In the past few months, alliances and joint ventures have been essential for many companies to meeting the challenges of the COVID-19 pandemic. But during crises, strain can emerge even among allies, often revealing underlying problems. In this episode of the Inside the Strategy Room podcast, Ankur Agrawal, a partner in our finance practice in the Americas who focuses on healthcare, and Eileen Kelly Rinaudo, a leader in our work on joint ventures and alliances, discuss the importance of regular partnership check-ins to make sure that, like any relationship, both sides are getting what they need. You can listen to the episode on Apple Podcasts, Spotify, or Google Podcasts.
Sean Brown: Ankur, could you first lay out some key reasons why companies should pursue partnerships?
Ankur Agrawal: For many industries, partnerships have become the norm. I spend a lot of my time in the healthcare sector, where payers are partnering with providers, and providers are partnering with health-tech companies. An ecosystem is rapidly evolving, and it is similar across other sectors.
You may need a partner to reduce your risk, expand your scale, enter new geographies or get complementary skills, and a partnership is often a low-cost way to achieve these goals. But if it is not managed, it will not only be unsuccessful but will likely hurt your brand. There is a market in partnerships, and attracting good partners depends on your success with previous ones. Like health checks for human beings, a partnership health check can detect signs of problems that need to be addressed, whether it is in funding or talent or roles. A partnership is a living entity and requires constant attention and nurturing to thrive. That is a challenge because it involves two companies—sometimes more than two—that often have very different cultures.
Sean Brown: Eileen, are you seeing an increase in the number or complexity of business partnerships, especially over the past six months?
A partnership is a living entity and requires constant attention and nurturing to thrive.
Eileen Kelly Rinaudo: We definitely see more companies being open to alternative deal structures including strategic alliances and joint ventures. There are many different rationales. It could be ecosystem plays that Ankur mentioned where businesses work with other companies that bring different capabilities. Another reason is the increased focus on risk reduction and cost sharing as a mechanism for that. We also see more creative financing, with companies bringing in alternative partners with financial strength or that have more capital-efficient growth strategies.
Sean Brown: In your experience, do most joint ventures and partnerships succeed?
Ankur Agrawal: The track record is quite mixed. Our data shows that more than half of partnerships fail to meet expectations (Exhibit 1). Multiple entities make it even more complicated. In the healthcare sector, that is partly because, traditionally, value-chain participants have been adversarial and the partners remain protective of their turfs.
Eileen Kelly Rinaudo: I want to highlight that while many companies are frustrated with their alliances, 25 percent report that their partnerships meet or exceed some expectations. Unfortunately, roughly half fall into the underwhelming category, a block with high potential but not hitting the targets. It is also worth pointing out that of the 19 percent that indicated their partnerships were failing, more than a quarter admitted that part of that failure was due to a lack process clarity for reevaluating their partnerships over time. You need to make sure not only to properly set up the partnership but if you make a mistake or if things change, you can adjust on the fly.
That ability to evolve your partnership is critical to getting partnerships that stand the test of time. And consistent, proactive health checks are the most important tool for having those conversations and interventions.
Sean Brown: Have you seen any significant differences among industries in the success of joint ventures?
Eileen Kelly Rinaudo: I do see substantial differences. That is partly because there are two areas to consider: the individual partnerships and the partnership portfolio as a whole. Some sectors, such as pharmaceutical companies, have many partnerships and are used to that portfolio approach. They are more likely, as an industry, to have a consistent approach to managing their portfolios as well as individual partnerships.
On the opposite end, you have oil and gas. Those players usually have small portfolios in terms of the number of partnerships, but the ones they have are very large. They tend to be thorough in how they handle individual partnership health checks but not necessarily always comparing across partnerships.
Most other industries fall in between. Whether the companies have a large portfolio of small partnerships or a small portfolio of large partnerships, success depends on individual partnership programs’ level of sophistication, strategy, and whether or not the partners have developed strong internal processes.
Sean Brown: Are there any differences between how you approach alliances and JVs of equals versus situations involving an incumbent and a start-up? I would think a combination of a David and a Goliath would make regular health checks more critical.
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Eileen Kelly Rinaudo: I will be a little provocative and say no. Proactive health checks are critical for any partnership, it doesn’t matter who your partner is. That said, what you measure, the specific metrics underneath and how they influence the success or failure vary depending on the type of partnership and the strategic rationale behind it. Does your partnership rely on cost reduction or on capability or IT sharing? Those are very different, so the metrics you would use are different. But the importance of a thoughtful, consistent process of review is similar.
Ankur Agrawal: I would add that sometimes the time spent is quite similar whether the partners are roughly equal or not. A partnership may be small, but you may need to nurture it carefully because of its high potential, so I would not just index on size. How strategic the partnership is to your overall growth and strategy is key as well.
Sean Brown: You mentioned the importance of metrics. What about qualitative assessments of things that are maybe harder to measure?
Eileen Kelly Rinaudo: It takes more effort to gather qualitative information, whether it is through a survey of the management team and the leadership of your parent organizations or through interviews. But those comments can help you uncover problems or strengths whose impact you were not aware of. You can also convert qualitative feedback into a quantitative measure—for example, a performance assessment rating on a scale of 1 to 5.
Sean Brown: Is it important to have a regular cadence to these partnership check-ins? And how frequent should they be?
Eileen Kelly Rinaudo: Whether you have a systematic process or just do health checks as needed throughout the life of the partnership, I am a strong believer that planned reviews are important. They not only help you understand the potential for intervention but set up a smoother relationship with the JV’s management or your partner. Part of the game is making sure everybody is on the same page. Few things are worse than feeling like things are going well and then finding out your partner perceives the performance as abysmal. Planned reviews can be quite helpful in that, especially if you involve your partner or at least make them aware and share the insights.
Few things are worse than feeling like things are going well and then finding out your partner perceives the performance as abysmal.
Sean Brown: Do you recommend establishing the health check criteria at launch or once the venture is underway and you have a better sense of what your want to track?
Eileen Kelly Rinaudo: It is easier if you create the structure at the beginning. It is not reasonable to expect that you will never evolve that structure; I cannot think of a partnership health check process where something did not evolve or was added over time. You want the ability to adjust.
If you did not establish a health check process at inception, that’s fine; you can add one. It might take a little longer to get alignment on how you approach it and what you measure but that can sometimes help you better understand your partner’s perspective.
Ankur Agrawal: I think investing the time up front to hammer out the main elements is quite key. Sometimes, for timing reasons or varying degrees of the partnership’s importance for the two entities, there is a tendency to leave some key details for subsequent discussion. Usually, that is a recipe for disaster. You need not focus on every detail at the outset but having the right criteria and framework in place is important. If it takes a long time, that is usually a symptom of the partnership’s difficulty and how hard it will be to manage.
Sean Brown: What would you say are the main benefits of partnership health checks?
Eileen Kelly Rinaudo: One is that it is useful to see what is going well and what is going poorly and correct it. The second piece is that understanding your portfolio performance and the team’s capabilities can help you identify internal weaknesses or blind spots, which can guide changes in future partnerships. It can also, as Ankur mentioned, set you up as a partner of choice going forward and that can be important, not just from a reputational perspective but to ensure you are able to effectively participate in the market. Lastly, a partnership review and portfolio evaluation can help you make faster and more decisive movements in core business areas as well as in pursuing growth opportunities, whether into adjacencies or more complicated cross-industry partnerships.
Sean Brown: So what should a health check cover?
Ankur Agrawal: There are six components that you need to periodically test (Exhibit 2). First and foremost is strategy. Are you still strategically in sync with the goals that that led you to set up the partnership? In some cases, the answer may be no, and it may be time to terminate the partnership. Yet often we find the partnership strategy is not well articulated. The strategy alignment has to be there throughout the partnership life cycle. You need to co-create the strategy with your partner in the design phase, which then manifests during the launch planning. That strategy has to be linked with the resource allocation processes of both partners and the strategic elements need to be well defined and measured along the way.
Sean Brown: Great. What is the next element?
Ankur Agrawal: Culture and communication. You need a systematic way to not only evaluate the different aspects of culture but understand how to mitigate the culture’s impact. Sometimes one partner’s culture dominates, which can lead to poor outcomes despite a strong strategy. Partnerships can work well even with very different partner cultures as long as there is a mutual understanding of those respective cultures.
For example, I am working with two partner institutions, one a not-for-profit and one a for-profit. You can imagine the cultural challenges these two entities face with their different mission orientations and practices. To address that, they make sure the partnership leaders overcommunicate across both entities so there are no misconceived notions.
Eileen Kelly Rinaudo: I would add that some cultural issues are logistical in nature. For example, when you come to a meeting, have you done a pre-read? Are you arriving on time or is everybody a few minutes late? These are things that within our own companies are kind of bred into us and are not big tension points. But when you start working with another company where pre-reads are not normally done and you spend the first half hour of a meeting reading the document together, that can cause tension. These logistical questions can make a material difference.
Sean Brown: What is the third component of the health check?
Ankur Agrawal: The third piece is operations. How are we doing day to day? Is the partnership driving the outcomes we expect? You need performance measures and milestones when you check on progress. What are the performance targets? What are the mechanisms to get more resources? What are the common sources of data? What is proprietary information and what is not? What are the three or four metrics that get measured and when? Yet when we ran the survey Eileen mentioned earlier, many partnerships did not have performance measurements in place, or those measures were insufficient. The qualitative part also remains quite important, especially as the partnership evolves and some of the older metrics are no longer relevant.
Sean Brown: What about governance? What should the governance framework include and how does a health check assess it?
Eileen Kelly Rinaudo: Governance incorporates four things: structure, people, roles and responsibilities, and processes. The governance style should be tailored to the culture of the partnership itself, not just the parent companies, and it needs to evolve over time. The most important and often underestimated aspects that should be established at the beginning are the decision rights and processes, and the alignment of incentives.
With the structure, you want to make sure you have a central point of accountability. Is that a joint venture CEO or more of a committee approach? Do you have an active board structure or a decision committee structure, and how do they interact? A health check helps you evaluate whether those entities are working well or if they need to be reevaluated.
From the people standpoint, we generally recommend having senior executives from each partner company on the board for continued engagement, but in terms of daily management, you want an empowered team able to make decisions and not pop every decision up to the board or the management committee.
Processes are probably the most important thing to understand. The regular cadences for tracking, the regular meetings to understand the decisions, the process behind the meetings—are all those things working well or do they need adjustments?
Let me give you an example of how governance can affect a partnership. When one energy industry joint venture did a health check, the team realized that problems they thought were operational actually stemmed from governance. They had too large a board and the board was controlling too many decisions, which led to management frustration and slowed things down. So, the partners made a series of changes to clarify the roles and responsibilities, empower the management team, and increase efficiency of meetings and decision processes. That created more rapid processes and decisions, which in turn helped with operations.
Sean Brown: Assessing the financial performance of the partnership must be another important health check criterion. How should partners assess that?
Eileen Kelly Rinaudo: There are many components to partnership economics that need to be considered—not just the contributions at the beginning but also the expectations for future financial flows. That includes things like service level agreements, any cost sharing that you do over time, any capital calls or expenditures you expect, and other types of financial transfers between the parent organizations. Then there is the overall financial performance.
But despite the importance of the economics and the frequent complexity of these financial flows, companies often lack the tools to consistently assess their long-term financial metrics. When we polled our clients about whether they had models for ongoing financial evaluations, only 44 percent said they did. It is much more common to have simple financial tracking versus the full perspective of how all the different components affect the financial flows. That can lead to discontent over time.
Sean Brown: You and Ankur have both mentioned the importance of establishing ways to adapt the partnership over time. How does the health check address that?
Eileen Kelly Rinaudo: It is important to build a dynamic partnership. When we asked in our survey what characteristics shifted for partnerships over time, 60 percent of respondents said that the scope or the resources needed experienced a material change. Almost 40 percent said that about governance and 29 percent said structure or deal terms changed (Exhibit 3). It is important to acknowledge that the partnership will likely evolve and make sure you have set up contingency plans and mechanisms for changes.
Some of these changes can seem big and scary—for example, coinvesting in a new product or entering a new market or allowing a new partner to join. Those require deep conversations that question the strategy behind the partnership. But changing your governance processes or how you run meetings can also have a material impact, so I would encourage an open mind about how even small adaptations can be impactful.
Sean Brown: Do you often see exit provisions discussed up front as part of the mechanism for managing the partnership’s evolution?
Eileen Kelly Rinaudo: Yes, exit provisions should always be discussed during negotiations. Nobody likes talking about the exit at the beginning, but it is critically important so that people understand the potential triggers. How can we exit smoothly so the exit does not take away from the benefits the partnership had generated over its life cycle?
Sean Brown: Of the six elements of the health check you have described, what would you say are the most important considerations?
Eileen Kelly Rinaudo: It is critical to develop a proactive process, making sure the timing of the health check is agreed upon and the partners are clear on what to expect. Having predetermined metrics for each of the six health check components is also key to maintaining accountability, visibility, and consistency in your partnership and your portfolio overall (Exhibit 3). And finally, the concept of the dynamic partnership that can adapt—make sure that you bake in the ability to evolve when you design your partnerships.
