Joint ventures can often seem like a slam dunk from the outset – two successful companies joining forces to push forth some new, fantastic idea – but things don’t always go smoothly, regardless of either parent company’s best intentions. As this new JV gets off the ground, hiccups and problems can quickly lead to disillusion and bickering amongst the invested parties, often leading to an ultimately unsuccessful venture. Why do so many JVs fall short? According to a January 2014 McKinsey & Company article titled “Avoiding blind spots in your next joint venture,” the answer lies in the skipping of best practices and steps of the process in order to reach the end more quickly.
In many cases, the process lacks discipline and continuity or doesn’t follow the five stages of development: designing the business case and internal alignment, developing the business model and structure, negotiating deal terms, designing the operating model and launch plan, and finally overseeing ongoing operations. The article provides four possible reasons for why JVs fail: a rush to completion, a lack of leadership continuity, declining parent company involvement, and poor risk planning.
Issue: Rush to Completion
Often, pressure to get the deal done quickly and the JV launched leads to key issues being overlooked – especially when there is complexity to the venture. When the focus becomes getting it done vs. getting it right, JVs run into issues. It seems a disproportional amount of time is spent on steps where less overall value is at risk, often due to those involved being distracted by what’s familiar instead of focusing on what’s necessary for the particular JV.
Companies think that by focusing on what they know, and possibly even skipping steps, they can move things along and get the JV up and running more quickly. This is perceived as a “safe” option and can lead to the aforementioned being unprepared for some operational realities. Other times the involved parties get so wrapped up in the deal terms they forget to focus on the actual content of the JV.
It is crucial to find a way to balance the pressure for quickness with the demands of thorough planning.
Issue: Lack of Leadership Continuity
One of the biggest struggles for in-progress JVs is to maintain a clear view of what the end result should be throughout the process. There are often a lot of cooks in the kitchen so to speak in addition to all the moving parts of the venture itself, so maintaining clarity can be a struggle. Usually, each person involved will only have responsibility for one or two things. This, combined with potentially unaligned measurements for success, can lead to disorder and chaos. As more people join the project, senior management usually steps back after the initial stages, which can also lead to chaos as roles won’t be plainly defined.
When leadership is disjointed, decisions made earlier in the process can have an unintentionally huge effect later on. It is vital for senior management to stay involved with at least overseeing the JV in order to keep everything on track and moving towards completion.
Issue: Declining Parent Involvement
It perhaps seems obvious that executive and senior management input should be constant throughout the JV process, but this isn’t always the case – to detrimental results. Even when a JV manager is appointed, other senior management are only involved at the beginning and many seem to only be concerned with the deal terms stage. Important decisions are therefore frontloaded in the process, leading to some forced aspects of the JV instead of letting everything develop organically.
Issue: Bad Planning in Regards to Risk
Each parent company has their own risk profile, which in turn colors their view of the JV and its risks. Often times, creating an appropriate/JV-specific risk plan gets neglected in order to get to more mutually agreeable terms, even of those terms are not best for either parent or the new JV. Left unaddressed, these issues can come to light too late in the process to be appropriately handled. Identifying risk and creating a plan for the JV should be a collaborative process.
Creating a successful joint venture, like any other business decision, requires focused management from the initial idea stage through implementation, and continuing with strong management of the venture once it has launched.