Stop the excuses. What JV CEOs can do to improve the performance of their businesses.
WE HAVE SAID IT BEFORE: Being a JV CEO is one of the toughest jobs in modern business. Not only must JV CEOs handle all the classic challenges of running a company – often in fast moving, emerging industries and markets – but they must also deal with a set of issues that emanate from the unique ownership structure of a joint venture. By definition, joint ventures have multiple owners, and these owners often have some level of operational interdependence with the venture, and often have imperfectly aligned financial and strategic interests, corporate cultures, and expectations.
This places great demands on JV CEOs and the businesses they run. According to our research, JVs have a median lifespan of less than ten years, and roughly half of JVs fail to meet the financial and strategic expectations of their owners. According to U.S. government data, joint ventures by U.S. companies abroad have historically produced materially lower return on assets than wholly-owned business units.
What can JV CEOs do to improve the success of the businesses they have been selected to lead?
To answer this, Water Street Partners recently conducted research to test the link between performance and a set of practices which JV CEOs are generally able to fully or substantially affect the adoption. We also tested certain unique structural features of joint ventures that JV CEOs often point to as a source of their difficulties. Unlike other research studies Water Street Partners has done over the years (see JV Performance Research), this research did not test practices that were outside “the core influence zone” of JV CEOs. Examples of such practices include seniority or time dedication of board directors, number and nature of board committees, and contractual terms in the agreement.Our research encompassed 81 JV CEOs and other executives from around the world and across industries (see About This Research). Within their JVs, we tested the prevalence of 43 independent variables (i.e., best practices) on a five-point scale of excellence, and compared the resulting scores to the strategic and financial performance of the ventures relative to owner expectations. We then identified the ten practices with the highest correlation with performance. When scores on these ten variables were aggregated, and plotted against overall venture performance, the data showed that these ten practices collectively account for 41% of the variation in performance within the model (Exhibit 1). This is significant for a business correlation, particularly one that excludes industry, company strategy, macroeconomic conditions, and other important but non-JV specific factors. The best way to interpret these results may be in the following context: for a JV CEO looking to improve the performance of their joint venture, it is very reasonable to look first at these ten practices.
Exhibit 1: Correlation between JV Success Equation Practices & JV Performance
So, what are the ten variables that matter most? They are management practices that fall into five common functional areas that often prove to be challenging for JV CEOs – strategy; governance; shared services and operations; organization and talent; and finance and planning:
Key strategy tasks
- Defining a strategic growth model that is clear and understood, indicating whether the JV is intended to be a growth business focused on profitability, a captive of the parent companies, or a hybrid in between. An effective tool to clarify the specifics of the growth model – and to balance owner and market needs – is a set of Guiding Principles, endorsed by the venture’s Board, to evaluate trade-offs as they arise. These guidelines help JV CEOs and Boards steer the business to meet the needs of the market and the needs of multiple owners by clearly stating the owners’ strategic and managerial intent toward the JV in plain business language.
- Developing and enforcing a venture-led but collaborative strategy process for the JV, which annually incorporates owner input into strategy development early in the proceedings. CEOs who institute an annual calendar that clearly lays out the strategy process timeline with activities needed to develop or refine the JV’s strategic goals and plan, including meetings that need to occur, who attends the meetings, who owns the process, what inputs are necessary, and the process and outcomes for each activity, find it easier to control their destiny. They are more likely to advance their strategy with Board members who appreciate the clarity such a process calendar provides on when and how they will engage on strategy.