Alliances can be complex: check out our view on the top 6 commercial threats specific to JVs

Marriages can sometimes be difficult.

(This is an excuse for a couple of Les Dawson jokes!)

My wife sent her photograph to the Lonely Hearts Club. They sent it back saying they weren’t that lonely.

I said to the chemist: ‘Can I have some sleeping pills for the wife?’ He said: ‘Why?’ I said: ‘She keeps waking up.’

Like Les’ relationships, JVs are complex. They bring together companies from different organisations with potentially very different cultures and ways of doing things. They also bring in new staff to work at the JV level who may have no experience of any of the partners. Elsewhere, the parties to the JV may well be in competition. In alliancing and partnership arrangements the partners must learn to work with each other as well as with the employer.

This complexity brings with it risks.

In our experience, the most significant commercial threats specific to JVs are:

1. Insolvency of the JV or of one of its partners

A new JV may not have established lines of trade credit. It may take a while to mobilise effective commercial and accounting processes. These factors can lead it to suffer cashflow difficulties.

2. A lack of transparency of costs and margins between the parties

Companies within a JV may be unwilling to disclose costs to their partners, either to protect commercially sensitive data or to comply with The Data Protection Act.

Without proper transparency, inappropriate costs may be charged to the JV and ultimately to the employer.

3. A failure to agree common commercial approaches

If the treatment of a cost varies between parties to a JV this may create uncertainty for the employer and concerns over relative margins for the JV partners.

4. A failure to exploit the synergies of the JV

Partners to the JV may be unwilling to exploit their supply chains for fear of losing commercial advantage elsewhere on other contracts. One partner providing a resource, such as plant, can create mistrust and conflict.

5. Weak commercial processes and controls

This can be a particular problem for JVs as staff adapt to new ways of doing things. Weak commercial processes and controls ultimately can lead to unpleasant commercial surprises. These problems can be made worse where staff mobilisation is delayed.

6. A failure to demonstrate value for money

Ultimately, the points above result in an over-arching risk of JV’s failing to demonstrate value for money. This risk is particularly significant when a capital programme is ramping up. The JV may mobilise resources at a point when they are not required.