This article originally appeared on Forbes.com.
It may be time to reconsider joint ventures.
For years, many business leaders viewed joint ventures as unpopular and not particularly successful tools for developing a business or optimizing costs. But new Bain & Company research has found surprising evidence to the contrary. In fact, overall, the value of joint ventures grew 20% annually from 1995 to 2015—that’s twice the rate of M&A deals.
In our global survey of 253 companies that used joint ventures to spur growth or optimize their product mix, more than 80% of the participants told us that the deals met or exceeded expectations.
What do these companies do right? They develop the talents and routines to make joint ventures successful and understand the fundamental difference between joint ventures and M&A. For example, if an acquisition goes off course, the acquirer has the power to take all the steps required to shift direction. But with a joint venture, you can’t start over. You need to have the right foundation in place before the deal is signed, with solid agreement on strategy and ways of working—as well as on how to end the deal when the time is right.
Create a repeatable model
Working with companies on more than 450 joint ventures, we’ve learned that the best partners create a repeatable model for success. They establish a sound strategic foundation, with clear deal objectives. They operate with an aligned joint venture architecture, and with deal structures that prepare the partners for evolving scenarios, setting up the deals for healthy integration or solid ongoing management. They also carefully manage leadership transitions. As a result, the partners prevent a host of potential challenges, such as unclear roles, slow decision making and an inability to resolve disputes.
Winners conduct careful evaluations before jumping in. They operate under the assumption that joint ventures work only when everybody wins. In successful joint ventures, top management is involved from the start, and stays involved. The best companies also overinvest in governance and partner-fit assessment up front, explicitly identifying possible future challenges and anticipating ways to change the joint venture model to accommodate a new market or environment. They tailor the specifics based on the type of deal—scope or scale. For example, in scope joint ventures, they adopt a “start-up” approach and focus on growing the pie. In scale deals, they adopt a “merger integration” approach and emphasize cost sharing.
Setting up a joint venture for success
Companies need to tie their joint venture objectives to corporate growth strategy, first assessing whether a joint venture is a better option than organic growth or acquisitions. Winners conduct detailed market and competitor analysis and business planning to ensure there is a clear value-creation potential for each partner. Next, they assess partner fit based on a comprehensive set of predefined criteria, such as strategic intent, decision-making style, risk approach and culture. They develop “what-if” scenarios to anticipate potential misalignment and related response strategies. And they define a joint venture business plan, perimeter and structure, as well as the key principles for a future operating model, from both a parent and joint venture perspective.
After assessing partner fit, the next step is to design the joint venture and negotiate the deal. That involves answering a host of questions: What should the joint venture look like, and what operating model will be most effective? What’s the best way to align interests and structure the deal?
In our experience, the best companies build a sustainable joint venture organization and governance structure designed as much for flexibility as for effectiveness. Also, they identify additional mechanisms that will ease the day-to-day operations and preserve the strategic intent and balance of power.
Once a deal has been designed and negotiated, it’s time to create the joint venture itself and take the steps needed to deliver the desired results.
Success can depend on the partners’ ability to focus the organization on the most critical decisions that will maximize the joint venture’s value while ruthlessly prioritizing the initiatives that will deliver the most value. It’s important to resolve people issues early, getting the leadership in place to start building a new culture as soon as possible.
The best companies fully anticipate that conditions will change. For a joint venture to survive, it must adapt to those changes—everything from shifts in market conditions to changes in management at a parent company. It’s a challenge to keep the spirit and intent of the founders alive, even after four or five rotations of management. Fortunately, companies can ensure successful lifetime management. For example, monitoring systems can enable continuous assessment of changing performance and conditions, helping companies determine when it’s time to refresh or refocus a joint venture’s strategic foundation to capture its full potential.
Ideally, the parent companies and management will arrange for two types of meetings during a deal’s lifetime. They will establish a monthly or quarterly schedule of performance-management meetings to review short-term progress. The partners will also set up a series of less frequent meetings—every two or three years, for example—with the goal of reviewing the strategy and refreshing it, if required.
Another big requirement for success: knowing from the very beginning of a joint venture how to handle disputes and how the venture should end. For example, when a dispute or litigation arises, partners need to proactively manage the arbitration with a dedicated team to support the process. And exit strategies must be clearly determined in advance. Parties need to agree on the mechanisms to manage a separation the right way—or to renegotiate the deal.
Companies increase their odds of successful joint ventures if they invest in building and maintaining a strong joint venture capability. Those that anticipate few deals or low-value deals, or expect to have a relatively small percentage of their overall activity under joint ventures, can rely on a joint venture knowledge-management program. However, companies that intend to make joint ventures a key part of their growth strategy should establish an exclusive joint venture team to provide proactive support and supervise all joint ventures at the business unit or central level.
Arnaud Leroi is a Bain & Company partner based in Paris who leads the firm’s Mergers & Acquisitions practice in Europe, the Middle East and Africa. Philip Leung is a Bain partner in Shanghai who leads the firm’s M&A practice in Asia-Pacific.