There were two reasons given for the strategic partnership announced recently between Microsoft and Nokia: scale and access to innovation.
These are two of the most common reasons for joint ventures, according to Graeme Read, group managing director of Antal International, the executive recruitment firm.
“Joint ventures can be a very useful way to share risk, to access other markets and to gain local knowledge,” he said. “But you also need to be sure that your goals are aligned and that your exit plan is in place from the outset. You have to enter with the end in mind.
“Often in the rush and emotion and excitement at the start people tend to not look at the what-ifs: what if it does not work out, what if it hits a rough patch, what if we want to exit the joint venture or sell it? In a typical 50-50 joint venture you will hit deadlock unless you have planned ahead.”
A partnership can be more difficult to manage than a merger or acquisition because decisions need to be agreed jointly, said Steve Allan, a director at Towers Watson, the professional services firm.
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“Joint ventures are challenging. They have all the complications of acquisitions without the final clarity of ownership. Once you take away that clarity of who is the final decision maker it makes the people issues even more complicated,” he said. Someone has to take charge — it’s not practical to have two drivers.
The partners in a joint venture should try to avoid creating the impression that one company is leading the other. This can be done by building a team that has its own characteristics.
The partnership’s managers have a critical role to play here. “What you need to do is forge a new company to bring people together. People will look to their leaders to help them with this. They will want to see whether their leaders really believe in the new arrangement.”
In an ideal world the joint venture would be staffed by talented people who choose to join the new project because they see it as a career opportunity, but most of the time you just have to do the best you can, he said.
If this means that leaders will be joining the joint venture for a time before returning to their parent company, they must take extra care to ensure that employees see their commitment to the partnership. “If people start to lose faith that the leaders are there for the interests of the joint venture, then you have planted a negative seed.”
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It is also important to sell the benefits of joining the new alliance to staff, added Michel Driessen, a partner at Ernst & Young, the professional services firm. For example, it may offer them more career development opportunities.
“You need to tell them what you are doing and why you are doing it and you need to emphasise the benefits to employees,” he said. This should be an ongoing process, not a one-off, Driessen said. And don’t forget the basics such as explaining what will happen to pay, pensions and other benefits, as this sort of worry can be distracting.
Culture clashes can be just as distracting and can mean that people in the team spend their time worrying about how things are done rather than what is achieved, Driessen said.
Done right, collaborative projects can allow businesses access to contracts that they would not have won on their own, said GBS Bindra, the innovation director at Logica, the business and technology service company.
“We work with many partners, including some of our competitors, to help solve complex problems [or take on contracts that are too big for any one business],” he said. “You need to have a mature conversation with your competitor company when you know that the pie is too big for one organisation. It’s better to divide the pie and work together.”
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Clients typically do a check to ensure that the two partners can work together effectively before awarding the contract, he said.
The most important part of due diligence from a potential partner’s point of view is simply getting to know the other side. Don’t rush it, Read said. “Joint ventures can fall apart on cultural mismatches,” he said.
“Take time to get to know your partner, get a sense of their leadership style, their emotional temperature and so on. If you are very different it will be very difficult to get the engagement of all the people required to make it a success, so it is probably best not to do it. We have walked away from joint ventures where we felt our goals were different or there was inequality in what each put in.”
Other business and strategic issues may mean that it is not easy or even possible to walk away from a proposed joint venture. However, managers should factor in the cost of dealing with people issues when developing the business plan so that they are clear about just what will be needed, Allan said.
For example, if employees joining from one company are on better salaries than those from the other, this will need to be equalised. Other costs could include incentive schemes and even the extra management time needed to help unite people as a team.
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“You need to be prepared to invest in this, even though it may mean sacrificing short-term profits,” Allan said.
Close the door on bribery
Joint ventures and partnerships can leave firms vulnerable under the Bribery Act 2010, said John Smart at Ernst & Young, the professional services firm. “You have a responsibility to understand who you are working with from the financial perspective but you also need to check that you will not be taking part in bribery and corruption,” he said.
“If you don’t do this due diligence, there is a risk that after you have created the joint venture there will be practices that you would not allow in your own company, such as bribes being paid to win contracts, inappropriate hospitality and so forth.”
There is a particular risk when entering joint ventures with companies based in countries that have different attitudes to bribery. Smart advises doing a risk assessment of your company’s exposure and the practical arrangements, including governance, that are put in place.
It may not always be realistic to insist that your partner does everything your way, but you do need to be comfortable that any compromises do not expose you to excessive risk.