JOINT VENTURES
Partnerships and joint ventures are an important source of revenue and innovation for many large companies, particularly in areas of emerging technology. New research shows that companies that restructure a large percentage of partnerships show better financial returns. Companies creating new partnerships should take steps to allow for future restructuring
Successful companies actively manage their businesses through periods of economic growth, downturn, and recovery. They do so by innovating, making strategic shifts, rewiring existing operations, reallocating resources, entering new business lines, and restructuring existing ones.
For most companies, joint ventures and other partnerships are a critical part of the equation. Companies like Amazon, GlaxoSmithKline, Lockheed Martin, Rio Tinto, Shell, Siemens, and Volkswagen hold large installed bases of joint ventures and partnerships and, in many cases, depend on such partnerships for 25% or more of revenue or net income.
Partnerships have emerged as a key vehicle to compete in new technology-driven domains, including renewable energy, circular economy, digital health, and mobility. And amid anti-globalization sentiments and a rise in restrictive regulatory regimes, joint ventures with local partners act as strategic tools to expand or solidify a company’s international foothold.
Partnership can’t remain static, however. Many are in need of restructuring to meet changing market conditions, shifting owner company strategies and financial positions, and other forces. For example, Amazon, JPMorgan Chase, and Berkshire Hathaway recently unwound Haven, a high-profile joint venture launched three years ago to lower costs and improve outcomes in the U.S. health care market, due to strategic differences. AES and Siemens recently brought in a third partner, the Qatar Investment Authority, to help fund growth of Fluence, their large-scale energy storage joint venture.
Is shaping and reshaping joint venture and partnership portfolios a sign of corporate weakness, capability gaps, and strategic missteps – or a source of competitive advantage? To find out, we conducted an analysis of 60 leading companies across six sectors and more than 2,200 of their joint ventures and partnerships to understand how their portfolios have changed in the last four years.
We found a strong correlation between overall partnership portfolio activity and company return on capital (ROC). Companies that were more active in restructuring existing and forming new joint ventures and partnerships were more likely than industry peers to meet or exceed their industry’s three-year average ROC.
Enable Restructuring
Some 70% of joint ventures and partnerships are in need of restructuring at any given time, according to our surveys of executives, and that, on average, the median joint venture takes 39 months longer to restructure than a wholly-owned business. To enable active joint venture governance and more timely restructuring, companies might consider the following
Restructuring a joint venture often requires changes to legal agreements, which can be difficult, time-consuming, and sometimes impossible to renegotiate. To avoid the need for amending legal agreements, companies should consider negotiating contractual terms that enable flexibility. This might include deal terms that require the agreement to be renewed after a defined period such as 15 or 20 years, performance-based contingent contracts to incentivize performance and continued contributions from all owners, sole risk provisions, and transfer of interest deal terms to promote easier exits or changes in ownership.
Another critical way to foster timely restructuring of joint ventures is to appoint senior people to the board who have the right mix of skills, experiences, incentives, and commitment — and ensure that the board has the right culture and spends the right amount of time on the right topics. Composition and workings of joint venture boards don’t compare favorably to those of corporate boards. For instance, the median joint venture director spends just 15 days per year fulfilling their duties and has a tenure of just 30 months in role, compared to 35 days per year for public company directors, who have a median tenure of 8.5 years. Additionally, joint venture boards spend considerably less time on strategy and long-term topics as compared to corporate boards (five vs. 14 days per year).
How do companies improve their effectiveness in finding, screening, and consummating new joint ventures and partnerships? A few of the key takeaways that emerged from our work
Companies need to broaden how they originate deals and use additional sources such as corporate venture capital units, third-party venture funds, incubators and accelerators, external scouts, and internal networks to help identify new partnership opportunities. This need is especially acute since, unlike in M&A markets, investment banks rarely source partnership opportunities, as banks have a hard time applying their percent of transaction fee structure to joint ventures and partnerships. Beyond expanding the sources of new deals, companies should also have another look at the size, capabilities, structure, and incentives of those in business development roles, potentially adopting more VC and PE team structures and incentives.
Evaluating and consummating a high volume of new joint ventures and partnerships, especially in frontier technologies and capabilities, often requires changing how the company reviews and approves transactions. For instance, our survey of executives in 20 major chemical and oil companies reveals that 80% believe that their companies’ traditional capital investment and M&A stage-gate process is ill equipped to handle new technology and sustainability partnerships and investments, while less than 20% of these companies have adapted their investment process to reflect the unique demands in evaluating and consummating such transactions, including the need to evaluate uncertain technologies, unfamiliar partners, and novel deal terms, to take rapid decisions.
Stability may have great appeal, especially today amid so much economic uncertainty. But putting your partnership portfolio on the move — that is, actively exiting and otherwise restructuring existing ventures and entering into new partnerships — is likely to be just the medicine your company needs
Risk Mitigation Strategies
This SOP outlines the standardized procedures and guidelines for the initiation, execution, and closure of joint venture projects. It aims to ensure effective collaboration between partnering entities, mitigate risks, and achieve successful project outcomes.
Roles and responsibilities within the joint venture project shall include:
Partnering Entity: Contribution of expertise, resources, and adherence to the agreed terms.
Project Manager: Overall project supervision, communication, and performance monitoring.
Project Proposal and Evaluation: Identify project opportunities and assess alignment with strategic goals.
Prepare a comprehensive project proposal including objectives, scope, and expected outcomes.
Partner Selection and Due Diligence: Identify potential partnering entities based on complementary skills and resources. Conduct thorough due diligence to evaluate partner's financial stability, reputation, and compatibility.
Legal and Financial Consultation: Seek legal and financial consultation to draft the joint venture agreement.
Address legal structures, profit-sharing mechanisms, and dispute resolution procedures.
Terms and Conditions: Define each party's responsibilities, contributions, and decision-making authority. Set forth project milestones, timelines, and exit strategies.
Project Planning: Develop a detailed project plan outlining tasks, timelines, and resource requirements. Ensure clear understanding of project goals among all stakeholders.
Resource Allocation: Allocate necessary financial, human, and technological resources as per the project plan. Regularly monitor resource utilization to ensure optimal allocation.
Communication Protocols: Establish regular communication channels between project teams and stakeholders. Define reporting frequencies, formats, and escalation procedures.
Risk Identification: Identify potential risks and uncertainties that could impact project progress. Categorize risks based on severity and likelihood of occurrence.
Risk Mitigation Strategies: Develop strategies to mitigate identified risks, including contingency plans. Assign responsibility for monitoring and addressing risks throughout the project.
Key Performance Indicators (KPIs): Define relevant KPIs to measure project progress, quality, and financial performance. Regularly track and analyze KPI data to assess project health.
Regular Performance Reviews: Conduct periodic performance reviews with all stakeholders. Identify areas for improvement and implement necessary changes.
Budgeting and Expenditure: Develop a detailed project budget, allocating funds for various project phases. Monitor expenses and ensure adherence to the budget.
Profit Sharing: Clearly define profit-sharing mechanisms in alignment with the joint venture agreement. Regularly review financial performance and distribute profits as per the agreement.
Outline a clear dispute resolution process in case of conflicts between partnering entities. Encourage open communication and negotiation as the primary means of resolution
Evaluate project outcomes against initial objectives and KPIs.
Ensure all legal, financial, and operational obligations are met.
Document lessons learned and best practices for future joint venture projects
- Joint venture agreement template.
- Risk assessment matrix.
Performance review template. - Project budget template.