What Gets Measured is What Gets Done
by Jack Prouty, Past President, M&A Leadership Council
In our popular training course, “The Art of M&A® for Integration Leaders,” we state that the ultimate measure of overall M&A success is whether you increased shareholder value or not. While this is the bottom-line measure after the integration is completed, you need to identify the critical performance measures that will drive success early in the process, monitor them frequently, and hold people responsible for successful execution of those elements that, aggregated together, will lead to achievement of expected business benefits.
Let’s step back: I was involved in some research several years ago in which we conducted a study of 700 global companies which had made recent acquisitions. Eighty-three percent (83%) of the senior executives stated that their M&A was successful. Yet when we looked at actual shareholder value after the deal only 31% of those companies actually created value in the combination. Why the gap between perception and reality? They did not understand nor focus on the fact that you need a score card…. you cannot manage what you don’t know.
The unfortunate reality is that too many companies make sweeping statements upon announcement about how great an announced acquisition is going to be, only to state a few years later in a small footnote of their annual report that they had to take a significant financial hit due to unexpected costs incurred in the integration. However, leading-edge companies who excel at M&A spend time early in the lifecycle of the transaction beginning to identify their key performance indicators (KPIs) and critical success factors (CSFs).
They will use these metrics to drive the integration effort and achieve the value of the deal.
While the performance measures will vary by industry, the nature of the deal (why you acquired the entity), and other elements I will outline later -- the identified measures are often fairly typical across companies. For determining the performance measures to be used, I usually use this simple model:
1. “Why Did We Acquire This Company?” (i.e. Acquisition Rationale)
The first component centers around this question. If it was to expand our products and services, enter new markets or geographies, or acquire breakthrough technologies then we need to identify quantitative and/or qualitative factors for measuring the achievement of them, assign responsibilities for delivering, and upon Legal Close begin tracking and reporting.
2. Integration Objectives
The second component answers the question - what are the objectives for this deal? Without going into too much detail here, I would recommend that these fall into several types:
- Between Date of Announcement and Legal Close what are the things we need to do to preserve the value of the existing assets of the two companies? These may be key customer retention, key employee retention, maintaining current productivity levels, etc.
- Upon taking Legal Ownership of the acquired company, what are the things we need to do to begin realizing the value of the combination? These measures may be headcount reduction, back office consolidation, professional services savings, etc.
- The third integration objective should be to create incremental value beyond just simply combining the two businesses and getting expense synergies. This is the area least often focused on, but could be the most significant business benefit of the M&A. These measures could be new products, new uses of technologies, new markets….. things that result from combining the assets and capabilities of the two companies in a way that did not exist before.
3. Business Benefits and Synergies
Another component, and the simplest of all, is that tied to the business synergies (ideally identified during diligence and then further validated in the pre-close). The synergies identified are typically the following: revenue enhancements, expense reductions, cost avoidance, cash flow improvements, gross margin increases, and market share. For each of these we need to outline quantitative measures.
4. Issues and Risks
The final component should center on issues and risks that have been identified. For each issue and/or risk we need to evaluate it, quantify it, and develop the appropriate measure to track it (either to minimize the business/financial risk or to eliminate it).
If everything becomes “important” then nothing is really important
For the resulting key performance measures I recommend that they are prioritized and only the most important ones focused on. If everything becomes “important” then nothing is really important. I would try to have no more than 6-10 key performance indicators at the executive or summary level, although you can have 4-8 key performance indicators being dealt with within each functional level.
Focus on developing leading indicators as well as lagging indicators
Another recommendation is that you focus on developing leading indicators as well as lagging indicators. Let me explain: a lagging indicator would be customer turnover percent. However, this is a report-out on results that have already occurred. I also want a leading indicator that gives me an early warning of an issue or problem so I have time to fix it. For example, if my issue is customer retention then I might want to do a periodic customer survey to monitor customer satisfaction. A low percent would provide an early warning that we have a problem we need to address asap before we have a high customer turnover.
Track and report on a monthly basis
Once you establish these performance measures I would track and report on a monthly basis. I also would use these as the framework for prioritizing integration efforts. If specific tasks do not support the achievement of the acquisition rationale, integration objectives, synergies, and issues/risks mitigation we should not be spending time and resources on these tasks.
Without going into more detail in this article, I hope I have sold you on the following points:
- If you want to achieve the value of an acquisition it is important to install a rigorous and well-thought-out process for developing the key performance indicators, measuring success, and tracking and reporting results
- The performance measures developed should be tied to acquisition rationale, integration objectives, synergies, and issues & risks
- Whatever the key performance indicators are, they cannot be subjective. You need to translate them into quantitative or qualitative data that can be measured
- For the selected performance measures, focus on the critical few and try to identify leading indicators (for early warning and corrective action) rather than just lagging indicators that report after the fact
For those interested in learning more, we build this important topic into our training sessions on The Art of M&A® for Integration Leaders, as well as custom company on-site training programs we conduct at your place of business.
Best regards,
Jack