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|In: Industry Commentary|Last Updated:

Go figure.

The success rate for mergers and acquisitions is now below 20%. And yet, they’re more popular than ever.

Why might that be? Speaking, as a spectator and occasional supporting consultant, it’s because, superficially, they appear to be a way for companies to:

  • Buy customers instead of having to win them.
  • Add new, complementary products without having to undertake the risky business of developing them.
  • Gain access to new regions with different rules of engagement without having to build the abilities needed to do business there.
  • Fool unwary investors by posting year-over-year revenue gains without having actually increased revenue.

Superficially, that is, acquisitions look like a lower-risk alternative to organic growth.

And so, in spite of overwhelming evidence that this has nothing to do with How Things Work Here on Earth, mergers and acquisitions continue to be one of the most popular business growth strategies.

This is a big, complex topic, surrounded by plenty of AFG. Over the next few weeks we’ll talk about some of the practicalities of achieving M&A success … or at least, avoiding M&A failure … that don’t get a lot of attention from the standard sources of business wisdom.

Starting with this one, which should be tattooed on the foreheads of everyone involved: Above all, do no harm.

Or, if you prefer Aesop to Hippocrates, Don’t Kill the Golden Goose!

Take, for example, this common mistake:

An enterprise-scale company acquires a small entrepreneurship to add its products to the enterprise portfolio.

The small and profitable entrepreneurship succeeds, it turns out, in part by running lean, doing without much of the bulletproofing needed by large enterprises but not entrepreneurships.

But in the pursuit of fairness, the enterprise loads up the entrepreneurship — now a separate business unit — with all that bulletproofing and the general and administrative overhead charges that go with it.

Superficially (there’s that word again) this is reasonable: Instead of running its own email system, for example, the newly acquired business unit gets to use the enterprise unified communication system.

Except that the entrepreneurship didn’t run a unified communication system. It used Slack, which might or might not scale to enterprise proportions but which is dirt cheap and was very good at supporting the collaboration that made the entrepreneurship work.

The result: Disruption during the transition, and less-effective collaboration paid for by higher overhead costs once the transition is done.

Acquiring companies make this sort of mistake all the time, usually by failing to think through the most basic element of enterprise business architecture — the desired level of unification.EnterpriseArchitectureQuadrantChart
As shown in the diagram, when an enterprise acquires a business it has three types of decision to attend to: What to standardize, what to integrate, and what to leave alone.

A company standardizes when all business units have to use the same (as examples) core accounting software, chart of accounts, and office supplies provider. Standardization usually results in nicer discounts for the standardized items. Theoretically it should reduce support costs as well — an Integration benefit that’s a frequent source of intense disappointment.

Unlike standardization, where everyone gets their own copy of the standardized item, with integration everyone shares the same copy. “Copy,” by the way includes such things as shared IT support staff, which is why expectations of lower support costs so often end up unfulfilled.

Here’s why. Imagine the entire enterprise standardizes on the Microsoft suite of productivity and collaboration tools — MS Office, Exchange, Outlook, SharePoint, and Skype for Business. In theory this means IT support staff only need to learn how to support this one collection of products instead of needing, say, Slack expertise as well.

The disappointment arrives when it turns out staffing ratios depend on the number of people needing support, not the number of products needing support. If IT needs 50 support staff if it’s standardized on the Microsoft product line, needing 45 to support the Microsoft products and 5 to support something else is no more expensive.

Back to the big picture: Whether you should standardize an acquisition, integrate it, some of each, and to what extent all depend on how the enterprise plans to operate them in the future. If it wants to own and run the same successful business it just bought, the best solution is to mostly leave it alone — to run as a holding company so as not to kill the golden goose.

But it’s all contextual: If an enterprise buys a failing business with promising products or access to promising markets, it should arrive at a completely different business architecture.

* * *

In case you have a suspicious nature and think I’m writing about Dell’s coming acquisition of EMC, or NTT DATA’s coming acquisition of Dell Services, nothing could be further from the truth.

Among the reasons: I have no involvement in the former and as far as the latter is concerned I’m just a passenger on that train — I don’t know anything more about either transaction than you do.

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|In: Cognitive Enterprise|Last Updated:

Dialog from Blazing Saddles:

Gabby Johnson: I wash born here, an I wash raished here, and dad gum it, I am gonna die here, an no sidewindin’ bushwackin’, hornswagglin’ cracker croaker is gonna rouin me bishen cutter.

Olson Johnson: I’m particularly glad that these lovely children were here today to hear that speech. Not only was it authentic frontier gibberish, it expressed a courage little seen in this day and age.

And so it is that some of my colleagues and I have added the acronym “AFG” to our vocabulary, for “authentic frontier gibberish.” There are skeptics who might want to apply the AFG seal of disapproval to some of the more vague and less useful discussions about Digital and why it matters to modern businesses.AFG

The AFG is unfortunate, because the Digital business model fits nicely into a list of about twenty we developed some years back at my old consulting company, IT Catalysts (credit where it’s due — our starting point was Michel Roberts’s excellent Strategy Pure and Simple (1993)).

At the time we called the business model in question the Technology/Competency model. The idea: Take something your business is already good at and find new, marketable uses for it. In The Cognitive Enterprise Scott Lee and I made it the third part of our Customers/Communities/Capabilities formulation, “capability” being our now-preferred term for “competency.”

And companies that adopt this business model don’t stop with taking advantage of the capabilities they’ve already mastered. They take the next step, making strategic decisions about what new capabilities to build, and for that matter which existing ones are declining in importance and should therefore be sunsetted.

Enter Digital strategy. Shorn of the AFG, adopting a Digital business strategy means using newly emerging or under-exploited technologies to build new business capabilities, which, once mastered, can be used to bring new products and services to market quickly, because so much of what’s needed to bring them to market is already in place.

Simple example: As a consultant, I’ve developed a decent bag o’ tricks for meeting facilitation. I’ve also developed a reasonably good set of techniques for taking strategic intent and turning it into a program of action.

These are, I think, two of my Capabilities, and if you disagree please don’t disabuse me of my conceit.

The point is that with these two Capabilities in hand (and some others, but the point here isn’t to extol my numerous virtues) … where was I? With these existing capabilities I’m in a position to develop consulting services for a variety of specific topics as the need arises and their potential catches my attention.

Digital, for example.

So … if Digital business strategy is a subset of the broader-based technology/capability-driven business model, which is the big deal, Digital, or capability-driven business models in general?

I’d vote for capability-driven business models, with this proviso: There aren’t many new business capabilities to develop that don’t require the use of new and interesting technologies.

But still, what matters (I think) are the capabilities more than the Digital technologies that enable them. The reason goes back to the ongoing, even accelerating trend of business temporal compression (AFG?). While it depends on what your business sells and who it sells it to, in many cases marketplaces are changing fast enough that traditional approaches to strategic planning just can’t keep pace.

As a general rule, the value of a capability will last longer than specific products, product lines, or even product categories. And so, building strategic plans around capabilities makes the most sense for many and perhaps most businesses today.

Take smart products and the Internet of Things (IoT if you want to be cool). Imagine IoT isn’t one of your capabilities, but a competitor has mastered it.

We in IT have become accustomed to products capable of detecting and reporting defects before they cause overt outages.

Imagine consumers start to expect all their major purchases to do this. This isn’t unlikely — customers might not be sophisticated about technology in all its gory detail, but they’ve become pretty savvy about what technology can do.

If you’ve mastered the IoT, you can add this feature to all your products fairly easily. If not, good luck — you’ll have missed a major marketplace shift.

Building a business that’s adept at detecting marketplace shifts early and adapting to them quickly will prove to be the path to sustainable success.

My guess is that Digital will part of the mix, because Digital technologies are what will give businesses the new capabilities they’ll need to adapt at the speed of customer expectations.

* * *

On an entirely different subject: I gave a speech last November at PhreakNIC in Nashville, about the Embedded Technology Generation and its implications. It isn’t exactly TED talk material, but if you’re interested, you’ll find it here.

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