Reference
Supplier, partner or co-owner: the continuum of joint venture relationships
"Let's do a joint venture" usually arrives as a single idea. It is a choice along a line. Many partnerships that go wrong started at the wrong point on the line, or stayed at the right point too long.
At one end, a business buys from whichever supplier is cheapest this month. At the other, two businesses put money into a new company and own it together. Six arrangements sit in between.
The question is not whether to partner, but how much each side commits, who controls what, and how either of you gets out.
Eight points on one line
| Arrangement | What is shared | How you get out | |
|---|---|---|---|
| Buying | 1. Unit supply from many sources | Nothing beyond the order | Stop ordering |
| 2. A panel of suppliers, consulted for each purchase | A place on the list | Drop them from the panel | |
| 3. Long-term contracts with a few suppliers, each with a set share | Forecasts and some planning | Wait out the term | |
| 4. One supplier on a long-term contract | Operating detail, systems, often people | Exit clauses and a painful transition | |
| Partnering | 5. A contractual alliance: an agreement to reach a joint outcome, usually with no new entity | Targets, gains and losses, some decisions | Unwind the agreement |
| Co-owning | 6. A dependent joint venture: a new entity run as a subsidiary of one partner | Profit, under one partner's control | That partner buys the other out |
| 7. An interdependent joint venture: a separate entity with strong links to each parent | Profit, people, assets and decisions | Negotiated under the shareholders' agreement | |
| 8. An independent joint venture: shared equity in a new standalone business | The business itself | Sell the stake, float it, or wind it up |
Moving right, three things change together. Commitment rises. Each side puts in more, and more of it is useful only inside this relationship.
Control changes shape. You lose the buyer's power to walk away, and gain a say in a business you could not run alone.
And the way out gets harder. At the left end the exit is a phone call. At the right end it is a negotiation, and either someone wrote it down at the start or nobody did.
The conversation changes too. At the left end the two sides talk about price. At the right end they talk about how to share the value, and who owns what when the relationship ends.
When the contract stops working
A business usually moves right because a supply arrangement has run out of room. The signs are easy to spot. The buyer has squeezed the contract hard over several rounds. Fewer suppliers remain, and each earns a thinner margin.
The work starts to look like labour hire. The supplier can no longer afford to invest in systems, training or new services. Innovation stalls.
The buyer carries more risk of poor service, or of a supplier failing. Every renewal costs more to run, and adds less.
A claims-services provider saw this with its largest customer. The customer wanted better outcomes and an ambitious long-term vision. The standard contract delivered neither.
The provider's answer went further than a better contract. It laid out the whole line, from multi-source supply to an independent joint venture. Then it argued for the point that matched what the customer wanted to control with what both sides would commit.
That point was an interdependent joint venture. It would start by taking over the existing contract and grow from there.
How to choose
Five questions decide where on the line a relationship belongs.
What do you need that you cannot simply buy? Capacity, a capability, access to a channel or market, or someone to share a risk too big to carry alone. If the answer is a product at a good price, stay at the left end. Partnerships cost a lot to run. They cannot replace a competitive market where one exists.
How much will each side have to sink into this relationship alone? Systems built for one customer, a plant sized for one buyer, people trained in one partner's methods.
Some investments are worthless outside the relationship. The more of them one side must make, the more it needs ownership to protect it, and the further right the arrangement has to sit. A supplier asked to build dedicated capacity on a two-year contract will price in the risk, or decline.
How far might this grow? A relationship with a fixed scope can live on a contract. One that could grow into new services, customers or markets needs a structure that grows with it, without reopening the deal each time. A joint venture earns its cost there.
What does each side need to control? Write down the three or four decisions each partner cannot give up. The brand, the customer relationship, the price, the technology. If both sides need the same decision, no structure will fix it. If they need different ones, the structure can give each side its own.
How well do you know each other? Trust built on a track record can do the work equity would otherwise do. Research on alliances has found that partners who have worked together before are less likely to use equity in their next alliance (R. Gulati, Academy of Management Journal, 1995). First-time partners tend to need more formal structure.
Start further left than you think, and earn the move right
Strong partnerships rarely start at the right end. They start with a narrow shared objective both sides can reach, and deliver it. Then they widen the scope as confidence grows.
The claims-services proposal set out that path in stages. First, the joint venture replaces the standard contract. Next it takes on the core claims work, then the other back-office services.
Then come offers built for particular industries. Only then does it move into new categories and new markets. Each step had to earn the next.
The same logic runs the other way for a buyer. An insurer wanted to grow a dealer channel into a new state. It compared the options on payback: renegotiating the existing agreement, a joint venture, an acquisition, or building its own. The entry paid back only if the channel sold all five of its products. That settled the choice before anyone argued about structure.
Choosing among the joint venture forms
Once the answer is "co-own", three choices remain. They differ on who runs the business day to day.
A dependent joint venture runs as a business unit of one partner. It suits a relationship where one side clearly brings the operating capability. The other brings money, access or a customer base. The form is quick to set up and clear to run. The other partner is, in practice, an investor.
An interdependent joint venture has its own board and management. It stays closely tied to both parents and uses their people, systems or customers. It suits a partnership where both sides bring something the venture cannot work without. It is the hardest to govern, and often the most valuable.
An independent joint venture is a standalone business that happens to have two owners. It suits a venture that will eventually outgrow both parents. It also suits one that one or both parents plan to sell or float.
The legal form is a separate question from the relationship. In Australia a joint venture can be purely contractual, with no new entity. Or the partners can incorporate a new company registered with ASIC, each holding shares.
The choice changes liability, tax and how decisions are recorded. It needs a lawyer and a tax adviser, and this page is neither. For the strategy, decide the relationship first. Then choose the form that fits it.
How it goes wrong
The partnership starts as a favour. A customer asks a supplier to "work more closely". Five years later neither can leave, and nobody decided that. The terms still reflect the favour.
The structure is right for a market that has gone. A joint venture written for one era keeps running on its original terms. Meanwhile the market, the product and the partners' needs have all moved. Renegotiating it is harder than any sale, because each side has a veto and a memory.
The exit was never written. Every joint venture ends. The ones that end well agreed at the start how a partner can sell, and what happens if one partner is bought. They also agreed how to split the value if they part.
The partnership is staffed as an afterthought. Some parents use a joint venture as a parking place for executives near retirement. Others hand it to people who see it as a career risk. Either way, those people manage it as if it did not matter. It then proves them right.
Frequently asked questions
Is a strategic alliance the same as a joint venture? No. An alliance is an agreement to work towards a shared outcome, usually with no new entity. A joint venture creates a business the partners co-own, or at least co-run.
The alliance is easier to start and to end. The joint venture can carry more investment and more growth.
Should we go 50:50? Only if both sides bring equal value and agree how to break a deadlock. Without that, equal shares send every disagreement back to the two parents. The venture waits while they argue.
When should we move a supplier relationship into a joint venture? When the supplier needs to invest in things only useful to you, and the scope could grow well beyond today's contract. Both sides must also be able to name what each will control. If only the first is true, a longer contract with investment protection may be enough.
How do we compare the options? Put each one on the same page. Show what each side commits, what each controls, what the payback is, and how each of you gets out. The option that looks best on the first two often looks different on the last.