It is hard to imagine two organisational activities that result in more high profile, costly failures and reputational damage than corporate acquisitions and senior level recruitment (although culture change probably comes close). Situations where high hopes and strong rationale underpinning an acquisition or senior level hire can quickly give way to the realisation that a big mistake has been made are all too common. At first glance they may not seem to be too similar; yet both activities share some of the same fundamental problems and issues. Given that failure in these activities is hugely damaging to businesses, isn’t it time businesses changed their approach to hiring and acquiring?
Let’s start with the obvious; both senior level recruitment and acquisitions are notoriously hard to get right, failure rates for recruitment are estimated to run at around 40%, whilst anything between 50% and 90% of M&A transactions fail to deliver on planned outcomes. Interestingly, these high failure rates seem to be consistent over time and despite new understanding and advances in knowledge of organisational behaviour there has been little change or innovation in the way businesses approach these activities.
Things Going Wrong and Outside Experts
Given the historical track record of things going wrong; where there is an expectation of failure, there also appears to be a corresponding lack of desire for new approaches. Where there are low-expectations; a certain proportion of acquisitions and senior level appointments are expected to fail and this is viewed by many organisations as simply a cost of doing business. This inertia is due to a number of factors ranging from the established support services that provide transactional advice to businesses, an overly simplistic approach to search, challenges of integrating new senior executives and newly acquired businesses and a failure to fully appreciate the real costs of getting things wrong.
Both M&A and recruitment are supported by well-established industries in the form of investment banks, corporate finance advisory businesses and headhunters. This has inevitably led to an overemphasis on the transactional part of the process. From a headline perspective this is where all the brainpower and intellectual capital is deployed; where all the sexy stuff happens, the secret sauce that gets used to unearth a particular candidate or target business. The transaction is invariably seen as the most high value part of the process, where the complex and difficult stuff takes place. Unfortunately, this emphasis appears to be misplaced.
Clearly, the role of outside experts is one factor that helps perpetuate the disconnection between transaction and integration. By placing much of the perceived effort or value on the transactional stage, the inevitable belief is that if you identify the “right” target or candidate, the integration will take care of itself emerges. This is fundamentally misguided and although businesses in the past few years have woken up to the importance of integrating new managers and businesses effectively, this is still a poorly understood process that fails to receive the emphasis that it deserves.
I would also argue that there is a further problem with the current paradigms of the role of external advisors and that is the way that it forces businesses into viewing these processes as criteria based activities. In other words you articulate a strategy or set of requirements and then build a picture of what that vision looks like, judging various targets against these markers. By making the search dependent on a few specific, tangible criteria there is a danger of missing out on target businesses or candidates that are contextually much better fits, even if the strategic element at first glance may not appear as compelling. For example a new senior executive may be deemed to need to have had a specific level of industry expertise or number of years in a specific role. Yet it is relatively easy to acquire industry specific skills but much harder to for a senior executive to adapt to an environment that is fundamentally different to that which has enabled her to be successful in the first place. Likewise an acquisition strategy may be based on a strictly defined set of criteria such as geographic location, product, industry sector etc. This has the result of screening out potential targets that may represent a much more positive long-term opportunity.
A Box Ticking Exercise
By reducing these activities to a box ticking exercise, there is the risk that businesses oversimplify the process and completely ignore the actual variables that will govern whether a deal or new appointment is successful or not. This approach will lead to a situation where a candidate or business may seem like the perfect addition, yet in actual fact, from a cultural perspective represent a very poor fit with very little chance of success.
Furthermore, a criteria driven approach placIes huge emphasis on historical performance data in order to spin a narrative about future outcomes. From an M&A perspective, historical data is used as a base to project future performance and justify the rationale behind the transaction, identify synergies etc. For recruitment; track record and star quality are the underlying justifications for many senior level appointments. Yet the reality is that historical performance is a poor predictor of future outcomes, particularly when we look at the inevitable contextual change brought about by a change in owner or employer.
The problem here lies in our natural desire to simplify or easily explain a particular scenario, in this case the belief that a track record of success is a good predictor of future outcomes. Furthermore, this perspective encourages us to view performance and success in isolation, rather than considering the wider context within which performance is taking place.
Performance is Non-Linear
What businesses need to understand is that performance is non-linear, this holds true for both people and organisations. In other words, it is unrealistic to hire an executive who has achieved great things in one organisation and expect her to carry this performance directly into a new role. This is not because that person is less smart or capable when transferring roles but the context has changed, the relationships and networks that enabled high performance have been broken.
We are all guilty of looking to explain things in as simple and narratively convenient manner as possible. For example, in the organisation a successful manager is seen as the instigator and touch point for her high performing team, in other words a symbol. When we see success or high performance, we perceive a Midas touch, what we don’t see are the less visible factors that shape performance. In a world of complexity and uncertainty, we are often guilty of over-estimating the role played by the high profile or most visible individuals
For a senior executive, the key driver to performance is always going to be the effectiveness of relationships and networks that she has within her organisation. No matter how smart or talented you are, without strong collaborative relationships you are unlikely to succeed. What is important to understand is the impact of moving from one system to another.
Likewise, the notion that you can predict the performance of combined businesses by plugging the numbers into a spreadsheet and combining them is equally flawed (the whole notion of synergy is something that takes far too many variables for granted and should be outlawed as justification for an acquisition). When you make an acquisition, you may acquire the business but without an appreciation of the networks, relationships and culture that drive that business, the historical data lacks predictive accuracy.
You also often hear of acquiring companies pledging to retain the star performers post-acquisition. This seems like a sensible strategy, however it again fails to take into account the reality behind the performance of such stars. Again, it is important to be aware that people don’t perform in isolation and whilst identifying and making efforts to retain top performers is sensible, you have to go beyond this to understand the relationships and networks that enable this success and ensure that these are maintained and supported, rather than just the individuals themselves. By only focusing on the identifiable stars, you run the risk of damaging the relationships and networks that enable these people to perform.
The reason why performance both for individuals and organisations is non-linear is because performance is subject to changing context. Whilst we are very good at simplifying things to create a positive picture of future events, looking at the most easily explainable reasons for performance, what we are not so good at is in understanding the contextual factors that are the real drivers of performance. All this means that it is necessary to stop looking at potential targets or new executive hires in isolation. An appreciation of the wider, less tangible factors that govern performance must be adopted. This means that the criteria driven approach needs to be dropped.
The problem with current approaches to hiring and acquiring isn’t necessarily that advisors are nefarious types who are only focused on the next fee (although I’m sure that others may argue this), poorly aligned with their client’s long-term interests. The issue is that despite all the modeling, forecasting and interviewing, your investment bank or headhunter lacks the relevant information and insight to reliably forecast whether a particular candidate or acquiring a business will prove successful. Furthermore, this situation is exacerbated by the high fees that are charged for advice which are as much about providing reassurance about the quality of analysis. In other words clients are led to equate the size of the fee with quality of predictive insight and this is quite clearly not the case.
Another way of looking at this issue is that whenever a hiring or recruitment decision is made, many of the factors supporting or underpin this decision get damaged or broken, losing their effectiveness. In other words M&A and recruitment processes are destructive by nature. This is at variance with the common perceptions of optimism and positivity that go along with these processes. No wonder that so many fail to deliver on initial expectations. Instead of looking at these activities as additive it is necessary to understand the effect of removing people or organisations from their existing environment and networks and start planning from there.
A Changing Context
With this in mind, I would argue that success in recruitment and M&A comes down to a couple of key issues. When we look at changes in context, the questions that need to be asked are; given the change in context or environment, can an executive or business unit quickly form new relationships, identity, and adapt and strengthen its existing networks? For senior level appointments, the speed with which the new hire can form and develop effective new relationships and networks within the business is always going to be the key indicator of long-term performance. We know that at that level, any candidate is likely to be intelligent, resourceful and determined, the question becomes, who is going to engage and develop productive relationships within the organisation?
Likewise for acquisitions, if the plan is for integration, the speed with which effective new networks can be formed between the two businesses is the key variable in being able to meet the expectations of the transaction. This requires both businesses to understand what is being lost at the time of the transaction and also have the ongoing commitment and ability to build and cultivate new networks.
Above all, it is necessary to try and understand in as much detail as possible, how the change in context will impact on performance. To do this, there is a need to gather deep information and insight into culture and relationships internally within the business. This requires organisations to have a far greater understanding of their own internal cultures and networks than they currently have. Developing a new approach means going beyond the obvious. For example, when looking at the issue of organisational culture, the tendency is to think that there is a single overarching set of values and characteristics that underpin an organisation’s culture. This may be the view from the c-suite but what is not understood is the fact that within any organisation there are numerous sub-cultures and networks that although there may be an implicit acknowledgement of, organisations really don’t understand their influence.
As well as the inadequacy of transactional norms; current onboarding and integration processes are insufficcient for providing sufficient insight into how best to integrate a new manager or business. There is too much emphasis on the process side and not enough on the more intangible aspects. For example during an acquisition integration, much of the time and effort goes into ensuring that structures, systems and processes are neatly combined, this emphasis on the tangible and what is controllable comes at the expense of the more complex and thorny people issues that ultimately are going to determine whether a transaction is successful. It is important to ensure that payroll and other processes are integrated but at the end of the day, if the people involved cannot work together all this time and expense will come to nought. Where effort is put into communicating about group culture, the results are often formulaic or ritualistic. Instead, it is necessary for businesses to have far greater levels of self-awareness and understanding of those who they are looking to bring into the fold.
For things to change, businesses and their advisors need to approach these activities from a different mindset, instead of viewing recruitment and M&A as a process that adds to existing capabilities, they need to understand the initial negative implications of making these decisions in far greater detail than they do at present. This calls for far greater effort to be put into recreating or rebuilding the networks, relationships and culture that have been broken by the acquisition or hiring process? It is in this area that the investment needs to be made.
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