Joint Ventures: Driving Innovation While Limiting Risk

Companies may have to innovate their capital deployment techniques to remain ahead of the recent substantial marketplace and economic disruptions. But those capabilities cannot always be scaled in-dwelling or addressed through traditional mergers and acquisitions.

CFOs are more and more using joint ventures to grow their enterprises while sharing risk and benefiting from optionality. Companies frequently use joint ventures to restrict chance exposure when they buy new belongings or enter new marketplaces. A the latest EY survey of C-suite executives showed that forty three{5f1a26c78b28d929d9f27dbb969c4a714b2b0100827b4d18c2e7d82d75f494e2} of organizations are contemplating joint ventures as an alternate kind of expense.

Although organizations normally flip to classic M&A to spur growth and innovation over and over organic selections, M&A can be complicated in the recent ecosystem: potentially large capital outlays with a limited line-of-sight on return, inconsistent marketplace growth assumptions, or merely a increased threshold to clear for the enterprise situation.

Balancing Trade-offs

Companies may will need to weigh the trade-offs between managing disruption and risk as they look at pursuing a joint enterprise or alliance, specifically, (i) how disruption will facilitate differentiated growth and (ii) the risk inherent in capital deployment when there is uncertainty in the marketplace. The solutions to these questions will help advise the path forward (demonstrated in the following graphic).

  Balancing Sector Disruption with Uncertainty 

Analyzing a JV

Agree on the transaction rationale and perimeter. A lack of alignment concerning joint enterprise associates regarding strategic objectives, goals, and governance structure may impact not only deal economics but also enterprise general performance. Whether the hole is linked to the definition of relative contribution calculations or each partner’s decision rights, addressing the issues early in the deal process can help achieve deal objectives.

Sonal Bhatia, EY-Parthenon

Start out due diligence early and with urgency. Do not undervalue the time and hard work demanded to put together and exchange appropriate information with which your team is relaxed. Plan for because of diligence, as effectively as probable reverse because of diligence, to include not only financial and commercial components but also purposeful diligence aspects, such as human resources and information technology.

Define the exit strategy before exiting. While partners might exit joint ventures based on the achievement of a milestone or because of to unexpected situations, the great exit opportunity should be predetermined prior to forming the structure. Reactive disagreements, arbitration, or litigation threats over the mechanisms of JV dissolution and asset valuation can outcome in not only economic but unnecessary reputational loss.

Launching the JV

Once both companies have navigated the difficulties of diligence, the hefty 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 emphasis contain:

Defining the path to value generation. In joint ventures, value generation can come from achieving income growth and reducing costs through combining capabilities. Constructing alignment and commitment in the group and father or mother companies to realize the growth plan may be critical. Companies that fail to create value normally 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 running model. A joint venture needs an operating model that combines 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 players with no incentive to encourage innovation or disruption. Companies often don’t invest enough time planning for 3 essential and linked components:  (i) defining how and in which the enterprise will operate, (ii) the market, and (iii) the venture’s sell capabilities. They should be synthesized into an running model and governance structure that complement each other.

Neil Desai, EY-Parthenon

Trying to keep the society flexible. A joint enterprise culture that adheres to historical affiliations with possibly or equally moms and dads can inhibit how quick the enterprise will accomplish growth objectives, particularly in customer engagement and go-to-marketplace collaboration. Responding speedily to marketplace desires and developing customer commitments require executives to rethink the optimal society for joint ventures versus how items have usually been completed in the previous.

Situation Review

An EY team recently helped an industrial company and an oil and gas servicer form a joint venture that shared operational capabilities from equally parent companies to sell innovative, end-to-conclusion alternatives to clients. The joint venture was also considered to have an early-mover advantage to disrupt an untapped and unsophisticated marketplace.

One particular company had the domain knowledge, and both organizations had a part of a new marketplace providing. It would have taken each company more time to develop this marketplace providing by itself. Each company’s objective was to strike a equilibrium concerning managing the risk of going it alone with identifying a partner with a functionality that it did not have.

By coming collectively, the companies were in a position to enter new consumer marketplaces, deploy new item strains, explore new R&D capabilities, and leverage a resource pool from the father or mother organizations. The joint venture also allowed for better innovation, given the shared functions and complementary suite of solutions that would not have been out there to possibly father or mother company without major expense or chance.

The joint venture was in a position to function as a lean startup when leveraging two multibillion-greenback parent companies’ resources and expertise and reducing chance for both parent companies to provide revolutionary products and services to the marketplace.

CFOs can engage in a essential purpose in helping their companies pursue a joint enterprise, vet joint enterprise associates, and then act as an educated stakeholder across stand-up and realization activities. With ongoing financial and marketplace uncertainty, it may be especially critical for CFOs to identify options like joint ventures that can help companies stay ahead of disruption, spur innovation, and manage risk.

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

The sights expressed by the authors are not always all those of Ernst & Youthful LLP or other customers of the world wide EY group.

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