Joint venture negotiations are only the first battle, after which another wave of problems awaits
SEASONED DEALMAKERS tell us that joint venture is a four-letter word. Joint Ventures CEOs assert they have the toughest job in business. And many operating executives confess they would choose exile in Siberia over a joint venture rotation. These attitudes are not surprising, especially given how often joint ventures fail to deliver on their shareholders’ strategic, financial, or operational expectations. Water Street Partners’ research on joint venture performance has consistently shown at least half of joint ventures fail on one or more of those counts (Exhibit 1), among other sobering statistics.
The result of this failure? Many joint ventures limp along for years, consistently underperforming against expectations. Others are mercifully terminated by parents seeking an end to the bleeding. And some collapse spectacularly in a sea of recriminations and lawsuits.
Some degree of failure is inevitable in business. New technologies sometimes do not work. Markets often do not materialize. Old needs can disappear. Regulations change. Joint ventures are not immune to these ills. Ask Verizon, which pulled the plug after only one year on a video streaming joint venture with Redbox that failed to gain traction against Netflix. So too with Iridium, a 19-partner satellite phone joint venture that collapsed into bankruptcy nine months after launch in the face of massive upfront capital expenses, buggy technology, and poor commercial appeal.
But aside from these normal business challenges, joint ventures can also fall victim to other diseases caused by their unique ownership structure. Water Street Partners has served hundreds of joint ventures and conducted dozens of research studies over the years, giving us a front-row seat to the multitude of creative ways that joint ventures implode – and providing us insight into how to inoculate against those outcomes. (see Related Resources)
Most joint venture failures are rooted in one or more of ten common causes. Some are more likely to occur early in the life of the joint venture; others tend to emerge as the venture reaches middle age. Keeping these failures at bay requires focus across the venture lifecycle, putting the onus on dealmakers, joint venture Board Directors, and joint venture CEOs alike for diagnosis and treatment (Exhibit 2, click to view/download).
- Misalignment on venture strategy: Maintaining agreement on strategy is not easy when reasonable minds can disagree – or when the shareholders are moving in separate directions. Our benchmarking of alignment between joint venture partners shows that 69% are at odds on long-term strategy, and 58% cannot agree on the joint venture’s upcoming annual budget.
Partners that disagree on strategy often provide conflicting guidance to joint venture management, creating confusion and delay, and forcing the joint venture CEO to spend time and effort overcoming internal owner differences (instead of focusing on running the business). This is especially problematic in fast-paced markets such as high-tech, media, and telecom, where real-time decisions are required, and initiative is lost in the face of multiple Board cycles to achieve shareholder alignment.
Some solutions: During the deal phase, companies can take a number of powerful but novel actions, including conducting strategic partner due diligence; using misalignment scenario planning to uncover frictions and test solutions; structuring scope and exclusivity provisions to define not only where the joint venture will play, but also where has the right to expand; and pre-agreeing on a multi-year joint venture business plan. During launch planning and beyond, companies should consider appointing to the Board senior executives with real internal clout and an aptitude for strategy; holding annual Board strategy off-sites; and establishing processes for handling misalignments when they emerge.
- Over-satisfying parent needs and requirements: In its early days, the Star Alliance – a global airline partnership now owned by over 30 companies including United, Lufthansa, Singapore Airlines, All Nippon Airways, and Thai Air – was so focused on satisfying every owner requirement that The Economist observed, “Star has no fewer than 24 committees to sort out such matters as network connectivity, purchasing, and customer relations. Chairmanships have been spread around to keep everyone happy. For those involved, it makes even Airbus Industrie seem like a model of industrial efficiency.”
joint ventures have an understandable but dangerous instinct to try to satisfy every owner request – to build this product “bell” and that service “whistle” – instead of focusing relentlessly on the customer and what is realistic. This instinct leads to project delays and ballooning costs, and can sow the seeds of unhappy partners who eventually withdraw support from the monster they created.
When joint ventures are designed to act as a shared utility for three or more owners, they are particularly susceptible to lobbying for individual parent needs. A series of financial service industry joint ventures suffered from such infections. Integrion, an e-banking joint venture that included IBM and numerous major U.S. banks as owners, collapsed under the weight of a feature-laden product designed to meet the individual needs of 17 squabbling owners, without doing any one thing well.
Some solutions: Companies can take a number of steps to promote collaboration and balance, including crystallizing in the deal that parents are responsible for paying joint venture costs to meet their individual requests; developing a set of Guiding Principles during launch, which spell out what parents can and cannot ask the joint venture to do; appointing an independent Board Director to inject an impartial voice when reviewing parent requests; and formally tracking and reporting to the Board on the nature, timing, and costs incurred by responding to parent requests for support.
One highly successful healthcare IT joint venture we work with allows each owner to fund up to five software developers within the venture to design features that meet owner-specific requirements. Those developers are hired and managed by the joint venture – but their fully loaded costs and work program are the responsibility of the owner.
- Insurmountable culture clash between parents: Many ventures are doomed to failure because the partners are incapable of working together effectively. At its most benign, this reflects the difficulty of bridging cross-border cultural differences to create a cohesive and effective joint venture culture. Our research shows that only half of joint venture employees have positive things to say about the culture inside their joint venture (Exhibit 3).
At its worst, culture clash is caused by a partner who demonstrates a different ethical yardstick, as Walmart discovered in India when its joint venture with Bharti was rocked by allegations of local bribery and corruption. Or it comes from a partner who views the relationship as a one-way street to extract value with no intent of collaborating, as Danone discovered when its Chinese partner, Wahaha, secretly manufactured and sold identical joint venture products outside the joint venture.
Some solutions: Early on, companies should ensure that due diligence focuses deeply on a potential partner’s corporate culture, values, and decision-making – including talking to their counterparties in other partnerships. During the deal, the partners should write legal agreements that specifically require the venture to adopt the strictest shareholder policies and processes for ethical conduct. During launch, the joint venture team should hold joint workshops to identify cross-border cultural differences, and communicate expectations as to how the joint venture’s own culture should function – including ethical-conduct guidelines.
- Inadequately defined operational interfaces with the parents: Joint venture legal agreements say little on the day-to-day structure of operations, and that space must be filled in by launch teams from the shareholders. In some cases, this process fails to sharply define which partner’s processes and systems the venture will utilize, causing each parent to bombard the venture with overlapping and sometimes contradictory expectations. In other cases, the parents agree to import one partner’s processes and systems without adapting them to the venture’s situation. Our research shows that these kind of mistakes during launch can erode up to 50% of venture value.
Consider the case of a $10 million startup biofuels joint venture....
This article is adapted from a forthcoming whitepaper by James Bamford, David Ernst, and Josh Kwicinski.