Joint ventures are becoming a widespread alternative to mergers and acquisitions for businesses seeking cheaper, less risky and more flexible access to knowledge and new markets. But the companies involved in them are warning of the challenges as well as the benefits.
For Canada Post, the anticipated pros currently outweigh the cons. Last year, the Crown Corporation partnered with Montreal-based integrator CGI to launch Innovapost, a joint venture that will exclusively manage IT infrastructure at Canada Post and its Purolator Courier and Progistix Solutions affiliates.
With predicted annual revenues of more than $200 million, Innovapost will begin operations this summer.
“This joint venture enables us to lower costs and provide better quality services. And, by bringing in a private company, we are reducing the bureaucratic aspects of Canada Post,” said Yvon Bolduc, Canada Post’s vice-president, partnership development.
Although anticipating success, Canada Post has the business equivalent of a pre-nuptial agreement with CGI. Safeguards include service contracts which govern Innovapost’s operations and a “scorecard” to track the new company’s performance.
“If the joint venture doesn’t work, we can terminate the agreement and continue our operations through insourcing,” said Bolduc.
Tracking the progress of its own joint venture was also important for Cap Gemini Ernst & Young, which aimed to take over the company it formed with Ontario Power Generation if it proved successful enough.
The partners established New Horizon System Solutions in February 2001 to run the power company’s IT infrastructure. But even though the partners had a prior working relationship, the joint venture was not always smooth.
“The biggest challenge was governance, because in this case our customer was also our partner. But because we each had our most senior people involved and because we had worked with OPG for many years there was a level of trust,” said Darren Saumur, Cap Gemini’s vice-president, energy.
The company acquired full control of New Horizon in April, providing Cap Gemini with a proven outsourcing operation specializing in energy sector IT services. As well as selling those services back to its original joint venture partner, Cap Gemini is approaching new markets across North America.
But for every success story, there have been some joint ventures that couldn’t overcome their challenges.
In 1997, Vancouver-based print solutions provider Creo formed a joint venture with Heidelberger Druckmaschinen AG (Heidelberg), a world-leading print and publishing corporation.
Heidelberg wanted access to Creo’s state-of-the-art computer-to-plate technology and Creo was swayed by the idea of entering new markets around the world. But the joint venture ultimately reflected its partners’ unequal priorities.
“We were only five per cent of their business but they were 100 per cent of ours. It was hard for both companies to be in sync from a partnership point of view. Although we benefited from the arrangement and expanded our global reach, it was a lot of hard work,” said Dave Brown, the Vancouver company’s vice-president, business strategy.
The joint venture came to an end in 2000 when Creo acquired a competitor — becoming the much larger CreoScitex — and Heidelberg refused to alter the joint venture agreement to reflect its expanded partner.
For Jason Bremner, senior analyst, outsourcing services with IDC Canada, both partners must be aware that joint ventures bring challenges and they should protect themselves accordingly.
“There can be conflicting objectives which emerge over time or the corporate parents can change, affecting the joint operation. It’s important to ensure that any joint venture agreement contains exit clauses,” said Bremner.
Despite the challenges, Bremner predicts an increase in joint ventures, particularly in IT outsourcing.
“Successful joint ventures will continue to enable companies to combine their skills and resources to gain something neither of them would otherwise have. This can give them a new market to attack in a less risky, less costly and more flexible way than an acquisition or merger,” said Bremner.
Vancouver correspondent John Lee is a frequent contributor to ITBusiness.ca.