When Arvind Korde, CEO of the JV, needed to communicate facts or issues to one parent, he always copied the other parent, thereby promoting openness and trust. And Korde and his team were quick to react to problems. TRW, which was focused on profitability more than growth, argued for higher margins and prices.
Koyo Seiko sought to build market share and maximize the scale of its global relationship with key Asian customers. In that session, the management team crafted a new vision for the JV and a constructive approach for resolving the conflict.
An appropriate structure should allow the JV management team to make timely decisions while providing the parents with sufficient oversight to protect their assets. But effective ongoing governance requires more than contractual agreements. Without the right launch planning, the typical JV contract is a recipe for disaster because every major decision is subject to board approval, which requires the agreement of both partners.
The launch phase is the time to go beyond the lines and boxes and address how decisions will be made and disputes resolved. To find the right balance between giving the JV enough autonomy and granting the parents enough control, companies should do the following:. Some companies grant the venture management team so much autonomy that it borders on negligence. This was the case in a billion-dollar industrial JV that combined similar business units to increase scale and reduce operating costs.
During the launch phase, the partners failed to create adequate oversight mechanisms. Three years into the alliance, the U. The JV was not part of the standard corporate-planning and strategy review forums and was never subject to the same level of scrutiny as the wholly owned businesses. In the wake of Sarbanes-Oxley, companies have increased their attention to transparency, risk management, disclosure, and performance management in their wholly owned businesses.
It means building a strong finance organization inside the JV to make sure that the board and venture management have the critical information they need to do their jobs. Of course, some corporate parents go too far and implement governance systems that stifle entrepreneurship and create dysfunctional bureaucracy. All major decisions required multiple subcommittee and board meetings, interspersed with additional fact-finding efforts by the JV management team.
Since each subcommittee met only four times per year, the time it took for the JV to make a decision became a distinct competitive disadvantage. Companies can avoid this governance trap by implementing a loose-tight governance model. As a general rule, parent companies operating through a JV board should play an active role in the three governance areas critical to driving financial performance and protecting shareholder interest: capital allocation, risk management, and performance management.
The parents should generally limit their interventions in more operational processes—such as staffing, pricing, and product development—where the JV needs independence to ensure competitiveness and market responsiveness. There are many ways to do this, but one effective approach is to map out each governance process, showing how information and decisions flow through the JV and parent companies. By mapping out both formal and informal decision-making processes, you can reduce the time and effort it will take to approve major initiatives.
The launch team needs to challenge—and limit wherever possible—the interdependencies between the parents and the JV. For practical reasons, most JVs depend on their parents to provide ongoing access to capital, people, intellectual property, raw materials, and customers. Both tangible and intangible contributions from the parents determine their actual return on investment.
When Partner B sees this happening, it uses the information to justify holding back its committed contributions, creating a loop of partner suspicion and distrust. Winning JVs start to address economic interdependencies as soon as an agreement looks likely in order to avoid launch delays and the loss of millions of dollars in potential synergies.
They make sure that the launch team contains appropriate expertise and authority to resolve important economic issues. Specifically, successful ventures do the following:. The process of sorting out who will provide what to the joint venture is time-consuming for everyone involved. In one high-tech consolidation JV, the partners spent 10, man-hours over four months determining precisely which services and resources each parent would provide the JV and constructing service-level agreements that specified transfer pricing, access rights, and other critical terms of the deal.
This group established criteria for determining which services the JV would purchase from the parents. It then documented the shared resources and services and collaborated with the purchasing and finance teams to price each shared service.
One of the most valuable tasks of the launch team is to challenge—and limit wherever possible—the number of interdependencies between the parents and the JV. Working teams in the high-tech consolidation JV initially generated a list of more than 1, dependencies upon one parent—that parent was slated to provide administrative services, component purchases, and shared research facilities, among a slew of other resources.
Recognizing that a heavy load could create unmanageable complexity down the road for the parent company, the launch leaders challenged virtually every line item on the list.
Eventually, they whittled it down to just services that the parent would provide the venture in the first year and less than ten services in the second year and beyond. Once a list of shared services is finalized, the launch team must develop transparent and honest methodologies for calculating transfer pricing.
This is critical for maintaining trust down the road. A telecom joint venture depended on one parent for 90 different shared services. The partners did renegotiate transfer pricing, but the distrust that was created continues to plague the venture. Parent companies need to move outside their comfort zones when devising an organizational structure for their JVs. To avoid this situation, the launch team should agree at the outset on the methods for allocating costs, specifying which operating costs should be included for instance, customer billing or maintenance and the basis upon which to allocate each shared cost for instance, per subscriber, per region, per dollar of revenue.
And the launch team should specify a path for resolving contentious economic issues. Finally, the JV should be linked to the corporate review and planning cycle of at least one of the parents, reducing the odds that important economic issues will fall between the cracks and require 11th-hour intervention.
Parent companies may need to move outside their comfort zones when devising an organizational structure for their JVs, adopting a staffing model, and designing incentive plans. There is a tendency in many JVs that combine existing organizations to select a familiar organizational model—either a regional one, if the parents are contributing assets from different regions, or a product-division structure, if each parent is contributing different products. This simple approach allows each parent to protect its turf and minimize organizational disruption—but it also dilutes the potential effectiveness of the new organization.
If the parents try to preserve the status quo, they risk reducing the synergies between them. The creation of a joint venture is an opportunity to unfreeze the organization. Beyond the issue of formal structure, a successful JV launch requires taking the following approaches to staffing and incentives. Separate legal identity — benefits from a clear corporate identity both internally, in terms of a dedicated management and workforce, and to the outside world.
Disadvantages The roles and responsibilities of LLP members are not as familiar as the defined roles of directors and shareholders in limited companies. Public filing requirements exist, in particular in relation to accounts, but these are not as extensive as for limited companies. Fiscal transparency means that the individual JV parties will be taxed directly. The partnership is not taxed on its profits. Sensitive details of the venture can remain completely private between the JV parties.
Limited partnership — popular as investment vehicles where the majority of participants are passive investors but not suitable for commercial joint ventures as limited partners must not be involved in the management of the venture.
Disadvantages General partnership — liability is unlimited and each JV party is liable for the whole of the liabilities of the venture although JV parties can themselves be corporate entities.
Limited partnership — general partner manages the JV and has unlimited liability. Limited partners have limited liability but must be passive and play no part in the day to day management of the company — otherwise the benefits of limited liability are lost. Potentially difficult to raise external loan finance as lacks a separate legal identity and does not own assets — it cannot grant a floating charge as security for financing.
Any change to identity of JV parties will entail a new partnership arrangement which can be an expensive and time-consuming process. The risk of the project failing and having a negative impact on profitability is lower because the costs associated with the project are distributed among each of the participating companies. How To Start A Business. Career Advice. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. A joint venture affords each party access to the resources of the other participant s without having to spend excessive amounts of capital. Joint ventures also provide the benefit of shared risk. Regardless of the legal structure used for the JV, the most important document will be the JV agreement that sets out all of the partners' rights and obligations.
The objectives of the JV, the initial contributions of the partners, the day-to-day operations, and the right to the profits, and the responsibility for losses of the JV are all set out in this document. It is important to draft it with care, to avoid litigation down the road. Another common use of JVs is to partner up with a local business to enter a foreign market. A company that wants to expand its distribution network to new countries can usefully enter into a JV agreement to supply products to a local business, thus benefiting from an already existing distribution network.
Some countries also have restrictions on foreigners entering their market, making a JV with a local entity almost the only way to do business in the country.
When forming a JV, the most common thing the two parties can do is to set up a new entity. But because the JV itself isn't recognized by the Internal Revenue Service IRS , the business form between the two parties helps determine how taxes are paid. If the JV is a separate entity, it will pay taxes as any other business or corporation does. So if it operates as an LLC, then the profits and losses would pass through to the owners' personal tax returns just like any other LLC.
The JV agreement will spell out how profits or losses are taxed. But if the agreement is merely a contractual relationship between the two parties, then their agreement will determine how the tax is divided up between them. A joint venture JV is not a partnership.
That term is reserved for a single business entity that is formed by two or more people. Joint ventures join two or more different entities into a new one, which may or may not be a partnership. The term " consortium " may be used to describe a joint venture. However, a consortium is a more informal agreement between a bunch of different businesses, rather than creating a new one. A consortium of travel agencies can negotiate and give members special rates on hotels and airfares, but it does not create a whole new entity.
Once the joint venture JV has reached its goal, it can be liquidated like any other business or sold. Microsoft has now sold its stake to GE, effectively ending the JV. GE is now the sole owner of the company and is free to carry on the business as it pleases.
Sony Ericsson is another famous example of a JV between two large companies. In this case, they partnered in the early s with the aim of being a world leader in mobile phones. After several years of operating as a JV, the venture eventually became solely owned by Sony. There are many reasons to join forces with another company on a temporary basis, including for purposes of expansion, development of new products, or entering new markets particularly overseas.
JVs are a common method to combine the business prowess, industry expertise, and personnel of two otherwise unrelated companies. This type of partnership allows each participating company an opportunity to scale its resources to complete a specific project or goal while reducing total cost and spreading out the risk and liabilities inherent to the task.
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