The vast majority of deals begin with a focus on the “outside gain,” e.g., expanding market opportunity, gaining new customers, securing access to new markets or geographies, or scaling an existing operation to increased heights and capacity. In many regards, the external emphasis is both right-minded and the clearest strategic lens through which to view financial gain, accretive growth and/or beneficial synergies.
It all makes sense on paper, and often business owners will talk themselves into a fundamental belief that any cultural misalignment, leadership issues or challenges on integration are merely speedbumps over which to traverse. The assumption is science and math will trump the unseen art of effective collaboration and partnership.
And therein lies one of the fundamental tenets of why 70 to 90 percent of all deals fail, according to a recent Harvard Business Review study, and even more distressing, why 50 to 60 percent of deals will actually diminish or evaporate shareholder value, per KPMG.
The adage “culture eats strategy for lunch” is often incorrectly attributed to management guru Peter Drucker, but the root genesis of the phrase seems most likely to have come from Giga Information Group back in the fast-paced, deal-crazy tech environs of 2000. Transactional flow was happening at unprecedented levels, but the huge majority of deals went south quickly. Most frequently, the trend that emerged was that two disparate cultures simply couldn’t seamlessly mesh, and carnage was often left in the wake.
Though it’s a vastly different world today, deal flow in 2018 and 2019 is similarly hot and getting hotter. Deloitte recently published a survey that said nearly 80 percent of organizations plan on executing more deals this year than last year, private company valuations exceeded nine times EBIDTA at the end of 2018 and private equity transactional flow continues trending upward at historic clips.
And yet, the crash-and-burn percentages have remained nearly constant. The math is consistent, but the nuance of blending cultures and maximizing human talent remains an elusive target. Big company or small, the underpinning of human behaviors — and the fluctuating nature of said behaviors — can be slippery. But they can also be understood and predicted if the time is taken to step back and truly evaluate the aspirations, hopes, worries and priorities of the individuals involved.
Gaining that foothold, however, requires things in transactions that too often are either ignored or intentionally held at arm’s length — input, engagement, discussion and communication with the critical constituencies who will be ultimately responsible for driving a fruitful integration that maximizes assets.
Take a forceful step back to apply the same rigorous focus of financial analysis to human capital and to lay in place a change management plan that will connect, inspire and motivate. Leaders must deliver consistent, cadenced messages that are repeated (behavioral economists estimate that most people need to hear something at least seven times before it’s truly inculcated), and then be willing to shape strategy around the organic element of culture. Not vice versa.
Done well, the outcome is that culture nourishes strategy, instead of eating it for lunch.
Chas D. Withers is CEO at Dix & Eaton Inc.