Consortium: Meaning, types, advantages & disadvantages

What is a Consortium

A consortium is a short-term alliance between non-competing, self-reliant parties. These companies and organizations work together to complete a single project as a “consortia.” Consortiums, also known as syndicates, are a type of legal entity in Nigeria governed by the provisions of the Companies and Allied Matters Act 2020. 

The entities that make up a consortium work together and share resources, but they are only liable for their commitments under the terms of the Consortium’s agreement. As a result, each member of the Consortium is free to do its own business as usual and has no say in the daily functioning of the other companies in the consortium unless those doings directly affect the Consortium’s goals.

Types of Consortium

It is possible to classify a consortium into two distinct categories:

1. The open or external Consortium

The open or external type is where the customer is aware of all participants in the consortium and an eventual agreement is reached between the client and all participants.

2. The internal Consortium or the quiet Consortium

The internal or quiet type is the one in which each Consortium has an equal economic connection with the customer or client. Still, the syndicate is often represented externally by only one of the consortia, the so-called consortium leader. The latter has the authority to represent the joint venture in talks, form agreements, divide work between the partners, and send out client invoices.

In practice, differences across kinds tend to be nebulous. Therefore it seems important to choose a unified leader for clear customer communication. Whatever form the collaboration takes, the services and capabilities each Consortium will contribute must be discussed and agreed upon separately.

Other forms of Consortium

In addition to these categories, consortia can also have the following structural forms:

1. An organization may form a bidding consortium to compete for an open contract for service.

2. Syndicates in a bank consortium work to establish cooperative project finance while attempting to reduce or share the risks associated with the endeavour.

3. To establish standards, for instance, consortia from the same industry often work together in what is known as an “industrial consortium.” Again, several organizations come to mind; the World Wide Web Consortium (W3C), the Object Management Group (OMG), and the HR Open Standards Consortium are just a few.

4. To provide the necessary capacities and securities, public-sector building contracts sometimes require individual enterprises to form a partnership between equal legal entities. ARGE is the acronym for “Accredited Regional Governing Entity” and is commonly used in the construction sector to describe such groups.

Consortium and Government

Standards for manufacturing, food production, product compatibility, consumer safety, and other areas are frequently developed through joint efforts between governments and commercial businesses. The government uses its position as a major customer to influence these partnerships.

There is an economic benefit for countries that create their standards over others. Those who can reach an international consensus on a single standard set are often the market leaders in their respective industries. Nonetheless, the development of standards raises worries about antitrust abuse. 

Industry standards are generally developed through joint efforts between governments and private companies, with the former using its considerable purchasing power as a consumer to influence the latter.

Consortium and Joint Ventures

While consortiums frequently work together, they maintain their identities when conducting day-to-day business. Joint ventures (JVs) involve two or more partners sharing ownership, risks, profits, losses, and control.

Advantages of a consortium 

  1. The companies in the consortium can pool their resources to create a symbiotic relationship between their respective businesses.
  2. Companies in the Consortium can leverage the knowledge and skills of other companies, which the companies ordinarily may not have and could not afford at the beginning. 
  3. Tender applications may be given an edge over the competition if the bidder has access to data or the potential to deliver in other regions. This is most significant when a company on its own cannot satisfy the demand requirements for the deal.
  4. There are greater chances for companies, especially companies engaging in construction or corporate practice to pass through a tender review process using a consortium unlike when it goes on its own.
  5. Cooperating on a project’s development can save money and reduce the workforce for all companies involved.
  6. Business partners can share the burden of risk.

Disadvantages of a consortium 

  1. Some companies may be resistant to working together on a bid to win. Therefore, it will need far more work during the business tendering stage to find suitable collaborators and justify how doing so will increase the likelihood of success.
  2. Putting together a consortium is an effort that requires time. If the Consortium is put together in a hurry, it may not work out well and end up causing issues for the parent companies.
  3. Consistent and high-quality results from a consortium’s work typically necessitate greater time and energy spent on management.
  4. To make sure the Consortium is set up in a way that is “fit for purpose,” it is recommended that you get legal counsel, which can be costly.
  5. If one of the associate companies in the consortium can’t come through, it could reflect poorly on the rest of the companies in the consortium when it comes time to bid on future projects. 

Conclusion

The business world has adapted to engage in a variety of business practices that are aimed at increasing revenue in the long run. The business contemplates making additional profits while providing the best services to the general public.

Most times a business can be limited as to the services they can offer, but require a deal that would span through varying services offering; the business can contract with several other companies that engage in services that complete the process of the bid- when this occurs, such would be referred to as a consortium.

This article provided all there is to know about a consortium, how it works, its definition and others.

Frequently Asked Questions

Is a consortium the same as a holding company?

No, the holding company controls the subsidiaries under it, the consortium is a relationship between two independent companies.

Are the members of a consortium called associates?

Associates, syndicates and members are the various names a consortium can be referred to.

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Richard Okoroafor

Richard Okoroafor

Richard is a brilliant legal content writer who doubles as a finance lawyer. He brings his wealth of legal knowledge in corporate commercial transactions to bear, offering the best value that exceeds expectations.

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