Merge to grow: Realizing the full commercial potential of your merger
Companies
can protect existing, and drive new, revenue by focusing on seven activities.
For companies
that manage mergers well, cost
synergies are often intuitive and tend to come quickly. The cost savings can be
significant and are often more than enough to justify a merger on their own.
For this reason, cost savings tend to get most of the management attention
during the planning and execution phases of mergers.
Revenue synergies can deliver significant
benefits as well, but they tend to be harder to achieve and therefore may
receive less attention. That lack of focus can destroy significant value. In
the three years after the deal closes, companies that neglect the painstaking
work of an integrated approach in large mergers see the sales growth of the
combined company sink an average of seven percentage points. Indeed, according
to a recent McKinsey survey of integration executives,1more
than a third of companies fail to achieve their revenue goals following a
merger, and almost half of the respondents call out sales and marketing merger
capabilities as the most critical gap in their integration teams.
In our experience, the biggest factor
behind lost revenue synergies is a failure to carry out an effective commercial
integration program. Capturing all the growth benefits of a merger requires
conscious management focus and a structured program that protects existing
revenue and drives sales.
Our research and experience show there are
seven steps to get it right:
1.
Establish a central team staffed with ‘A-players’
In a recent McKinsey survey of 1,600
M&A executives,2we
found that more than 70 percent of those who meet or exceed their
revenue-synergy goals establish what we call a commercial integration
management office (IMO). This group, which is ideally established soon after
announcement and well before close, is responsible and accountable for the
overall commercial integration effort.
Too often, however, we see companies staff
the integration team with those who happen to be available or are part of
special-projects groups, often including part-time team members who lack the
necessary skills. An inadequate IMO often results in a failure to prepare the
commercial organization for a seamless integration on the first day of the
merged company’s existence, i.e., Day One.
To be successful, the IMO needs an
integration leader with complete accountability, allocated full-time for the
duration of the effort and with the appropriate seniority to guide the
integration strategy. The rest of the team should consist of highly skilled
A-players who can devote the necessary time and are deeply networked within
their respective organizations.
2.
Validate the deal model to set realistic targets
It’s crucial that acquiring companies
stress test the deal model. In many cases, the expected revenue synergies turn
out to be based on little more than gut-level, back-of-the-envelope estimates.
For revenue-based deals, such estimates underpinning the projected value of the
acquisition can set up potentially unrealistic aspirations. The results of the
M&A Capabilities Survey show that some 87 percent of companies whose
mergers are successful identify sources of value effectively, vs. only 66
percent of their less successful peers.
The integration team needs to ensure that
careful, bottom-up logic supports any estimate of potential revenue synergies
and that they are achievable within a reasonable timeframe. This requires both
deep probing within the sales organizations to develop a clear basis of facts
and detailed marketing research to answer such questions as: Do the sales teams
from both companies sell to the same decision maker within a given customer? Is
the nature of the sales, whether more transactional or strategic, the same in
both organizations? What knowledge and selling skills are required to
effectively cross-sell products? Is the customer adoption process—and therefore
the sales cycle—similar in each?
The integration team should supplement and
test this analysis by digging deep into both organizations’ data as well. This
allows the merged business to develop a complete picture of deal value and how
to capture it and helps to detect and resolve conflicts between the two sales
organizations. In many cases, a clean team can be helpful in getting such
answers.
3.
Engage senior leaders regularly with clear roles and governance
As might be expected, senior-level
commitment is important for a successful commercial integration. But our survey
underscored just how important it is: 70 to 80 percent of mergers and
acquisitions that achieved or exceeded their revenue-synergy goals have strong
senior-leadership involvement from the CEO to sales.
While leaders may understand in principle,
they often fail to follow through with those actions that ensure success. Too
often, for example, executives are consumed either by the quarterly priorities
of hitting their existing targets so they delegate the integration planning to
the commercial-integration leads. In addition, there is often a lack of clarity
around who has what role at the leadership level. These issues create a
reluctance to make decisions or engage deeply.
In these situations, we have found
establishing a clear governance structure made up of the future commercial
leaders to be most helpful. This committee should meet regularly to review and
make decisions on robust, fact-based recommendations developed by integration
teams. For one media merger, the committee comprised the business-unit
presidents, leaders of each sales force, and the commercial-integration leader.
The governance model it established was a detailed mechanism to drive clear,
regular, and effective decision making.
4.
Preserve and protect existing revenue
One of the biggest priorities for the IMO
before the deal closes is the M&A version of a phrase attributed to the
Hippocratic Oath: First, do no harm. The most common source of revenue
disruption is a failure to resolve lead responsibility for overlapping customer
accounts and sales territories. Sales teams operate best under conditions of
certainty and clarity, particularly with regard to role, leadership, account
assignments, quota and target attainment, and compensation.
Creating this level of clarity often
requires multiple steps. The commercial-integration team starts by charging a
clean team with creating a combined customer database (see sidebar “Seven
questions to ask”). Doing this well may require a lengthy process of matching
customer names, reconciling assignments on each overlapping account, and
creating appropriate rules of engagement and incentives for collaboration
before the new organization and new account assignments are rolled out.
This was particularly true in a recent
merger of two distribution companies that had more than 2,000 overlapping
accounts, putting some 15 percent of combined revenue at risk. The two
companies set up a commercial clean team that matched customers, resolved the
sales-rep assignments on those accounts, and used advanced analytics to design
new territories—all before Day One.
5.
Communicate, communicate, communicate
Our survey showed that 77 percent of companies
that successfully build commercial strength through a merger commit and invest
in clear and effective communications. For less successful companies, it’s just
46 percent. Communication is an effective tool to manage risk, especially
during the transition period. The most effective communications are clear,
relevant, and timely. Best-performing companies take this to heart in
communicating to both their own people and their customers.
Communications to commercial employees
need to address their three most important M&A-related questions: Will I
have a job? Who will I report to? What is going to happen to my compensation?
Lack of transparency and slow decision making, especially in consolidations
with territory and customer overlap, drives front-line talent loss and a
resulting drop in sales. Several experienced serial acquirers have coined and
regularly use the “Rule of 7” as a key guiding principle in their mergers: To
be effective, every message needs to be repeated seven times using seven
different channels.
Customer communication is also a
differentiator that many acquirers fail to use effectively. In fact, they
commonly adopt an incorrect mind-set, communicating only when “we have answers
to their questions.” Top performers, in contrast, have a clear communication
strategy, reach out purposefully, and keep an open channel with customers to
reassure them that the company is engaged and focused on avoiding disruption to
services and offerings. Some even establish a customer advisory board during the
integration planning and execution phases in order to really tap into customer
thinking rather than rely on assumptions about customer needs and preferences.
6. Make
retaining sales talent a C-level priority
Are you talking to your best commercial
talent? Because you can be sure your competitors and headhunters are, as soon
as the deal is announced. Mergers can be unnerving for sales teams, especially
for top performers. Our M&A Capabilities Survey showed that 82 percent of
merging companies that achieve their revenue goals make it a priority to
implement a plan to retain top commercial talent.
In our experience, the best plans usually
focus 80 percent of the effort on the 20 percent of the team that matters most.
Not all of that 20 percent will be the top revenue producers; the group of most
valuable players also includes those sales support and operations people who
are critical to ensuring that the sales team can deliver.
Engaging with these individuals is just as
important as identifying them. We’ve found that a mix of tactics that allow the
integration team to be responsive to individual employees is most effective. It
can range from formal nonfinancial and financial retention packages, to clear
communication of roles, to a simple lunch or coffee with an executive that
reassures the employee that s/he is a valued member of the team.
7.
Actively manage cultural differences
Not surprisingly, the differences between
two legacy commercial organizations can be substantial. Nevertheless,
executives in M&A situations often overlook or fail to pay enough attention
to cultural issues. The most important principle here is to address those
differences in practices, processes and capabilities that truly have an impact
on the value at stake and at risk. A deep understanding of the intricacies of
each commercial organization is the starting point for any journey toward
successful integration.
As an example, when two healthcare
organizations were merging, it became clear in the integration process that
there was a difference in what the term “target” meant. In one organization, it
was a stretch goal deployed to encourage new thinking; in the other, it meant
an absolute “must hit” expectation that, if missed, could impact compensation.
Early on, this simple semantic misalignment, which reflected very different
cultures, caused a period of unproductive confusion about basic expectations,
requiring the team to clearly define the vocabulary as well as a new set of
metrics within the performance system.
Key cultural differences are identified
through a robust cultural diagnostic involving both qualitative and
quantitative measures. A few of the culture-management practices that are
critical for commercial organizations include degree of sales-force autonomy as
well as the compensation structure and how it ties to desired sales behaviors
and roles, such as hunter vs farmer, generalist versus product expert, or
industry specialist.
This diagnostic should be launched at the
outset of the integration. Once complete, the team should develop a
comprehensive strategy to integrate the two commercial cultures. It should
include agreement on a shared vision for the new commercial organization,
cross-pollination of leading talent, alignment on the performance system (e.g.
target setting, quota and compensation, evaluations), and consistent modeling
from leadership.
Any merger has the potential to deliver
massive value—that’s generally the reason for the merger in the first place.
But driving organic growth through the commercial function requires focus and
commitment on those activities that can actually make it happen.
By John Chartier, Cristina Ferrer, Alex Liu, and Rui Silva
http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/merge-to-grow-realizing-the-full-commercial-potential-of-your-merger?cid=other-eml-alt-mip-mck-oth-1707&hlkid=3f1443037c1643f2961570becf3c00e6&hctky=1627601&hdpid=47cbea58-f62e-4e15-bb43-32edf788a842
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