Launching and operating a world-class JV is a complex effort, but it can produce a better ROI than acquisitions and mergers. Choosing the right partners and providing senior leadership oversight over the life of the JV are critical.
By Joseph Warren

There is a saying about Joint Ventures (JVs) that goes something like this: Get the launch right and the rest will take care of itself. Sounds simple, but the reality is that even JVs that follow commonly recognized best practices fail with regularity.

Best practices include carefully selecting the right partners, and ensuring there is internal alignment of business goals, a well-defined structure and decision making process, strong governance, and an equitable financial system.

The best practices make good business sense, so why do so many JVs fail? The answer is that too many JVs are rushed to startup, avoiding discussion on complexities like cultural differences and market strategies.

There is a new addition to the list of best practices: Slow down the negotiation process and consider all stages of development from design to ongoing operations, and strategies for keeping leadership fully engaged.

Speed to Launch Can Mean Speed to Failure
When companies decide to pursue JVs, there is a lot of pressure to get the organization to launch as soon as possible. It is not surprising because the JV is formed as a strategic solution to meet a need or solve a problem, such as capturing a new market or accessing technology.

The sooner goals are met, the better for the parent companies, but there is another reason for speedy launch. It is tempting for the executives, and other leaders responsible for JV launch and minimizing risks, to focus only on what they are most comfortable with, like financials or marketing. They fail to customize language and negotiate critical items, so they can turn their attention to other responsibilities. The result: appropriate attention is not given to the JV elements where the most value can be created. This was the conclusion of McKinsey & Company consultants who interviewed 20 S&P 100 companies that have evaluated or managed over 250 JVs. Taking shortcuts will leave potential value on the table.

Due diligence is a common business term, but in this case it means more than standard evaluation of traditional business elements, such as accounting, distribution channels, legal, and regulatory requirements. Comprehensive due diligence also requires performing due diligence on the JV partners which includes standard evaluations and much more, like business relationships, culture of the partnering organization, culture of the home country of the JV partners, and political relationships.

JV partners that are not aligned in terms of mission and vision, ethics, marketing strategies, operations, and other critical operational elements normally addressed in a business plan will end up with a risk-laden launch, an incomplete operating plan, or both.

During the potential partner assessment and negotiation stages, executive evaluators need to provide the time and resources to complete an in-depth analysis and require senior managers and project leaders to provide a detailed presentation that covers all the stages of JV development – developing the initial business case, internal alignment, business model design, organizational structure, JV agreement terms including exit strategies, operating plans, launch plans, and ongoing management of operations. Toward the end of the process is when executive attention to the JV begins to wane.

Complementing Partners
How does leadership choose the right JV partners, which is a critical step to success? The JV participants must complement each other, and that should be a factor in developing the business case. Even the most detailed business plan will fail if the companies involved are at odds in terms of vision and goals. Beyond that, the JV companies should bring synergistic advantages to the new organization.

For example, a publicly owned company with stock-based capital joins a privately owned company. As a result, both have greater access to innovative technologies and are able to introduce the new technology to market in a much shorter timeframe through combined funding. That is synergy, but even synergy will only produce full value when the details are right.

Underfunding from the start was one of the reasons the JV formed by Verizon and Redbox failed after 20 months. The intent was to combine streaming service with kiosk DVD rentals, but the 450 million pledged by both companies to expand the content catalogue was not nearly enough money. The catalogue became a list of low-grade movies.

Synergistic partners also need to be of like minds concerning strategy. Partners that disagree on critical JV business elements face dealing with ongoing and rising conflict, which takes critical management attention away from running the business. Conflicts will arise during the negotiation stage, and they should be taken seriously and not just smoothed over in order to get the JV launched. Culture clashes require special attention in order to create a cohesive JV.

The key question each company must ask itself is whether the two companies can develop effective decision-making and operational systems that meets the expectations of both companies as to the type of JV culture desired. If cross-cultural conflict – social or organizational – remains unresolved during the negotiation process and into launch, at the very least it will be nearly impossible to achieve full value because focus will be on conflict resolution and not on operations. Lack of mutual understanding between leaders breaks down trust, overshadowing everything.

Continuity in executive participation and operational management is important. It is common for different managers to step in at different phases of the JV – from the development stage to ongoing operations. Unfortunately, a common practice is for senior decision makers to attend the initial presentations and early negotiations and then disappear. They appear again when time to sign legal papers, and then disappear again.

The absence of senior management influences during launch and ongoing operations means the JV does not have the cohesive oversight it needs, leading to disjointed decision-making and the degradation of JV value. Adding senior decision-makers to the JV board can provide the oversight continuity needed and ensure the needed resources are provided.

Successful JVs that deliver the expected value are the end result of careful negotiations to ensure the right partners are selected and ongoing operations drive the desired value.