How Process Management Can Reduce Mergers and Acquisitions Risk

In the chaos of businesses aligning, the best people are often the first to go

Published: Wednesday, October 14, 2015 - 15:18

T

he world’s worst-kept business secret is that most acquisitions fail. Depending on what metric you use to evaluate success, mergers miss their intended goals by as much as 85 percent of the time. With a failure rate that high, there’s no single cause, and there’s no silver bullet that will guarantee successful post-merger integration. When you read the postmortems on failed business combinations, it’s clear that the role of process management is too often overlooked as a strategy to reduce risk.

What could possibly go wrong when you ignore process tenets? Everything.

Case in point. Last week, I had dinner with an old friend who was exhausted after working all day—on his day off. Ever since his company was acquired, he spends his day putting out fires and consoling his demoralized colleagues. His business, a once-profitable midsized manufacturing company, is now a place where people cry—almost every day.

On paper, the acquisition made sense. A larger company needed greater manufacturing capacity to fulfill a new client’s purchase order. My friend’s business had excess capacity and the equipment necessary to make the products. What could possibly go wrong?

From a process management perspective, everything can—and often will—go wrong.

Strategic alignment

The acquirer had experience producing massive volume but focused on only a handful of different products—a classic high-volume, low-margin company. The acquired company is a moderate-volume, higher-margin company that produces relatively smaller batches of hundreds of different products. As a result, the basic operating goals of the merged companies are different. One prioritizes volume; the other priorities product diversity and agility. The levers management uses are now very different—and thus contributing to at least some of the crying.

Governance

I asked my friend if he likes his new boss. He asked, “Which one?”

The poor guy now has eight bosses (two sets of functional, geographic, product line, and business leads). That means there are eight people setting meetings and constantly reprioritizing day-by-day agendas. It’s a classic case of no one being in charge because everyone is in charge. (Cue more crying.)

Process models

For decades, my friend’s business had run like it always had. Everyone knew what had to be done. Processes knowledge was implicit; new hires learned by watching their colleagues. The integration of multiple businesses is now creating the need to map and manage cross-functionally for the first time. And that’s a task that only works when people communicate.

Surprise: Crying is not conducive to effective communication.

Change management

When it comes to integrating operations, buyers often seem to think they know better than the sellers. The result is that they are quick to dismiss the “old ways” used by the acquired organization. But in the manufacturing space, my experience is that old machines can be as temperamental as the mechanics who have spent decades keeping them running.

Treating the acquired company’s tacit knowledge as a real asset can help with the bumps of the transition and reduce the us-vs.-them mentality. In other words, sharing is caring.

Process improvement

Another truth is that every company has suboptimal processes. An acquisition, especially one that leads to increasing manufacturing production, can exacerbate what’s already broken. Making fragile machinery work harder will not magically improve the worn-out parts. Consider planning downtime to allow for maintenance. Running at a high utilization and hoping nothing will go wrong is a recipe for disaster.

Process performance

Following an acquisition, there’s real pressure to make sure the acquired company is “hitting its numbers.” But what are the right numbers? A high-volume, low margin business tends to have very different internal benchmarks than a lower-volume, higher-margin business. A “good” number for one business may not be a “good” number for the other business, and neither may it be attainable.

My friend’s business was given the directive to produce more but without considering the full costs of doing so. The mechanical upgrades, the cost of modifying the existing space and talent, the potential overtime for line workers, and the collapse of company morale are all contributing to killing margins.

And that can lead to a dangerous spiral. Buyers should be aware that your best people are always the first to go.

Tools and technology

The process issues common to post-merger integration require real attention; this is no technology fix. When you’re trying to dig your way out of a hole, keep investments to a minimum. Work with what you’ve got until you know exactly what you need. And more important, know what you don’t need so you’re not tempted down the expensive “customization” rabbit hole.

Process management is all about getting out in front of business risks. Proactively addressing basic process management issues during a merger is all the more crucial. Executives’ unwillingness to consider fundamentals such as those found in APQC’s Seven Tenets of Process Management are doing so at their own peril and the emotional well-being of their employees.

First published Sept. 24, 2014, on the APQC blog.

About The Author

Jess Scheer

Jess Scheer, senior consultant of advisory services at APQC, helps organizations target and prioritize their process improvement initiatives, using value path and prioritization heat maps to target the processes and process steps most in need of support, and by navigating softer change management challenges, such as executive buy-in, and providing ongoing monitoring to measure results and minimize unintended consequences. Scheer leads APQC workshops, teaches process courses, and is a sought-after speaker for industry events. Before joining APQC in 2011, Scheer was editor and research director for Kennedy Information helping consulting firms drive greater profitability and improve employee engagement.