Joint Ventures: Driving Innovation While Limiting Risk

Companies may have to innovate their capital deployment tactics to remain ahead of the present enormous sector and economic disruptions. But those capabilities cannot always be scaled in-home or resolved through traditional mergers and acquisitions.

CFOs are increasingly using joint ventures to grow their firms while sharing risk and benefiting from optionality. Companies frequently use joint ventures to limit hazard exposure when they buy new property or enter new markets. A modern EY study of C-suite executives showed that 43% of organizations are looking at joint ventures as an alternate form of expenditure.

Even though organizations usually transform to traditional M&A to spur growth and innovation in excess of and higher than natural solutions, M&A can be difficult in the present natural environment: potentially large capital outlays with a limited line-of-sight on return, inconsistent sector development assumptions, or merely a bigger threshold to apparent for the business case.

Balancing Trade-offs

Companies may require to weigh the trade-offs between managing disruption and risk as they contemplate pursuing a joint enterprise or alliance, specifically, (i) how disruption will facilitate differentiated development and (ii) the risk inherent in capital deployment when there is uncertainty in the sector. The answers to these queries will assist advise the path forward (revealed in the following graphic).

  Balancing Market Disruption with Uncertainty 

Assessing a JV

Agree on the transaction rationale and perimeter. A lack of alignment among joint enterprise companions pertaining to strategic goals, plans, and governance structure may impact not only deal economics but also business overall performance. Whether or not the gap is linked to the definition of relative contribution calculations or each partner’s decision legal rights, addressing the issues early in the deal process can help achieve deal goals.

Begin due diligence early and with urgency. Do not undervalue the time and exertion expected to put together and exchange appropriate information with which your team is at ease. Plan for due diligence, as well as potential reverse due diligence, to include not only financial and commercial components but also useful diligence aspects, such as human resources and information engineering.

Determine the exit strategy before exiting. While partners could exit joint ventures based on the achievement of a milestone or due to unexpected instances, the suitable exit opportunity should be predetermined prior to forming the construction. Reactive disagreements, arbitration, or litigation threats over the mechanisms of JV dissolution and asset valuation can consequence in not only economic but unnecessary reputational decline.

Launching the JV

Once both companies have navigated the problems of diligence, the weighty lifting begins with standing up the entity. The CFO, critical in structuring the business’s economics, can also help ensure a successful close and realization of early-year objectives. Key areas of target incorporate:

Defining the path to worth development. In joint ventures, value development can come from acquiring earnings growth and reducing costs through combining capabilities. Creating alignment and commitment within just the group and father or mother companies to recognize the growth plan may be critical. Organizations that fail to create value usually do so because they (i) insufficiently plan, (ii) lose focus after deal close, or (iii) establish poor governance linked to accountability and monitoring.

Developing the operating product. A joint venture needs an operating model that brings together the best capabilities of the partners while maintaining the agile nature of a startup. The combination can be tough to execute in a market that could have incumbent gamers with no incentive to encourage innovation or disruption. Companies often don’t invest enough time planning for three crucial and linked components:  (i) defining how and exactly where the enterprise will operate, (ii) the market, and (iii) the venture’s sell capabilities. They should be synthesized into an operating model and governance construction that complement each other.

Maintaining the lifestyle adaptable. A joint enterprise culture that adheres to historical affiliations with both or each moms and dads can inhibit how rapidly the business will achieve development goals, particularly in customer engagement and go-to-sector collaboration. Responding swiftly to sector needs and developing customer commitments require executives to rethink the optimal lifestyle for joint ventures versus how matters have generally been performed in the previous.

Case Examine

An EY team recently helped an industrial manufacturer and an oil and gas servicer form a joint venture that shared operational capabilities from each parent companies to sell innovative, end-to-end methods to shoppers. The joint venture was also considered to have an early-mover advantage to disrupt an untapped and unsophisticated sector.

Just one company had the domain knowledge, and both organizations had a part of a new sector giving. It would have taken each company more time to develop this sector giving by itself. Each company’s objective was to strike a balance among managing the risk of going it alone with figuring out a partner with a capability that it did not possess.

By coming alongside one another, the companies were being able to enter new customer markets, deploy new products lines, explore new R&D capabilities, and leverage a resource pool from the father or mother organizations. The joint venture also allowed for higher innovation, given the shared operations and complementary suite of solutions that would not have been out there to both father or mother company without important expenditure or hazard.

The joint venture was able to function as a lean startup although leveraging two multibillion-greenback parent companies’ resources and expertise and minimizing hazard for both parent companies to deliver impressive providers to the sector.

CFOs can enjoy a crucial position in assisting their companies pursue a joint enterprise, vet joint enterprise companions, and then act as an educated stakeholder across stand-up and realization activities. With ongoing financial and sector uncertainty, it may be especially critical for CFOs to identify options like joint ventures that can assist companies stay ahead of disruption, spur innovation, and manage risk.

Sonal Bhatia, is principal and Neil S. Desai a managing director at EY-Parthenon, Ernst & Younger LLP. Particular contributors to this report were being Ramkumar Jayaraman a senior director at EY-Parthenon, Ernst & Young LLP, and Caroline Faller, director at EY-Parthenon, Ernst & Young LLP.

The views expressed by the authors are not automatically those people of Ernst & Younger LLP or other associates of the world EY group.

E&Y, EY-Parthenon, Joint Ventures, JV