Is M&A a Real Proxy for R&D?

Companies often pride themselves on increasing their research and development (R&D) budgets, but we seldom hear about how the capital is allocated and the results of those investments. Blindly throwing money on pet R&D projects does not necessarily result in innovation or enhancements to a company’s product portfolio.

We often hear CEOs justify using mergers-and-acquisition (M&A) dollars as a substitute for organic growth by saying it is a proxy for R&D. It’s a catchy phrase to use during an investor call, and for the most part, people get it. It is a simple growth model, and many large industrial companies have used this approach to build an impressive portfolio of products and services.

In some cases, because of patent protection, trade secrets, or the difficulty of obtaining industry certifications, companies are forced to acquire technologies and product lines instead of investing in-house. Substituting in-house R&D with acquisitions is a great strategy to build scale and diversify the technology portfolio, but it comes with significant risks. I believe a healthy combination of M&A and R&D capital allocation helps companies achieve sustainable growth and profitability.

Typically, public companies spend anywhere from 2 to 5 percent of their revenues on R&D. Companies that invest in R&D stay ahead of the technology curve, better serve their customers, and build a moat around their business models. In the long run, investors tend to value organic growth over M&A because of its lower risks of execution. Several industry experts have noted that more than 50 percent of M&A deals do not achieve their intended purpose. Don’t get me wrong: I am not diminishing the role M&A plays in achieving growth and diversification, but I think it is important for business leaders to spend more time thinking about investing internally and actively managing R&D initiatives.

Investing in-house to build competencies and capabilities to design, build, and successfully launch new products and services will help build a competitive edge. Companies with a dedicated technology platform serving dedicated vertical market customers are better off innovating through in-house R&D because of their deep knowledge of their customer base. In my experience, I have seen companies with too many R&D projects. They struggle to prioritize and invest in the right programs to manage both short-term and long-term growth aspirations. It all boils down to picking the right bets on critical technologies that will significantly move the needle on growth and performance and add tremendous value to customers. So, how does one go about doing this?

There are various metrics to measure R&D investments. One of the most popular is the vitality index, which measures the percentage of revenues coming from new products and services in any given year. Metrics are good, but as we know, they can be skewed to show false progress unless managed properly. A rigorous approach to identifying, managing, and launching R&D projects helps companies achieve strong growth. A methodical approach to R&D based on markets and customer input is key to overall success.

Many companies have developed proprietary tools and processes for managing R&D programs and new product development (NPD) processes. Honeywell uses a system called Velocity Product Development (VPD), which ties product development to sales growth.Many industrial companies use the popular Stage-Gate process, which was developed by Stage-Gate International. In this approach, product development is put through a five-stage process from ideation to launch. The project moves from one stage to the next with a rigorous go/no-go decision-making process and by completing a set of activities and analysis to improve the effectiveness and efficiency of the entire system.

When we launched this process in one of the companies I previously worked for, I noticed we had more than 100 ideas competing for limited R&D capital. Some were pet projects of certain individuals, some were sponsored by our sales team to hit their sales quota, and some were genuinely game-changing ideas. We had to go through a rigorous analysis of all the ideas, which involved multifunctional teams, seeking market and competitive information to assess the value of each growth idea to the enterprise and our customers.

For the Stage-Gate process to work effectively, it is important to engage senior leadership and the key stakeholders responsible for delivering the projects. We held monthly technology reviews with senior leadership and cross-functional teams where we debated vigorously to make sure the right projects were funded. Given the competitive nature of industrial businesses, I often challenged the team on whether we could achieve an appropriate level of return on our investments. If an NPD idea came from a specific customer, I would challenge the team to partner with and seek investments from the customer or, even better, ask the customer for a memorandum of understanding to purchase the product after we launched it.

All of this sounds like common sense, but you would be surprised at how often this process is mismanaged. Once the projects were chosen, we made sure they were managed efficiently to completion with regular documented updates. We were prepared to say no to many projects when it didn’t make commercial or business sense to invest in them. These best practices allowed us to make significant progress on our R&D investments. However, there are challenges related to investment cycles, establishing global R&D centers, and building a dedicated R&D team, which I discuss below.

As with any good investment, we need to manage both the short-term and long-term aspects of R&D investments. Some projects take years to materialize, whereas others can be completed and launched within months. During tough economic conditions like what we are facing now, leaders are tempted to cut investment in R&D, but if companies are planning for the long term, they should resist this temptation. At times we pick a project that might cannibalize other products, and that has to be considered in the decision-making process. When companies do not have all the information to make informed decisions but there is pressure to invest in a particular program, they may adopt the “fail fast and fail cheap” approach—a quick and cost-effective way to test out new ideas. Finally, involving functional teams from sales, marketing, manufacturing, supply chain, human resources, and engineering helps company leaders make smart decisions on investments.

We see large multinational corporations establishing R&D centers in low cost countries (LCC) such as China and India. However, low cost is a misnomer, because the cost of doing business in these countries is rising, and the level of collaboration required between different operating centers takes considerable time and effort. Rushing to establish R&D centers in LCC, with only cost in mind, will not help a company achieve its goals. Smart companies think about R&D holistically to build technical competencies and capabilities globally with the intent to innovate quickly and launch global products and services efficiently. When I was managing an LCC manufacturing center in the Middle East, we moved our engineering center of excellence to India to better manage the cost profile and improve the efficiency of using a large existing engineering base. Ultimately, it comes down to using the diverse brainpower to network within their respective global organizations to find solutions to customers’ most difficult problems—today and in the future.

In his new book, Winning Now and Winning Later, David Cote, retired CEO of Honeywell, talks about Honeywell’s journey to establishing Honeywell Technology Solutions (HTS) centers in India, China, and the Czech Republic. David’s challenge was to persuade Honeywell leaders to rapidly increase the R&D in developing countries and to travel to those locations to observe the quality of work. He also viewed R&D centers as not just technology centers but as a footprint to expand locally with a deeper knowledge of local markets and customers. Over time, the company established a strong team of ten thousand employees at HTS, and the company not only benefited from this strong technology team but was able to generate $11.5 billion of organic growth during his tenure.

When companies get large and complex, it is typical for them to appoint a chief technology officer (CTO) who controls the R&D budget and all aspects of technology, innovation, and new product development. This makes sense, but where companies miss out is when they don’t build a culture of cooperation and collaboration between the CTO office and the operating units. When I was leading operations in Asia and the Middle East, I noticed local teams being pulled into R&D projects led and managed by leaders elsewhere in the world, with little to no input from the local teams on the projects’ viability. It was a real drain of valuable resources. To extract more value from R&D investments, it is important to break the silos within the company and tightly integrate the CTO’s team with operating divisions, including the regional teams.

Bottom Line

As a growth leader and an M&A professional, I understand and appreciate the need to use M&A to achieve growth and diversification. But this should not come at the cost of not investing internally in R&D and NPD programs to achieve organic growth. A balanced approach to strategic M&A and R&D investments helps companies build a competitive edge in the marketplace. Putting strong process rigor around technology innovation helps companies get more value for their investments. Finally, building a culture of collaboration between the technology team and operating divisions is key to achieving growth through innovation.

Is This the End of Globalization?

We see nationalistic leaders getting elected in many parts of the world. These leaders are concerned about trade disparities with other nations and the impact of lower economic activities on new job creation within their borders. Can you really blame them for that?

Today, business leaders are challenged with building resilient supply chain bases, getting access to essential materials for manufacturing, and competing for a dwindling pool of scientists and engineers because of new immigration laws. When it comes to free trade and globalization, there seems to be a tug-of-war between the Western democratic countries and the centralized authoritarian rulers of some other countries. No, this is not the end of globalization, but it is the beginning of a new era for globalization.

As the pandemic subsides and the world’s political environment calms down, there will be new norms for globalization with revised policies and rules of engagement between nations. According to the World Trade Organization, the total annual volume of the world’s exports of merchandise has seen a 50 percent increase since the 2009 recession, currently estimated at $19 trillion. However, gross domestic product (GDP) figures are not evenly distributed today. Asia has 62 percent of the world’s population but generates 37 percent of the world’s GDP. North America has 8 percent of the world’s population but generates 29 percent of the world’s GDP. For the world’s economic activities to continue, countries will need to maintain trade agreements and respect the laws of the land. When the benefits of globalization become lopsided, nationalistic sentiments are bound to creep in.

In the 1960s, American manufacturing contributed to 25 percent of the country’s GDP, but today, it is less than 10 percent. Since the early 2000s, more than 5 million manufacturing jobs have been lost in the United States. Slowing globalization will affect both the developed and the developing world. While costs may rise and growth may slow down in developed markets, countries in the developing world will pay a huge price in lower economic activities with a significant slowdown in their economies. Further, developed countries are considering emerging technologies such as artificial intelligence, automation, telecommunication (5G), robotics and health sciences as national security and implementing trade barriers. Countries want to be self-reliant in certain key sectors such as pharmaceuticals. This puts CEOs’ of multinational corporations (MNCs) in a bind trying to figure out the impact of geopolitics on their businesses.

In the last two decades, MNCs invested heavily in far-flung countries to expand markets, gain economies of scale, reduce the cost of operations, and tap into a talented workforce for R&D and innovation. However, there is a major tradeoff between efficiency and the resiliency of the supply chain and manufacturing base. The pandemic has caused massive disruptions to supply chains, and several MNCs have announced re-shoring to manage production risks. Further, the rising costs in some developing countries is making it easier for companies to favor re-shoring. The Japanese government is encouraging their companies to re-shore with a $300 M incentive program. Apple is moving some of its production capacities to different parts of Asia to diversify and manage production risks. This means that consumers will end up paying more for goods and services— the cost of doing business in the new era.

So, what can business leaders do to address the current challenges?

First, it is important to get the fundamentals of global strategy right. Companies have to evaluate and reevaluate the reasons to be in far-flung markets with a wide portfolio of products, services and production facilities. For some companies, going global may not be the best use of their resources. The strategy has to be dynamic, in that it should be flexible to address ever-changing market trends and geopolitical risks.

Trends in areas such as urbanization, population growth, regulations, and infrastructure spending all point to higher growth opportunities in developing markets. Large industrial companies, who generate a third of their revenues from international markets, cannot ignore these trends. Nevertheless, companies have to be diligent in allocating their valuable resources to chase narrow slivers of the global market share. Leaders have to go beyond setting regional strategies to developing clear, country-specific or sub-regional strategies. There needs to be tight collaboration between business units and their regional teams in developing these strategies. For example, company leaders need to develop compelling product localization plans that address the unique needs and characteristics of local markets. They also need to investigate all elements of the strategy: what products/services to sell, through what channels, and at what price to clearly defined end market segments.

Second, leaders should manage the short and long-term risks associated with supply chains. McKinsey estimates that supply chain disruptions lasting a month or longer now happen every 3.7 years on average, costing more than 40 percent of a year’s profit every decade. When it comes to global sourcing, companies have to balance resiliency over efficiency. In the past, companies built an efficient global manufacturing process with LEAN programs to achieve lower inventory levels and better cost position. With disruptions, companies now have to come up with new models to achieve resiliency through a diversified mix of vendors and regionalizing manufacturing systems. In one of my previous roles, we deliberately built a balanced supply chain strategy by sourcing critical raw material from Germany (high cost, high reliability) and Southeast Asia (low cost, lower reliability). This diversified strategy allowed us to differentiate and charge premium prices in the marketplace by offering products with an industry-leading short lead time.

Third, it is important to protect the intellectual property (IP) of your offerings. Over time, IP associated with products and services gets diluted through product localization and theft of technology. Companies have to overinvest in R&D to remain on the edge of the technology curve to remain competitive. When I started my career in the nuclear industry, Western companies had the technology advantage. Over time, with technology transfer through partnership with Asian companies, they have lost the advantage, but now they are trying to catch up with the next generation of nuclear technology.

Lastly, if your company isn’t careful, channel partners can end up becoming your competitors. Developing countries have built formidable enterprises that can be great partners for you in their home markets, but do not forget, they aspire to compete on a global stage—and are capable of doing so. Companies have to go beyond drafting ironclad contracts with suppliers and partners to proactively managing IP and the business model. Product line leaders and general managers of the business should take a bigger role in how the design principles, manufacturing drawings, bills of materials, and so on are managed and disseminated both inside and outside the company.

Bottom Line

We are entering a new era of globalization. Rules will change. New policies, regulations, and trade barriers will be introduced. Countries and companies will compete for limited resources, technologies, and talent to improve their odds of winning in the global marketplace.

Despite the challenges, business leaders can’t ignore high-growth markets. The macro trends of urbanization, population growth, changing regulations, and infrastructure spending point to continued growth in these markets.

Business leaders are forced to reevaluate their global strategies, in combination with geopolitics and business risks. In the short term, it is important to manage supply chain risks to achieve resiliency over efficiency. Finally, protecting a firm’s IP and investing in R&D to remain on the edge of technology curve is critical to its long-term success.

If we want to keep globalization alive for the next generation, there is no alternative to ensuring that it works to the benefit of all.   — Christine Lagarde, Head of the IMF

Leadership During Challenging Times

We live in uncertain times. The world as we know it has changed dramatically because of the rapid spread of the Covid-19 virus. The pandemic, racial tensions, geopolitical issues, financial meltdown, and high unemployment are some of the challenges turning our lives upside down. It feels like we are being hit with a hundred-year flood, and sadly, there are no signs indicating that the waters will recede anytime soon. How can individuals, leaders, and corporations react to such dreadful events? Strong and decisive leadership can make a big difference in how quickly we emerge from this difficult situation.

Recently, I was asked to present my perspective on leadership during challenging times to a panel of business leaders. My experiences and observations have led me to a few fundamental leadership tenets to consider right now. Purpose-driven organizations are resilient, and with the right leadership, they can thrive on chaos and gain an edge over their competition. When purpose-driven leaders motivate their teams to deliver value without compromising on their vision and values, they create reasons for their employees to wake up in the morning and come to work with passion and energy. I see three broad areas of leadership that can have a significant impact on organizations and communities:

  1. Empathy, Engagement, and Communication
  2. Decisiveness and Focus
  3. Innovation and Collaboration

A crisis is an opportunity riding a dangerous wind. Chinese proverb.

Empathy, Engagement, and Communication

An organization is nothing without the people who stand behind it. But people are emotional. Their fears and anxieties get amplified during challenging times. If these negative thoughts aren’t addressed through good communication, they will impact the overall culture of the organization. Leaders make themselves present and available during difficult times and keep their team hopeful and optimistic through transparent and trusted communication. It is important for the team to feel that their leadership is committed to the health and safety of all its members.

Be empathetic; take time out of your busy schedule to see what life is like in someone else’s shoes. To emotionally connect with the team, it is acceptable for leaders to share their own feelings of vulnerability. Actively listening to their team members’ challenges and offering to help where it matters will help boost morale within the organization. 

A few years back, during a bad fiscal quarter, one of my direct reports barged into my office, demanded a salary raise, and threatened to quit if he didn’t get one. At first, I was extremely angry and disappointed, but instead of judging his intentions, I asked to continue the conversation after work. During our conversation, it became apparent that money was not the primary issue. This person was dealing with a multitude of challenges, ranging from personal family matters to career growth and a feeling of helplessness. I was happy that he came and talked to me. Spending meaningful time with this person and relating his experiences to my own helped address the situation. As leaders, we have a duty to listen, empathize, and support our team members during difficult times.

The number one practical competency of leaders is empathy. —Peter Drucker

Decisiveness and Focus

Resources, whether financial or human capital, are constrained irrespective of the size of an organization, and these constraints are magnified during challenging times. Leaders have to be thoughtful and decisive to focus the limited resources on things that really matter, in both the short and the long term. That means leaders should be open and willing to make tough calls early in the game and say no to programs that don’t add value. 

Leaders paint the big picture of what the goal looks and feels like and how the team is going to get there. Exhibiting a sense of urgency by making decisions fast and emphasizing speed of execution gives your team a sense of progress.

Move away from a command-and-control management style toward creating empowered, dynamic teams—teams dedicated to solving specific problems without any hierarchy or formal reporting lines.

When I was leading an organization in the Middle East, we went through some dramatic changes in a very short time frame. While we were still integrating an acquired company, our parent company merged with another large firm. The core markets crashed because of lower oil prices. We lost a large customer because of a trade embargo enforced by the US government. A perfect storm. Our people were confused, distraught and felt vulnerable.

I engaged my leadership team to explore all possible avenues of growth during difficult times. We discussed and debated the risk of not taking bold, strategic actions. We even went back to the basics and discussed the company’s strategy and purpose. We questioned whether we were using the full strengths of the organization. Once we identified specific growth initiatives, we created small, dynamic teams to work on them. After a painful six months, we stabilized the business, brought back the people we had furloughed, built a strong team, and, more importantly, built a strong culture of execution.

The best way to predict the future is to create it. —Peter Drucker

Innovation and Collaboration

When the world is looking bleak and people are pessimistic, smart leaders look toward a future where there are untapped opportunities. Leaders use disruptions as a catalyst to innovate and differentiate.

Innovation is not restricted to introducing new products; it involves all elements of the business model, including people management. It is also about transforming a company’s core business model to better serve its customers. Think about how the medical practice has changed in the last few months, from patients visiting doctors in person to virtual visits. Similar paradigm shifts are taking place in the industrial sector, where companies are having to offer automation and digital solutions at a faster rate. The current environment is forcing companies to reevaluate supply chain strategies and risks, and to rethink people management processes. There are no sacred cows when it comes to innovation.

Encourage your employees to learn, collaborate, and solve problems. It is all about moving forward and not getting stuck with the status quo. Instead of sending more customer satisfaction surveys, pick one or two industry challenges and partner with your customers to address them. While weak companies retract and become more internally focused, smart companies get ambitious and start playing offensive. Use the full competencies and capabilities of your organization to differentiate in the marketplace.

The enterprise that does not innovate ages and declines. And in a period of rapid changes such as the present, the decline will be fast. —Peter Drucker

Bottom Line

At every step of our lives, challenges and opportunities are lurking around the corner. Strong leaders don’t get bogged down by the hardship of challenges but continue to harvest all their energy to seek opportunities to improve conditions for their team, organization, and community.

Certain core leadership traits, as described above, do not change no matter what calamities society is facing. An energetic and passionate leader, who can engage their team and focus their energy on solving specific problems, will make a big difference during challenging times. 

The challenge of leadership is to be strong, but not rude; be kind, but not weak; be bold, but not bully; be thoughtful, but not lazy; be humble, but not timid; be proud, but not arrogant. —Jim Rohn

Passion Drives Performance

I sometimes ask why traditional large companies have a challenging time attracting and retaining passionate people who believe in their company’s vision. What makes a startup company environment more appealing when it comes to attracting and retaining passionate employees? Is it that entrepreneurial companies have passionate leaders who surround themselves with other similar leaders and are able to communicate their vision clearly to their teams to engage and motivate them?

Recently, I was talking about recruitment strategy with a senior leader at a large international company, and he said that what he looks for in a candidate are leadership traits and values that are aligned with his company’s purpose. He then asked me what I look for in new recruits. I replied that I look for passion, perseverance, the drive to energize the team, belief in a larger cause, and a can-do and roll-up-the-sleeves attitude. We both concluded from our conversation that hiring passionate people who are aligned with the purpose of the company can lead to solid performance.

I have no special talents. I am only passionately curious. — Albert Einstein

In her book, Grit: The Power of Passion and Perseverance, Angela Duckworth discusses the secrets of successful people from all walks of life. She points out how successful people have a ferocious determination and describes how their passion is enduring. People who exhibits the unique combination of passion and perseverance have grit, working on something you care about so much that you are willing to stay loyal to it.

Now, if purpose is the glue that binds passion with performance, how does one define purpose? We already have enough jargons about mission, vision, goals, and values, but where does purpose fit into all this? Do we really need more jargons to confuse the business community?

Passion + Purpose = Performance

Let me try to address these nuances in the simplest possible terms. I came across this simple definition by Brian Sooy in a blog post on his company’s website: Purpose guides you, mission drives you, vision is where you aspire to be, and impact (performance) is what matters. It is the why you do what you do, how you do it, and what you will achieve in the future.

Purpose is the reason you journey. Passion is the fire that lights the way.

In a 1960 speech to Hewlett-Packard (now HP Inc.) employees, David Packard said, “Purpose (which should last at least 100 years) should not be confused with specific goals or business strategies (which should change many times in 100 years). Whereas you might achieve a goal or complete a strategy, you cannot fulfill a purpose; it’s like a guiding star on the horizon—forever pursued but never reached. Yet although purpose itself does not change, it does inspire change. The very fact that purpose can never be fully realized means that an organization can never stop stimulating change and progress.”[1]

Which comes first, passion or purpose? They go hand in hand and are two sides of the same coin. Passionate people are driven by a purpose, and they surround themselves with other passionate people to drive results. Some people are lucky to find their passion early in life, some find it later in life through sheer persistence, and for some, it remains elusive for a long time.

 If you can’t figure out your purpose, figure out your passion. For your passion will lead you right into your purpose.— Bishop T. D. Jakes

In entrepreneurial companies, purpose may not be written on the walls of the building, but the entrepreneur lives and breathes their purpose daily. However, in traditional companies, the purpose may exist but not be widely felt throughout the organization. The responsibility falls on the shoulders of all the senior leaders of the company to keep the team focused on the purpose and recruit and groom future leaders to embrace the purpose.

A few years back, I met the CEO of a large company who was passionate about the organization’s purpose. His passion seemed contagious to anyone who met him. Surprisingly, when I met some of his other team members, I found that they were not as excited as he was when it came to the company purpose. It is important that the purpose be internalized throughout the organization to engage and motivate the broader team.

Senior leaders should invest energy in hiring and grooming other leaders who are aligned with the purpose of the company and, over time, cull people who do not believe in the purpose. This keeps the company vibrant, energetic, and productive. In a pyramid organizational structure, midlevel leaders play an important role in conveying the purpose to fully engage the people at the lower rungs of the organization.

One person with passion is better than forty people merely interested.  – E. M. Forster

The next logical question is how to find and recruit passionate leaders who believe in your purpose. Welcome to the world of recruitment. A recent article in The Economist magazine[2] says that the top five recruitment firms pulled $4.8 B in fees in 2018 worldwide advising their clients on hiring top talent.

These top recruitment firms have all the technology, connections, and intellectual resources to bring passionate leaders to their clients. Yet recruitment has proved to be more of an art than a science. No number of psychometric tests or simulations will help detect the correlation between passion and purpose unless one adds a human touch. Interviewing potential leaders with a focus on what drives them to wake up in the morning and go to work, and understanding their personal values, helps you get close to your goal of finding the right leaders.

There is no passion to be found playing small—in settling for a life that is less than the one you are capable of living.  – Nelson Mandela

Here are a few things I look for when scouting talent for passion and purpose. Leaders who are passionate are authentic. They think big, they are willing to stand up for a cause, they are confident and persistent, and they exude energy. They have been tested in difficult environments, some of them have failed many times and bounced back, and they are ready to go because they believe in the big picture.

While interviewing, instead of saying, “Tell me about yourself,” say, “Tell me about yourself and about your passion in life and work.” Instead of saying, “Walk me through your resume,” say, “Walk me through your resume and highlight your accomplishments and failures. Tell me what excited you in these jobs (and what didn’t), and finally, what would have kept you in each company or role.” You will learn a lot by asking these probing questions.

Passion and performance don’t come instantaneously. Sometimes people have to grow into them. Sometimes the purpose may be too grandiose for even the most passionate people to grasp. That is when a leader’s personal touch is needed to build confidence in the purpose and align it to the values of other leaders.

Hiring passionate people is only part of the story. Retaining high performers takes significant effort and engagement on the part of a leader to keep the team motivated. Isn’t that what leadership is all about?

The Bottom Line

You have to be burning with an idea, or a problem, or a wrong that you want to right. If you’re not passionate enough from the start, you’ll never stick it out.  — Steve Jobs

[1] Jones, Bruce. 2018. “Mission Versus Purpose: What’s the Difference?” Disney Institute Blog, October 23.

[2] Briefing. 2020. “Take Me to a Leader.” The Economist, February 8.

Leading from the Front

Business leaders have often drawn wisdom from military leaders when it comes to managing their teams. One concept that stands out from military culture is leading from the front. However, this concept can be misunderstood if leaders try to apply it to business environments without fully understanding what it means.

Leading from the front is not about always being in people’s faces, shouting and screaming commands. It’s about setting the pace with a team, earning team members’ respect, and leading by example. The leader makes quick, decisive moves, knowing that the risk of not making decisions is greater than the risk of making them.

Military leaders who lead their troops to victory are on the front lines of battle. They are in the trenches with their troops, and they lead bravely and fearlessly. Similarly, in the business world, good leaders are in front of customers, addressing their challenges; walking the factory floor to gain an understanding of employees’ needs; and rolling up their sleeves to solve real-life business issues with their teams.

When things go wrong as a result of decisions, leaders take full responsibility, but when they win the war, they give full credit to their troops.

It is better to lead from behind and to put others in front, especially when you celebrate victory when nice things occur. You take the front line when there is danger. Then people will appreciate your leadership. —Nelson Mandela

As much as we try to make a hero of one person in the business world, typically a team of people slogs day and night to make things happen.

A famous quote from General George S. Patton comes to mind: “An army is a team. It lives, eats, sleeps, fights as a team. This individual hero stuff is a bunch of bullshit.”

Leaders leading from the front have earned the admiration and loyalty of their troops. Leading from the front means setting the example and, instead of telling the team to do things, doing things with them.

What you do has far greater impact than what you say. —Stephen Covey

To lead from the front, you have to be a follower first. Wisdom, knowledge, and the right to lead do not come because one attended a top-rated school. Great leaders have been in the trenches before, slogged through life’s challenges, failed many times, and followed other great leaders. Only then do they earn the stripes to lead.

Before you start to lead from the front, you have to lead from the side or from behind. You must have the humility to learn, contribute, and then earn the respect of your team.

Leaders who lead from the front are visionaries. They have an uncanny ability to think broadly and deeply about topics ranging from business to the potential effect of their actions on their team, community, and customers.

These leaders have mental maps to project how things may unfold based on the team’s actions. Further, they can communicate with simple bite-size messages to inspire, engage, and energize their teams.

Vision is the main tool leaders use to lead from the front. Effective leaders don’t push or pressure their followers. They don’t boss them around or manipulate them. They are out front showing the way. The vision allows leaders to inspire, attract, align, and energize their followers—to empower them by encouraging them to become part of a common enterprise dedicated to achieving the vision.

—Burt Nanus

In addition to being visionary, leading from the front requires leaders to be approachable, nonjudgmental, and humble. By nature, leaders are ambitious, assertive, adamant, and sometimes aggressive. These traits, although helpful at different stages of leadership, need to be moderated to connect with the team. As the leader, you need to feel the pulse of the organization, but you can do that only if you are in the trenches with your team members.

A word of caution: Leading from the front requires the traits listed above, but you run the risk of getting too far ahead of your team if you don’t keep it close to its mission. Communication is important, and communicating simple, consistent messages helps keep the troops together.

I am fortunate to have reported to good leaders and some not-so-good leaders, all of whom helped me sharpen my leadership skills. Frankly, I have learned more from the not-so-good leaders, because those lessons get imprinted much more deeply on your brain.

One has to be lucky in life to find good leaders and mentors to follow, because they not only inspire you to achieve your full potential but make a big difference in your personal and professional life.

The Bottom Line

A true leader has the confidence to stand alone, the courage to make tough decisions, and the compassion to listen to the needs of others. He does not set out to be a leader, but becomes one by the equality of his actions and the integrity of his intent. — General Douglas MacArthur

Expat Advise – Moving to Dubai

Published in Financial Times.  September 2018.

Visit this website to the Financial Times Article on this subject

Global business executive Ramesh Nuggihalli moved from the US to Dubai in 2011 to work for an engineering company. He lived there for three years before returning to Chester Springs, in the suburbs of Philadelphia, towards the end of 2014.

Dubai is the most fascinating and lively city in which to live and work in the Middle East, and a great place to raise a family. The city has built a brand for having iconic buildings, themed shopping malls, fancy police cars and traditional souks (Arab markets) for spices and gold.

The weather can get extremely hot during the summer, when people stick to indoor activities for most of the day. The winter months are gorgeous and, in the evenings, you sometimes need a light jacket in the desert.

The cost of living in downtown Dubai is comparable to that in Singapore, where I lived between 2015 and 2017, or Hong Kong. Alternatively, you can choose one of the suburbs or neighboring cities, such as Sharjah or Abu Dhabi, for a lower cost of living.

I lived in the Old Town area of downtown Dubai in a small apartment because it was close to the airport, my two offices and all the shopping malls. I could walk to a souk and the many restaurants surrounding the famous Burj Khalifa skyscraper, and get to a beach within a 15-minute drive. I particularly enjoyed going for a run on the sand at the public Jumeirah Beach.

There is a tendency for expats not to mix with the United Arab Emirates population, but the locals are very friendly and passionate. I made some very good friends and it was easy for me to strike up a conversation and have an engaging discussion.

The food culture in Dubai is unbelievable. You can spend $500 for two at a fancy celebrity chef restaurant such as Nobu, or Armani Hotel Dubai at the Burj Khalifa, or have a simple Arabic or Indian meal for less than $50. I preferred the latter and thoroughly enjoyed the kebabs, shawarmas and tandoori chicken. My favourite place was a south Indian vegetarian restaurant called Saravanaa Bhavan (there are seven branches in Dubai), where you can get a decent meal for less than $7.

Although you are allowed to drink alcohol in Dubai, it is important to understand the local norms on where to purchase and consume it, especially during the month of Ramadan. The culture is amenable to expats, though, and you can always find food, although you are not allowed to eat openly in public places during Ramadan. It is also advisable to be conservative in what you wear when in the malls or on the beach, and to refrain from expressing strong political views.

The city is very safe and has state-of-the-art public transport and taxi services. Prices of cars are reasonable, but you have to be careful driving on the highways — I almost had an accident on my first day on the road when the other cars stopped abruptly because of some commotion. Some even advise sticking to sport utility vehicles to be on the safe side.

The desert has its own charm and many people like to go dune bashing (off-road driving) or camping at the weekend. You can drive to one of the six neighbouring emirates or even to neighbouring countries such as Oman in less than three hours.

In Oman, you can enjoy a day out with a boat ride to the fiords, swimming with dolphins or scuba diving. Many expats like to go for a big buffet lunch on a Saturday (Friday and Saturday are the weekend in Dubai), although I was never a fan.

I am often asked to compare life in Dubai with that in Singapore, but I find it a very difficult question to answer. Dubai is much more glamorous, but Singapore is livelier, with hawker centres (food stalls) all over the town and a diverse religious culture, with Buddhist or Hindu temples, churches and mosques.

When it comes to doing business, both cities allow you to move in quickly and establish yourself. The cost of living, housing and schools are similar, too.

To imbibe the culture, you need to stay for at least three years. Don’t underestimate the little things you might miss from your home country. Every time I visited the US, I would bring back my favourite Kashi cereal and Amy’s soup. Unless you and your spouse want an adventurous life, don’t take a foreign job because it will be difficult for both of you.

Until I moved to Dubai, I didn’t realise how expensive and difficult it can be to find an apartment that you like and that is conveniently situated. It was also hard to secure places for our children at the American School of Dubai. Some companies buy slots at international schools for their employees, but if you don’t work for such a company, finding school places might be difficult.

The Prospects and Perils of Project Pursuit

It is every manager’s dream to start a new fiscal year with a strong backlog of orders that generates enough sales for the year and beyond. If you are one of the lucky few sitting on a big backlog because of project business, you might consider planning a vacation at the beginning of the year or dropping by Starbucks and enjoying a nice latte before heading to work.

Project pursuit is the process of planning, organizing, coordinating, and controlling the resources to accomplish specific goals of bidding on and winning new projects. This article relates to industrial projects, such as building a power plant or supplying the critical balance of plant equipment to a major oil refinery project.

In the project business, the hunt for the next new project never ends. As the company depletes its backlog, it is critical to replenish it, which is done by being persistent and focused in the approach to seeking new projects. Keeping the book-to-bill ratio greater than 1 is a healthy target to strive for. It takes a different mind-set, business model, and risk appetite to be in the project business.

The definition of project changes from company to company, but in general, it relates to a scope of work that is complex and large in size, requires sourcing material from third parties, manufactures in multiple places, and has a delivery cycle that can go beyond 6 to 12 months. It may or may not involve on-site construction but may include long-term service agreements or field support while products are being installed. The contractual terms, revenue recognition, and resource allocation can be tricky compared with a short-cycle business or direct product sale.

My experience in developing EPC (engineer, procure, and construct) projects in the international markets started more than two decades ago when emerging countries were building power plants to drive their fast-growing economies. Those were the heady days when Western firms would bid on, win, and execute complex infrastructure projects in developing countries. The experience led me to be smart about the project business, and during that time, I learned a couple of tricks of the trade when it came to winning and executing large, complex infrastructure projects.

One cannot underestimate the risks involved in the project business. If the risks, both the known and the unknown, are not managed properly, they can wipe out a company’s balance sheet. A good example of this is the recent spate of nuclear power plants being built in the United States and the United Kingdom where project delays have doubled or tripled the cost of construction and bankrupted a large player in the industry.

If you are not lucky enough to have a customer relationship management (CRM) application to manage new project sales, don’t worry: God created Excel for that. In the absence of a CRM application, one can still manage project sales using a simple MS-Excel worksheet (see template below), although it is not the answer if you want to build a robust project business.

To successfully bid on, win, and execute projects, you have to consider many factors. Here are three important considerations to keep in mind while you are actively chasing projects to bid on and win.

  1. Pick the right project.

No matter where you work, company resources are always constrained. Allocating the best and the brightest members of a team to chase the right opportunities is a critical part of the leader’s job. The decision to invest in bidding on a new project should be made scientifically. It should not be based on emotion or the fact that someone in the organization fell in love with a particular project or customer. The opportunity cost of not working on other profitable projects, which you might have better chances of winning, should be considered in the decision-making process.

One can create a simple point system along five to eight criteria to help decide which projects to pursue. For example, when I was serving the Oil & Gas (O&G) industry, we set up a simple set of five criteria to consider: Lead Time, Compliance with Specifications, Price, Service and Application Support, and Competition. Before we started the bidding process, the sales, marketing, and operations teams together assigned points along those five. If a project’s final score was not above 75 percent—an internal cutoff point to approve new project bidding—we would not invest valuable resources in it.

It is important to think about the strategy to win before investing time and resources in a project. A few years back, a young engineer walked into my office and made a passionate argument in favor of bidding on a project. “Ramesh,” he said, “we are the only company in the world who could make super duplex material [a strong material used in harsh applications], and manufacture and deliver products to the site, in batches, to meet the short lead time the customer is demanding.” This led to several internal strategy sessions. We made a quick decision to bid, and we won the project. That one project alone constituted approximately 30 percent of the annual revenue for that business unit. As leaders, we have to be open minded and opportunistic when there are compelling reasons to chase a strategic project.

  1. Start the missionary work early.

Smart companies start pursuing a project before the specification hits the street, and in many cases, they are involved in the project well before the start of the front-end engineering and design (FEED) process. Major infrastructure projects need project funding, and using this information as a guide, you can start working with various stakeholders to highlight how your products and services differentiate your company from the competition.

More importantly, work with the influencers to support their efforts to reduce project cost, improve efficiency and reliability, and reduce project time with innovative ideas. Writing white papers in industry journals and publishing them in industry conferences to set industry standards on performance levels helps differentiate your offering. Proposing alternative solutions to address various plant performance requirements, while remaining cost competitive, helps differentiate your offering.

Put yourself in the customer’s shoes and think about what a successful project execution looks like for them. Although price and performance are key to customers, having deeper discussions with them may reveal that they need after-sale services, readily available spares, or even project financing.

Nowadays, the specification for a complex project is developed in one country, designed in a second country, and procured in a third country, and the project execution team is based close to the project site. Having the ability to interact and coordinate activities with all these customer touch points is important to the overall success of the project—at both the bidding and the execution stage.

For international projects, work with your country’s consulates abroad, be part of trade missions, and establish relationships with governmental entities that support exporting products—all the steps that improve your probability of winning projects.

When I was involved in developing EPC power projects in Asia Pacific, our company targeted Australia, which had plans to build several power plants. We knew competition from Asian players was going to be intense. As an American company, we started the missionary work in the country with various stakeholders and targeted two projects we had the best chances of winning.

On my first trip to Australia, we spent more than a month meeting all the stakeholders and building brand around our company’s offering. We demonstrated how our technology could help the local EPCs build an optimal plant at the lowest possible cost. We established a small local project office and actively started bidding on those two large EPC power projects. Although we lost the first project, we won the next one, which was worth approximately $110 M for the company.

  1. Manage risks.

By nature, the project business is a risky one, and there are few risk-free projects out there. An unforeseen risk can not only wipe out the profits from the project but also bring the entire enterprise down.

For that reason, many companies avoid the project business and stick to a simple product sales model. And sometimes, it is wise not to bid on a project with significant risks. That being said, companies can become well prepared by being smart about the scope of supply, having the capabilities to assess and manage risks, and building a solid project management team.

Companies that are predominantly in the project business establish a risk management team whose job is to assess potential risks and make recommendations to mitigate them. Project risks can vary from financial (such as the cost of goods or labor going up rapidly during execution) to execution (such as design changes). Developing a good project execution plan, before inking the project, helps address the potential known and unknown risks.

Companies that have developed a well-defined delegation of authority to assign project responsibilities to the right individuals within the company help mitigate potential risks.

In Conclusion

Project business is attractive to some companies because it brings big dollars to the top line, but if not managed properly, it can wipe out all the profits and bankrupt the company. Even a simple project needs to have a good execution plan and a dedicated project management team. Building a professional project management team in-house with professional Project Management Institute certification (PMI) will help you build a solid execution plan.

As industrial companies merge, creating a larger basket of offerings to their customers, getting into the project business is inevitable. Being prepared both at the leadership level and mid-management level to manage these complex sales and their execution is important to the overall success of the company. The Asian EPC houses (Korean, Japanese, Chinese, and Indian) have taken a predominant role in the world’s infrastructure projects, and through learning from their mistakes, they have built competencies to successfully manage complex project business.

The Bottom Line

Let our advance worrying become advance thinking and planning.     —Winston Churchill

The Not-So-Good Leadership Traits to Avoid

In an age where everything is stored digitally, I have this habit of saving good articles by cutting and pasting them into a paper notebook.

While flipping through the pages, I recently came across one of those cut-out articles – The Worst Leaders, published by Harvard Business Review (HBR) in 2009. There are thousands of articles and books on good leadership, but few talk about the characteristics of worst leadership.

At some point in our lives, we have worked for great leaders and have had the opportunity to experience the respected qualities that come with strong leadership. Other times, we face the misfortune of having to work for not-so-good leaders, yet there is ample room to learn from those experiences as well.

Here are the top 10 traits of worst leaders according to HBR and keeping an eye on these blind spots helps to improve one’s leadership:

  1. Lack of Energy and Enthusiasm – these are the leaders who avoid new initiatives and they can suck all the energy out of any room
  2. Accept their own mediocre performance – these are the leaders who seem to be ok with average level of performance
  3. Lack clear vision and direction – they believe their only job is to execute
  4. Have poor judgment – they make decisions that colleagues and subordinates consider to be not in the organizations best interests
  5. Don’t collaborate – they view other leaders as competitors and they are set adrift by the very people whose insights and support they need
  6. Don’t walk the talk – they set standards of behavior or expectation of performance and then they violate them
  7. Resist new ideas – they reject suggestion from subordinates and peers. Good ideas are not implemented
  8. Don’t learn from mistakes – they fail to use setbacks as opportunities for improvement, hiding their errors
  9. Lack of interpersonal skills – they are either too abrasive or aloof and unavailable
  10. Fail to develop others – they do not develop new leaders causing individuals and teams to disengage

Realistically, one can’t expect to excel in all aspects of good leadership in its entirety. Keeping an eye on a handful of leadership traits, which are part of your core leadership style, and improving on others is a good balance to have.

Bottom Line.

You can’t create greater followers under poor leadership.

The ABCD of Channel Management

Multinational companies are expanding their product portfolios, getting into new regions, and serving multiple end markets to continue their growth aspirations. This complex environment challenges a company’s CEO, CMO, sales leaders, and business unit presidents to effectively plan the sales process to serve their large, diversified customer base. A good salesperson is worth her weight in gold, but adding salespeople without a planned approach to channel management becomes an expensive proposition.

Building, training, and deploying a direct sales force is quite expensive, and companies with products and systems containing high-technology content typically lean toward this direct model. However, a majority of companies have a combination of both direct and indirect sales channels, where representatives outside the company help the original equipment manufacturer (OEM) sell their products. Indirect sales channels can range from resellers and independent sales representatives to value-added distributors and system integrators.

I have managed businesses with a mix of both direct and indirect sales channels, but I’ve been surprised by how some companies place little to no importance on actively building and managing indirect sales channels.

In this article, I explore the Always Be Closing Deals (ABCD) mentality of channel management and give pointers based on my personal experiences with building channel management processes and expertise. As much as it is tempting for large firms in the B2B world to disintermediate the channels, one has to thoroughly weigh the pros and cons of doing so. Indirect sales channels pull the demand from the front-line customers to the factory floors, and when done well, it gives you the lowest cost-of-sale-per-dollar of revenue.

Certainly, the positive effect of having indirect sales channels is the ability to scale quickly and get broader market penetration at the lowest possible cost. This allows companies to put more feet-on-the-street in multiple markets and multiple regions quickly. This model works well for midsized companies that are resource constrained and selling products that are not complex engineered systems.

Companies do face some challenges with channel partners when it comes to their ability to influence the product brand image, get direct customer feedback, and obtain market intelligence. Further, without direct customer contact, it becomes challenging to get a bigger share of the end customers’ wallet.

Don’t forget, your channel partners may be multi-product line partners who sell not only your products but also your competitors’ products. In a recent example, one of our channel partners was competing with our company on services and rental offerings without our knowledge, which led us to open our own service and rental business in the region. These conflicts in scope should be addressed during partnership structuring.

For a partnership to work, a few things need to happen between the partners. An OEM will be very interested in getting customer feedback on product performance and data on installed base to later serve customers with services and replacements. Further, the OEM will be interested in gathering data about industry trends and competitive knowledge of the end markets. Finally, the OEM will expect to meet or exceed the sales target assigned to the channel partner.

Similarly, the channel partner looks for sales training, marketing collaterals, product training, engineering support, and, of course, increased sales. As you can imagine, the common goal for the partnership is to achieve top-line growth for both the parties.

Based on my experience in building channels in high-growth markets serving multiple end markets, I have listed three critical considerations for a typical industrial OEM:

  1. Channel Mapping, Structuring, and Due Diligence

Thorough mapping of the channels to various end markets, key accounts, different product lines, and different regions of the world helps you think through the efficiency and cost of building indirect sales channels. Pay close attention to any exclusivity demands of the partners and the overlapping of products and regions. Structuring agreements for 12 to 24 months provides an optimum time frame in which to test out the partnership.

Conduct the right amount of due diligence before bringing a channel partner on board. Understanding the partner’s company structure, financials, historical track record, product and market fit, and SWOT analysis is critical. Finally, for any partnership to be successful, it is important to make sure the chemistry works, the values are aligned, and the ethical standards of the partner match those of the OEM. In some emerging markets, I have sought the help of American or Canadian consulates’ business attachés to help identify reputable and ethical partners.

Channel partners are independent businesses who look after their own goals. OEMs should make sure they are getting the right amount of attention and resources they need from their partners to grow in selected markets. Doing a Pareto analysis of your partners’ performance and culling the bottom performers helps keep the channels robust and productive.

Having more channel partners is not always better, something I learned the hard way. Channel partners need marketing support, application engineering support, and technical training. If one does not have the staff to meet those requirements, the channel performance goes down over time, and no amount of blaming is going to help rebuild the trust in the relationship.

  1. True Partnership

Key to building any successful partnership is establishing clear guidelines and rules around the engagement. There needs to be open and transparent communication about sales pipelines, lead generation, and lead management. Aligning and setting annual and quarterly performance goals and having timely discussions around performance are important to keeping the partnership true to form.

OEMs sharing tools and templates on best practices with the channel partners and creating a community where partners learn from each other helps increase the level of engagement. Going on joint sales calls and capturing market intelligence and customer feedback is invaluable to any OEM aiming to further optimize the channels.

In one of my previous companies, we invited channel partners from multiple countries to witness the pre-launch of a new product line. We got tremendous feedback from our partners on our product configuration, marketing plan, and launch price; as a result, our engineers and supply chain leaders had to go back to the drawing boards and alter our launch program significantly. When OEMs include the partners in their multigenerational product planning process, it’s a win-win for all.

  1. Investment

Compared with direct sales channels, creating channel partnerships is much more cost-effective, but to make it work and deliver value, one has to continue investing in the channels. Co-investing with channel partners to incrementally add salespeople will incentivize them to deliver incremental growth. Other investment ideas include providing regular sales and technical training, sharing marketing and advertising costs, and helping to build social media platforms for your channel partners. Giving price discounts helps meet short-term volume needs but is not considered an investment for long-term growth.

Proactively connect the channel partners to your company’s engineering, manufacturing, and product teams. Encourage your engineering team and product managers to visit the partners and make joint sales calls. There is immense value to tightly integrating the channels with the technology and manufacturing teams. Support the channel partners with business systems like CRMs or LEAN so that the partnership is mutually beneficial.

In Conclusion

In a resource-constrained environment, it is important for leaders to allocate sales costs appropriately to get maximum benefit on top-line growth. The normal metrics of bookings, backlog, sales, and book/bill ratio are good to measure, but leaders should go one level below and look at other factors, such as where sales are not coming and whether there is any merit in allocating resources to a slow-growth segment or product line.

Doing a deep review on channel performance once or twice a year at the senior leadership level helps keep the channel strategy robust and current. Some channel partners are not only your partners but also your customers, and companies should treat them accordingly. Reaching beyond traditional advertising and trade shows to allocate part of your marketing budget to working with channel partners on joint investments will be much more powerful and yield tangible results.

Finally, channel partners are an extension of your company brand, and therefore it is important to make sure the partners are in line with your company’s values.

The Bottom Line

In a complex global business environment, your strategy and approach to channel management makes a big difference in achieving strong, profitable growth.

The Art (and Science) of Acquisition Integration

Companies worldwide closed or announced $3 trillion worth of acquisitions in 2017, with North America leading the transaction value by more than 50 percent, followed by Europe and China. It was a bumper year for mergers and acquisitions (M&A), and the new tax laws passed in the United States are encouraging companies to repatriate more than $1.5 trillion in stranded cash from overseas accounts, which is further expected to increase the M&A trend in 2018 and beyond.

Experts are attributing the increasing trend toward M&A to technology and business model disruptions that are taking place, from the retail industry to industrial sectors. The same experts also predict that approximately 50–70 percent of these transactions will fail to add shareholder value. Beyond the strategic intent of doing a transaction, acquisition integration (AI) plays a big part in the success of a deal.

In the recent past, many deals have failed, rather spectacularly[1], to achieve value committed during the transaction phase. Value creation work and integration planning does not start when the deal is announced. In fact, it starts when a company’s CEO and board members first start discussing a potential transaction.

A strong board will ask all the tough questions starting with the big “why.” Why are we considering this transaction? How is this going to add value to our current portfolio and customers? How does this transaction fit into the overall strategy and vision of the company? Finally, how are we going to integrate this new company, and who will manage the integration process?

The AI process consists of two parts: One is the tactical element of integration (science), such as making sure employees get paid the first month after the deal closes. The second element of the AI process is the strategic element (art) of achieving the intended purpose of the transaction and adding shareholder value. This article deals with that second element.

Leaders and organizations that are adept at change management thrive in the M&A world. In the past, the realm of M&A used to be the big blue-chip companies, but today, the M&A process is ubiquitous and senior leaders are expected to know the tricks of the trade. What used to be the big corporate M&A team consisting of dozens of professionals who help the business unit presidents acquire and integrate, has typically whittled down to a very small team. The presidents and general managers are now expected to pick up both the front-end deal negotiations and the back-end integration process, with limited help from corporate.

After spending a decade in corporate development roles in large industrial companies integrating and managing cross-border deals, I have come to appreciate what it takes to integrate a company. Further, I have been on both sides: acquiring and acquired. I have experienced mergers, divestments, de-mergers, reengineering, restructuring, reorganization, and the creation of tax-efficient models. Throughout all these corporate ventures and adventures, one thing has been constant: change.

There are a million things to consider during the integration process, but if you are the CEO or a board member of the acquiring company, I recommend that you first concentrate on a few critical factors that will have a disproportionate effect on value — both positive and negative. Let me highlight below the top three considerations in the art of AI where you manage the strategic elements of the AI process.

  1. Managing Value Creators and Value Destroyers

When a deal is presented to the board for approval, the presenter articulates the strategic value of the transaction. In all cases, a dollar amount is attributed to these value creation ideas. In M&A lingo, these value creation ideas are called synergies. Typically, these synergies are sales synergies (top-line growth), cost synergies (profitability growth), and sometimes, negative synergies, where you might lose sales synergies because of certain market conditions.

Instead of allowing attention to get misdirected and bogged down by a dozen synergy ideas, I recommend that the integration leader list the top five value creators with tangible values and assign it to specific individuals to plan and deliver. One example of this could be the two merged companies jointly bidding on active large projects by pulling in each other’s products and services to increase the probability of winning a project.

Every transaction is accompanied by a host of risks, and if the risks are not managed properly, they start to erode the value. Again, the CEO and board should request a list of the top three value destroyers and manage it effectively to avoid or mitigate unforeseen risks. An example of this could be loss of sales because of a potential new customer who also happens to be a potential competitor of the acquiring company.

In an example of a similar situation, the CEO of a large industrial company personally visited its impacted customers within the first 30 days of announcing the deal, to assure them that they would be served with the highest level of integrity and that any information provided to them would not be used for any competitive reason other than serving them. The CEO was able to retain at least 80 percent of the business, although the company still lost some because few customers wanted to diversify the supply base.

  1. Integrating Culture and People

Once you get past the equipment, intellectual property, and various other line items on the acquired balance sheet, the most important asset that comes with an acquisition is people. Understanding the culture of the acquired company during the entire deal process and getting to know the senior leadership of the acquired company is an important task – not simply for the human resources department, but also the entire senior management.

What do I mean by culture? By its simplest definition, culture is how a company operates and does things on a daily basis. It can be as mundane as putting up (or not putting up) Christmas decorations in the lobby. One has to study the cultural dissimilarities between the two companies and prepare the combined team to deal with potential issues, both big and small. These factors need to be addressed early in the integration process to avoid any long-term damage to the combined culture.

As an example, in one of my previous companies, we had zero tolerance when it came to legal compliance. Through a series of events, we discovered and terminated the head of sales on Day 1 because of compliance reasons. Despite the impact we knew it would have on first-year sales, we were sending a powerful message to the entire organization about our values and beliefs and how we wanted to manage the combined company going forward.

When the first rumors of a merger-in-the-making come out, they send shock waves through the organization. The first question that comes to employees’ minds is whether they will have a job after the deal is closed. The level of uncertainty and ambiguity that surrounds the deal process will have huge psychological effects, and those can and do affect people’s performance. It is vitally important to have a formal communication plan that keeps the teams updated on the deal progress and to be intentional about killing any rumors that are affecting the company negatively. The one piece of advice I have often given to my team to alleviate their fear and ambiguity during a deal process is “Keep doing your job and use the merger to create personal growth.”

The senior leaders of the acquiring company should spend a disproportionate amount of energy addressing the people issues; that critical task should not all be left to the HR department. Having open and transparent communication, building trust during interactions, managing power struggles, avoiding leadership ego trips, and preventing the loss of key employees becomes one of the most important leadership accountabilities during the early stages of integration.

  1. Addressing Change Management

A big part of AI planning and execution is about the change management process. In my observation, many senior leaders are ill-prepared and trained to effectively execute a change management strategy.

There are various change management models, but I have successfully used this self-developed simplified three-step process—what I call the three Ds—:

  1. Discovery Stage: Understand the need to change and build a baseline on what to change and how fast to change.
  2. Developmental Stage: Build a business case for change by including the stakeholders. The plan needs to have a starting point and an ending point with measurable metrics.
  3. Deployment Stage: Launch the plan with open and transparent communication, seek buy-in, and manage resistance at all levels. Finally, measure the progress, and continue to revise the plan and re-deploy it where necessary.

I was involved in a change management process where the company wanted to reorganize the business from a regional structure to an end-market-structure. The CEO invited 90+ senior leaders from all over the world for an intensive, hands-on workshop where we launched the three-stage change management process described above. It was highly effective as we were able to manage resistance in the breakout sessions, come to agreements on change priorities and timelines. By the time, 10 days later, the leaders went back to their regions, they were able to effectively and consistently communicate and cascade the plan to the next level. This was a costly and time-consuming exercise, but as we demonstrated, when done properly, it delivers solid results.

How Do You Know It When You See It?

In terms of the Acquisition Integration process, the senior leader(s) who sponsor the transaction manage the critical steps and they are actively involved through out the deal process. Success demands that the leadership clearly understands the value drivers and value destroyers and prepares the team to address them in the early stages of integration. The CEO or Deal Sponsor can articulate the acquisition rationale in simple terms, and the leadership team knows where and how the business will be integrated well before the transaction closes.

It is my observation that High-performing companies and serial M&A dealmakers hire general managers who have not only executed transactions but have successfully integrated them. They don’t use a generic integration playbook for all the deals; each plan is carefully customized to each transaction, with the value drivers clearly identified.

Between the steering committee, deal sponsors, external advisers, subject matter experts, functional leaders, regional leaders, and the teams — from both the acquiring and acquired company – the size of the integration team can, at times, be unwieldy. Smart companies keep the team size to a manageable few who are directly involved in delivering results. Further, they seldom use outside consultants to come up with synergy estimates, and it is all done internally with the help of the chief commercial officer (CCO). Off late, many companies are hiring CCO who manage all aspects of growth from strategy, marketing, e-commerce to M&A/Integration.

When, at the CEO and board level, leadership is focused on strategic aspects of the integration and regular reviews are held to make crucial decisions, you start to see value creation at work. Synergy assumptions are tested and retested during the entire deal process, and when the assumptions are wrong, the leadership is bold enough to drop a synergy and pick another synergy to replace it. The leadership team keeps a close eye on cost synergy, which is the controllable piece of the synergy book, which is executed flawlessly according to the plan.

Synergy goals are well articulated and driven to different business units and regions with clear execution plans and defined milestones on the way to achieving the results. Activities are prioritized, such as finance closing the books, so that the resources are effectively deployed to deliver value. Leaders keep a hawk eye on the value creators and destroyers, and they come up with contingency plans quickly if something is not working.

A good acquisition integration plan is simple, measurable, and executable, and delivers the intended value. In the art of AI, the senior leaders concentrate on the value drivers and destroyers, culture, and people, and build capabilities around a change management process to create value for the business.

The Bottom Line

Simplicity is the soul of efficiency. —Austin Freeman

[1] A few examples are Daimler–Chrysler, AOL–Time Warner, and HP–Compaq.