Aligning risk within a joint venture: ready for a win-win outcome?

So we’ve all heard the phrase ‘win-win’. We have probably even used it in situations when we’ve been trying to convince someone that a certain course of action would provide a mutually beneficial outcome. But what does it mean in the context of optimising a joint venture?

The Oil and Gas industry provides a good example of where these issues are put under the spotlight. All joint venture participants in a coal seam gas (CSG) to liquefied natural gas (LNG) project need to align risk so as to maximise profits from the project. Even though each individual participant enters the joint venture with its own risk appetite, it is only by collaborating with the co-conspirators in the project that all participants will optimise the overall outcome.

A diversity of decisions

Consider the matrix below which shows two companies, Company A and Company B, and the way they can choose to approach decision-making within a joint venture.

#1 Lose-lose

In the lose-lose scenario each company effectively ignores the existence of the joint venture. Their decisions relate entirely to their individual companies and their risk appetites within the joint venture are no different to their corporate risk appetites. In this scenario neither company achieves the returns or realises the opportunities envisaged when each company entered the joint venture.

#2 Win-lose

In both of the win-lose scenarios one company acts in their own self-interest. The other makes decisions in the interests of the joint venture by adopting a risk appetite that is specific to, and commensurate, with the venture. In this scenario the returns of the joint venture are constrained by the misalignment in attitudes and actions of the parties and a venture that is permeated by suspicion and mistrust.

#3 Win-win

In the win-win scenario both companies suspend self-interest and act in the best interests of the joint venture. Here both companies make mutual decisions based on a shared risk appetite that is specific to the venture rather than based on their individual company’s operations and attitudes. As a result, in this scenario the returns of the venture are optimised and both companies achieve the returns envisaged upon entering the venture.

Fuelling a win-win outcome

So how do joint venture parties ensure they optimise the venture and achieve a win-win outcome? Our work in risk, conduct and reputation has proven a win-win outcome is only possible if the venture is built on a foundation of trust.

At its most fundamental level, trust is built by doing what you said you would; fairly and transparently.

If trust is about the promises each party makes and those they keep – it can be achieved ethically, competently and with alignment whether the venture exists in the billion dollar gas sector or between two individuals in the domestic cleaning business.

Trust and behaviour under the spotlight

But to fix a problem as foundational as trust, we have to first understand the problem -pull it apart and look at what causes or erodes trust.

So what do we believe is the root cause? In just two words, alignment and behaviours.

These two are equally important drivers of trust. We need to start with the behaviour of each party and ensure there is alignment in their shared strategy and appetite for risk and that this is being demonstrated through their behaviours.

Trust management, then, begins with an assessment of behaviour. The parties should ask honestly if they are seeing:

  • An increasing reluctance to learn from past mistakes
  • A growing lack of alignment in risk appetite between parties
  • Mounting reticence to escalate risks appropriately and communicate these to partners, regulators and other stakeholders
  • Inadequate challenge of excessive risk taking
  • A tendency towards shooting the messenger when risks are raised
  • Evidence of one or both parties acting in their own self-interest.
Four fundamentals for every leader to know

Are you and your partners aligned? Do you work towards the same goals? Or do you just think you do? It’s these questions that determine whether a party is worthy of being trusted.

So how do you achieve a win-win outcome? We propose the following four powerful solutions:

  1. Create a shared strategy and meaning that continually evolves within the broader context of your competitive position in an evolving global market
  2. Recognise that there must be a conscious and common understanding of the appetite for risk taking that is in line with the strategy of the joint venture and represents a win-win outcome for both parties
  3. Ensure the joint venture’s risk culture is grounded in the shared value and common practice of understanding, communicating and controlling how each participant’s activities contribute to the overall venture’s risk profile. The true test of whether the risk culture is embedded is that everyone in the venture can explain the risk appetite and profile
  4. Ensure there is risk transparency within the joint venture. Risk discussions should be direct and timely, and should directly feed into the assessment and control of risks and with the transparency required to build confidence.
What’s next?

To be able to keep our promises we need alignment in strategy, risk and culture. These are the measurable, practical and predictive ways to achieve trust and a win-win outcome when considered together.

In this way we don’t just relay risks, we anticipate them.

This blog has been prepared as part of Deloitte’s involvement at APPEA Conference 2018 (14 – 17 May).  Check out the Daily Digest blog for all APPEA insights, our webpage for the latest reports that bring to life the key APPEA themes, and social coverage via @APPEACONFERENCE and #APEPA2018 on Twitter.

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