04 Mar Don’t just integrate, innovate!
Note: This is part of a series of posts about driving transformation through Mergers and Acquisitions (M&A). Here’s my first post. This summarises the M&A challenge and the ten recommendations I have for success.
In the past, the focus of many M&A deals has been on growing market share through lower costs, greater scale and improved operating efficiencies. For these types of deals, it makes sense to follow the traditional playbook approach to M&A integration. This means following a predetermined path where key milestones are achieved through a sequential set of activities. This is the classic “waterfall” approach with regular stage-gates and without deviations. In other words: stick to pre-deal objectives, realise the cost synergies, and don’t have any surprises along the way.
But nowadays organisations are using M&A somewhat differently. Rather than looking to achieve scale efficiencies and reduce costs, organisations are increasingly using M&A to upend their business models and change what they do. In practice this means securing new capabilities, creating new customer experiences and driving new and different ways of working. This is certainly different; well beyond the scope of the more typical integration activities such as merging systems, combining company divisions and streamlining business processes.
Using M&A to innovate and transform is a commendable way of delivering business growth. It is more often a better, cheaper and faster way of delivering transformational change compared to the organic alternative. However, organisations need to tread carefully when it comes to M&A integration as they could be in danger of killing deal value rather than creating it.
Note: I generally use the term innovation in reference to a capability an organisation may have that makes it unique, competitive and differentiated in the market – the organisations ‘secret sauce’. This innovation represents a special combination of people, technology and processes that deliver value propositions to the customer.
While organisations may go out of their way to pay a premium to acquire these innovations, they could also find themselves inadvertently destroying value rather creating it after the deal is done.
So let’s consider what you shouldn’t do and should do when integrating and innovating after a deal is done.
Don’t let Integration be the enemy of Innovation: Three things you shouldn’t do…
1. Defer innovation to a later stage
If an organisation is looking at a transaction as an innovation opportunity, the competitive edge it’s looking to achieve can be wiped out if priority is given to functional combination of the two firms. What this does is to delay opportunities to innovate at some later stage (perhaps by a year or more). While this may sound initially like a pragmatic and safe choice – after all, no one wants to mess up the integration basics from a deal, it can be an incredibly risky choice, as it gives competitors the green light and extra time to catch-up and surge ahead. In fast-paced competitive industries (such as technology and consumer goods) any time advantage can be quickly lost.
2. Put M&A integration on autopilot
Another potential issue is when integration is put on autopilot with teams programmatically combining technology, processes, people and culture, with scant attention to anything else. In this situation, the integration teams, without proper knowledge and understanding, find themselves unknowingly bulldozing through and destroying the very innovations that justified the deal. Like arteries to a beating heart, innovations can be destroyed when value chain connections are inadvertently severed.
For example, a highly prized set of innovative products may be inherently reliant on the brand promise, product platform and cultural work practices. If the products are integrated into the acquirer’s product suite without proper thought and attention, the customer experience could be irrevocably damaged.
3. Take a bolt-on approach to innovative capabilities
The final problem is when integration strategy and planning work hasn’t properly figured out how an innovative capability might actually work post-deal. For deal makers and executives, it’s tempting to believe that a much desired innovation can, in some way, be simply bolted on. But this is a mistake; chiefly because a capability doesn’t stand in isolation to the rest of the value chain. A degree of reengineering of the firm’s business and operating model is inevitably required to make an innovation work. If time isn’t spent figuring this out and doing the work, the integration will unlikely succeed.
Don’t just integrate, innovate! Three things you should do…
1. Kick off the innovation exercise immediately. Don’t wait!
The post-deal effort is best organised as two groups running side-by-side.
The first group looks to complete the integration required to achieve full operational control, realise the synergies defined pre-deal, and cut off any remaining ties with the seller.
The second group’s primary task is to kick off what’s needed to deliver upon the deal’s strategic imperative and the full potential it has to offer. This means mustering the people with the energy, deep skills and knowledge necessary to articulate the revenue opportunities and bring the vision to life.
2. Use Agile to enable incremental and continuous innovation
In the corporate world, away from tech teams, Agile is becoming more and more popular as a way of working. It’s changing office culture by smashing down organisational silos and archaic work practices.
An Agile approach enables incremental and continuous innovation through the integration process. Since Agile is inherently flexible, adaptive and iterative, work can be conducted in short sprints; each focused on immediate priorities and requirements.
The most effective way to get started on the Agile path is through a series of workshops held with cross-functional teams. This is far preferable to the more usual business planning type initiatives. These workshops, lasting from just a couple of hours to a full day, look to see how aggressive growth targets can be met through new and innovative solutions capable of delivering material value.
These workshops require plenty of planning, careful selection of attendees and strong facilitation for them to be a success. The best insights and thoughts for new growth opportunities invariably come from the people working at the coal-face. So what needs to happen is for the attendees to build off one another’s ideas and create a collective intelligence on building commercially viable solutions.
3. Make the innovation process more science than art
The most powerful intellectual toolset we have when determining what drives success is the Scientific Method. Its deceptive simplicity yields extraordinary power. The steps are more-or-less like this: Observe, Hypothesise, Experiment, Analyse, Conclude, Repeat.
Unsurprisingly, the innovation process follows exactly the same steps. Innovation is effectively the scientific method in action.
Now there’s a strong temptation to inject artistic license with a series of brainstorming initiatives intended to bond people together, have few rules and where all ideas are ‘good’ ideas. That’s not always a good idea. Instead, apply the same kind of intellectual rigour and discipline found in science. By all means, make it less stuffy, but equally avoid the temptation to move away from what essentially is a rigorous evidence-based exercise.
The innovation exercise may go down a number of paths. For example, the focus may be on how the ‘Order to Cash’ process should be re-engineered, changes to the customer experience, or brand. Whatever the path, there always needs to be a demonstrable link between operational drivers (value levers) and the creation of deal value. The best way I find of doing this is to model the way various operating activities connect to measurable value drivers. While it can be a time-consuming exercise it has a powerful way of focusing attention on those activities with the greatest impact on value.
Hopefully, this particular tip has given you some thought. With this, and other posts in the series, I’m chipping in with my own thoughts and experiences so that all of us professionally involved – CEOs, CFOs, Executives, Product Managers, Consultants and Advisors – get that little bit better next time around. My email is below; happy to discuss this and other posts in further detail.
Thank you for reading!
Senior Consultant, BTD Consulting