Since outsourcing resembles a partnership or joint venture, many outsourcing contracts have been structured as joint ventures.
Rationales for Joint Ventures
The rationale for joint ventures can be driven by marketing for new customers in a given industry, by financial incentives for the customer to share in savings generated by the service provider’s technology and process improvements. In some cases, joint ventures can be used as a tool to gain “first mover” advantage in a niche market, with the intent of achieving dominance in the market as it evolves. In other cases, the enterprise customer might want to tie up the service provider in a niche market, so that process technology of the enterprise customer that flows to the service provider is not misapplied to the competitive disadvantage of the enterprise customer.
Preparation
In the preparatory phases, joint ventures require analysis of the risks to the enterprise customer’s core business when it tethers itself to the service provider. If the basic service needs of the enterprise customer fail, then the joint venture fails too. If the joint venture serves to distract the parties from the ensuring the enterprise customer’s needs are met, the distraction can result in losses greater than under a straight outsourcing model (fees for services). For this reason, joint ventures tend to be adopted only after the parties have had some experience in working together.
The Agreement
Joint venture agreements must define the basic elements of the relationship:
- purpose and scope of the joint enterprise;
- the types and agreed valuations of the contributions by each party;
- contingency planning on the upside, involving a definition of success and how success might result in any organic changes to the joint venture;
- contingency planning on the downside, involving changes not anticipated in the business strategy but that may require further investment, assumption of new risks or even an organic change in the joint venture;
- decisionmaking principles and governance rules;
- exit strategies, including buyouts by one of the parties or by a third party on a voluntary or pre-committed basis, depending on the contingencies.
For this reason, joint ventures in outsourcing may take substantially more time to sign than a straight outsourcing.
Benefits
The benefits of a joint venture should be carefully defined and priorities given to the individual goals to assist decisionmaking. Such priorities may conflict, such as reducing the costs or improving service quality for the enterprise customer, or generating revenues from new market initiatives in the niche.
Conflicts of Interest and Viability
Among corporate lawyers and financiers, the short duration of most joint ventures serves as a testament to the inherent conflicts of interest that each party has when entering into the venture. The enterprise customer wants its own needs met first, but it also wants to enjoy the benefits of its contributions to the service provider’s prospecting for new clients and a share in the profits. The goals of present service benefits and promotion of future revenues from servicing other customers may conflict. Similar conflicts arise at the service provider level.
Before entering into a joint venture, the enterprise customer needs to decide whether, in the absence of a joint venture, it would enter into the market to provide the in-scope services to others in its market. If not, it should identify why and decide whether a joint venture would overcome any constraints or impediments to its entering that market. Over time, if the joint venture is successful, each party would have an interest in providing the in-scope services to third parties without depending on the other joint venturer. For this reason, joint ventures tend to have a short life cycle.
Despite such risks, joint ventures may serve important values and goals. Those values may overshadow the simple goal of effective business process management for the enterprise customer.