Friday, April 20, 2012

Strategic Planning Analogy #447: You’re Buying People

Years ago, I was working on a deal to do a joint venture with a company in Korea. We had all sorts of lawyers on our side helping to craft the proper legal document. We noticed that our potential Korean partners were not using a lot of lawyers. We asked why.

The response? They said that they would rather save their money and have us spend all the money on legal issues. Then, at the very end, and only at the very end, would they bring in their own lawyer to help make the final changes.

We thought that was a bit risky on their part, but we went along with it. After all, that put our lawyer in control of the contract, so we figured we were getting a better deal.

Later on, as we started preliminary work on the joint venture, we learned that within the large family Korean business with which we had been negotiating, there were many different family factions. As it turns out, we had negotiated with the wrong faction of the family. As a result, the joint venture failed.

We may have had a superior legal document, but since it was negotiated with the wrong people, the deal was worthless. In the end, we took the bigger risk by relying on lawyers rather than in understanding the people.

A lot of strategic planning involves doing deals with others. It could be joint ventures, mergers, acquisitions or some other arrangement. In doing these deals, it is easy to fall into the trap of seeing the deal as a legal or financial arrangement between two companies. Under that assumption, you would do as we did at that company in the story and put the emphasis on making the best legal arrangement we could. In other words, do a good job at doing the deal.

But successful strategies are not just about doing deals. Doing the deal is just a means to an end. Supposedly, the deal was done in order to accomplish a strategic objective. And supposedly, that objective could be better accomplished working with this partner rather than by doing it alone.

So, in reality, the most important aspect is not the creation of a deal between two companies, but in the creation of great working relationship between two groups of people. For, as we found out in Korea, if you are connected with the wrong group of people, it is irrelevant how good the deal was structured. The work was not going to get done.

So when structuring a strategic plan, don’t look at it as a series of deals which need to get done between companies. Look at it as a series of objectives which must be done by people, regardless of who they work for. Then focus on ways to get the best people in the best situation to get the best outcome.

The principle here is that companies are made up of people. And if you want to do great things, you need to get the right people together in the right way. The best deals are not the deals with the best contract or the best pro-forma financial model. No, the best deals are the ones with the best results. So, rather than fretting primarily over the words and numbers on the piece of paper, focus on what creates the best results—the people and their working environment.

Listed below are a few examples of how to put this idea into practice.

1. People Due Diligence
Before deals are done, most companies will do due diligence. In other words, they will investigate the company before purchasing it. A lot of the items on most due diligence lists have to do with looking for hidden risks. The idea is that you don’t want to purchase a company with a lot of unknown legal or financial liabilities. Therefore, companies have their legal and financial experts “scour the books” of the acquisition target (that is, read all the legal documents and financial reports to make sure you know what you’re getting).

This is not a bad practice, but it is not enough. What you are purchasing most of all (in most cases) are the people who work for the company, along with the culture and the practices by which those people work. That’s where the biggest risk lies. The company may have wonderful documents and great balance sheets, but if the people, the culture and the practices are wrong, it really doesn’t matter. The work won’t get done. Therefore, the main focus of due diligence should relate to the people, practices and culture.

I can think of more than one occasion in my career when I was negotiating with another company and had to tell my superiors that we needed to stop the negotiations right away because we are dealing with the wrong people. They were untrustworthy and/or had questionable business practices and/or the culture didn’t fit. It was useless to work any further on hammering out a deal, because you could never work well with them under any contractual scenario.

So make sure your people due diligence is just as thorough as your financial and legal due diligence (if not even more thorough). My Korean friends in the story understood this and put more emphasis on people and relationships than they did on having hoards of lawyers trying to protect them with a piece of paper. If we had done the same, our people due diligence would have shown us that we were negotiating with the wrong branch of the Korean family.

2. Get the A Team
Over the years, I have dealt with a lot of consultants and financial advisory companies. People will ask me which are the good companies. I always answer by saying, “If you get the A Team, they are all good. If you get the B Team, they are all bad.”

In other words, you are not really doing a deal with a company, you are doing work with a group of people. If you get the wrong people, it really doesn’t matter which company they came from.

Therefore, when negotiating with consultants, financial advisors, other service companies, or potential joint venture partners, don’t just focus on terms and prices. Focus on the people. Request that particular people be a part of the team working with you (and that they spend at least a meaningful part of their time on your behalf). Make it a key condition for doing the deal. Put it in the contract.

3. Think Through the Process in Advance
Even if you have great people, you can still fail if the surrounding process and culture is wrong. Therefore, you should consider how the work is to be done before doing the deal. Then you can put the topic of how the work gets done into the negotiations.

For example, the two companies may have differing visions on how to do the work. If you find that out after the deal is done, it may be too late to reconcile the differences.

A key point of contention is often about intellectual capital or proprietary information. How much sharing of knowledge will take place? What skill sets or technology will be contributed? Will your teams be working side by side or will the work be segregated so that the other does not see how you fulfill your part of the deal? Don’t assume anything in this regard. Talk it out in advance.

In addition, by talking out the process during negotiation, one can get a great window into understanding the culture at the other organization. If the cultures are too divergent, it may not be possible to find a great working relationship. And even if you are acquiring the entire company, that does not mean that one can instantly fix such a cultural divide by merely imposing the acquirer’s culture onto the one being acquired.

Remember, companies are made up of people, and the people may resist the cultural change. These people were likely at the other company because they enjoyed that other culture. You could end up with defections, resistance, and demoralization if you push a foreign culture too quickly on a situation.

When you look at literature on acquisitions, a key source of failure is lack of cultural fit. Figure this out in advance.

4. Negotiate With Outcomes in Mind
In the end, success is not the deal but the outcome. Therefore, it may be desirable to negotiate the outcome as part of the deal. For example, some of the price can be pegged to future outcomes. Or outcome incentives can be negotiated as part of the deal. Buyout or separation clauses could be pegged to performance. At the very least, the deal could outline in detail what the outcome expectations are (by party), so at least you are going into the deal with a common goal.

Strategies shouldn’t be focused on doing deals. They should be focused on accomplishing strategic objectives which improve the positioning and performance of the company. This is the ongoing work that is done by the people long after the ink on the deal has dried. Therefore, strategy needs to concern itself with the people and the processes and culture in which these people operate. Otherwise, you will have a lot of deals that get you nowhere. And that isn’t worth a whole lot.

How much of your strategic time is spent on looking at people and culture versus time spent on getting a deal done? Is your desk cluttered with legal documents and financial proformas or is it covered with people and cultural assessments?

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