Here is a brief excerpt from an article co-authored by John Chao, Eileen Kelly Rinaudo, and Robert Uhlaner for McKinsey & Company’s “Insights & Publications” practice. In it, they explain how and why even joint ventures developed using familiar best practices can fail without cross-process discipline in planning and implementation.

Much of the information, insights, and counsel they provide is also relevant to strategic alliances as well as to other collaborative relationships and initiatives.

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Joint ventures (JVs) often seem destined for success at the outset. Two companies come together in what seems to be an ideal match. Demand for the planned product or service is strong. The parent companies have complementary skills and assets. And together they can address a strategic need that neither could fill on its own. But in spite of such advantages, revenues decline, bitter disputes erupt, and irreconcilable differences emerge—and managers call it quits.

Not all joint ventures fall apart so spectacularly, but failure is far from a rare occurrence. When we interviewed senior JV practitioners in 20 S&P 100 companies—with combined experience evaluating or managing more than 250 JVs—they estimated that as many as 40 to 60 percent of their completed JVs have underperformed or failed outright. Further analysis1 confirmed that even companies with many joint ventures struggle, even though best practices are well-known and haven’t changed for decades.

In fact, most of our interviewees endorsed several that have long been the gold standard for JV planning and implementation: a clear business rationale with strong internal alignment, careful selection of partners, balanced and equitable structure, forethought regarding exit contingencies, and strong governance and decision processes. So why do so many joint ventures fall short? Our interviewees suggest that in the rush to completion, even experienced JV managers often marginalize best practices or skip steps. In many cases, the process lacks discipline, both in end-to-end continuity and in the transitions between the five stages of development—designing the business case and internal alignment, developing the business model and structure, negotiating deal terms, designing the operating model and launch, and overseeing ongoing operations.

Moreover, parent-executive involvement often declines in the later stages. Finally, many JVs struggle with insufficient planning to respond to eventual changes in risk. Such lapses, even in the early stages of planning, create blind spots that affect subsequent stages and eventually hinder implementation and ongoing operations. We’ll examine each of these issues, along with the approaches some companies are taking to deal with them.

Rush to completion

Many of the practitioners we interviewed noted the pressure—from investors, senior executives, and the board—to get deals done quickly, as companies strive to stay ahead of evolving trends or aim to meet fiscal deadlines. When that pressure for speed meets the complexity of the JV process, it can overwhelm even experienced practitioners—especially during the transitions between stages of development. As the head of a global pharmaceutical company lamented, “We continually fall prey to the pressure to get a deal signed and then forget to plan for operational realities.”

Many companies lack the forethought and discipline to address those operational realities at each phase in a JV’s development and spend more time on steps where less value is at risk and less time where more value is at risk (Exhibit 1). Some rush through the business-case design by skipping steps—usually thinking that it will be easy enough to return to any issues later—and end up trying to reverse engineer the business case.

Others focus more on a deal’s financials, which are familiar and comfortable for those with M&A experience, than on the less quantifiable strategic and operational issues, such as what might trigger a decision to walk away from a deal, the cost of ancillary agreements, the impact of exit provisions, and the effect of decisions to delegate authority. Still others substitute boilerplate agreement language in critical terms of the agreement or in arbitration clauses rather than tailoring them to the deal at hand.

Not surprisingly, our interviews suggest that taking such shortcuts leads to many proposed JVs failing prior to implementation. In general, as the head of business development for a high-tech company commented, “The assumption that a business case will just happen leads to a great deal of pain. People underestimate the difficulties they’ll encounter.”

In one pharmaceutical partnership, for example, managers defined only a cursory business case, hoping to move quickly to reap the potential financial benefits of the arrangement. When they later were forced to reconsider certain decisions given the lack of focus and detail in the business plan, they realized that the two companies had different visions for the partnership and terminated it without realizing its expected returns.

The solution is intuitive: companies must find ways to balance the pressure for speed with the demands of planning a healthy joint venture—especially allocating their time and resources in line with the potential for value and impact.
No single approach will work for every company or in all circumstances, but the approach taken by one global industrials company is illustrative. Any business unit presenting a JV proposal to the executive committee of this company must include in its presentation a detailed business case, an investment thesis, an assessment of competitors, and detailed profiles of priority partners.

It must follow an explicit checklist of expectations for each stage in the planning process—including deal structure and terms, financial analysis, launch, and operating-model design. Senior managers must also use this checklist during progress reviews, both to ensure alignment and consistency and to serve as a forcing mechanism for raising issues. Although this approach demands significant time and resources even before detailed negotiations with a JV partner, it also increases everyone’s comfort and confidence in the vision for the deal.

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Even companies that rigorously follow the common best practices for JV planning will falter if the process lacks a comprehensive view of execution both within and in between stages of development. Maintaining vigilance and balancing these four pressures is critical to the success of a JV.

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To read the complete article, please click here.

John Chao is a McKinsey alumnus, Eileen Kelly Rinaudo is a senior expert in the New York office, and Robert Uhlaner is a director in the San Francisco office.