Summary

Surveys show that, in average, mergers and acquisitions destroy value. Highly publicized successes are not sufficient to compensate for disastrous operations. Yet, it is relatively easy to set the rules of good acquisition practices. M&A professionals know them well, but seem to keep breaking the rules: make acquisitions beyond the scope of their strategy, produce unrealistic business projections to accommodate for sellers exorbitant demands, or fail to implement integration plans. The mechanisms leading to these repeated mistakes are powerful enough to overcome experience and wisdom; because M&A is a fascinating activity, with stakes far beyond simple efficient business; because closing an Avoiding the acquisition curse is a short term objective, and making it profitable is a long term activity. A matter of egos, passion and consistency over time.

Introduction

Mergers & Acquisitions underperform

The measure of acquisition success is the Net Present Value of the operation: initial price and transaction cost (cash out), and resulting cash flows that would NOT have occurred, wouldn’t the acquisition have taken place. A positive NPV means the cash used produced more value than if it had been paid back as a dividend to the shareholder.

Surveys consistently illustrate that:

• one fourth of all acquisitions create value far in excess of initial expectations (very positive NPV, above budget)
• one fourth of all acquisitions perform less than expected, but pay the cost of capital (positive NPV, below budget)
• one fourth of all acquisitions destroy some value (negative NPV) even though cash flows remain positive
• one fourth of all acquisitions end up generating negative cash flows.

In half of the cases, the buyer would have been better off not doing the acquisition. And worse, the aggregated Net Present Value of all M&A activities seems to be significantly negative. In other terms, humankind would be better off without M&A… But we don’t really want to hear this, do we?

M&A is of course not only a matter of NPV. It’s a way to remodel industries, to create new businesses, to change corporate culture, to introduce new talents in the organization, and to bring additional growth beyond internal growth… And M&A is a lot of fun. In other terms, we would rather accept negative NPVs than live in a world without M&A. Fair enough. But we also want to improve the M&A process, don’t we?

The M&A curse

M&A teams are usually high profile professionals and acquisitions are under top management scrutiny. So why would bright people perform less in acquisitions than in other activities? Some deals occur that should have never closed. Some decisions to drop a deal are never taken, because acquisition teams are exposed to pressure that biases them towards closing deals at any cost:

• pressure for short term external growth: in publicly traded companies, boards commit to external growth; closing a deal is always a good short term result, while real NPV is measured many years later, and with unreliable measures…
• pressure from partners: Mergers and Acquisitions involve actors (banks and consultancies) whose retribution depends on the conclusion of the deal; they tend to heavily influence decisions toward making the deal at any cost; in the expression “success fee”, success often means “deal closing”,instead of “good deal closing” AND “bad deal dropping”…
• pressure from inside; acquisition teams invest a lot of passion, determination and intelligence, and the process is long; the more it progresses, the more it becomes difficult to interrupt, even when some rational reasons suggest that the whole project is uneconomical.
• pressure from top management: acquisition is not merely a matter of fine economy, but also a matter of leaders’ egos. The moral satisfaction of increasing the size of one’s business through an acquisition may help make bad decisions to buy… Overdeveloped egos have a cost.

In addition, the value of an acquisition comes from years of good operation. Yet, the team that makes the acquisition is not the team that will extract the value. Not one person or group can be made accountable for the whole process.

So yes, there is a curse on M&A. It is somehow like poker: players who drift away from purely rational processes lose money… And it is also like derivative banking: the transaction is a short term objective, disconnected from the long term profitability…

It takes outstanding procedures to remain on the safe side and resist pressure. Or it takes to be familiar with all the processes that may affect judgment at each step of the acquisition process.

Zooming on problems

All acquisitions are decided on the base of positive projected NPVs. If real NPV is negative, it means either that the initial projections were wrong, or that the post acquisition process goes wrong. Or a bit of both. And it may also mean that the acquisition should have never been considered in the first place! We will see how this can happen during three essential phases of the acquisition process:

• Target screening: this is where the global strategic fit of a target is assessed.
• Deal negotiation: the team builds a business case that provides a realistic NPV, given a fair purchase price
• Acquisition integration: a team is built to implement the planned integration process.

1 – Global Strategic fit

The theory

Targets that are not within the scope of the global strategy should not be considered at all. They are bound to become failures, even if they may look at first glance as good opportunities.

If part of the target business is within the strategy, and part is not, make it break apart before you consider buying the piece that fits your strategy.

The wisdom behind the theory

But why should we ignore a business “just because it does not fit our strategy”? After all, we are in business to make value for the shareholder.

Efficiency

We all dream of being omniscient geniuses, but we are not: we develop over time a competence and a culture in specific sectors, and this is where we can strive for excellence. Entering a business where we have not competence is costly. If we do it, this cost has to be considered, as part of the company’s strategy.

In the example above, 60% of this business is not within the field of competence of the potential buyer. The buyer will not be able to maintain the operating margin, because he does not know this business. The acquisition will not be profitable.

Sustainability

Sooner or later, the acquired business will require some investment. And investment money is a limited resource: inside a corporation, projects and businesses are in competition to obtain a share of available investment money. It is highly unlikely that the acquired business will get investment money in 3 years time, even if he deserves it, just because it is simply not in the focus of the company. A business outside the strategic scope is bound to fade and fail.

The reality

The target screening process is very subjective, and non-measurable factors have a very heavy influence. Few corporations have a clear strategy, with an easy-to-use and objective model to assess the strategic fit of an acquisition. This leaves a lot of room for manipulation.

Twist the strategy

Starting with a sound strategy, with proper market definition and clear core activities, it is easy to widen the scope of the strategy to make it encompass the target:

• Define “necessary complementary activities” to core activities: typically, a service activity that was not considered initially can become part of the strategy if someone explains clearly that the core product business cannot develop without services. The problem is that service activities require a very different skill set, and provide very different returns…
• Extend the definition of a market to encompass the activity of the target.

Influence the perception of the target

It is very easy in an analysis report on the target business to reduce the importance of the non-core businesses, or increase their apparent profitability to make them more appealing, underestimate costs, or overestimate the capability to divest non core businesses.

Work around strategic priorities

Some external factors help soften the rigor of the strategic fit analysis:

• if a business has not received acquisition money for some time, its targets may be considered with more tolerance
• the candidates of a political heavyweight may be exposed to a more lenient screening
• than others.

2 – Realistic NPV given a fair purchase price

The purchase price negotiation is an external process (between the buyer and the seller) AND ALSO AN INTERNAL PROCESS, as the acquisition group negotiates the NPV of the deal. The goal is to make it not only positive, but also more attractive than the NPV of other competing acquisition targets! The NPV projections for the deal attractiveness (short term) are also the base of post acquisition integration budgets.

The theory

Terms – To express the theory, we need to remember some simple terms:

• P1 is the amount of money that this business represents for the owner today, as it is: Net Present Value for the seller of the cash he would generate with his business, with reasonable growth and sustainable profitability.
• SP is the minimum price the seller wants (in technical terms, the seller’s reservation price). SP is often way higher than P1 (can be double), as business owners add emotional value to the true realistic economic value.
• P2 is the amount of money that this business will represent in the hands of the buyer: Net Present Value for the buyer of all future cash flows that can be attributed 100% to this acquisition, once all the synergies have been calculated.
• BP is the price the buyer’s acquisition group negotiates internally: it represents the buyer’s maximum price, also called the buyer’s reservation price. BP is lower than P2, but often close.
• P is the negotiated purchase price.

Basic negotiation theory

The conditions to make a deal possible are:

• P2 must be above P1, so that the acquisition makes sense from an economic point of view;
• SP must be lower than BP, so that it is possible to make a deal.

P1⇒ SP ⇒ P ⇒ BP ⇒ P2 ⇒

The seller starts somewhere above SP. Buyer starts somewhere below BP. P is somewhere in the middle depending on the very complex mechanism of negotiation.

The wisdom behind the theory

From a purely rational and theoretical point of view:

• P1 represents a value that belongs to the seller.
• P2-P1 represents a value that should go to the buyer, as it is the value of the synergies that the buyer will be able to extract from the acquisition.

The negotiation will split P2 –P1 in a part that will go to the seller (P –P1), as a result of his negotiation capability, and a part that will go to the buyer (P2 –P), as an extra benefit for his cash.

The reality, beyond pure negotiation

The buyer determines initially his P2 and BP, based on his perception of the company, and an anticipation of P. Over the course of the negotiation, he may revise both P2 and BP, if he finds relevant and valid reasons to do so.

The seller drifts

What the seller has in mind at the beginning of the negotiation is an opinion on SP, but not an accurate P1, for 2 important reasons:

• the seller is emotional
• to compute his P1, the seller always projects a business where HE continues to put efforts everyday (and night) to make it grow,taking chances, using all his entrepreneurial skills. In reality, P1 is the opportunistic cost of stopping this business to start doing something else (holidays,new business, or salaried job with buyer to continue running the business post acquisition).

In addition, the seller can claim that the value [P2 –SP] only exists if he accepts to sell… And he will try to get a share of this value during the negotiation, in particular if there are several potential buyers. The seller is a “lean and mean” guy, tough minded, and a shrewd businessman.

Hence the almost crazy prices that some sellers announce. It may happen that SP is higher than P2. Or that the seller’s entry price is above P2. If buyers were rational, they would of course negotiate down quietly, and walk away if the seller persists.

The buyer drifts

The buyer’s team is under pressure to make the deal, as we saw earlier. And P2 is subjective… because it integrates synergies, which are financial projections of future efficiencies… It is easier to re-work P2, rather than take a chance to break the negotiation, or tell the boss that the deal is impossible. So, the acquisition team goes back to Excel. Excel does amazing things when handled properly to justify about anything:

• Shift costs from recurring to extraordinary: long term post acquisition profitability will increase
• Shift revenues from extraordinary to recurring (same effect)
• Increase the marginal profitability of synergies
• Increase the scope of some synergies
• Transfer some synergies from “possible” to “certain”
• Reduce and delay some future investments

Anything that improves the final year cash flows boosts the value of the perpetuity… In the end, the acquisition team may negotiate a price way above anything acceptable, and the acquisition will NEVER be a good one, because the price is way too high.

None of the above is dishonest. And nobody can blame an acquisition specialist for fine tuning his perception of the business. But when needed, fine tuning will mean increasing P2 more often than it should.

Good practice – On the right price

Determining the right price is complex, and there is a lot of literature on the topic. Some gurus stick staunchly to one method (see in the box) that usually provides a very low price. Of course, life requires a little flexibility, but there are still some rules with which none should cheat, and that negotiators should repeat as a mantra before any negotiation exercise:

• Anything above P1 (no-growth no synergy) belongs to the buyer, not to the seller. Because the value of growth belongs to the manager that makes it happen.
• Any cent above this value is strictly a matter of negotiation skills, and that’s where the negotiator is evaluated.
• he negotiator’s maximum price should be the NPV of the most likely synergistic case,with three years cash projection, no investment and a simple perpetuity.

A good practice is to establish negotiator’s incentive to reduce pressure on deal closing and increase pressure on “bad deal dropping”. The negotiator should be rewarded if he loses to a competitor, but forces the competitor to buy at a price OVER P2.

Good practice – On NPVs

NPV is both a necessity, and a fool’s game. It is a necessity because of the amount of work it takes. Making proper projections brings a better knowledge of the target business. It also is a necessity to compare projects competing for the same acquisition money. But it also is a fool’s game because then, it may only tell who is the most talented and credible liar…

Finally, computing NPV can become a toxic exercise when acquisition teams start building NPVs to justify a purchase price. As NPVs look like math, they may influence decision makers, and comfort them in bad decisions. NPVs should only be made by the people who are going to manage the business, as they are their budget.

The negotiator should never be entitled to discuss the NPVs. Not even “under supervision”: if the negotiator is good, he will negotiate P2 up with his supervisor!

Synergies should be discussed ONLY with business people not involved in the negotiation process.

3 – Sound integration process

If there is one thing on which all modern managers agree, it is the importance of the integration process. And still, in reality, this process is mostly overlooked. The study of best practices gives the following guidelines:

• Dedicated integration team
• Free the previous owner in the first year

Yet, in reality, things happen very differently, and always for apparently very sound reasons.

Dedicated integration team

The theory

Recommendations based on commonsense are:

• Include the integration team cost in the acquisition costs, or as a negative synergy, or as a cost of synergy, and budget it.
• Create an integration team made of one person from the acquiring company (A) and one person of the target company (B) FULL TIME FOR AT LEAST SIX MONTHS, and some more part time resources from A and B;
• Create an integration review committee, meeting once a week for 6 months, then monthly for two years, including one of the key people of A’s negotiation team.

The wisdom behind the theory

Integration team:

• The goal is to have on both side a person from each culture making the transition, and solving the problems through a JOINT approach taking A’s AND B’s culture, not just A’s culture.
• The two workers from A and B have as a mission to get to understand the culture of the other company, to explain the discrepancies, and prepare the “action” phase.
• People who have two part time activities tend to favor the easiest and most rewarding activity. Integration work is very difficult to reward based on incentives. If people are not full time o such activities, they may end up doing little to nothing for their integration duties.

Review Committee:

• the member of the negotiation team is a key element: the negotiation process brings a lot of information on people’s hidden agendas, company’s informal processes, and it also creates scars that only the people who ran the negotiation may understand.
• Review committee must not dissolve once an “action list” has been exhausted: problems appear after several months, as a consequence of the acquisition, and someone must be there to monitor it.

The reality

Integration teams are budgeted part-time, because in general “none in A or B can all of a sudden stop doing his usual work and dedicate his time to pure integration tasks…” I agree, it may look particularly straining on an organization to dedicate so much time to integration. But it is so easy to destroy value that it is worth doing it.

A common practice is to select the most open persons in B, ask them to get to know A on their spare time, and act as transmission chain for B towards A. This ignores that A also needs to talk to B, and that A may have to adapt marginally to B, not just B to A!

The acquisition integration team comprises some people from the due diligence team. But the negotiators are usually high profile guys, who immediately jump on their next negotiation, far more valued than an integration.

DUE DILIGENCE DOES NOT PROVIDE THE SAME UNDERSTANDING AS NEGOTIATION. So this valuable information is lost.

Action plan

The theory

“Observe for three months, prepare for three months, announce after 6 months, implement in a week, fine tune over 6 months, everything is finished after one year”.

The wisdom behind the theory

The reason for this is not a male display of action oriented management style. It is based on several human rhythms:

• It takes some time for people to speak up. People in B will not speak openly: an acquisition is a trauma, and it will take some time before people open up. So please remain patient and only listen for three months.
• It takes six months for anyone to understand a new environment: a new job, a new house,a new organization; you cannot expect to make sound decisions before.
• People expect changes to happen, whatever has been promised to them. If changes do not appear, after a year, people are disappointed and start playing a new game.
  • People cannot perform in the first months following an acquisition: because of stress, because of the additional burden to understand and adapt to new constrains; because there is an easy scapegoat when things do not go right: the acquisition! After six months people are ready for change, and change is urgent.
  • If things do not change, there are bad side effects after a year: relationships between former colleagues spoil, and some irreversible moves are made. It takes a year to disaggregate a human system that goes through the trauma of an acquisition.

In B, people know who is good, and who is bad. They expect the bad people to be let go, and the good people to be identified, promoted and rewarded. A must not disappoint this expectation. This means listen, plan, and act.

Of course, acting after 6 months may cause to make some mistakes. But mistakes made at this time hurt much less than expected actions not undertaken. And mistakes will be quickly forgotten if people are back at work with clear objectives, and a confident future.

The reality

People speak before they listen. We all do. And we all tend to agree with the simple idea that “there is no reason to wait to make the administrative integration, so let’s proceed now”. It is wrong for 2 reasons.

• Existing administrative processes usually match operational reality and sometimes some human particularities: B may have some very specific habits that are not compatible with A’s standard administrative processes. Of course, B will adapt, but it may affect operations adversely.
• A’s stiffness on processes may be a good business practice, but it will be perceived by B as a lack of care, or worse. Acquirers have a reputation of being arrogant: as A is in a dominant position, A’s middle management may be tempted to abuse. Any process that reinforces this impression during the initial phase is negative, and often useless.

Some things go quickly, and some other things never occur! In some cases managers in A will say: “the best thing is NOT to touch anything! It will be business as usual; the acquisition will be transparent”. It is not only wishful thinking, it is a mistake, and it often covers the reluctance to do changes. There is no such thing like business as usual after an acquisition. For many reasons including three major:

• The owners have sold: they were the fearless devoted leaders, they are now the fat Ferrari drivers. Their troops do not consider them as before the acquisition, and it is in itself a drastic change.
• B was permanently at risk, B within A is NOT anymore: this may not be true, but it is B’s employees’ perception. And this is again a major change.
• Customers of B do not have the same perception and attitude as before. Funny enough:they will NOT accept anymore some mistakes that they were tolerating from B, and at the same time, they will expect B to inherit all the bad habits of A!

In addition, action is not always nice. It means firing people. It means taking chances selecting the people who should go and the people who should stay. For some managers in A, it is the first time of their professional life that they have to restructure. The first time is not easy. And when things are not easy, it is often simpler to postpone them. BUT, people in B expect things to change. They expect some restructuring, and from day one, they have started to anticipate: single out the least appreciated people, promoting oneself, all the non-glorious attitudes that we animals tend to adopt when threatened. It is struggle for life, and it also creates wounds. These wounds, if not healed, get infected, and infection propagates.

Good practice

All integrations are transitions. The virtues of transition management compared to ordinary management are now well understood in all industries. Integration should just be handed to transition managers for 18 months, until they are ready to hand back the business to standard operation. No more, but no less.

I may add that some things should be purely and simply prohibited:

• pretend in any way that business after the acquisition will be “business as usual”.
• make an integration task list, and consider that once the final box has been ticked, the integration job is over.
• pretend that line managers are able to handle an acquisition without special skills and training.

Conclusion

The economic crisis that we are experiencing has demonstrated at length that professionals with excellent technical skills could work their best to create major failures affecting people’s lives. Some of the lessons learnt were:

• short term goals may lead to major wrong decisions
• excessive trust in technicality obscures economic reality
• self interest make people lose all commonsense
• passion for figures and money challenges consideration for other human beings.

Lessons learnt from acquisitions are very similar in many aspects. But money pains are not the most important.

Integration is a matter of helping professionals who had dedicated their working time to a certain way to do business, transition to a new professional life. There is much more than figures at stake. All acquisitions result in some people losing their job. Fair enough: business also follows some kind of Darwinian evolution. But bad integration results in unnecessary and often irreversible human damage. And managers should never accept that. It’s not an operational mistake anymore, but a human fault.

It may also result in simple destruction of an activity, of a production capability, of a previously dynamic business, of a creative or innovative momentum. I will describe such a thing in a next paper. Then, beyond the fault, it’s a lack of elegance, a “crime against business aesthetics…” Not to be forgiven.

For 20 years, I have practiced innovation in all sorts of organizations, from the smallest (2 people) to the largest (>100.000). I have seen failure and success, and sometimes, I have participated, to failure and to success.

I have studied in detail most of the standard theories and applied several: Blue Ocean, Open Innovation, TRIZ, Creative Design Thinking, CK, Jugaad, RID and many more… I have looked at success stories (from Apple and Google to Swatch and Favi, and so many others) and read tens of studies.

Don’t expect me to criticize any of these: they all contribute to innovation. But expect me to criticize all: they lead us to believe that there is a winning formula. And none of these theories are winning formulas, just useful tools. Because there is no winning formula.

However, from what we do day after day in all sorts of organizations, I believe there is a winning approach, driven by a state of mind and a thorough understanding of the mechanics behind innovation. Formulas targeting only a sub-part of organization (R&D, Strategy, Product Design…) eventually fall short of initial expectations, and, with a few exceptions, only produce marginal and disappointing results.

Introducing the winning approach to innovation

Many managers know the winning approach; many more practice it by instinct rather than by applying a theory. Few of them can explain what they do, but when they dare do it, it can be summarized in a few words: « listen, connect, dare, persist and implement »… There is no recipe (a process or organization common to all), as it always depends on the local situation (people, structure, field of activity, environment).

The winning approach consists in creating a situation where ideas will emerge, develop, die or prosper, just like new varieties of plants will appear in a botanist patch, some of them becoming graceful flowers, others promising medical plants, a few new sources of food, and many, barely new converters of CO2 into Oxygen… which is a good start though (and one or two, undetectable new poisons for solving your family problems like Borgia or Agrippina did…).

The winning approach is based on trust: trust in the capability of all individuals to contribute to innovation, and trust in the capability of some to harvest. Trust in collective intelligence, and dedication to making good use of it. This faith in collective intelligence is a prerequisite to build the much needed state of mind.

Trust is necessary but not sufficient. Growing ideas to maturity and harvesting takes particular skills, not only in the concerned field of business, but also in the way ideas turn into innovation. Otherwise, investing in innovation produces disappointing results for most organizations (see BCG surveys for more on this).

Losing formulas

“It’s not so much that innovation is difficult, but killing innovation is just too easy”. Here are some ways to kill innovation.

Put R&D first

There is little correlation between R&D and innovation! Some companies with consistent investment in R&D fail to innovate (see Orange), and studies by BCG or Booz Allen have consistently demonstrated that. It’s a mistake to entrust R&D to produce innovation. 2 simple reasons for this:

• Innovation often contains technology, technology can trigger innovation sometimes, but in most cases, technology only represents a fraction of what customer consider in an innovation. R&D is clearly a key resource for innovation, but should not be considered as the source of innovation.
• When R&D is considered as the source for innovation, it deters the rest of the organization to contribute, either to generate ideas or simply to refine and adjust concepts.

Bet on marketing/strategy alone

Marketing undoubtedly provides invaluable information on markets, customers and trends. Strategy undoubtedly can help identify new avenues for development. But in a field of activity, all competitors have access to the same information. And in addition, this information describes the current state of a market (statically and dynamically). Marketing/Strategy is a good way to match competition, but it is not sufficient to be ahead of it: the world is changing so rapidly that no analysis, no matter how smart it is, can give a lasting head start.

Thomas Edison did not make a success with the light bulb by looking at the candle market.

Customers and markets are a source of inspiration, but just like for the previous point, the main drawback is to ignore other sources of innovation.

Bet on genius

Of course, no one does it, we are not so naïve! However, we entertain a fascination with all the geniuses who have changed the world (and became rich). And there are so many papers on finding radical innovation inspired by the successes of these geniuses that it keeps our mind focused. So, let me hammer this point, it’s worth it…

Yes, creative genius produces innovation: Edison, Ford and many others have demonstrated it. But the first bad news is that there are not enough geniuses in the world, and like soccer players, they are way too expensive for you… Betting on genius may put you ahead of the pack, but the cost is too high and the probabilities that you have found the best genius are too low to make it a valid innovation strategy.

Second bad news: even a genius is not sufficient today. A genius can invent something great, but to make an invention useful (ie turn it into an innovation), it takes a whole bunch of expertise and work. And it is very difficult to adapt or modify an idea coming from a genius. Many promising start-ups have failed because of this.

The good news is that innovation (even radical) rarely results from a stroke of genius! Specialists of Kaizen know it: innovation, even radical, comes from a massive amount of ideas producing sometimes minor changes in an internal process, sometimes nothing, and sometimes something great.

Some companies do extremely well when they manage to mix intelligently R&D, marketing, strategy and a touch of genius. It is called “transverse approach” and it is a good approach. Others push the approach to the limit, and bet on collective intelligence…

Collective intelligence breeds innovation

A manager who, by instinct, collects information and ideas in the field, not just in his management team or in marketing studies, or in one single department, does nothing else than mobilizing collective intelligence. This approach has been widely developed in many management theories (see Kaizen), and is increasingly popular under the name “participative innovation” (from suggestion boxes, to innovation challenges).

A manager, who puts a team to collaborate in order to find new ideas or actions, rather than rely on his own intelligence, does it too: he mobilizes collective intelligence. This is also very popular in many theories around innovation and creativity these days.

But even in organizations where one of these two trends develops, I see disappointment: people in the field rarely produce an idea worth implementing as such, and teams working on creativity rarely come up with an idea worth implementing. If proponents of one or the other end up with deception, I believe it is due to a misunderstanding: collective intelligence produces improvement in operations but it is not magic, it does not produce instantaneously innovation, it only breeds innovation. But it takes time, sweat and toil.

Toil (and brains, but not just genius)

Collective intelligence uses all the brains available. They all work similarly, but each brain has its own strength and weaknesses. Some of them are good at gathering information, some of them connect information, some of them possess knowledge, some of them can solve problems, some of them build a vision, and a few invent new solutions… The difficulty is to use all the strength available and get round the weaknesses. This takes hard work, to gather information, connect information, identify opportunities, build a vision and a solution to implement it, solve all the problems until it is finally fully implemented.

Sweat (and guts, and humility)

Even when everybody contributes, with brains and work, no evidence appears like magic, no obvious idea flashes like the polar star. The first solution is never the good one, the first obvious idea is rarely the hidden golden egg. Most successful start-ups have gone through rough seas at one point or another: they have rolled-up sleeves, and gone back to the workbench again and again. The path from an idea to an innovation goes through trial and errors, and a lot of sweat. And it takes humility and persistence: humility to admit mistakes, persistence to correct them.

So please, mister CFO, don’t shoot ‘em dead to quickly because they say “I don’t know yet”, or “I was wrong”…

Time

“He’s gone tell us that it takes time to find something”. Yes indeed, and no. Collective intelligence immediately produces significant improvement: “continuous innovation” for products, services and processes, with a clear improvement in operations efficiency. Because people start solving their own problems, and stop doing stupid things. Collective intelligence also produces quickly a fair amount of “incremental innovation”. Because people are eager to do better, and usually have held back a fair quantity of “not so bad ideas”.

But radical innovation takes time, and so does “rupture”. Because it starts with a small, odd, eccentric observation or idea, which will remain overlooked, underestimated, ill-rated, until other work, one day, will give it some sense and make it shine. And this is why I say that there is a winning approach: the one that will give time for the best ideas to grow, and go through the standard four phases of any innovation.

It may suit you or not, but it is so: it takes 9 months to make a child, and 22 months to make an elephant calf.

The four phases

History demonstrates that innovation goes through four phases: perception, maturation, resolution and propagation. Be it a service or a product, the “working prototype” appears to the public in the third phase (when all problems are solved), and gathers all our attention. The “working prototype” has one or a few fathers, who look like geniuses. As a consequence, the other three phases remain underestimated and ill-organized in most organizations. And these are the phases where collective intelligence makes the difference.

The first phase is a phase of “perception”, starting with a massive amount of information: a bit of knowledge, some observations, an unsatisfied need, a dream, an event, a smell, a piece of statistical data, a personal feeling, an emotion (anger, frustration, pleasure…). And in the end, some of this indistinct information aggregates around one topic…

The second phase is a phase of “maturation”. Bits of information connect. It comes through questions: why did we see that, what is behind the data, what triggered this comment, why doesn’t this work well, why, why, why…? (Socrates says: 5 “why” minimum). There is often no obvious answer, but after a while, evidence surfaces. Not evidence of a solution, but evidence of an opportunity that smells good enough. An opportunity that brings together a concept, answering a need, with a first sign of a solution that may be viable (I can hear people whispering “profitable”, but wait, it will come in due time).

The third phase is resolution. First meaning of resolution: decision to go further. It smells good enough to explore further and start investing a bit. Second meaning of resolution: solve implementation problems. That is where R&D is needed most! “R” for “research”, and “D” for… “design”. If it’s innovative, it means that we don’t know yet how to do it! So we need to find out a way to implement, to satisfy a customer potential need. That’s where numbers will appear (cost first…).

The fourth phase is propagation. It’s the poor relation of innovation… too often overlooked. This is when non profitable innovations must be killed. But before they are killed, they must be given a chance to be profitable. R&D is needed again, but this time, “D” stands for development of a viable industrial implementation on a large scale. And Finance becomes king, as “cash is king” and innovation without cash in the end is really an efficient way to go bankrupt (my experience). Propagation is the phase where the innovation must be adjusted to reach a large audience and generate profit. Propagation is where the problem is not anymore the solution designed in the third phase, but the way it will reach all its intended audience, profitably.

What about Sales and Marketing?

It is either always there in all 4 phases, or completely absent! When innovation is for the end-customer, marketing must be on board as of day 1. But innovation is not meant to be for the end customer, just for any customer, be it internal or external. But even when innovation serves an internal client, the methods of sales & marketing should prevail, to help reach the final goal of an innovation: make profit.

What comes next?

The right approach is not sufficient. Each of the four phases needs structuring. There are tools, skills and people, that needs either to be identified and selected, or grown and developed: for collection of information, for treatment, for opportunity identification, for maturation, for problem solving, for final design and “sale” of the nascent innovation, for large scale development.

These skills, tools and people are specific to innovation as they need to develop capabilities which are contrary to standard operations: autonomy, flexibility, risk, right to fail, collaborative work, imagination… (Standard operations favor control, rules and processes, planning, standards, “zero risk” and individual excellence).

For what we see in organizations, there is a specific formula for each group, no “one fits all” solution. But all formulas have one thing in common for sure: a specific state of mind. What kills innovation is fear: fear of judgment, of failure, of poor individual performance. Fear kills this little spark that all people contributing to innovation have in their eyes. Fear freezes brains. I know one thing that can defeat fear: fun. Sharing and growing ideas, giving birth to an innovation take sweat and toil, but it is a pleasure. Whatever approach you choose, if the consequence is that people enjoy 10% of their working time dedicated to doing things differently, then, the result will show on the bottom line.

About the author: Olivier Pujol has worked over 23 years in many countries, positions, and companies. He has conducted business in 12 European countries, in Africa, North America, South America, and Asia, for companies like Schlumberger or Honeywell, as well as SMEs and start-ups. He has been in the position of CEO, COO, field manager, strategy and M&A specia list, business developer, and consultant. He worked on offshore platforms, in the jungle, but also in board rooms and electronic labs.

Over the years, Olivier has specialized in two fields:

• Management of organizations (with the hindsight of many sectors, company policies, and a long practice of management)
• International development of innovative products and solutions (after experimenting himself the challenge of selling innovation)

Olivier holds an MSc of l’Ecole Centrale de Paris, and an MBA from Insead. He can speak 5 languages (French, English, Spanish, Portuguese and German).

Export is nowadays not anymore a “nice to have”, but a necessity for innovative SMEs. It goes through building an international export culture and contracting local executives.

The Global Innovation Index 2011 indicates that countries like France and Italy are lagging behind other equivalent countries in terms of innovation. However, these countries demonstrate a capability to innovate in many fields.

Recently, the French Business Confederation has expressed the concern that French SMEs seemed less capable than others to grow internationally. And the Global Innovation Index ranks France very low for services export (like Italy).

The latter could explain the former: innovation without export remains confidential and has little chance to succeed and generate profitable business.

But exporting is not easy. It takes the willingness to approach each market as a totally new market, in terms of customers, distribution and competition. Innovative companies must enrich their culture with international business culture, mixing foreigners and locals at executive level.

Export is a necessity

Some very large countries have a domestic market large enough to generate significant revenue and economies of scale, ie: profitability.

But in many countries, home markets are not large enough to turn innovation into profitability: international growth is a necessity. Some countries, like former Commonwealth countries, or from the former USSR have a very favorable access to a selected international market. But for most European countries, their previously fast growing domestic markets are not sufficient today in a context of international competition.

Language is a barrier that can be overcome as the Dutch and the Scandinavian have demonstrated. In some countries, export is almost in the genes of the population (Singapore, the Netherlands, Ireland, Belgium…). And they are successful. But other countries do not have the culture to do so, even though they don’t really have a choice: export is a matter of survival today.

Specific needs for export

Success in a country does not make success in another country. Some specific products like small electronics, chocolate bars, shoes or cloths may induce to believe that markets are homogeneous internationally, but at a more granular level, it is not the case. Design is often country specific, but also market structure and market regulation. Crossing borders takes to reconsider all local elements: customer’s expectations, competition and distribution.

Foreign customer expectation

Entrepreneurs immersed in their home market have a natural understanding of their customers’ behaviors and expectations. They can identify new trends and design the right solution. They can complete their intuition getting market feedback and applying well known marketing processes, to gather customers’ opinions, finalize the right offer, and go to market. They know well their distribution network and after a bit of trial and error, they can find the right final packaging for the offer.

Question: how much of this offer is specific to their home market?

Food is the easiest example: eating habits, cooking habits are significantly different in all countries (can you compare Japan, Spain, the US, the UK, India, Morocco or France?) In some countries, people prefer to prepare meals, in others, they buy and cook ready meals. Some like to buy fresh food every day, others long life products once a week. Food chains know this problem well as they are used to adapting traditional recipes to local habits when they export a concept.

It is easy to make mistakes: a car called “Nova”, created in an English speaking country, was exported in Spanish speaking countries under the same name (“no va” means “doesn’t work” in Spanish); the German “Gerber” baby food, could never be sold in France as “gerber” means “vomit” in French.

These are funny obvious cases but many are not that obvious. Each country has its peculiarities. One of our iCEOs(*), about to launch a telecom business in a new Asian country, decided not to trust international marketing analysis covering this country: “I asked a local marketing agency to run a local market study, by fear that I would miss something crucial. And I was right! I would have gone “one-eyed” amongst competitors with good eyesight.”

Local competition

Being in one country at the forefront of innovation does not mean in today’s world that there is no competition abroad. Service ideas are not unique, new products can be created at the same time on both sides of the Atlantic.

Having a competitor on a new market is a good thing: customers are more inclined to make the leap of faith of buying an innovative solution if there is a diversified choice already. But ignoring a local competitor can be a bad mistake, as he has the natural understanding of is native market. In addition, when a foreign company arrives on a new market, it boosts local potential competitors who can catch up thanks to their intimacy with local customers and distribution. Local market expertise is a necessity when developing abroad.

Foreign country distribution

One of our iCEOs described a typical situation: two soft drink companies developed almost simultaneously in an Eastern European country; one hired local executives, and quickly established a dominant position, while the other, with mostly foreign managers, stalled. It wasn’t until the second company “poached” local executives from the first company, that they regained a market share more consistent with their international market position.

Most countries have subtle specificities when it comes to distribution that international managers may not always identify. A multinational industrial company with 35 different business lines found out that for some businesses, the global strategy had to be specific for targeted countries, because of local distribution peculiarities (different habits for wholesalers, retailers or installers, 2 tier distribution in some countries, 1 tier in others). They could identify it because they were strongly established in each country, and followed their local executives experience and knowledge.

Local executives may also be aware of local regulations, or have political contacts enabling them to influence local regulations or simply approval by government bodies.

Creating an international culture for export

In order to address these challenges, innovative companies need to build an international business culture, as early as possible in the export process.

It is sometimes difficult for SME top executives to trust and hire a foreign executive in the target country. Prejudices are engrained and even sometimes justified! Moreover, language barriers can make it difficult for the recruiting company to perceive the real competence of a foreign executive.

But there are executives with either bicultural competence, or a strong international business culture in addition to their local business culture. The problem is to find them. This is what a natively international recruiting network can provide: identify, select and propose these profiles.

In addition, exporting entails major financial risks. Hiring a full time executive too early is somewhat hazardous. In order to mitigate the risk, SMEs need flexibility: the possibility to temporarily contract these executives and go for permanent recruiting only when success is in sight and when the personality match is confirmed.

About the author: Olivier Pujol has worked over 23 years in many countries, positions, and companies. He has conducted business in 12 European countries, in Africa, North America, South America, and Asia, for companies like Schlumberger or Honeywell, as well as SMEs and start-ups. He has been in the position of CEO, COO, field manager, strategy and M&A specialist, business developer, and consultant. He worked on offshore platforms, in the jungle, but also in board rooms and electronic labs. Olivier holds an MSc of l’Ecole Centrale de Paris, and an MBA from Insead. He can speak 5 languages (French, English, Spanish, Portuguese and German).

Consultants with experience and hindsight can help executives make the right decisions and implement them for success

“Success is 51% good decisions versus 51% bad decisions”. But actually, when making the “post mortem” analysis of a failure, few business decisions can be singled out as “bad”. Some weaknesses in the decision processes may explain how a rationally “good” decision may not be “right”. And these weaknesses can be overcome.

Weaknesses in the decision process

Incomplete decisions

1. Incomplete information: When information is incomplete, decision may look good, but be wrong. What if a new regulation is about to change the market situation in a country that you don’t know well? What if you are missing a subtle yet crucial element of customer behavior in a foreign country? I once was expecting a mandatory administrative approval that seemed a small hurdle on my way, as there was no doubt I would get it; I did not know that, for historical reasons, it would take 2 years… But when preparing for a crucial decision, we also must allocate the time available to gather necessary information. And it is far from obvious to know when we have covered all the crucial information.
2. Cultural biases in unclear situations: Most decisions are not a choice between “yes” or “no”. And even then, “pros” and “cons” are not separated by a large margin. Evaluating a situation entails a lot of subjective judgment, possibly affected by cultural biases: years of competition with one company may induce to overlook another threat; a focus on technology may affect the perception of non technological parameters. Here are a few examples where challenging evidence can be crucial:
   • A major distributor is willing to take your product; is it a good enough reason to go for it?
   • You are heading a small company; would you consider using an international mammoth to help you grow, even though he could be a competitor?
   • You need funding and you are naturally turning towards national VCs; what if international fund raising was easier and bring unexpected additional benefits?
   • You have started expansion in the US, but you need more growth; would you consider trying Asian government agencies in countries that are on the other side of the map?
     
     In case of a crisis, emotional reactions will bias even further the decision process: some managers may become tougher than necessary, while others may not be able to adhere to tough decisions.
     
3. Ban on intuition: Intuition is merely a consequence of an unconscious analysis of information and processes fueled by one’s experience. This does not mean non-rational, but it means that one cannot make it explicit. An independent boss may impose decisions based on his intuition. But most decisions are collective (from Boards to project teams) and leave no room for intuition. Explain a posteriori why one trusted a wrong intuition is a risk that no manager can take, let alone a decision body. Decisions must be based on facts and arguments that can be demonstrated to the group. Right intuitions that may make the difference between a good decision and the right decision have no room in Board Rooms.
4. Short term perspective: Masters at chess and go are the ones who can best anticipate possible moves and evaluate the resulting situation. Business is exactly the same, and complexity is at least equivalent. But the world has evolved: the environment changes faster than ever: a revolution like Gutenberg’s printing press, invented in Germany, took decades to conquer Europe whereas the iPad was introduced worldwide in less than 2 months. Managers now favor reactivity, innovation and adaptability over long term planning. But fast changing world only means less time between crucial moves. It does not reduce the complexity. We used to have 3 weeks to produce a 5 year strategic plan, we now have 3 days to produce a 1 year tactical plan. Time pressure increases the risk of “apparently good” decisions: less time to consider a wide scope of parameters, to evaluate positions, to challenge cultural biases.

Decisions not made

Good or bad decisions are not the only thing to consider. There are decisions that are never made: options we do not consider (see before), moves that seem so obvious that we do not even question them and submit them to decision.

At the end of the 90s, the capital venture backed entrepreneurial model was so popular that most innovative companies adopted it without ever questioning the fundamental needs of their business. This model was not adapted for every business. Similarly, transferring a technology from one market to another using the same distribution model that worked once may seem an obvious and unquestionable movement that would not survive in fact any thorough analysis.

Decisions not fully implemented

Approving intellectually the soundness of a decision does not mean being able to implement it with full force and efficiency. And it may make the difference in the end. A good decision only half heartedly implemented may result in delays, and eventually cause a bad situation.

An entrepreneur who has demonstrated his ability to develop aggressively his business will only reluctantly follow a wise decision to slow down. A start-up CEO asked to stop technical development and invest massively in sales and marketing will find it difficult to implement the change, if his background is essentially technical.

Improving chances to make the right decisions

Leave room for experience

Management experience helps questioning what may seem obvious. It also helps perceive the consequences over time of a decision. Operational experience enables to evaluate what actions must follow decisions and how they should be implemented to reach the goals.

Experience is not sufficient without hindsight. Hindsight comes when people take the time to stand back and analyze (something people do more often about failures than about successes). Hindsight adds to experience the capability to formulate in rational terms what is only an intuition for others.

Contract experienced executives

I remember a very short sentence from one of my shareholders, who had been invited to our Board meeting: “You will never be in place on the shelves early enough for Christmas”. This warning was ominous and right. Had we listened to him, we would have changed drastically our strategy and avoided a crisis.

The competence (experience) was there and available, but we did not include in our decision process to seek after it. The same sentence, from a contractor paid to deliver his wisdom would have probably drawn more attention.

Experience in decision and implementation, analytical skills and hindsight are a precious resource to help executives make and implement the right decisions. These are the people we select for our short consulting missions.

About the author: Olivier Pujol has worked over 23 years in many countries, positions, and companies. He has conducted business in 12 European countries, in Africa, NorthAmerica, South America, and Asia, for companies like Schlumberger or Honeywell, as well as SMEs and start-ups. He has been in the position of CEO, COO, fieldmanager, strategy and M&A specialist, business developer, and consultant. He worked on offshore platforms, in the jungle, but also in board rooms and electronic labs. Olivier holds an MSc of l’Ecole Centrale de Paris, and an MBA from Insead. He can speak 5 languages (French, English, Spanish, Portuguese and German).

Towards a new form of consulting?

The future of SMEs goes through their ability to develop innovation and international business. This requires from top managers in these companies to be more aggressive and take more risks than ever: new offers, new products, new subsidiaries or acquisitions in foreign countries, new partners…

Taking risks is inherent in top management role, but it can be comfortable at times to get professional advice. Companies may use consulting services. Another solution is to rely on experienced managers, who can provide advice at a minimal cost.

Emerging needs in consulting

Companies traditionally contract with consultants when:

• They need extra brain power (strategic analysis, HR or legal problem, communication or marketing operation or technology expertise)
• They need external professional resource for design and sometimes implementation of a specific solution (global strategy definition, implementation of a new IT system, setting up of a new structure…)
• They need to solve an internal problem
• They want to “nurse” management (counseling or coaching)

3 parameters may influence the choice of consulting:

• Time: speed is more and more crucial in a fast evolving world
• Scope: local (same country), cross-border (export), or global
• Cost (not only the final amount, but also the phasing)

The market for consulting is well organized to answer most of these standard needs, but no so well prepared to offer solutions for the new emerging needs, as a consequence of evolving business necessities (time – international).

I will characterize these new needs by distinguishing what can be considered as the “high end” and the “low end” of the business:

“high end” or traditional

The customer is a large firm, the mission has a company wide scope and requires external resources, working for the headquarters. The time frame is months to years, and costs are in the range of millions of Euros.

The mission requires a strong and well established methodology and either very strong analytical skills and market intelligence, or a deep knowledge of an IT solution. It will mobilize a full consulting team, on-site or off-site.

“light” or emerging

The customer is a small to medium size company, or a subsidiary of a large company, facing an operational issue, possibly involving two different countries. Time is super critical (weeks), and accepted cost is in the tens of thousands of Euros.

Most of the resources are within the company. The customer does not want a nice methodology or theory, but good understanding of his specific problem, quick analysis, pertinent advice in both countries, from someone with strong operational experience, and potentially, a follow-up either through consulting or through recruiting. Each dollar spent over time must bring visible value immediately.

Standard consulting offer

For “high end” missions, large consulting firms have established over the years standards of quality which make them perfect resources for board level problems. Partners chase deals, young professionals do the analytical work, and managers drive the project and present the results.

These firms have produced over the years smaller size consultancies, created by defectors applying either the same methodology or their own version.

For “light” missions, these consultancies have neither the people nor the processes to do the missions, and their costs are prohibitive:

• Analysts are mostly young and bright professionals just out of school, selected for their analytical skills. As illustrated in several “career management studies”, they are not specifically interested in consulting, but in adding a prestigious line on their resume. Project leaders and managers are former analysts who have demonstrated their skills and willingness to climb in the hierarchy. They do not have most often an operational experience. Associates, partners and senior partners are either lifelong consultants, or former senior executives with a good network and a fat address book, recruited for business development. The actual operational experience of such teams is close to nil.
• Processes are heavy: partners negotiate a deal, the mission must be well defined, to protect both sides legally, and it takes time to mobilize the team, and the customer has little choice about the people who will execute the mission.
• Such structures have heavy costs. One day of an associate is already in the range of 10K. And his job is to sell as many junior days as possible. With even only a few junior days, all missions must be in the range of hundreds of k€, far above customer capacity.

“Light” missions are not a business for standard consultancies.

Emerging structures for “light”

The entrepreneurial frenzy at the turn of the century, a new generation of managers has been given the opportunity to grow and mature quickly. They have seized opportunities to create their business, or to develop internationally their business to take advantage of globalization.

The beginning of the 21st century being slightly less inspiring, first with the end of the bubble, then with the crisis, thousands of these professionals are now available.

These people have demonstrated their skills: intelligence, will power, ability to work at board level as well as to get their hands wet, pragmatism and international competence… And they have accumulated through their successes and the vast scope of difficulties they have had to overcome, a strong experience and most important: hindsight.

There is a consequent, worldwide and untapped reservoir of skilled and mature managers, able to provide high value to customers, provided that the offer can meet the need!

These managers cannot join large consultancies, as the cultural gap is too large. Instead, they now try to gather in groups of 5 to 30 to address the “light” consulting needs. These structures can be cost efficient and very reactive, but with two limitations:

• The variety of competences available to customers
• The efficiency of the professionals as consultants

Variety of competences

Each customer has very specific needs (business problem, sector, size, nature of solution, personality…). When such small consulting agencies only have 5 or 10 available profiles, it is very tempting to oversell the experience of a consultant to match customer’s demand (“You have worked 2 years for Shell when you were 25? Good, you’ll be our oil industry specialist…”, or “My consultant has been to China twice, he knows the country well!”)

Efficiency of consultants

Being experienced and knowledgeable is not sufficient. Listening, understanding, analyzing, finding the appropriate experience in one’s background, having enough humility not to impose but to propose, but yet enough confidence to convince… This is not granted to everyone. And most important, it is mandatory to find the good fit with the customer, who is himself a “boss” with a strong character… There must be no question at the end of the mission that the customer is ready to pay for the value that was given to him.

How to create a valid offer for customers?

To overcome both limitations, the main solution is to have a large variety of profiles to propose to customers, while respecting 3 mandatory necessities:

• High quality profiles only, to ensure the quality delivered to the customer
• Light and efficient administrative process, to be time and cost effective
• A highly flexible offer, to provide tailor made solutions for both consultants and customers

A large and reliable pool

Creating a large pool of consultants is not very complex, as all have ties in some communities on Internet (alumni, forums, investors networks…).

What takes time, competence and patience is not to gather resumes, but to select and qualify the profiles, and to feed a database with the appropriate data for future search. It may take years, but it then provides the “raw material” for an adapted answer to today’s “light” consulting demand.

Light and efficient process

Speed and cost effectiveness are key. And the business is in essence global. The administrative process must be light enough to propose a choice of adapted profiles in a matter of days or weeks. This process must adapt to all countries, as customers and consultants can be located or operate anywhere.

Flexible offer

It is not only a matter of adapting to customer needs, but also to minimize costs. Adapting to customer needs means being able to offer 3 days missions or 3 months missions. It also means to support the customer until full satisfaction, from very short mission to eventually permanent recruiting.

Last but not least, it also means being creative in the mission’s format: a final report is not necessarily a Power Point presentation at the customer’s headquarters, with people traveling miles, and paying for hotel rooms. It can be a 4 hours video conference call (or working session).

Conclusion

“Light” consulting can make the best out of modern communication means:

• Match customers and consultants all around the world
• Offer instantaneous answer, and tailor made service
• Provide high returns for a reasonable and progressive investment.

About the author: Olivier Pujol has worked over 23 years in many countries, positions, and companies. He has conducted business in 12 European countries, in Africa, North America, South America, and Asia, for companies like Schlumberger or Honeywell, as well as SMEs and start-ups. He has been in the position of CEO, COO, field manager, strategy and M&A specialist, business developer, and consultant. He worked on offshore platforms, in the jungle, but also in board rooms and electronic labs.