Joint Ventures 

If large firms, whether they are oil and gas, or industrial, or any other sector, want to get access to emerging economies, if they want to hang on to the business they have, they must be effective in the joint venture space.

It is relatively easy to form a joint venture, it is quite another thing to make it work.

I firmly believe that even some of the largest firms in the world, are equipped to deal with joint ventures as they were, ten or twenty years ago, but really struggle to be effective in the joint venture space as it is today – particularly in the emerging economies.

Joint ventures are a dangerous space. They are a space that you should not enter upon lightly. When going into a joint venture, one of the more dangerous things is to announce it to market as a great triumph at the moment of signing a joint venture agreement. In our experience you begin to find out whether a joint venture is viable, and will deliver value, two or three years into the joint venture.

I believe that a very commonly held misconception is the fact that once a joint venture agreement has been signed it stands. We’re now looking at a scenario where joint ventures are live entities, where the structure of the JV, the ability to deliver in the joint venture, the relationship between the parties, is constantly changing as they go forward.  And many business leaders operate on the concept of – ‘I’ve struck a deal and that deal is valid for the next three decades’ – that is no longer the way it works and certainly not in the emerging economies e.g. the former Soviet Union and other key areas that large businesses want to go into.

What we’re seeing now is that you need to stay with the deal, resource the deal, govern the deal, operationalise the deal, and be prepared to change course within the framework of the joint venture, repeatedly during its lifecycle.

In the majority of cases joint ventures suffer from issues and degrade. They degrade in terms of relationships, they degrade in the overall value they deliver to the original investor. A good joint venture has the same issues but very successfully captures those issues, builds on them and strengthens the relationships as they move forward.

I believe that joint ventures should be thoroughly health checked for ‘real world’ implementability before the joint venture agreement is signed.

I believe that joint ventures should be operationalised thoroughly and professionally, rather than be left to chance, as they often are. It’s very easy to convince yourself that the deal is real. Most of the parties that we work with are heavily incentivised to do the deal, to transact the joint venture, and that leads to a degree of optimism/bias as to the actual implementability. So let’s health-check, let’s check whether it can work in practice, let’s contingency plan and let’s operationalise it correctly – and then you’re off to a good start.

I believe joint ventures often fail or under deliver because of ineffective governance. That’s not to say that there isn’t any governance – there’s usually too much of it – but it fails to detect the issues early enough, and then it fails to intervene effectively.  What we see around the world is that a lot of money is spent on governance, which is by and large ineffective, and is a cost incurred and just gives the joint venture owners and participants a false sense of security.

If you’re seeing heavy governance and very few actual interventions, the joint venture is going off track.

I believe the cultural differences are often the make or break in a joint venture. It is commonly understood via our clients that there is a cultural barrier and many of them struggle to surmount that cultural barrier and we can help. What is less commonly understood, but perhaps more critical is that the cultural effects come into play in year two, three and four of the joint venture, after the captains and the kings have ceased and departed and the everything is operational and then one finds the joint venture often experiences the fact the cultural misalignments are having a significant value eroding effect further down the line.

Joint ventures are like a marriage. There’s too much focus, certainly in large business, about contracting the marriage in the first place (so the wedding ceremony), it’s about the prenuptials. There’s insufficient attention, resource and capability at keeping the relationship live, to tackling issues, to working forward and keeping that marriage positive for all parties involved.

The joint venture space will change over the coming years in a number of ways. Western companies will have to get used to being the minority partner in the joint ventures. They will have to get used to joint ventures being live entities. There is still a perception out there with a lot of our clients that once a joint venture agreement has been signed that we are looking at a deal that is going to be valid for twenty or thirty years, I think we’re going to be looking at deals that are valid for two, three or four years, and then need fundamental refurbishment. So it’s going from a static situation to a live dynamic situation where the joint venture, just like any marriage, matures, changes and is a live entity until the end of the joint venture.