Contributed by Joe Torrez http://www.torrezbv.com/
As a corporate development specialist or a transaction advisor, you have a vested interest in increasing the likelihood of success of the transactions you manage. Whether that interest is,
• To grow the bottom-line and enhance the value of your company (or those in your portfolio) and generate increased returns for shareholders, or
• As transaction advisor, to satisfy your customers and create a significant competitive advantage for your firm. The more successful deals you close, the more transaction customers you attract.
• And perhaps that interest extends beyond the success of your company or clients to your own professional aspirations and benchmarks of personal success.
You probably don’t engage in a transaction if you lack the confidence of reaping the benefits of a successful acquisition such as…
• The financial targets of the acquisition are achieved as fast as possible to build cash flow (and minimize burn rate) and profit.
• Added shareholder value is created in the combined enterprise.
• Productivity is maintained during the transition and shows sustained increase over time.
• Employees and customers remain engaged to the company.
Despite having high confidence in the transactions we engage in, they continue to fail or underperform. And this failure comes despite all the published accounts and analysis we have read about…
• the low rate of acquisition success
• the causes for acquisition failures or substandard performance
• advice on how to fix these causes, including greater attention to culture, human capital (employees, suppliers, customers), and communication,
• and leadership teams and their advisors know these things, especially of the financial risks associated with ignoring culture gaps
Why then do transactions continue to fail or underperform? Is this simply a case of what is called the Knowing – Doing Gap, where knowledge is not implemented_ and we continue to operate in less than effective ways?
“The definition of insanity is doing the same thing over and over again and expecting different results.”
“At some point in the life cycle of virtually every organization, its ability to succeed in spite of itself runs out.” Brien’s First Law
What’s getting in the way of successful transactions? 5 underlying causes behind failed or less-than-effective transactions.
#1 Limited view of the Transaction Life-cycle
The focus is on getting to the altar and closing the deal rather than making the marriage successful. To make this happen, financial, legal, & technical perspectives dominate; these are the strongest and most listened to voices in the deal room. And management teams and their transaction advisors, whether internal or external, are measured and rewarded on his/her own perspective and expertise in bring the deal to the close – as quickly and financially beneficial as possible.
And that’s it.
The acquisition process isn’t geared to go further Creating long-term success begins with consideration of Integration-related activities, and those typically only begin after deal close, often after it is too late to leverage the energy of the deal.
#2 Thinking Traps
The way management teams perceive, think, discuss and decide collectively as a team about a transaction is a risk to the success of the acquisition. The assumptions individual team members have about the transaction, based on their own interests, perceptions or fears and anxieties, are often left unsurfaced and untested.
More often than not, the strong voice – usually belonging to the CEO or CFO – wins. Voices of dissent or alternatives are quieted, either directly or by their own choice to protect themselves (from loss of position, promotion, resources, social standing, bonus, etc.).
Which data are used in the decision process is often problematic. In many cases, data supporting a “Go” position is highlighted and potentially damaging (to an individual position), disconfirming data is withheld from the discussion. Often data is not made readily available to all team members, usually not out of intent but from standard practice of creating bulky fact-bases and presentation packs.
Teams and leaders learn organization defensive routines such as these to keep them safe and ‘in-control,’ but frequently result in personal and organizational ineffectiveness, or even incompetence.
Discussions are superficial, polite, face-saving and often dominated by one perspective; blame behavior is frequent. Decisions are made quickly, fueled by potentially dysfunctional, unchallenged thinking like:
• “This target is perfect; this deal is a slam dunk.”
• “We need this.” Just get it done. Now.”
• “We’ve succeeded in the past; if we follow the same formula, will
succeed again in the future.”
• “This company was my baby. I know we must let go, but…”
• “We’ll take care of the culture stuff later. The finance and legal
stuff needed to close the deal.”
• “Those external advisors we’re paying millions to say we should do this. They can’t be wrong.”
• “The external advisors are to blame for that last transaction that didn’t work. We don’t need to do anything different.”
• “Don’t worry about conflict or culture; the right governance structure will solve everything.”
No one wants to marry a loser; in our minds he/she MUST be a prince or princess. We must win, we must be in control. And when those thought patterns dominate, we’re in trouble. Rarely do we back up, re-evaluate, and let go.
#3 A Mechanistic Transaction Process
The transaction process often focuses on the “What” of the deal versus the “How” of the process in bringing two (or more) companies together. A ‘Check-in-the-Box’, project management mentality dominates, for the sake of speed and repetition (getting more deals done faster).
The process is driven by financial, legal, technical expertise with a fixed perception of risks related to those points of view…and blind to the risks that impact employee performance and sustainable profit generation once the deal is closed.
#4 Poor Health and Low Capability of the Acquiring Company
Many companies acquire because of their inability to create organic growth within the existing limits of their market.
The deeper causes behind the inability to stimulate organic growth are often fundamental challenges related to innovation, generating and implementing new ideas, and executing any major initiative or change. Leadership teams of companies like these are often rigid in their thinking and behavior, and as a result have reinforced cultures that are slow to learn, slow to adapt, and ultimately unable to deal with complexity.
Adding a new floor to an already shaky foundation … It might become the tallest building in the area for a while but at the expense of long-term stability and sustainability.
#5 Treating employees are Passive Bystanders
Many acquisitions happen to managers or employees (on either side of the transaction). Very few employees are typically involved in the process. Employees hide their Knowledge and Expertise to maintain their own security & value in the company. Fear of loss rules.
Formal communication serves as a superficial sedative to calm employees. As the transaction and integration draw out over time, rumors gain power. The Impact:
• Skepticism, fear, anxiety, conflict, disengagement (sit and wait for ‘the’ package) diminished quality & productivity, employee attrition, customer attrition
5 Interconnected Remedies
Remedy 1: The Process – Extend the view of the transaction Life-cycle.
Focus on a successful marriage rather than only deal close. Assess & mitigate leadership and organization risks of acquiring company, early in each transaction. Engage leadership teams early, before deal close to begin thinking of major integration issues. Include behavioral risks in due diligence (and walk away with better valuation) and integration outlook.
Before the close of the deal, be ready with the integration plan.
• Faster achievement of synergy targets
• Greater buy-in and trust amongst leadership
• Improved Employee & Customer Engagement (Retention)
• Sustained business success of combined enterprise
Remedy 2: Identify & Manage the Key Variables (the “missing links”) Driving the Transaction & Integration Process.
Despite what the many articles and analyses say, it’s not simply about “Culture.” Culture is a construct that relates to how things are done around an organization in order to not only create customer value and generate profit but also to gain rewards and stay out of trouble.
Three cultural variables contributing should be evaluated and managed during a transaction and integration:
• Behavioral, including mental models, biases, team dynamics, and decision-making.
• Emotional, including separation anxiety, feelings around individual and group security and value, fear of the unknown and of loss, trust.
• Structural, including clarity, alignment, and integration across the organization.
Compliment financial, legal, and technical expertise and perspectives with expertise in Organization Behavior to surface and manage the risks related to how these variables can limit a company’s capability (or more specifically a leadership team’s capability) to:
• Collectively and coherently think about, discuss, understand, work out issues, plan for, and ultimately implement a transaction.
• Improve business performance, pre- and post-acquisition.
• Effectively engage in organization change, whether limited to a specific unit or across the whole system.
If the organizational capability to do these things is low, then odds of a failed transaction are greater.
Remedy 3: Build the Capability and Performance of the Top Team(s).
When things aren’t going right for a company, the source is usually based in the performance of the top team. Silo mentality and behavior, unclarity and confusion, and misalignment across an organization is rooted in a top team that has trouble working and learning together.
The likelihood of successful transactions and integrations will increase when management teams are able to:
• Surface and challenge all of their assumptions about a transaction and its integration as a product of open, productive conversations. Flawed assumptions, no matter how well accepted they are, invariably lead to flawed decisions which invariably lead to flawed behaviors and to flawed outcome. And unsurfaced, unchallenged assumptions reinforced by past success increase the chance of creating unbounded optimism and illusions of superiority and control. The ‘Disease of Victory.’
• Break silos that keep people and groups from each other, recognizing that a real Return on Relationships can be created when ideas, expertise, resources are brought together and shared more freely. And as a result, a clearer, shared view and commitment can be built about the strategic fit of a potential acquisition, its risks, and integration needs.
There is a risk, however, in focusing on the performance of a top team. It takes courage for a CEO and his/her team to look in the mirror and ask how they are contributing to the success or failure of their company and its potential acquisitions. But many top teams choose to look away from that mirror and take an easier path, focusing on operational initiatives or a mechanistic approach to organizational change and culture that is focused outside of the boardroom (on “them” rather than “us”).
So what capabilities should a top team develop in order to increase the success of acquiring and integrating? As a starting point, these could include_:
• Building and communicating a shared vision.
• Systems Thinking & Dynamics to understand how thei organizations fit together and operate across boundaries, time, and space as well as to solve the thorny performance problems that slow down the process.
• Having productive conversations in service of surfacing and challenging assumptions, making decisions, and taking action that all can commit to.
• Learning as a team, including making mistakes quickly, frequently, and once.
• Engaging others across internal and external organizational boundaries.
• Problem solving as a daily practice on the path to sustained business performance improvement.
• Building and maintaining a foundation of trust and accountability.
Remedy 4: Stimulate Inclusion of Employees.
It is critical for leadership to influence employee commitment to the transaction as early and as frequently as possible. One means of doing so is by getting employees involved. Asking them to invest their perspectives, knowledge, and expertise in the transaction and integration process builds their internal commitment to the long-term success of the union.
Implementing the right tools and structures will help achieve and sustain employee involvement and contribution. These can take the form of not only traditional communication and engagement events but also knowledge management systems and collaborative technologies that make it easy for people to connect and share with others.
Having the right tools and structures in place, coupled with employee commitment to a transaction, can unleash the collective intelligence and experience of the company (and its acquisition target). And with it comes greater speed of learning, improvement, and integration; innovation; agility; resiliency; and ultimately competitive advantage. “A great idea is simply two good ideas coming together to meet for the first time.”
Widely networked organizations with porous internal and external boundaries can achieve this. Highly structured, hierarchical, bureaucratic organizations will not.
Generating employee commitment and buy-in without asking for their investment runs the risk of breeding passivity, helplessness, and disengagement. Asking for employee investment without generating their buy-in runs the risk of breeding ambivalence, misalignment, waste, cynicism, and disengagement.
And without the right supporting structures in place, neither employment commitment nor investment will be sustained. And the acquisition will be at profound risk.
Remedy 5: Discover How Customer Value and Profit are In Reality Created and Sustained
Every company has some chain of processes designed – intentionally or not – to create and deliver value to its customers. Whether this chain actually accomplishes that is determined ultimately by the customer and reflected in the company’s financials. If that value chain is unclear and performing inefficiently or inconsistency prior to an acquisition, it likely will only become worse following the transaction, especially if operations are to be integrated (and if they’re not, the problem operation becomes ignored if the bulk of leadership attention is shifted to the acquired company).
Getting one’s own company in order before adding on to it through an acquisition will strengthen performance of the integrated companies. This involves identifying and stabilizing performance across the customer value chain, driving out waste and underperformance. Identifying the weakest link in the value chain in each of the separate companies, as well as in the combined one, will point to where improvement efforts should focus, at least initially until that link is strengthened and a different one becomes the weakest link.
Creating structural alignment and a process for ongoing, disciplined performance improvement will enable a company to integrate an acquisition more rapidly and efficiently. Knowing what the vision is and the plan for getting there (i.e. the strategy) is important but not enough. This must be supported with intelligent organization design to ensure the elements of the customer value chain as they exist across organizational functions fit well together and all policies and procedures are aligned to that chain to promote and sustain effective team and individual behavior.
If a company thinks of and applies these remedies as an interconnected portfolio of interventions, it can be much more effective in completing its transactions and integrating their acquisitions. And consequently, fuel for growth will be generated enabling the company to engage in more transactions. The impact:
• Increased valuation of the company
Greater competitive advantage and larger market share
• Greater profitability
• Greater predictability over future performance and growth
1 J. Pfeffer and R.I. Sutton, The Knowing-Doing Gap, HBS Press, Boston Ma, 1999._2 C. Argyris, Flawed Advice and The Management Trap, Oxford University Press, NY NY, 2000. _3 Two sources to draw from for building a leadership team development program include:
Peter M. Senge, The Fifth Discipline, Currency Doubleday, NY, NY, 1990
Patrick Lencioni, Overcoming the Five Dysfunctions of a Team, Josey-Bass, San Francisco, CA, 2005._4 For more information, see:
J.P. Womack and D.T. Jones, Lean Thinking, Free Press, NY, NY, 2003.
E.M. Goldratt, The Goal: A Process of Ongoing Improvement, North River Press, 2004._