Torrez B.V.

The Collision of Cultures and Destruction of Value

elephantseeselephant — Thu, 19 Nov 2009 13:01:18 +0000

“The merger and acquisition market is slowly moving again. The crippling impact of the credit crisis is diminishing. “There is a tilt. We get more work.””(Joris Heerkens, PhiDelphi Corporate Finance, Het Financieele Dagblad, 19 November 2009).

You want to grow our profits, in a sustainable manner. You opt to grow via a ‘buy and build’ strategy. But you know, perhaps firsthand, that making transactions work, and work quickly, is not easy and certainly not a given. As the new realities of the marketplace evolve, companies have a choice either to go back to their old ways of working, or explore doing things differently to take advantage of new market realities. Companies considering an acquisition can benefit from a new way of doing the transaction, focusing on the success of the “wedding” as well as the “marriage,” creating a new culture that amplifies the strengths of the acquired and acquirer.

Even prior to the crisis, it seemed clear that the process behind the ‘buy and build’ strategy was not working. Much had been written over the years about the ’soft side’ risks of mergers & acquisitions: If a company neglects the people issues before and after an acquisition, the potential for value destruction, or at least delayed or unrealized synergy targets, is dramatically enhanced.

In a 2006 IDC survey commissioned by BearingPoint, 150 C-level executives in multiple industries were asked about the most significant business challenges they faced during a merger. Cultural integration ranked at the top; most respondents however admitted it was among the last thing they consider when deciding whether to attempt a new merger, acquisition, or partnership. Though the statistic may differ from study to study, the conclusion remains: Most acquisitions fail to meet expectations. (for instance, Hay Group found that within 5 years, more than 30% of all acquired companies were sold off and that 90 percent of mergers never came up to the acquiring firm’s expectations.)

Acquiring a company, no matter how seemingly clear the rationality for the transaction, is often a collision of cultures. Different assumptions, values, ways of working, sources of pride and security or fear, etc. The ‘soft side’ issues permeate every ‘hard side’ issue facing a combined company, from setting strategy to executing their core processes related to designing, producing, and delivering their products and services, to dealing with complex performance problems, conflicts, and crises.

As the appetite for acquisitions increases once again, will acquiring companies and their advisors do more of the same? Or will they dare to take a different approach to enhance success. What does doing different mean? As a start…

Because of the influence of ‘soft issues’ on value realization of the transaction, the financial executives involved in an acquisition should be the champions of assessing and managing these risks, more so than human resource directors. They should be vigilant in assessing the potential costs of ignoring or mismanaging the ‘soft side.’ And they should put a strong framework in place that will defuse fear, insecurity, decrease sense of worth instead generate “early wins.”

Will Rogers once said, “Even if you are on the right road, you will eventually get run over if you just sit there.” And in this environment of continued uncertainty and complexity, just sitting there doing the same can potentially devastate value. Just sitting there will perpetuate organizational dysfunction and poor health. Can you afford that? Are you willing to accept unnecessary leakage (i.e. hidden costs and increased burn rate) in your investment?

One of those options is an easier route to take than the other. One is known and safe, the other not.

Acquiring a company, no matter how seemingly clear the rationality for the transaction, is a collision of cultures. Different assumptions, values, ways of working, sources of pride and security or fear, etc. The ‘soft side’ issues permeate every ‘hard side’ issue facing a combined company, from setting strategy to executing their core processes related to designing, producing, and delivering their products and services, to dealing with complex performance problems, conflicts, and crises.

Organizational Health & Strategic Performance

elephantseeselephant — Wed, 02 Sep 2009 13:00:19 +0000

Healthy organizations come in all shapes and sizes.

Today at the Triple Bottom Line Investing Conference in Amsterdam (www.tbli.org), I had a fascinating conversation with Mel Young, President of Homeless World Cup (www.homelessworldcup.org). Their vision is for a healthy, abundant, confident world where everyone has a home, a basic human need. To get there, they use football as a trigger to inspire and energise people who are homeless to change their own lives. By this approach the Homeless World Cup creates better opportunities for people who are currently homeless and excluded and reduces homelessness on a global level. Homeless people, in major cities throughout the world, playing organized football against each other. Mel finds that participants develop a greater sense of belonging, individual worth, and capability to achieve, qualities that carry over beyond the competition…and qualities that attract potential employers. Many participants find employment and ultimately homes after the competition. Others organize themselves and begin micro-businesses that produce products that are sold back into the communities. Their goal: Involve more than 1 million players by 2012. Imagine the potential economic upside! Social entrepreneurship at its best.

Healthy organizations come in all shapes and sizes.

How does Mel and Homeless World Cup make it happen? What are the basic ingredients that drive good health and top strategic performance in his organization? It begins with leadership. Meeting Mel, you’ll understand right away what Jim Collins means by Level 5 Leadership: a humble leadership approach that aspires to help a person achieve her potential. That style also helps the organization be quick to recognize and admit to mistakes, and rather than blame (a hallmark of unhealthy, dysfunctional companies worldwide), Mel’s organization learns quickly, as a team, and puts those learnings into practice. Fast action. Doing versus talking and planning and compromising and on and on. Having a clear vision and guiding policies (read: Rules of Engagement) such as “Responsiveness and Commitment to Social Impact” and a means of measuring impact and holding people accountable defines organizational alignment in the structures that drive people’s behavior. And “Focusing on core competencies and partnering with the best organisations in specific areas [e.g. Nike] as a key driving force” extends the organization’s capability to create, deliver, scale far beyond its own finite set of resources and reach. Healthy, high performing organizations recognize that there is tremendous economic value in creating, fostering, and leveraging a network of people and organizations to create new capabilities and continue to add value to its products, services, or delivery mechanisms (see Verna Allee, www.vernaallee.com). Designing your organization for speed, resiliency, agility and adaptability, innovativeness, self-correctiveness…taken together, you’ll play your own game smarter and better than your competitor.

Homeless World Cup and Mel Young. A wonderful example of Organizational Health in action, for non-profits and for-profits alike.