As with other areas described on this site the risks associated with JV (joint venture) performance can be viewed either from the internal perspective of a JV Manager or externally as a JV partner (shareholder or ownership participant). Here JV performance is considered in its broadest sense to include overall business/financial performance and the performance of functional departments (e.g. manufacturing, logistics, sales, marketing, HR, accounting etc). JV planning is key to effective perfomance monitoring and will also be dealt with here.
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Performance: A JV Internal Perspective
From a JV internal perspective the approach to managing performance is similar to that used in other well run business enterprises. Key controls for managing performance risk include effective and efficient processes for;
- business planning,
- business approvals and
- reporting, monitoring and management against performance planning targets.
In addition people capability assessment and management processes are important enablers of good performance by helping to ensure that the right people are doing the right jobs.
In order for these processes to consistently operate effectively and efficiently the JV will need to have a robust set of procedures for each functional area. If it has its own internal audit department these procedures will be used as a basis for performance audits. The design of the procedures can be assessed by benchmarking them against similar procedures used by best-in-class organisations. Such benchmarking may be possible if the JV belongs to an industry body or association that shares information about good practice.
Good procedures can also be developed in-house through ‘bought-in’ expertise. Expertise can be acquired by either recruiting staff with appropriate experience in the design and operation of similar processes or through temporarily hiring external specialists/consultants.
JVs have an advantage over many other enterprises in that they can ask their shareholders or ownership participants to help in the design of performance processes. Clearly all parties have a vested interest in helping the JV to implement effective and efficient performance processes and the JV can benefit from the experience, and learn from the mistakes, of its ‘parent’ companies.
JV Performance: An External Partner Perspective
As a shareholder or ownership participant in a JV it is important to get assurance that the performance processes used by the JV are well designed and being used effectively. Generally partners in a JV will do this through a combination of:
- ongoing reviews of the performance of the operation – here the timeliness, quality and relevance of information provided by the JV to its partners is important
- assessments made during management meetings (e.g. board meetings, shareholder meetings, committees) in which the partner participates, and
- audits of the JV operations and processes and by reviews of the suitability and effectiveness of the JV’s own internal audit process.
The rights which support each of these areas are normally defined in the JV formation agreements (see governance section). These should describe which JV oversight/management meetings the partners will attend and the format/content of such meetings. They also specify the kind of information the JV is expected to provide to the partners and the frequency and timeliness of this provision. Partner rights to audit the JV should also be laid down in the formation agreements as well as the expectation that the JV will have its own internal auditing process.
Planning for JV Performance
JV Performance can be influenced by the partners in the JV playing a full role in the JV planning process. The JV formation agreements should specify the rights of shareholders or ownership participants to approve JV activities and expenditure. They also detail whether partners have a right to veto any elements of the annual JV plan they may consider to be inappropriate. Similarly longer term projects like major construction or expansion plans with, for example, a five year planning horizon should also be approved by the partners in advance.
The plans presented to the partners should identify the JV’s short, medium and long term objectives and goals (the JV targets), the resources it requires to achieve these targets, and the specific activities which need to be undertaken together with their timing. Resources required for the plan should not just include the physical resources but must also identify financial, people and intellectual (e.g. technology/research/training) resource requirements.
A key goal of the partners in the planning process is to ensure that the JV’s plans are realistic and well balanced. The JV should not be overambitious in its expansion aims and risk running into a cash flow problem. The finance requirements of the plan therefore need careful consideration – will the cash needed by the JV come from it’s own resources, loans from third parties (and will they need partner guarantees) or cash injections/loans provided directly by the partners?
During the year JV performance is then measured against the monthly or quarterly targets laid down in the plan. Any major variance against these targets should be reviewed by the partners in the JV during the performance reviews mentioned above and corrective actions agreed.
The JointVentureRisk.com website and its author, Chris Duggleby, are not qualified to provide legal advice and therefore any questions in relation to the legal liability of a joint venture or its partners should be addressed to suitably qualified, competent legal advisers.
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