In this issue, we look at situations where financial measurements may fail to achieve a comprehensive performance assessment and suggest certain non-financial measures that can be considered.
After months of challenging negotiations, the joint venture (JV) terms have been agreed on and documented. But the work does not end here. Now comes the question of “How do I measure the performance of my new JV?”
While the traditional measure of performance is usually profit, the key strategic goals of JVs are not always monetary. Sometimes, JVs are set up as an agreement to share research, knowledge or certain intellectual property -- as in the case of a JV that was established to combine the R&D efforts of two specialist businesses. If traditional financial returns within the business unit are measured, the JV appears to cost more to operate than originally anticipated. There’s also the risk of being perceived as non-performing. Whereas in reality, both partners are extremely satisfied as the combination of the two R&D units have produced new technology, which one party would never have developed alone and which is of value to both partners in their businesses outside of the JV. As long as the partners’ strategic goals remain aligned and the sharing of created IP has been agreed to beforehand, the JV may actually be viewed as outperforming.
There is no “one-size-fits-all” approach to performance measurement. So it is crucial to understand the importance of non-financial performance measurement when evaluating JVs or alliances.