Joint Venture Portfolio Management:
The The End of Adhocracy

How Natural Resource Companies Are Moving to Deliberately Manage their Portfolios of JVs
By James Bamford, Joshua Kwicinski, Ashley Snyder, and Geoff Walker
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NEW ENERGY IS BREWING in the joint venture portfolios of natural resource companies. While joint ventures have long accounted for a material portion of industry balance sheets (Exhibit 1), a series of catalysts are stirring some of the world’s biggest companies to rethink how they manage their portfolio of JVs, especially those they do not operate.1 Chief among these catalysts is the Macondo oil spill and its financial and reputational fallout on all parties, including its non-operating partners Anadarko and Mitsui.


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).

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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.

Another executive made it even more tangible:


I believe there is at least $3-5 billion in additional annual income from performance managing our non-operated downstream portfolio.

The new model: Deliberately managed. For most companies, the old approach is no longer acceptable. Our benchmarking identified more than 150 discrete portfolio-level initiatives being performed by the companies in our survey (Box 3). These initiatives run the gamut from basic portfolio analysis (e.g., developing a baseline picture of the non-operated venture portfolio) to developing new corporate policies for governance, risk management, and information sharing. They include new methodologies to evaluate whether a nonoperated venture has in place processes that are “materially equivalent” to those of the company, and, if not, what to do about it.

Other initiatives relate to training of directors, and developing tools for those at the front line of non-operated venture management, especially asset managers and secondees. In other cases, companies are launching performance improvement programs aimed at specific themes within their non-operated venture portfolio – for example, concerted efforts to investigate and optimize non-operated JV financial structures, enhance JV capital discipline, and reduce non-operated JV purchasing spend or labor costs.

All told, it is a blizzard of activity.

But in this snowstorm, what does good look like? First, to be clear, a deliberately managed portfolio is unlikely to mean a centrally managed one, where P&L accountability for all non-controlled ventures resides in one place or that no deviation or innovation is allowed within individual assets. Rather, we believe a deliberately managed non-operated venture portfolio meets three fundamental tests:

Standards of performance: The first test is the ultimate one: Does the non-operated JV portfolio have a performance and risk profile on par with the company’s wholly-owned or - operated assets? For most natural resource companies, the answer is decidedly “No.” Non-operated JVs underperform other asset classes by 10-30%, according to our analysis.

Standards of operational excellence: We have defined 18 standards of operational excellence that we believe enable sustained performance and risk management, and are thus hallmarks of a deliberately managed portfolio (Exhibit 2). These standards fall into six categories: portfolio stewardship, performance optimization, human capital management, governance and risk management, operating management and support, and relationship and stakeholder management. Within each category, we have defined specific, testable criteria that define what excellence looks like.

Standards of mindsets and behaviors: The final test relates to the company’s attitude and culture toward non-operated ventures. In simple terms, does the company believe that non-controlled ventures are the red-headed stepchildren of the parent’s portfolio, or in fact an extraordinary source of competitive differentiation and way to get access to technology and resources without incurring the costs of operatorship? We have defined a set of behavioral and cultural attributes that characterize companies with a deliberately managed portfolio (Exhibit 3).



How do companies reach this target state? That answer depends on where the company stands today.

For companies just starting. For earlystage companies looking to chart a sensible path out of adhocracy, two initiatives are the most logical places to start:


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.

The JV Discovery Audit will result in a Board-level presentation that summarizes the venture portfolio, and its risks and issues. It will also establish a set of standards that ventures should be evaluated against in the future, and make specific recommendations as to what portfolio-level initiatives, if any, the company should additionally pursue to better manage its collection of ventures.

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