Joint Ventures: Reality of Success & Failure. October 2011

Transcription

1 Joint Ventures: Reality of Success & Failure October 2011

2 Introduction Increasingly companies are looking for innovative ways to structure their commercial arrangements with their more strategic service providers, aiming to: Incentivise vendors to improve performance Retain control of core assets while leveraging 3rd party skills to improve performance and cost Commercialise assets and turn a cost base into a profit centre However, anecdotal evidence and hard-won experience often cause these models to be viewed sceptically by senior management perceived failure of the JV model has the potential, if unaddressed, to overshadow partnering considerations The intent of this thought-piece is to examine the reality of Joint Ventures: Analyse definitive sources and quantification regarding JV success and failure rates; Compare with acquisitions and even term contract outsourcing; Outline risk mitigants and approaches for your company to adopt to enhance chances of success 2

3 Contents Overview of potential co-operative models Joint Venture success and failure: overview of well-known views and assertions Potential risk mitigants Key success factors Summary 3

4 Overview of potential co-operative models Many types of interorganisational model exist JV isn t always the right solution Increasing integration and formalisation in the governance Type of relationship, other than Supply Agreement HIERARCHICAL RELATIONS JOINT VENTURES EQUITY INVESTMENTS COOPERATIVES R&D CONSORTIA STRATEGIC COOPERATIVE AGREEMENTS CARTELS FRANCHISING LICENSING SUBCONTRACTOR NETWORKS INDUSTRY STANDARDS GROUPS ACTION SETS MARKET RELATIONS Description Through acquisition or merger, one firm takes full control of another s assets and coordinates actions by the ownership rights mechanism Two or more firms create a jointly owned legal organization that serves a limited purpose for its parents, such as R&D or marketing A majority or minority equity holding by one firm through a direct stock purchase of shares in another firm A coalition of small enterprises that combine, coordinate, and manage their collective resources Inter-firm agreements for research and development collaboration, typically formed in fast-changing technological fields Contractual business networks based on joint multi-party strategic control, with the partners collaborating over key strategic decisions and sharing responsibilities for performance outcomes Large corporations collude to constrain competition by cooperatively controlling production and/or prices within a specific industry A franchiser grants a franchisee the use of a brand-name identity within a geographic area, but retains control over pricing, marketing, and standardized service norms One company grants another the right to use patented technologies or production processes in return for royalties and fees Inter-linked firms where a subcontractor negotiates its suppliers long-term prices, production runs, and delivery schedules Committees that seek the member organizations agreements on the adoption of technical standards for manufacturing and trade Short-lived organizational coalitions whose members coordinate their lobbying efforts to influence public policy making Arm s-length transactions between organizations coordinated only through the price mechanism 4

5 Overview of potential co-operative models A variety of organisational economic, strategic & political motives for an alliance... requirements will determine best fit co-operative model Category Motive: Learning & internalization of tacit, collective and embedded skills Restructuring, improving performance Requirements Acquiring means of distribution Organisational: Learning / Competence Building Economic: Market- Cost- & Risk related Vertical integration, recreating and extending supply links Complementarity of goods and services to markets Gaining access to new technology Legitimation, bandwagon effect, following industry trends Obtaining economies of scale Market seeking Cost sharing, pooling of resources Fitness for purpose of specific cooperative models E.g. Service performance Cost Risk Feasibility given cost recognition and VAT rules Strategic: Competition Shaping / pre-emption / Product & Technology related Risk reduction & risk diversification Diversifying into new businesses Co-specialization Developing products, technologies, resources Achieving competitive advantage Ability to agree a suitable model with partner(s) Cooperation of potential rivals, or pre-emptying Political: market development Overcoming legal / regulatory barriers Developing technical standards 5 Source: Elaborated from Agarwal and Ramaswami 1992; Auster 1994; Doz and Hamel 1999; Doz, Olk and Ring 2000; Harrigan 1988a; Hennart 1991; Lorange and Roos 1993; Zajac 1990

6 Contents Overview of potential co-operative models Joint Venture success and failure: overview of well-known views and assertions Potential risk mitigants Key success factors Summary 6

7 % of JV Mortality % of JV Mortality Joint Venture Success and Failure: Overview Original sources point to the potential for JV mortality Kogut s definitive work analysed the life-cycle of JVs 90.0% 16.0% Domestic JVs 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% Hazard Rate: JV being acquired Hazard Rate: JV being dissolved 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% International JVs All JVs 10.0% 2.0% 0.0% Age: 1 Age: 2 Age: 3 Age: 4 Age: 5 Age: 6 Age: >6 0.0% Age: 1 Age: 2 Age: 3 Age: 4 Age: 5 Age: 6 Age: >6 Age of JV Age of JV indicating significant time sensitivity About 11.3% of JVs were dissolved for whatever reason by 3 years old. 19.5% were dissolved by 5 years old. The annual death rate has two peaks: early infant at 2 years and mid-life crisis at 5 years old Source: The Stability of Joint Ventures: Reciprocity and Competitive Rivalry, J. Kogut, Warwick Business School, Booz Allen Hamilton, Mercer, Outsourcing Center need to care for the very young and those in older age 7

8 Joint Venture Success and Failure: Overview However, JV s fair no worse than other alliances and partnership arrangements, such as acquisitions More than half of acquisitions fail Outsourcing Contract( IT Scope) Renegotiation Rate Outsourcing Contract (HR Scope) Renegotiation Rate 8 Mercer Management Consultancy Outsourcing Contract (all) Renegotiation Rate 50% of acquired companies kept at arm s length 15% fully integrated 9% symbiotic. Startegic Alliances General Failure Rate Half of all transactions end in failure Acquisitions Failure rate Warwick Business School JV Acquisition by end 5th year 40% of strategic alliances [fail]. JV Acquisition by end 3rd year failure to pick the right partner, to agree goals up front lack of relationship and chemistry JV Dissolution by end 5th year inadequate and erratic communication interference by parents JV Dissolution by end 3rd year 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% Booz Allen Hamilton Source: The Stability of Joint Ventures: Reciprocity and Competitive Rivalry, J. Kogut, Warwick Business School, Booz Allen Hamilton, Mercer, Outsourcing Center so it s about getting the right deal to yield a reasonable balance of benefits over a period of time

9 Joint Venture Success and Failure: Overview Many JVs and Outsourcing may count toward the hazard rate but go on to becoming something else: this is not necessarily failure Telefonica O2 Radianz Sainsbury JP Morgan Started of as a joint venture formed in 1985 between BT Group (60%) and Securicor (40%) and known as Cellnet. In 1999 BT Group acquired Securicor's 40% share of Cellnet and the company was later rebranded as BT Cellnet. BT Cellnet was rebranded as "O2" in 2002 In 2005 Telefónica acquired BT Group's European mobile telecommunications businesses In 2000 Reuters (51%) entered into a joint venture with Equant (49%) to establish Radianz. Radianz provided an IP platform to deliver content and conduct transactions along with network connectivity and security to end-users and combine Reuters networks with Equant s technology. In 2004 Reuters acquired Equant's 49% stake and then sold 100% of Radianz to BT. IT outsourcing to Accenture. Initiated in 2000, the 10 year contract was terminated 3 years early as new CEO decided to bring its IT operations back in-house During its term the venture transformed Sainsbury s IT capabilities providing a stable platform for growth whilst halving the operating costs of IT IT outsourcing with IBM. The 7 year contract was entered into in 2002 and terminated in 2004 following JP Morgan's merger with Bank One on the basis that the merged bank now had enough capacity in-house to manage its own technology. 9

10 Contents Overview of potential co-operative models Joint Venture success and failure: overview of well-known views and assertions Potential risk mitigants Key success factors Summary 10

11 Potential risk mitigants Identification and quantification of risks is a vital step in managing them Key Sources of Risk Consistency of strategy & objectives Compatibility of culture and expectations Selecting partners Verifying assumptions Financial stability of the venture Review of legal agreements No external advisor input Due dilligence findings Congruence of strategies and long term goals Identify potential conflicts; seek to harmonise explicitly Compatible oragnisational structures? Corporate cultures? Problem solving approaches similar? Similar intent in market? Financial viability? Lack of transparency Omission of ongoing reviews Stable over time? Variations understood and accepted? Avoid creating new risks in the legals Legals reflect the essence and spirit of the deal? Removal of ambiguity Failure to keep objective Insufficient skill set in house Consistency? Issues addressed? Chemistry? Proven Methods for Risk Quantification Quantitative methods such as NPV Sensitivities as a learning tool Understand differences between each party s baseline view and risk occurrence view (sensitivities) Deliberately estimate probabilities of risk items Create scenarios including pessimistic and optimistic Use advisors to challenge Avoid overt conservatism 11

12 Potential risk mitigants Risk sharing and mitigation Traditional approach: allocate risks according to party best able to manage or absorb the risk Threats to risk management Legal Agreements Earn Out Formulae Risk Insurance Contingency Plans Conservative view adoption Complementary Approaches Risk management through planning Hedging or insurance not available Unknown political interventions or changes to polocy Surfacing of new unanticipated risks without time to manage them Lack of partner cooperation due to goal conflict Unwillingne ss of one partner to share risk Unpredicta ble changes to legal, regulatory or institutional constraints Lack of risk management know-how Superior risk plan characteristics: Create a subteam, comprising negotiation, implementation and SME representatives Assign specific risk elements to individuals on point Consistency across the spectrum Allocate risk sharing acceptable to all: win-win Appropriate compensation in deal reflecting risk taken Maintain customer focus and intent to ensure uninterrupted customer satisfaction Reasonable balance between costs and benefits for all parties Safety valves: reasonable escape clauses; ability to flex; flexibility regarding enforcement; back up plans Wide acceptability by project team, senior management, external advisors 12

13 Potential risk mitigants World class approach to risk management 1. Identify risk early 2. Scrutinise assumptions 3. Identify key financial drivers 4. Model impacts from the moment brought to the team for likelihood and variability and how linked to risks Quantified for each financial driver 5. Runs sensitivities & scenarios 6. Assess risks to financials 7. Prepare trade offs 8. Balance interests to understand impacts and payments with special care help negotiators allocate risk sensibly, transparently Incorporating risk management into project plan 13

14 Contents Overview of potential co-operative models Joint Venture success and failure: overview of well-known views and assertions Potential risk mitigants Key success factors Summary 14

15 Key Success Factors Several key success factors emerge for successful partnerships Clear business purpose/objective for the JV Partners have an alignment of interests in making the JV succeed Sound business case/business plan i.e. it is set up to succeed financially and not end up being a financial drain on the JV partners Good cultural fit between the JV partners Relationship of trust between the JV partners Robust and fair/open governance structure Strong and experienced management team JV partners do not seek to micro manage the JV thereby alienating management 15

16 Summary There are many models of collaborative organisation: JV is only one of them Likelihood of Joint Venture success or failure is similar to that of other collaborative models. Such collaborative models tend to serve a purpose for a period of time then they evolve. Potential risk mitigants are available; it s smart to manage the key success factors and benefit from experience of those who have gone before For further discussion of this topic or to arrange for an Elix-IRR expert to review your Joint Venture strategies, please contact us 16

17 Contact Us For further information on the research, please contact the following persons at Elix-IRR: Stephen Newton Partner Tel: +44 (0) Anthony Potter Principal Tel UK: +44 (0) Tel USA: Elix-IRR is a Sourcing Advisory and consulting firm focused on providing business support through the entire sourcing lifecycle for large-scale outsourcing and other complex sourcing transactions. Elix-IRR combines technical, operational and supply-chain capabilities, supplemented by extensive outsourcing advisory operational experience across all aspects of the sourcing process. With deep experience in the buy-side, sell-side, legal and advisory aspects of sourcing initiatives we provide high-impact services to FTSE 100/ Fortune 500 and middle-market clients across the complex strategic sourcing landscape and guide our clients in making the right supplier choices. 17 Elix-IRR Partners LLP