Joint Venture Portfolio Management:
The The End of Adhocracy
Meanwhile, new regulations and regulatory scrutiny – on everything from non-operator responsibilities and anti-bribery to new joint venture accounting rules and increased attention to anticompetitive practices in ventures among competitors – are further driving companies to act.
Recent public announcements suggest that many leading natural resource companies are taking steps to more deliberately manage their JV portfolio, ending an era of ad hoc initiatives and highly localized and often passive management of non-operated ventures. They join a few early movers, notably Dow Chemical and ExxonMobil, who found corporate religion on JV portfolio management more than a decade ago.
We call it the end of adhocracy.
To better understand what’s going on, Water Street Partners recently benchmarked how 38 large natural resource companies are approaching the management of their non-controlled JV portfolio (Box 1). Our aim was to answer three questions: First, what initiatives are companies pursuing “above the asset” – i.e., at the business unit or corporate level – to bring greater coherence, value, and risk management to their collection of non-operated ventures? Second, how are they organizing to do it? Are they depending on loose networks of practitioners, designating accountable executives, or forming separate units? And third, how are the portfolio-level activities being driven into the individual assets in a way that drives value rather than just added bureaucracy?
The purpose of this note is to outline the path out of adhocracy, map where companies are on the journey, and offer a few thoughts on how to get started. Additional tools and analysis, including the full benchmarking report and a set of global standards for non-operated JV portfolio management, are available on our website to subscribers of the Joint Venture Advisory Group (Box 2).
THE PATH TO EXCELLENCE
The old world: Adhocracy. Until recently, most chemical, mining, power, and oil companies did little to deliberately manage their non-operated venture portfolio. Instead, they preferred to manage at a local level, with limited centralization or coordination.
Such a locally-driven and asset-by-asset approach was built on a set of entrenched beliefs, including a view that accountability needed to reside close to the asset, that there was limited value to be gained from better managing non-controlled ventures, and that the diversity of legal contracts and venture types made it extremely difficult to generate much value from a more integrated corporate approach. For oil and gas companies, portfolio-level initiatives and roles tended to be limited to legal training of JV directors and central management of non-operated JV contractual obligations, where a few lawyers and accountants made sure the company was meeting its contractual requirements and exercising its audit rights.
One executive summed up the situation this way:
Non-operated JVs are the last performance frontier. First we drove major performance programs into our operated assets. Then we turned to our contractors. Now we are turning to our non-operated assets.
I believe there is at least $3-5 billion in additional annual income from performance managing our non-operated downstream portfolio.
A JV Discovery Audit: A JV Discovery Audit is a broad and openended review of the JV portfolio, intended to uncover practices, issues, and performance patterns across the portfolio and to identify areas for further investigation or action. Typically sponsored by a CFO or similar executive officer and taking a small team 2-3 months to conduct, such an audit will often actively investigate, through interviews and data collection, perhaps 15-30 JVs across different segments of the company portfolio – enough to give a fair sampling of what is going on. In most cases, the audit team will place a fair amount of emphasis on classic audit items: venture performance and risk, and on matters related to governance and controls, operational processes, and reporting and audit. Done well, however, the discovery audit will also look at other non-standard audit dimensions, including partner choice and capabilities, commercial conflicts, and how the company organizes its internal teams to govern and oversee ventures.