more than a few owners. Here we look at a broadly-relevant issue – enabling growth – in the context of a class of ventures where the issue manifests itself in its most extreme: Joint ventures with 5-20 owners.
Joint ventures are special-purpose vehicles – created by their parent companies to pursue a specific product market, enter a new business, or deliver improvements to a certain corporate capability or function (e.g., purchasing, back-office systems, distribution). Parent companies do not necessarily wish JVs to maximize profits by pursuing growth opportunities, especially if those opportunities clash with the broader global portfolio ambitions and optimization strategies of the parent. Sometimes, the sole purpose of the joint venture is to build and operate an asset (manufacturing plant, refinery complex, or a mine) at world-class levels, and nothing more.
But not always.
Many JVs have “good growth” sewn into their jackets – but have a hard time getting at it. Consider a European railroad venture. Initially formed as a simple cross-marketing venture, it had the potential to pursue a slate of cost-reduction, revenue-enhancement and strategic value-creating activities for its parent companies (Exhibit 1). This was good growth – but the venture and the shareholders were slow to get after the best of
Exhibit 1: Slate of Growth Opportunities
European Rail JV Example
Growth opportunities –Additional areas where owners might collaborate
Similarly, a financial services shared utility had a slate of new-product-related growth opportunities – some of which were within its core offering (merchant processing), others represented moderate step-outs into adjacent businesses (e.g., e-invoicing, anti-fraud services to banks), while some were fairly radical departures into new business lines targeted at new customers, and not necessarily just serving the owner banks (e.g., financial service software application development). And yet the owners and the venture stared at that slate for three years without any action.
Joint ventures underperform as an asset class. We believe that the underperformance is, in part, due to the fact that shareholders often cannot get aligned around growth, or do not put in place the financial, governance, and organizational structures to pursue perfectly good growth opportunities.
EXTREME CASE: SHARED UTILITIES AND CONSORTIA
Today, there are hundreds of shared utilities and consortia around the world that are material to their parent companies (Exhibit 2). Such entities often perform fairly narrow – but critical – functions within their comparative data for two-partner joint ventures or wholly-owned businesses, it’s hard to imagine that such a figure is anywhere near as low. enter these spaces.3 It means that companies are burning a lot of Board member and management team time discussing never-pursued ideas. And it means that, starved for growth, some shared utilities and consortia are in the process of dying a slow death, unable to consistently attract top people, and thereby undermining their ability to execute on their initial purpose.
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Our analysis of 20 shared utilities and consortia1 shows that 60% have not met expectations related to expanding into new product and service areas – despite often significant opportunities to deliver value to the owners. For example, a European banking utility went 1-for-25 in the last five years in gaining final approval for new initiatives that were pre-screened and deemed of high interest to the banks before being presented to the Board. Similarly, a global airline alliance board member told us: “It has proven extremely hard to get anywhere new. Frankly, we make the UN look like a model of decision-making efficiency.”
Our analysis shows that the median “pursue rate”2 for new initiatives in shared utilities and consortia is 16%; while we do not have good comparative data for two-partner joint ventures or wholly-owned businesses, it’s hard to imagine that such a figure is anywhere near as low.
There’s a real cost to such ineffectiveness: It means that the owners are forgoing significant synergies from unpursued initiatives. It means that separate and partially duplicative entities are occasionally being created by a subset of owners to pursue new initiatives. It allows competitors to enter these spaces3. It means that companies are burning a lot of Board member and management team time discussing never-pursued ideas. And it means that, starved for growth, some shared utilities and consortia are in the process of dying a slow death, unable to consistently attract top people, and thereby undermining their ability to execute on their initial purpose.
What does it take to grow in multi-owner environments? Our experience and data suggest that the alchemy of growth hinges on a half-dozen critical elements.
THE CRITICAL SIX
1. Strategy: Invest the required Board time to gain real alignment on growth. The “great growers” among shared utilities and consortia are those where the owners hold a common view about whether the venture should grow. To be clear, it is by no means a foregone conclusion that a joint venture should grow. As one Board member of a financial services shared utility recently reminded us:
I did not invest in the entity for it to be a ‘risk venture’. I want management to run the infrastructure at scale and with extreme operational reliability and efficiency – and that is it. Nothing more, and nothing less.
But if the owners are interested in growth, there needs to be clarity – at an actionable-level of specificity – just how much time and other resources to invest, which product markets, and what form it should take. Such alignment does not come easily with 5-20 owners, each with somewhat differing strategic agendas and financial wherewithal. As a starting point, the Board should plan to spend at least 30% of its time on strategy – and resist the temptation to over-focus on operations. Operational metrics should be provided in Board prep materials, but best discussed on an “exceptions basis” at Board meetings. Our benchmarking data shows very clear improvements in growth performance (with no decline in operational and financial performance) when consortia and shared utility Boards increase time spent on strategy to at least 30%, and as high as 50%.
We’ve developed a tool to help shared utilities and consortia evaluate the level of owner alignment across a series of growth dimensions – a critical step in driving a productive growth agenda. It provides a structured, fact-based way for the owners to have a holistic conversation, and identify root-cause problems and opportunity areas. For instance, in one banking shared utility, such an analysis highlighted that owners had a much higher aspiration for new product growth than management – with a median view among the Board that 25% of activities should be tied to new products in three years.
But it also revealed some collectively-shared contradictions with regard to the ownership and resourcing of the growth agenda. In particular, there was a desire for relatively strong owner involvement in driving the development of new initiatives (with median Board member wanting 40-50% of the total effort in developing new initiatives to be resourced from the owner-banks, and not the venture management team). However, an activity-based time-allocation analysis showed that Board and committee members were, on average, spending just seven days per year on the venture, six days of which were devoted to preparing for or attending Board meetings.
2. Control: Create a voting structure that does not require 100% agreement. Recognizing few entities with 5-20 owners will be fully aligned on anything, shared utilities and consortia need a governance, ownership and decision structure that prevents a “tyranny by the minority”. An obvious way to achieve this is to require only simple majority for most decisions.
There are ways to take this further. For instance, Board decision-making might be based on weighted voting (calculated from a formula related to owner initial capital contributions, volume or usage commitments, or market size), while allowing most decisions to be made by simple majority (leaving supermajority decisions to such major issues like admitting new classes of partners, changing the bylaws, dissolution, etc.). Alternatively, the size of the main Board might be limited to six to eight members, with representatives from the other owners sitting outside the central governance body responsible for setting strategy and investment decisions. Or, the governance construct might be a corporate-style shareholder model, where all shareholders participate in an annual general meeting, which then votes on a slate of Board members (some of which might be pre-determined based on size and revenue commitments to the venture).
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1 Data from Water Street Partners proprietary database of joint ventures, shared utilities and consortia. The 20 shared utilities and consortia in the sample set are derived from multiple industries: financial services (7), healthcare and high tech (4), airlines and transportation (3), media (3), and other (3). These shared utilities and consortia are among the most prominent such entities within their respective industries. Median venture age is more than 10 years, with a median annual operating budget of roughly $70M.
2 In this case, we define “pursue rate” to mean: Of all the ideas generated and discussed % of opportunities deemed by the Board of Directors to be of significant interest to the owners, and the venture management team has been asked to invest time and resources to develop the business case and generate owner and market support.
3 In the US payments business, for example, a failure of banking shared utilities and the banks that owned these utilities to identify and invest in growth opportunities opened the door for outside companies like PayPal and First Data Corporation to carve out compelling business niches for themselves.