Tis the season to be jolly...

as we near 2012..we muz reflect retract n react on what we did wrong this year and try our hardest to make better endings next year or at least put a broader smile on the ones we love, that intuitive ..he isnt that bad after all....reflectively...there hasnt been one bad intention, fowl communications  that you missed out this year ,either in single or a group,the unleash of evil doings were so great,i could imagine satan thinking i couldnt do it better myself....all spoiled by divine interventions...of god really saying...not so fazz!@#%^...bucko.!!!.im in charge...and yet the malicious deeds continued,spread like wild fire,intense hatred so bad, it literally shifted earths paradigm of natural living.i mean..there had to be those earning 5k above,playing 21 n worked better than sapura rite?..and ohh..Wales n London .. a tough act to beat i guess..haha.but are you such losers you  cant match or beat that charsee??.but are we really on to  becoming the most punitive society ever lived because that "thing" is so much better than I!?...or is it really god putting you up to this in telling  you to really watch each word that come out of dat stinking mouth and you are really nothing and will be nothing even if God wanted you to..and just  because you think you deserve a higher plateau as you pray endlessly ..and those who doesnt deserve to be conned in going to hell...its plainly clear it does not work like dat!...or a royal,sultan or a king,a billionaire,millionaire an army of ministers, dishing out the same hatred but nothing gets done, its all work of god, as i told him in my prayers, i accept what come may,god!men,women,children, of rich and poor,managers,ceos,gms, con men ,prostitutes, destitute s, handicapped,has beens,siblings,relatives of course,stand in solidarity to just end my miserable life..but the not so fazz of god stopped everyone short of joyousness and delight!Such is the intense evil going around i only point to the rise of abu dajals...a period so cruel n vicious, the prophet said, even he would shudder to live through it, this was from the Chosen One!
i dont know if i ever get to write same time next year,  but through  the instances of extreme criminal  situations committed by persona du royales so to speak, is my habit of trivial ice smoking and the visit to professionals a death sentence worthy judgement and stay in my house if you like,but driving me out n my rights say we are right on course of hoo stays and hoo lives undereground...soo...as i live you this rather complex but really simple year of living,i m really asking here to one and all....if i answer mine ..would you answer yours...and really...real men dont whisper nor echo like satans,they face da music or foes ..they  just act like da shit has hit da fan!....and the chips fall where they may!!capische..dats all...salam and a have a brilliant 2012!...on my mother soil n rational countrymen..i have a chance!

Resetting the Cost Structure at Shell

A senior finance executive explains how a zero-based cost management effort is leading to significant performance improvements.

Illustration by Lars Leetaru

For virtually every company, the need to manage costs is an imperative for sustained high performance. The need is especially acute now. After several recessionary years and a hesitant recovery, today’s business environment leaves no room for error. Indeed, in the oil and gas industry, recent and long-term trends suggest a period of continuing uncertainty.

Demand for oil and gas is nearly impossible to predict, as industrialized economies revive in fits and starts and emerging economies mature, changing global trading patterns. Meanwhile, the supply side has its own question marks, as the impact of events like BP’s spill in the Gulf of Mexico, the post-earthquake nuclear power plant accidents in Japan, climate change concerns, more stringent drilling regulations, and political turmoil in the Middle East add to the challenges and opportunities facing the oil and gas industry. Questions abound about where new energy sources and reserves will be found, and what the future energy mix will look like.

Given these industry conditions, companies that fail to deftly manage revenue and costs will find themselves vulnerable to market and price fluctuations that are often out of their control. Consequently, in early 2010, Royal Dutch Shell PLC’s European Upstream leadership team decided to pursue a significant improvement in its cost structure, one that would have a substantial impact on the company. We defined having a substantial impact as lowering the cost budget by 30 percent. In fact, the only aspect of our business that was off-limits was what we call HSE, or health, safety, and the environment; to achieve top performance in our industry, we must protect our workers and assets and the environment around them. Uncompromising HSE management is a prerequisite.

It was obvious to me that traditional continuous improvement and lean efforts, many of them already widely adopted by Shell, would not be sufficient to meet the high expectations we had for our European business. I see continuous improvement in a big corporation as necessary in what I would call managing cost creep: reducing the 3 to 5 percent in additional costs or waste that most large companies seem to generate every two or three years. But continuous improvement alone wouldn’t do this time; we wanted a “hard reset” to make a significant difference. We wanted to achieve a real step change in cost levels and, more importantly, in the company’s approach to cost management.

To establish the program, the executive vice president for Europe (equivalent to a CEO) and I (a CFO for exploration and production operations in Europe) put our full weight behind the initiative from Day One, by communicating the importance of resetting our cost base and spending behavior throughout the organization. We characterized it as a way to allow our teams to explore new revenue opportunities. We described cost reduction as a priority that was as important to our business as oil and gas production and hydrocarbon maturation. We articulated both the size of the cost management effort that we wanted and the timing (2011 through 2013). Moreover, we backed up our new cost estimates with benchmarks, such as unit cost of production, to illustrate our current performance, and where we could improve relative to our competitors and the top quartile in our industry.

We and the wider leadership team involved in exploration and production of oil and gas in Europe put substantial resources behind this cost management campaign. We created two multifunctional teams made up of our most talented staffers — handpicked from a wide array of company functions, including technical, production, commercial, and finance — to identify cost opportunities and develop implementation plans. We freed these staff members from their day-to-day work for five weeks to spend 100 percent of their time identifying realistic cost management opportunities.

Often, when there is a special project, you go around the organization and ask, “Who is available to work on it?” But we felt that this effort was so critical to our success that we needed the best talent in the organization to oversee it and drive it to completion. This sent a message to everyone in the company that we were serious.

The teams initially explored a series of cost-control frameworks, but the most powerful was a strategic approach known as zero-based cost management. This unique, holistic approach involves a fundamental reassessment of the entire business to answer these questions: Which activities and assets still fit with the company’s future goals and strategy, and which should be improved or eliminated? How much funding is required to support each necessary activity or asset at peak performance? And finally, which budgets must we alter to reach cost management targets? Simply put, in zero-based cost management, the budgets for assets, operations, functions, and departments are rewound to nil as a starting point so a fresh argument can be made for every funding and portfolio decision.

The results of this focused cost management and reduction analysis were presented to the company’s leadership. After approval, a commitment session was held with the managers of each of upstream Europe’s functional groups that could challenge the findings. If those groups did question the budget levels, a discussion ensued so they could reach a consensus. Ultimately, we obtained a commitment from these functional managers to meet the proposed cost limits, which were subsequently embedded in the business plan.

A Three-Step Implementation

A zero-based cost management implementation can be broken down into three steps.

Step 1. Reexamine the company’s goals and strategies. This sounds dramatic and disruptive, but in fact it isn’t. We simply needed to have a series of pragmatic discussions among members of management, both upper level and midlevel, throughout the organization about where we thought the business was going in the next few years. The goal is to define a common reference point for everyone, a set of outcomes against which we can evaluate costs. Done well, this creates an environment for innovation and change by aligning people to a common goal.

We didn’t conduct a wholesale reexamination of strategy. We simply asked, What are we trying to do as a company and which activities are needed to execute our plan? Stacked next to this was our new budget expectation or target of reducing costs by 30 percent.

Also at this stage, we explored competitive repositioning of the portfolio. We ranked each of our assets by how well they were able to compete for capital and resource allocation within Shell at their current level of performance. This wasn’t an overly detailed exercise, but instead an effort to get an idea of where our best cost management opportunities would be found.

Step 2. Zero-base the activities. In this stage, we dove in deeply, stripping all business areas down to zero and then going through the exercise of building them back up. To do this, we asked, What is the minimum resource required to run each part of our business — that is, to cover the cost of those activities necessary to comply with legal, corporate, and regulatory rules as well as to achieve production targets? These are the “must-haves”; all other activities are essentially discretionary and optional, or in the zero-based framework, “nice to have.” Given the risks and dangers of our business, HSE is always a “must-have.” Much of what organizations do, however, involves an implicit choice about what to do above and beyond these “must-have” activities.Less imperative to operations, “nice to have” activities could in principle be eliminated without affecting the company’s license to operate. But the company’s competitive position may well be affected. As a result, “nice to have” activities must be separated into those that are needed to continue to support growth and marketplace performance and those that could be changed or even shelved completely. The ones we chose to maintain were certainly discretionary but were nonetheless considered distinctive and critical to our ultimate goal of being the most competitive and innovative energy company.

In some ways, identifying the keepers is the easy part. Discerning which activities can be terminated demands a great deal of discipline and dispassion, and requires smart, diligent teams who can prepare the business argument for or against them. Often, certain activities are green-lighted and well funded year after year because that’s the way it has been done historically at the company, even though these activities may have outlived their usefulness. For instance, a business unit may have at one point established teams to adopt and implement global standards, but these groups may have been rendered essentially irrelevant when the company set up centralized corporate standards centers that called on outside subject matter experts as needed. In our case at Shell, by canceling unused software licenses for the dozens of applications that we’d amassed over the years — such as geological imaging systems needed by only a small percentage of the people who had been given paid access to them — we were able to save millions of dollars without weakening operations in the least.

Moreover, sunk costs can sometimes persuade corporate executives to keep projects alive, with the idea that shutting down a project essentially wastes the resources already invested in it. As appealing as this notion of avoiding waste may be, it is foolhardy if better value can be unearthed elsewhere, in another project or asset. Tough and intelligent choices must be made about all activities for the full long-term impact of zero-based cost management to be felt.

Step 3. Adjust budget lines for surviving activities. After the “must-have” and “nice to have” activities were identified, we began the task of allocating the funding required to best manage our critical assets and projects. This means we actually lowered our budgets to match the expectations derived from the zero-based assessment. From this analysis, we could see whether after budgeting for all the activities core to our operations we could reach the 30 percent cost savings we envisioned. Had we failed to reach that goal, we would have had to pare back the discretionary activities and assets further.

Clarity and Commitment

In undertaking this exercise, we learned relatively quickly that there are many ways to challenge budgets for discretionary activities. For example, ask yourself, “Which activities can be simplified or aggregated?” Just because an activity is necessary doesn’t mean that it is being performed efficiently. In addition, similar activities may be duplicated across functions. Such cases may be widely known but remain unaddressed because changing them would be complicated, time-consuming, or difficult politically within the organization. In the zero-based approach, these impediments should be circumvented, once and for all. For instance, we combined and reduced “nice to have” finance and services activities linked to oil well operations.

At Shell, one of the key opportunities for cost efficiency was in rebalancing the work that we manage in-house and the work we contract out at our assets. We’ve increasingly embraced an outsourcing model for maintenance activities, but over time this has proven to be insufficiently flexible in reacting to market developments and business requirements and has resulted in additional costs. For instance, an integrated services contractor that performs a variety of tasks over numerous assets handles the frontline maintenance in our facilities. However, during our zero-based budget analysis, we realized that by bringing some of this work in-house, we could save on the cost of maintenance and reduce expenditures targeted for logistics and supervision. Particularly on offshore rigs, a tremendous amount of money is spent on moving contractors on and off the platforms and on coordinating their schedules.

Consequently, at one offshore project, we found that by in-sourcing maintenance typically handled by an outside contractor’s 30-person crew, we were able to improve costs materially. The Shell payroll and head count increased somewhat, but by fewer workers than the contractor employed because existing on-site teams could expand their responsibilities to handle some of the maintenance work. And thus by simplifying logistics and supervision, we found additional real savings. As importantly, the total number of workers spending time on drilling platforms dropped; hence, there was less worker exposure to potential health, safety, and environment risks.

Once we brought more of our maintenance in-house, ancillary gains could be explored. We examined, for example, the frequency and nature of the shutdowns we scheduled for upkeep and repair. Inefficient patterns, like cost creep, tend to grow in an organization over time. We found cases in which an asset was shut down just prior to, say, a public holiday — which created an extended shutdown that wastefully added nonproductive days to the operations schedule and forced us to pay premium rates for workers and equipment.

Besides the oil and gas production assets themselves, we found savings in each of the functions that provided support, such as finance, human resources, and IT. We already had shared financial services, the routine back office–like operations, located in Shell operations centers in several locations globally. But using the zero-based lens, we were able to optimize our use of finance experts — who, among many other things, do cost-benefit and appraisal analyses on assets and projects — by eliminating overlapping and redundant activities and spreading their work over multiple units.

And we zero-based our non-operated ventures, those in which other companies manage oil and gas assets in which we have a stake. We interviewed the people in the companies running these joint ventures and asked, “When you look at Shell as a partner, what do you think we add to the operation? Are we efficient? Can we do better to help hold costs down? In what ways?” We also ranked these non-operated assets by five criteria: HSE risk, material value to Shell, Shell’s ability to influence operations, Shell’s confidence in the operator, and how well technology was applied. We then classified the non-operated assets into two categories: those in which we could have a real and lasting impact on the expense curve in a way that would improve Shell’s financial performance substantially and those in which we should basically be hands off. This allowed us to vary resource allocation, in both governance and activity budgets.

Implementing a Zero Base

Several critical attributes are necessary to make sure that a zero-based effort is embraced by the organization as an actual step-change tool. Among them: having visible management commitment; having clarity and transparency about specific expectations, deadlines, and savings; having dedicated resources to drive the program; and supplementing the effort with symbolic high-visibility interventions or events, including frequent management discussions that emphasize the importance of the opportunity to the company’s competitiveness.

It may sound overly confident, but I was certain from Day One that our program would succeed, in part because I and the other managers were dedicated and committed to it and were not willing to accept failure or complacency. Not by being tough, but by being inclusive and committed, we created the environment for change and the motivation to deliver. It has taken 30 percent or more of my time to manage the process and to continually show that I am engaged, ready to communicate the appropriate management messages, and ready to direct the effort as needed. Because the program is being phased in over three years, the results are not yet in, but we are well on track to meet our goals.

The zero-based approach is not a one-time event, nor is it self-propelling. But with the right mix of management support and diligent analysis, this approach will yield sustainable results that are impossible to achieve with even the most diligent continuous improvement campaign.Salam

The Top 10 M&A Fallacies and Self-Deceptions

With merger and acquisition activity heating up, here’s a due diligence checklist for regaining clarity.

Imagine that you have just concluded a major merger or acquisition. Your organization is energized and focused by your speech, which outlined the features of the M&A deal and the potential of the combined entities. Having crossed off every item on your due diligence checklist, you expect big savings from restructuring; more importantly, you know that a year from now this newly created company will be the leader in its industry, with significant growth in revenue and higher profit levels.

Then flash forward to the first anniversary of your M&A deal announcement. The company’s performance is below expectations and you’re left with a nagging sense of doubt about the transaction. Wall Street analysts are questioning your firm’s strategy, the wisdom of the deal, and the prospects for your stock.

We have seen this story repeated again and again after mergers and acquisitions. What goes wrong? Often, when you look closely, a common set of attitudes is at play — implicit assumptions held by the leaders who put the M&A deals together and conducted the due diligence. These attitudes fall into two broad groups. First are fallacies, misleading beliefs about the nature of M&A itself. Second are self-deceptions, the acquirers’ misperceptions of their own company’s capabilities and competence. By becoming more aware of them, you can raise the success rate of all your M&A deals significantly.

Five Fallacies to Avoid

M&A fallacies are often ingrained in a company’s legacy practices, including the due diligence practices that have been successful in the past. It’s not enough to recognize these fallacies. You must take specific precautions to keep from being blindsided by them.

1. “We can’t walk away from this deal.” This fallacy about M&A seems to make intuitive sense. The people who put a deal together — often the business unit general manager and his or her staff — know the target company’s strengths and weaknesses and have the most at stake in the deal’s success. Like all of us, however, they are subject to the vagaries of human nature. When they are too close to a deal, it clouds their ability to make an objective, unbiased decision. They are far too likely to focus on details that confirm their preconceptions and ignore details that contradict them. This is known in the field as “deal fever.” It often manifests itself in statements like “We already have an agreement. Backing out would be too embarrassing to the CEO.”

You can generally avoid deal fever with a layered decision-making process. The deal team, including the business leader who champions the acquisition, should present the case to a separate group or individual who can review its attractiveness more objectively. You must balance these prudent checks and balances against your need for speed. The most effective companies adopt “high-speed lanes” for decisions that must be fast-tracked, as well as top-layer deal review committees staffed by executives who agree to make themselves available quickly if needed. A deal committee frequently includes members of the company’s capital committee, but the deal committee is smaller, enabling greater nimbleness and flexibility.

In one large industrial company, three layers of senior executives must approve a deal. The first layer consists of the president of the relevant business unit and his or her team; the second is a committee of senior corporate executives including the firm-wide CFO; the third includes the CEO and chairman of the board, plus corporate counsel and a few key advisors. Thus, the final level of approval consists of just a half-dozen individuals. Between 2002 and 2008, this company executed more than 50 transactions, and after the close, more than 90 percent of their deals either met or exceeded the performance target metrics set during pre-deal. The layered decision-making process, including efficient oversight at the top, is credited with being an important factor underlying the company’s success. It means that experienced executives, who were not involved in setting up the deal, participate actively in two levels of review.

2. “Any experienced negotiator can negotiate deals.” Executives often assume that all forms of negotiation are alike; thus, their commercial experience has prepared them for M&A deal making. Unfortunately, the auction-like nature of competitive deals can make mergers and acquisitions very different from negotiating a product launch or joint venture–related agreement.

For example, the acquiring management team may fall prey to a seller’s overoptimistic projections or their own synergy estimates. This is especially likely to happen when there are several competing would-be acquirers, and the team feels time pressure to complete due diligence and submit a bid. It is easy to lose sight of the fact that if the price and terms aren’t right, “winning” the deal can be worse than losing.

The answer is to think ahead of time about what you are willing to pay and to develop a true “walk-away” price. During negotiations, as you learn about the sellers’ motivations and as new options are suggested, this preparation can help you turn down any new arrangement that doesn’t give you what you need. Keep internal or external advisors in the loop to continuously check the value of the deal and provide advice on hard stops. You can also put measures in place that share some upside potential while still staying below the walk-away price. For example, you can prearrange a performance bonus for the sellers, to be awarded when agreed-upon financial milestones are reached. Be careful to make the terms explicit; even with good faith on both sides and well-thought-out milestones in place, it is possible to end up in a situation where targets are not met, and acrimony ensues.

3. “M&A performance is all in the numbers.” Many executives assume that if the financial arrangements are secure, the rest of the deal will follow. But all deals have two other significant factors to consider that are often not accounted for in the numbers: the human element and the need to develop the capabilities required to succeed in the new or merged business. This is especially important if the new business model is different from the company’s established model. A comprehensive due diligence process should take into account both the cultural and capability aspects of the deal.

Culture was a major potential hurdle when two large hotel and resort companies recently merged. One company had been founded by a hands-on entrepreneur who had always taken a data-driven, centralized approach to making major decisions (such as where to expand). The other company had been loosely cobbled together through past acquisitions, and left most expansion decisions to regional or local leaders. Before the merger was concluded, the senior leaders-to-be of the new entity conducted a survey of top executives across both organizations, and developed an action plan to counter the gaps in talent and skill that this survey revealed. The merger turned out to be a largely successful endeavor that brought two disparate organizational cultures into a cohesive brand and operating model.

In another case, the merger of capabilities had to be explicitly managed. A global operating company of a specialty materials group, which typically operated in business-to-business markets, acquired a maker of construction materials for consumers. Although the acquisition was relatively small, the president of the division made several trips to the acquired company’s remote headquarters and spent significant time learning about the capabilities it had, as well as those that would be needed to win in the acquisition’s market. This helped the acquiring company place the incoming team in the business unit that fit the team best.

4. “Information in the M&A process will naturally be kept confidential.”When middle- and low-level employees get wind of a possible acquisition, leaks are possible, and they can have major consequences. Confidentiality should be taken very seriously and enforced during the due diligence process; leaks can come from a variety of sourA division of a global industrial concern was in the midst of negotiating a potential acquisition of a publicly traded company when a person on the diligence team leaked information about the deal to an outsider. Word spread, and the stock price of the target rose, significantly diminishing the deal’s attractiveness. The person who leaked was dismissed, and a new confidentiality policy was put in place: All corporate development staff, as well as leadership team members, had to sign global nondisclosure agreements (NDAs) explicitly agreeing to secrecy on each deal to which they were privy.

Other ways of enforcing confidentiality include extending the NDA requirements to administrative staff, highlighting the importance of confidentiality during key due diligence checkpoints, prohibiting e-mail about the deal, and instituting preannounced penalties for leaks and breaches. Sometimes, key components of the due diligence process can be outsourced to a third party to reduce internal communications. These extra steps help reinforce the importance of the rules, even when the staff is already aware of the guidelines for confidentiality.

5. “There’s time for detailed postmerger planning after the merger takes place.” This fallacy is a comforting assumption for executives trying to rapidly conclude a detailed acquisition (while maintaining all their other commitments). However, it rarely leads to good results. Unless you define a detailed merger integration plan before the submission of the binding bid, you risk losing the momentum that you need to drive change and integrate the companies. In larger deals, in which input is required from the target to properly plan the postmerger effort, or in situations in which information is not forthcoming (such as hostile takeovers or auctions), due diligence can still identify the biggest integration risks and help you make the go/no-go decision, set your offer price appropriately, and identify initial risk mitigation hypotheses.

Identify a postmerger integration team and a leader during due diligence, as soon as it is clear that a binding bid will be submitted. This will help you identify some of the key integration risks and issues, and the resources required for integration. It will also lay the groundwork for postmerger review processes and metrics that can help hold the integration and business leaders accountable.

Self-Deception vs. Reality

Self-deceptions are often more difficult to address than fallacies, since practitioners think that they are already following the best practices. Our experience suggests otherwise.

1. “Our company’s M&A process is strategy-led.” Corporate leaders generally understand the importance of having a clear growth strategy before venturing into deals. Nonetheless, even in a sophisticated company, strategic definition can be surprisingly incomplete. This leads to significant delays in conducting due diligence, or to a lack of preparation in responding to deals when they become available (for example, responding to a banker’s deal book).

At a large global industrial company, one division was very successful at getting internal approvals, whereas another division was not. Both divisions had good overall financial performance, but the successful division also paid specific attention to integrating its M&A plans with its organic growth strategy. The division leaders reviewed this cohesive combined strategy with the CEO every year. The result was a predisposition at the corporate level toward deals proposed by this division, even before they were presented. The other division had to go through an extensive analysis and approval process, especially for M&A deals involving adjacent or unfamiliar markets.

This is not just a matter of generating buy-in. Deals need to be generated with strategic intent, no matter how attractive the financials appear to be. This means that the acquired business should bring in capabilities that fit with the capabilities system of the larger company — or bring in new products and services for which the acquiring company’s capabilities system is relevant. Otherwise, a deal may put the core business at risk or drain attention, time, and resources. In particular, mergers and acquisitions should reinforce and help build the capabilities that distinguish the core business from its competition.

 2. “We have a thorough understanding of our markets.” Most business leaders are predisposed to believe this. They have been involved in commercial transactions within their industries for the bulk of their careers. However, a merger or acquisition can easily bring a company face-to-face with aspects of its market that it doesn’t know well.

An oil and gas equipment company was about to buy a company that specialized in innovative technologies for reading container capacity. The would-be acquirers thought they knew the market well and assumed this technology — which was most useful for partially loaded containers — would fit. But during due diligence, they discovered that in the largest markets, full load deliveries are the norm, and the technology thus had little utility. Because they weren’t blindsided by their own assumptions, the company avoided making a potentially bad acquisition.

Draw on multiple perspectives, whether from inside or outside the company, to help you become aware of these sorts of issues. As you conduct due diligence, make sure you have a reasonably complete and up-to-date picture of the value chain for your target company’s industry; the relevant market size, relevant segmentation data, and trends and growth drivers in each segment; customer needs by segment; customer attitudes toward the target company; current profit and profit potential by segment; technology trends and potential substitute products; geographic nuances by segment and product; competitive landscape (including as much as you can glean about products, pricing, and costs); and barriers to entry and new disruptive entrants.

3. “Our core market success is replicable in adjacent markets.” The traditional definition of an adjacency is products and services that share some qualities or characteristics with your core market. For example, a manufacturer of frozen foods might think of entering the dairy business, because both businesses involve delivering precooled foods to supermarkets. In reality, however, most moves into adjacent markets are unsuccessful, especially those made through M&A. In our experience, only companies that have a well-defined M&A process that recognizes the importance of existing capabilities and the changes that will be required to evolve those capabilities have successfully executed such transactions with regularity.

Thus, when beginning an acquisition campaign, you should begin by evaluating your capabilities. Examine how well these will apply to the businesses in the company you are acquiring — and how well the capabilities you acquire will mesh with your own lineup of products and services.

The best acquirers take a strongly disciplined approach to business building, with strict criteria for acquisitions. These could include criteria related to target market size, degree of market fragmentation, gross margin targets, cyclicality and volatility, brand strength, customer concentration, and robust replacement parts or other streams of ongoing business. Such strict criteria should supplement the usual, simpler measures used by less-disciplined companies, which might be limited to target company size as well as revenue and earnings growth. When you reject target companies that do not fit your strictest criteria, you put a stake in the ground indicating that any company acquired will set up your company for above-market growth.

4. “We have a well-defined due diligence process.” Many corporate leaders learn the hard way that this isn’t true, particularly when their company is an infrequent acquirer or when they consider acquiring companies in different markets. They underestimate the amount of effort and time consumed by an acquisition or merger. Even when experienced senior executives are overseeing various functions, enthusiastic junior staff are executing the requisite tasks, and some due diligence processes are in place, there is still a tremendous amount of work to be done in a compressed time frame.

 

You may find, as you begin due diligence, that your processes are incomplete, and your team lacks the expertise to evaluate commercial prospects; technologies; legal issues; manufacturing footprints; procurement concerns; intellectual property; tax questions; regulatory issues; export controls; or issues related to health, safety, and the environment. At the least, you will need detailed standard questionnaires covering these issues; more likely, you will need to bring in experts who can answer questions with confidence.

However, this is not just a matter of finding the right people to help. One large diversified industrial company had a thorough due diligence process with pockets of expertise — but it was not well documented, making it difficult for everyone to coordinate, and for new staff to get up to speed. At one point, the corporate M&A team asked a divisional M&A team to add targets that had already been identified (by the division) as improbable candidates. Another business unit suggested a candidate that was not a good strategic match, but that was located conveniently close to the business unit’s headquarters.

To avoid these types of problems, arrange regular meetings of new business development practitioners across internal boundaries. Document what went well and what did not go well following each transaction, to share with the group. Use these meetings to drive best practice development; share basic information about the market, as well as simple tips and tricks. Create due diligence templates and questionnaires, such as data request templates, so that work can flow seamlessly, even if individual staff members depart in the middle of a project.

5. “Our legacy due diligence team knows what they are doing.” Even experienced due diligence staff may not have the right skills for every deal. It is important to bring in pertinent expertise to fully analyze a given opportunity, especially for adjacent markets, new geographies, and unfamiliar technologies.

In one case involving the acquisition of a technology firm whose primary customer was the U.S. government, due diligence was conducted by a team with very little experience in the defense sector. They correctly pointed out that margins on the target firm’s government business were declining somewhat; however, they failed to discern a coming wave of increased government spending in the company’s key business. The purchaser hesitated, opening the door for another buyer to come in and purchase the company. That competitor rode the wave of growth, enjoying high returns.

M&A is a complex process that requires significant and diverse skills and resources to execute well. By being aware of the trap these common fallacies and self-deceptions present, teams can design and execute an M&A process that is more effective and yields outcomes that consistently create rather than destroy values.  Salam