In M&A and Alliances, Integration Management Is Risk Management

From before duPont created the first divisionalized company over a century ago, executives have bought and “shared” companies’ assets and capabilities using mergers, acquisitions and alliances. Disciplines of integration and alliance management have developed to improve the success of these endeavors.

Too often, however, these disciplines devolve into standardized check-the-boxes exercises. When they do, much value is put at risk. Cost-conscious management begins to question the value of supporting dedicated, trained teams for seemingly “low-value” work.

Great integration management is critical for success. To build the right integration-management capability, executives must understand how it contributes to high performance.

Fundamentally, integration management is risk management. When done well fewer problems occur, those that do are resolved more effectively, and the potential benefits management touted actually come to fruition.

But therein lies a problem. Much of the value of integration lies in what doesn’t happen. And like the man who complains about thirty years of life insurance payments because “I didn’t die,” senior management’s commitment to excellent integration can wane. Success breeds complacency.

Integration managers compound this with tortuous attempts to show “the value of integration.” Often with the help of consultants, they develop convoluted methodologies that attribute “shareholder value” or “net-present value” to integration. Business leaders, particularly P&L owners, merely scoff. After all, the business “creates” value. Integration is, at its best, support.

Understanding that integration is risk management bridges this divide. The business creates value. Integration supports that mission by helping to get that value faster or at lower cost and by capturing greater “synergies”. It complements great business management.

A decade ago, David Thompson, then Chief Alliances Officer at Eli Lilly & Company, first articulated a “risk equation” to explain the contribution of alliance management. BTD Consulting has refined the Lilly model, using it with alliance management, post-acquisition integration and divestment. This Risk Equation is:

Its key terms are:

• Total Risk (R) – the combinations of elements that could impede or reduce the value of the acquisition or alliance.
• Technical Risk (TR) – the factors that threaten any developments necessary to achieving value. These fall in the areas of engineering, design and science. They are often the “new things” management targets in the rationale for the deal.
• Business Risk (BR) – factors affecting the value that the market will ascribe to the technical developments. The core question is: “If we achieve technical success, will someone pay more for it?”
• Regulatory & Legal Uncertainty (RLU) – the likelihood that regulators, politicians and the courts will not take actions that would impede achieving the deal’s objectives.
• Human & Organizational Risk (HOR) – those factors that arise because most deals are heavily dependent on the actions and reactions of people and groups. In cases of acquisitions and alliances, companies are bringing together people with potentially very different ways of approaching even simple tasks.

Note that this equation is the sum of three types of risk, Technical, Business and Regulatory & Legal. Different deals have very different mixtures. A massive consolidation, for example, might entail very little Technical Risk while presenting enormous Regulatory & Business Risks as anti-trust authorities scrutinize all elements. A pharmaceutical alliance might hinge on the ability to navigate the Technical Risks of developing an Alzheimer’s therapy. The success of a venture between a famous designer and a garment manufacturer will depend greatly on the value consumers actually are willing to pay for the new clothing line; Business Risk.

Finally, we confront Human & Organizational Risk. This is the area of perhaps the greatest difference between pursuing an internal project and so-called “inorganic” growth. Obviously even on an internal project, people and organizations are involved. Yet being from the same company, many of their routines, approaches and attitudes will be similar.

On an alliance or post-acquisition integration, however, differences in this area are myriad. As is the potential for misunderstanding, mistake and conflict.

We raise the other three risk elements to the HOR power to indicate its unique role and impact. A bad working environment, plagued say by mistrust and misunderstanding, will make everything more challenging. By contrast, companies with a well-honed approach to collaboration find that even the most difficult endeavors proceed smoothly. While a great working relationship cannot overcome Technical, Business, Regulatory or Legal hurdles, it does create an environment where solutions are much more likely.

In future podcasts, roundtables, workshops and articles BTD will expand on these ideas. These forums will present concrete tools. We will share great practices.

Today we invite you to view your integrations through the lens of risk management. You will find your priorities, efforts and ability to communicate greatly enhanced.