Joint ventures (JVs) and alliances are getting lots of attention these days and for good reason. Partnership activity has enjoyed a compound annual growth rate of 14 percent since 2016. That translates into more than 10,000 deals every year over the past five years. While activity slowed slightly in 2021, the technology sector continues to power deals, especially in healthcare and financial services where partnerships with tech companies are becoming essential to success.
The drivers of JVs and alliances are evolving, but growth remains the primary goal. In the early 2000s, companies often forged partnerships to enter new regions where regulations prohibited acquisitions or to establish a footprint without a local shareholder. Later, many companies partnered to reduce the cost and risk of new ventures. Today, many deals seek access to infrastructure, intellectual property, and technological capabilities.
In these uncertain economic times, we expect a resurgence of partnerships focused on costs and synergies. We are seeing numerous companies scanning for partners that can help them survive the difficult times. They are trying to understand which partners to approach and in which geographies and categories, and how to combine forces to be more resilient.
Benefits of partnerships
Why do companies choose to partner rather than build or buy solutions and capabilities? There are three primary reasons.
- Speed. A JV can help you acquire solutions and capabilities much faster than you would building them in house.
- Flexibility. Unlike an acquisition, a JV or alliance preserves flexibility that can be critical in complex, dynamic industries such as those undergoing the net-zero transition or digital transformations. Through a partnership, you gain only the assets you want, such as specific capabilities, sales channels, or customer categories.
- Innovation. Partnering gives you quick access to the innovative solutions, business models, and capabilities of disruptors. Take plant-based food, for example. We see great innovation happening there in technologies, brand propositions, and ingredients. A JV or alliance can enable a food manufacturer to get into the game without committing to only one technology or brand, and the benefits extend to both sides: the food company gets the foothold in the market while the disruptor gets the retail scale to commercialize its offerings.
Boosting the odds of partnership success
Like any union, a JV or alliance cannot succeed without considerable effort. We see several key success factors.
- Strategy. A winning partnership strategy looks beyond deal close to the relationship that will follow. How will you resolve issues, manage conflict, and even exit the partnership if it stops making sense? Setting a sound strategy requires partner alignment around the answers to three questions: What should the partnership achieve? What gaps do you need to fill? What opportunity do you want to capitalize on?
- Financial incentives. Next, the partners need to define the financial incentives for achieving the strategy and metrics for monitoring performance.
- Governance. Success also requires having the right governance structure in place. The core question for partners is, how much control do you want to exert versus extending flexibility to the joint venture operation?
Communication. Effective communication among partners relies on building trust. Success requires communicating frequently and developing a relationship that helps you navigate tensions when things get a bit rough.
This communication imperative reflects the cultural complexity of most partnerships. The typical JV or alliance brings together two established companies that have their own cultures, communication styles, and ways of thinking and doing things. The partnership has to combine those identities in a built-for-purpose entity that has a new strategy, scope, and structure.
Small wonder that many partnerships don’t meet expectations. To boost the odds of success, we recommend conducting a partnership health check once or twice a year to be sure that the JV or alliance is proceeding as planned. Making the most of the health check requires maintaining the flexibility to course-correct as changing market conditions or new uncertainties dictate.
Many things can (and often do) go wrong in a partnership. But launching the relationship with the right strategy, structure, and spirit goes far toward harnessing its full power.
Stefan Rickert leads McKinsey’s joint venture and alliances work globally. He is a senior partner in McKinsey’s Hamburg office. Gerd Finck is an associate partner and senior knowledge expert in the Düsseldorf office.