Joint Ventures: Driving Innovation While Limiting Risk

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

CFOs are more and more using joint ventures to grow their businesses while sharing risk and benefiting from optionality. Companies frequently use joint ventures to restrict risk exposure when they buy new property or enter new markets. A the latest EY survey of C-suite executives showed that forty three{bcdc0d62f3e776dc94790ed5d1b431758068d4852e7f370e2bcf45b6c3b9404d} of providers are considering joint ventures as an substitute sort of investment.

When providers usually turn to traditional M&A to spur growth and innovation above and earlier mentioned natural and organic choices, M&A can be tough in the recent environment: potentially large funds outlays with a limited line-of-sight on return, inconsistent sector growth assumptions, or merely a bigger threshold to distinct for the business circumstance.

Balancing Trade-offs

Companies may will need 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 growth and (ii) the risk inherent in capital deployment when there is uncertainty in the sector. The answers to these queries will assist tell the path ahead (proven in the following graphic).

  Balancing Market place Disruption with Uncertainty 

Evaluating a JV

Agree on the transaction rationale and perimeter. A lack of alignment between joint enterprise associates with regards to strategic goals, goals, and governance structure may impact not only deal economics but also business performance. Irrespective of whether the gap is linked to the definition of relative contribution calculations or each partner’s decision rights, addressing the issues early in the offer process can help achieve deal goals.

Sonal Bhatia, EY-Parthenon

Start due diligence early and with urgency. Do not underestimate the time and effort demanded to get ready and exchange appropriate information with which your team is snug. Plan for owing diligence, as effectively as possible reverse owing diligence, to include not only financial and commercial components but also useful diligence aspects, such as human resources and information engineering.

Outline the exit strategy before exiting. While partners might exit joint ventures based on the achievement of a milestone or owing to unforeseen conditions, the perfect exit opportunity should be predetermined prior to forming the framework. Reactive disagreements, arbitration, or litigation threats over the mechanisms of JV dissolution and asset valuation can outcome in not only economic but unnecessary reputational reduction.

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 include things like:

Defining the path to value development. In joint ventures, value development can come from reaching earnings growth and reducing costs through combining capabilities. Creating alignment and commitment inside of the organization and father or mother companies to notice the growth plan may be critical. Firms 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 linked to accountability and monitoring.

Developing the working product. 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 vital and linked parts:  (i) defining how and exactly where the enterprise will operate, (ii) the market, and (iii) the venture’s sell abilities. They should be synthesized into an working model and governance framework that complement each other.

Neil Desai, EY-Parthenon

Preserving the lifestyle versatile. A joint enterprise culture that adheres to historical affiliations with possibly or equally mother and father can inhibit how fast the business will reach growth goals, specifically in customer engagement and go-to-sector collaboration. Responding quickly to sector requires and developing customer commitments require executives to rethink the optimal lifestyle for joint ventures versus how issues have generally been performed in the earlier.

Case Research

An EY team recently helped an industrial maker and an oil and gasoline servicer form a joint venture that shared operational abilities from equally parent companies to sell innovative, end-to-end solutions to customers. The joint venture was also considered to have an early-mover benefit to disrupt an untapped and unsophisticated sector.

A person company had the domain know-how, and both providers had a ingredient of a new sector providing. It would have taken each company more time to develop this sector providing by itself. Each company’s objective was to strike a balance between managing the risk of going it alone with pinpointing a partner with a ability that it did not have.

By coming alongside one another, the companies were being able to enter new buyer markets, deploy new item traces, explore new R&D capabilities, and leverage a resource pool from the father or mother providers. The joint venture also allowed for bigger innovation, given the shared operations and complementary suite of solutions that would not have been obtainable to possibly father or mother company without considerable investment or risk.

The joint venture was able to function as a lean startup while leveraging two multibillion-dollar parent companies’ methods and expertise and reducing risk for both parent companies to deliver revolutionary expert services to the sector.

CFOs can play a vital position in assisting 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 economic 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 taking care of director at EY-Parthenon, Ernst & Younger LLP. Unique contributors to this post 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 all those of Ernst & Younger LLP or other users of the worldwide EY organization.

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