JV on the Rocks

Without plenty of attention and TLC, a joint venture may well run aground.

Trite as it may sound, a joint venture really is like a marriage. For both, good communication between partners is essential. Goals should be mutually agreed on. And a little passion helps. As for the darker side of the matrimonial comparison, many ventures, too, succumb to real-world temptations. Further, even if they don’t end outright in divorce (corporate-style), JVs often drag through years in an unproductive state.

There’s also a familiar ring to the reasons experts give for ventures failing or underperforming. Sometimes ventures just slide by for a while on good feelings from the wedding. “Many joint ventures have an initial endowment of independence from the parents, but then neither parent exercises the control they would exercise if the venture were an individual business unit,” says David Ernst, leader of McKinsey & Co.’s global alliance practice.

And in general, corporate partners simply do too little prenuptial planning. “Companies tend to be cavalier about alliances, and think of them as no big deal,” says Harbir Singh, a management professor and director of the strategic alliance program at the University of Pennsylvania’s Wharton School. A 2001 study he co-authored of 1,572 strategic alliances showed that while ventures are an increasingly popular way for companies to grow revenues, almost half fail.

There is much to be learned, though, from companies that understand the perils of venturing, and govern alliances with discipline and the desire to measure venture performance properly. The high level of planning that goes into Merck & Co.’s alliance structure, for example, assures that good decision-making “kind of cascades,” says executive vice president and CFO Judy Lewent, who has strung together successful drug ventures with Johnson & Johnson, AstraZeneca, Schering-Plough, and other firms. “As you think through the structuring of a joint venture, the structure enables the alignment of the partners to the best degree possible.” Merck wants the venture to be “as close to a wholly owned subsidiary as possible,” says Lewent, and that requires “the right kinds of performance measurements.”

The Unexamined Life

Inattention to measurement, however, seems endemic in most venturing. Mc-Kinsey, which counts itself something of a marriage counselor for troubled ventures, sees poor use of metrics at the root of JV problems. In a presentation titled “Measuring Alliance Performance: What CFOs Should Do to Avoid Job-Threatening Surprises,” McKinsey partner Ernst recently cited a 1999 Andersen Consulting survey showing that only 11 percent of alliance partners believe they have sufficient performance measurements in place. And a surprising 49 percent declared they had “essentially no performance measurements in place.”

What’s more, many agreements detailing the governance plan for JVs “specify pretty low levels at which parent or board approval is required for individual decisions. So from the outside, it looks like the board should have control,” says Ernst. The problem, though, is that the partners “tend to be invasive” and override board control “on individual expenditures or contracts that generate financial risk,” he says. “That means risk management is on a very ad hoc basis.”

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