20 Dec 2015
Companies that do acquisitions and invest in major, enterprise-wide, business transformations are more valuable in the long term. However, in the short-term it can feel like they are destroying shareholder value.
It does not take long looking at companies that have neither invested in themselves through transformation nor performed a significant refresh through acquisition to see that they tend to trend to stagnation. Many of those same organisations have tried to reverse their declines through operational efficiencies only to fall even further after a short-term bump.
Goals of transformation or acquisitions
Mergers and acquisitions can either be whole-of-company with enterprise impact (think the merger of companies like Continental and United) or they can be a targeted capability build (think Google’s acquisition of NEST). Internally initiated transformations are exactly the same.
Transformations and acquisitions are different sides of the same coin. While it is easier to see the activity around a transaction from the outside, a genuine transformation is no less disruptive. Both generate significant angst within their organisations and resistance to change is usually at its peak before the real benefits are realised.
For most changes of this significance, it is about knowing how to do something as an organisation that could not be done in the past. Typically, this new capability will result in a new class of services to the customer or bring together disparate parts of the organisation in a new or integrated way.
Either way, the key is to bring this capability together, which means integrating people, knowledge, systems and information.
Obstacles to change
People resist change, knowledge is hard to codify, employees take knowledge with them when they leave, systems are more fragile than people realise and information is more complex to integrate than anyone ever expects. The net effect is that what should be simple to implement fails to deliver the nirvana that many thought they were promised, runs way over time and usually gets cut short.
It seems, though, that the definition of whether a transformation or acquisition is claimed as a success really depends on whether the leadership that championed it is still in place. The question is then one of the causal relationship.
Arguably, the real measure of success should be whether the change takes the business towards a long-term position in whatever market that it operates. If the trend is towards specialisation then the transformation or acquisition should be deepening capability rather than broadening reach. If the trend is towards platforms (i.e., shared assets) then the change needs to take the business towards flexible business relationships.
Confidence in “winning ugly”
Many boards and exec teams say that they dread having discussions about these projects as it inevitably descends into dealing with the issues of major integration, particularly technology integration, which is running over budget and delivering a fraction of the intended benefits.
With the benefit of hindsight, many leaders admit that they would never have taken on change of the magnitude that they did, at the cost that was ultimately borne against the benefits that were formally claimed in comparison to the original business case. At the same time, these same leaders will be the first admit they are glad that they took the change on for the capability that it has created in taking the organisation towards their long-term goals.
We can conclude that this means that the formal return on investment (ROI) cases tend to focus too much on the short-term savings without adequately recognising the value of the long-term capability that is being created.
If we really want to set transactions and transformations up for success, more focus should be given in the financial business case to the benefits of the long-term future of the business and less emphasis on short-term savings. More often than not, the two are in conflict.