Rethinking Strategic Business Reviews for Your Joint Ventures

   

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Rethinking Strategic Business Reviews for Your Joint Ventures Featured Image_opt.pngPIONEERED BY GENERAL ELECTRIC in the 1950s, the strategic business review (SBR) was embraced – and refined – by nearly every large company in subsequent decades. Today, using a standardized corporate process and approach to evaluate business performance and make data-driven strategic choices seems almost second nature. Yet companies have been somewhat slower to adapt their corporate SBR process and structure to the unique needs of their joint ventures, leaving one to ponder: Why the disconnect?

To state the obvious, joint ventures are unlike wholly owned businesses. As entities jointly owned by partners with different strategies and investment appetites, JVs introduce critical questions related to scope, strategy, end game, and evolution. As separate legal entities with their own Boards, joint ventures raise essential requirements related to governance, compliance, fiduciary duties, delegations, and management of conflicts of interest. And with a range of partially-obscured and often asymmetric financial flows to partners – like service and license fees, supply or purchase agreements, and shared-use assets – joint ventures throw some novel twists into understanding basic financials beyond the entity’s P&L.

Most importantly, a poorly designed corporate-level review fails to properly position the venture’s strategic planning work – and its go-forward annual strategy – in the context of the broader company strategy. For example, consider one joint venture that was initially set up to be spun out via an IPO, but continued to be owned by its shareholder years later. The scope of the venture was encroaching on the core business of its parent companies, who happened to be head-to-head competitors in a major European market. Meanwhile, costs were spiraling, investment plans were languishing, and fast moving competitors that were not hampered by the JV “governance tax” continued to gain market share. The problem? Each shareholder’s internal review of the JV and ensuing strategic planning process failed to uncover and elevate deep-seated partner misalignments around the JV’s strategy.

Standard corporate SBRs are simply not designed to handle these sorts of issues. Absent a path to review JV-specific issues in a structured and disciplined way, companies risk missing opportunities and being perpetually surprised by foreseeable problems in their joint ventures – a material and growing asset class in many companies. Some key questions that a better-constructed review process can help companies with JVs to address include the following:

  • Should we consider selling the JV based on its fit with our corporate strategy or its performance?
  • If we consider the JV’s return to us compared to the “total economics” of the joint venture to our partner, is it time to renegotiate contracts between the JV and its shareholders that may not have been reviewed since inception?
  • Does the JV’s competitive situation – or our competitive situation in an adjacent buisness – warrant changing the JV’s scope or pressing for JV strategy changes that leverage owners more effectively and create more synergies?
  • Do we (and the JV) have the right secondee strategy? Or, should we either increase secondees or press for more independent employees?
  • Do we have a good governance and, separately, compliance approach?

This is not an obituary for the classic corporate SBR. Rather, it is a call to arms for changing how companies approach SBRs for the joint ventures in their portfolios. The purpose of this memo is to describe what a good corporate annual SBR looks like for JVs, highlighting some of the unique analyses that leading companies deploy.

REDESIGNING THE CORPORATE STRATEGIC BUSINESS REVIEWS FOR JOINT VENTURES

How should companies redesign their corporate SBR process to reflect the unique needs and issues of joint ventures? For starters, a redesigned corporate SBR should be owned by the head of corporate development or planning or the CFO, with input from business units with material linkages to joint ventures.

Additionally, the redesigned corporate SBR process for JVs must leverage and build upon – rather than reinvent – how the company approaches SBRs for its wholly-owned units. For instance, if the company conducts SBRs for internal units in the fourth quarter, schedules them for 2-4 hours, and varies senior executive participation based on the materiality of the business, the same should be the case for JVs. Similarly, if there are ways the company calculates financial and operational performance, summarizes the competitive landscape, portrays risks, and presents long-term strategy and forecasts, the JV SBR should follow these formats as much as possible.

The structure of corporate SBRs for JVs should only deviate from existing approaches when material JV-specific issues and opportunities are present, and the company should seek to standardized these JV-specific analyses across JVs.

By leveraging existing corporate processes, work is reduced, the odds of adoption go up, and company executives and Boards can better compare JVs and other businesses.

To understand what this might look like, consider the structure of a standard annual SBR. While companies organize their annual SBR in different ways and at varying levels of depth, annual SBRs tend to contain some version of five common topics (Exhibit 1): Business and market overview; current performance; organization and talent; governance, compliance, and risk; and strategy, forward-looking plans, and forecasts. We believe that JV SBRs need to include supplemental analyses and discussions within each of these sections.

Exhibit 1: Table of Contents for JV Strategic Business Review – A Starting Point

Exhibit 1 Table of Contents for Joint Venture Strategic Business Review A Starting Point v2.png
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In the full version of this article, available through our Joint Advisory Group membership, we illustrate what this looks like in each of these five standard sections – starting with a general description of the content, and then using a notional case example to illustrate key analyses.

Revisiting the corporate approach to joint venture annual Strategic Business Reviews doesn’t have to be like a trip to dentist. Start with the annual SBR process for wholly-owned units, fill in holes with JV-specific content, and utilize standardized templates to ease the pain for Lead Directors. Then, brace yourself for the positive response.

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