Joint Ventures: Driving Innovation While Limiting Risk

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

CFOs are progressively using joint ventures to grow their companies while sharing risk and benefiting from optionality. Companies frequently use joint ventures to restrict danger exposure when they buy new assets or enter new markets. A recent EY study of C-suite executives showed that forty three{d5f2c26e8a2617525656064194f8a7abd2a56a02c0e102ae4b29477986671105} of businesses are thinking of joint ventures as an alternative type of financial commitment.

While businesses usually transform to classic M&A to spur growth and innovation above and over natural and organic options, M&A can be hard in the present-day setting: potentially large funds outlays with a limited line-of-sight on return, inconsistent sector growth assumptions, or merely a larger threshold to apparent for the company circumstance.

Balancing Trade-offs

Companies may need to weigh the trade-offs between managing disruption and risk as they take into consideration pursuing a joint venture or alliance, specifically, (i) how disruption will facilitate differentiated growth and (ii) the risk inherent in capital deployment when there is uncertainty in the sector. The solutions to these inquiries will enable notify the route forward (revealed in the following graphic).

  Balancing Current market Disruption with Uncertainty 

Analyzing a JV

Agree on the transaction rationale and perimeter. A lack of alignment amongst joint venture partners regarding strategic targets, goals, and governance structure may impact not only deal economics but also company general performance. No matter if the hole is similar to the definition of relative contribution calculations or each partner’s decision legal rights, addressing the issues early in the offer process can help achieve deal targets.

Start out due diligence early and with urgency. Do not underestimate the time and work necessary to put together and exchange appropriate information with which your team is relaxed. Plan for due diligence, as perfectly as opportunity 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 may well exit joint ventures based on the achievement of a milestone or due to unexpected circumstances, 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 result in not only economic but unnecessary reputational decline.

Launching the JV

Once both companies have navigated the challenges 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 aim incorporate:

Defining the route to benefit development. In joint ventures, value development can come from reaching revenue growth and reducing costs through combining capabilities. Constructing alignment and commitment in the corporation and father or mother companies to understand the growth plan may be critical. Providers that are unsuccessful to create value usually do so because they (i) insufficiently plan, (ii) lose focus after deal close, or (iii) establish poor governance similar to accountability and monitoring.

Developing the functioning 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 gamers with no incentive to encourage innovation or disruption. Companies often don’t invest enough time planning for 3 critical and similar factors:  (i) defining how and where the venture will operate, (ii) the market, and (iii) the venture’s sell capabilities. They should be synthesized into an functioning model and governance structure that complement each other.

Holding the tradition flexible. A joint venture culture that adheres to historical affiliations with both or both of those moms and dads can inhibit how quickly the company will accomplish growth targets, primarily in customer engagement and go-to-sector collaboration. Responding rapidly to sector needs and developing customer commitments require executives to rethink the optimal tradition for joint ventures versus how points have generally been finished in the earlier.

Scenario Review

An EY team recently helped an industrial company and an oil and gas servicer form a joint venture that shared operational capabilities from both of those parent companies to sell innovative, end-to-end answers to consumers. The joint venture was also considered to have an early-mover gain to disrupt an untapped and unsophisticated sector.

A single company had the domain know-how, and both businesses experienced a component of a new sector supplying. It would have taken each company more time to develop this sector supplying by itself. Each company’s objective was to strike a harmony amongst managing the risk of going it alone with identifying a partner with a capability that it did not have.

By coming with each other, the companies were being ready to enter new customer markets, deploy new products strains, explore new R&D capabilities, and leverage a resource pool from the father or mother businesses. The joint venture also allowed for better innovation, given the shared functions and complementary suite of solutions that would not have been accessible to both father or mother company without major financial commitment or danger.

The joint venture was ready to function as a lean startup while leveraging two multibillion-dollar parent companies’ means and expertise and reducing danger for both parent companies to carry revolutionary services to the sector.

CFOs can perform a critical position in aiding their companies pursue a joint venture, vet joint venture partners, and then act as an knowledgeable stakeholder across stand-up and realization activities. With ongoing economic and sector uncertainty, it may be especially critical for CFOs to identify options like joint ventures that can enable companies stay ahead of disruption, spur innovation, and manage risk.

Sonal Bhatia, is principal and Neil S. Desai a taking care of director at EY-Parthenon, Ernst & Younger LLP. Distinctive contributors to this short article 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 people of Ernst & Younger LLP or other customers of the worldwide EY corporation.

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