Personal Finance

How to reduce joint ventures failure rates

plan-biz

Summary

  • Implementing a successful joint venture is a sure bet to faster growth and increased profitability.
  • However, various studies have shown that joint ventures and strategic alliances only succeed 50 percent of the time.
  • That means the other 50 percent do not live to realise the full benefits for which they were formed.

Implementing a successful joint venture is a sure bet to faster growth and increased profitability. However, various studies have shown that joint ventures and strategic alliances only succeed 50 percent of the time.

That means the other 50 percent do not live to realise the full benefits for which they were formed.

Joint ventures and strategic alliances can therefore pose serious problems to the partners and even to the business as a whole, at any stage of the implementation cycle. These problems can arise due to a variety of reasons and they form the bedrock causes of joint venture failures.

The main cause of failures is when the objectives are not clear and communicated to everyone involved.

This causes the partners to have false expectations causing them to operate at cross purpose to each other and to the venture.

The partners are also more likely to experience tense moments where there is an imbalance in levels of expertise, investment or assets brought into the venture.

Other causes include lack of an appropriate compensation from the joint venture contract, divergent cultures and management styles among others.

Even in the best relationship, you will almost certainly have problems from time to time and therefore there is no guideline that will insulate you fully from misunderstandings occasioned by human interactions.

But when the misunderstandings occur, approach them positively, looking for "win-win" solutions rather than trying to score points off each other.

Further safeguards should be embedded in the joint venture agreement that sets out agreed dispute resolution procedures in case you are unable to resolve your differences yourselves.

Companies entering into a joint venture should therefore set up an elaborate process and system to identify and resolve strategic differences among partners before they become insurmountable.

There are some nine key processes and systems that have been identified by various authorities in joint venture research, including Harvard Business Review, and they are discussed below.

Follow them as a guide to enable you avoid common loopholes that will cause joint venture failure.

JOINT VENTURE LEADERSHIP

The partners should identify the joint venture leadership and assemble a dedicated and experienced team to plan on delivery and execution of the objectives of the venture. This leadership team is responsible for getting the business up and running. Its tasks include developing a detailed business plan, creating the strategy road map that clearly lays out all the activities of all work groups, and intervening when the activities veer off track.

DEVELOPING A CLEAR COMMUNICATION STRATEGY

In order to make your joint venture relationship work, having a clear agreement is an essential part of building a good relationship. Most joint ventures fail due to lack of clear communication and understanding among parties.

Companies seeking to implement a Joint Venture are encouraged to consider implementing a communication strategy to keep all partners informed of every major developments so that they build trust and enhance the relationship.

Sharing information openly, particularly on financial matters, also helps avoid partners becoming suspicious of each other. The more trust there is, the better the chances that your relationship will work.

It is essential that everyone knows what you are trying to achieve and works towards the same goals. It is usually a good idea to arrange regular, face-to-face meetings for all the key people involved in the joint venture.

DEVELOP A QUALITY BUSINESS PLAN

Prior to closing the deal, the leadership team needs to develop a detailed business plan.

The group should define exactly how and where the joint venture will compete, project how the joint venture might expand beyond its initial scope, set financial targets, plan capital expenditures, and create a blueprint for the organization.

The leadership also needs to draw up performance contracts that make key joint venture managers accountable for the success of the venture.

The partners should clarify the resources, personnel, and behaviors required for the joint venture’s success so confusion about these matters will not hamstring the people charged with running the venture day to day.

APPLY RIGOROUS RISK MANAGEMENT AND PERFORMANCE TRACKING

Establishing clear performance indicators lets you measure performance and can give you early warning of potential problems.

Regularly review how you could improve the way things work and whether you should change your objectives.

For large joint ventures, put in place an audit process, including an active audit committee and external auditors focused solely on the venture’s financial and risk components.

It also implies building a strong finance structure inside the joint venture to make sure that the board and venture management have the critical information they need to perform their roles effectively.

DEPENDENT VERSUS INDEPENDENT ORGANIZATIONAL MODEL

The independent model lets companies create new and often more entrepreneurial cultures. The independent joint venture typically has an entirely separate reporting structure from the parents, its own facilities, and the freedom to source from external as well as internal suppliers.

This model allows venture management to have greater focus and unity of purpose, but it also requires the venture to establish and maintain separate HR systems.

The downside is that it can make it harder to recruit potential managers who would prefer the wider career opportunities offered by the parent companies.

Dependent model relies to a large extent on the systems and processes of the parent. Most organizations, however, go for the hybrid model, where the relationships are interdependent. Members of the management team maintain links to their original corporate parent.

They remain on the same compensation plans, anticipate future career moves back to the parent, and sometimes have dotted-line-reporting relationships to an executive in their parent organization. 

STREAMLINE DECISION MAKING

The partners should identify the venture’s most important governance processes and then designate the appropriate degree of parental involvement for each.

The parents should generally limit their interventions in more operational processes, such as staffing, pricing, and product development - where the joint venture needs independence to ensure competitiveness and market responsiveness.

BUILDING THE ORGANIZATION

Parent companies may need to move outside their comfort zones when devising an organizational structure for their joint ventures, adopting a staffing model, and designing incentive plans.

If the parents try to preserve the status quo, they risk reducing the synergies between them. The creation of a joint venture is an opportunity to unfreeze the organisation.

MAKE PEOPLE WANT TO JOIN THE TEAM

Regardless of the organizational model, the leadership must create a compelling value proposition that makes good people want to join the team.

For start-ups, the excitement of building something from the ground up is often sufficient to attract motivated players. In difficult turnaround situations, the compensation upside might be essential.

OBTAIN COMMITMENTS FROM PARENT COMPANY STAFF

Top-performing companies recognize that skills are transferred by people, not by processes or contracts.

Once the skill holders are identified, create formal contracts for them that define their levels of commitment to the joint venture and the metrics by which their performance will be evaluated and rewarded.

The leadership also needs to create incentives for parent company employees who spend less than half their time on the joint venture so that they are motivated to provide strong support.