|
Reviewing The Non-Financials Makes Good Business Sense
Studies report that around 30% of mergers and acquisitions deliver shareholder value, about the same number erode shareholder value, and around 40% result in a new organization with no noticeable improvement in performance or value. Similar failure rates for strategic alliances have been reported at around 40-60%. That’s a lot of value left on the table. A new kind of due diligence improves the chances of success. Most due diligence focuses on the financial and marketing factors, enquiring into all the relevant aspects of the transaction that can promote success and minimize risk. In the case of the M&A strategies on the right, the reasons in red have cultural and organizational implications that go beyond the financial and marketing considerations. When M&As fail to generate value, it is not usually because of a failure to validate the acquisition from a financial or marketing perspective. It is usually because the organizations are not able to successfully integrate post-merger. Organizational due diligence is about assessment and planning for compatibility and integration between organizations. Organizational due diligence focuses on the aspects of the transaction that are most likely to drive value and minimize risk in these situations: strategy, structure, culture, leadership, capabilities and processes. Organizational Due Diligence Process
Organizational due diligence works because it is based on the fact that success requires a respectful attitude to the contributions of others, and a purposeful approach to creating the new organization. The diagram below right illustrates a typical process. Organizational due diligence can begin at any stage in the process. Ideally, it begins with involvement before the change is planned. Cultural and organizational factors are built into the selection of the target, managing commitment, creating realistic expectations and setting achievable goals for the team. This is followed by identifying the key factors to the success of the transaction. For example, if the merger is intended to enlarge the market for the acquiring company’s products, a key factor might be the collaborative ability of the two organizations marketing departments. If a manufacturing organization enters into a partnership with a research organization a key factor might be the ability to share knowledge across organizational boundaries. Investigation provides the M&A team with qualitative and quantitative results on each of the key factors. This enables the team to compare different options and plan for contingencies. A good organizational due diligence provides guidance on where there is high and low compatibility between the organizations, indicating the degree of fit along different perspectives. Where compatibility is high and the issues are critical, there is an opportunity to celebrate the possibility for good synergies. Where there is low compatibility in areas of low criticality it is important that the organizations learn how to value the differences so as not to interfere with the merger. High compatibility in areas that aren’t critical can be seen as opportunities to appreciate the similarities in the organizations and engage employees. Finally, identifying where there is low compatibility in critical areas can provide leaders with guidance on issues to confront and manage to ensure the success of the merger. Other Applications Of An Organizational Due Diligence Analysis
Although this article has focused on mergers and acquisitions, the usefulness of the organizational due diligence process applies in at least three other situations. Joint Ventures, Licensing Agreements, co-marketing agreements, strategic alliances and consortia are all blended organizations that rely heavily on the interactions between organizations for their effectiveness. Many restructurings and reorganizations are purely internal, such as changes to reporting structures, or the creation of shared services. These depend on the culture and interactions inside the organization. Finally, the environments outside organizations change. When businesses move to new countries or new markets they have to learn to manage the compatibility between the way they have always done things and the culture of their new situation. In every one of these cases, an organizational due diligence that carries the organization through the change improves the chances of success and provides strategies to minimize risk. |
|
It is the areas of high criticality and low compatibility that provide the most challenge. A purposeful plan to specifically confront and manage these issues is the most highly valued contribution of an organizational due diligence. |
|
To download a PDF of this page to print or distribute, click here |
|
Organizational Due Diligence |
|
You should definitely read FarrarsFaucet, our newsletter which you can link to above, and The Principled Leader, tips, exercises and guides for being an Effective, Engaging, Ethical Leader. Click here or email us for a free subscription and updates. |
|
www.FGRAssociates.com ● ClientService@FGRAssociates.com ● Tel +1 612 423 2723 |