How to make mergers and business sales a success - Articles - Employee Benefit Adviser

How to make mergers and business sales a success - Articles - Employee Benefit Adviser

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• Evaluating potential candidates for a business merger is about finding business partners that have complementary practices. That way both businesses benefit from not having to spend time or money on building a new identity.
• Most merger failures result from poorly defined roles and responsibilities; the incompatibility of the principals; the lack of a shared vision for success; or no clearly defined, post-merger implementation plan.
• What you think your business is worth needs to be realistic and defensible.

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The myth of smooth earnings

Many executives strive for stable earnings growth, but research shows that investors don’t worry about variability.

McKinsey Quarterly
FEBRUARY 2011 • Bin Jiang and Tim Koller



Executives like their earnings smooth—even in normal times, they will go to great lengths to achieve steady growth in earnings per share quarter after quarter. As the economy emerges slowly from recession, we encounter even more deference to the conventional wisdom that investors prefer smooth earnings growth and shun earnings volatility. Those who make such claims have long cited stable earnings growth as a rationale for strategic actions. …
Our research shows that these efforts aren’t worthwhile and may actually hurt companies pursuing them. If investors really preferred smooth earnings, you would expect companies that achieve them to generate higher total returns to shareholders (TRS) and to have higher valuation multiples, everything else being equal. Yet using different techniques, company samples, and time frames, all the studies we examined¹ reached the same conclusion: there is no meaningful relationship between earnings variability and TRS or valuation multiples.
To illustrate these findings, we compared the TRS of 135 companies with above-average earnings volatility and the TRS of 135 companies with below-average volatility (Exhibit 1). While the median return of the low-volatility companies is higher, the statistical significance of the disparity vanishes when we factor in growth and returns on capital. More interesting, however, is the fact that plenty of low-volatility companies have low TRS, just as plenty of high-volatility companies have high returns. You can also see that the very volatile companies have more extreme TRS results.

Exhibit 1: Earnings volatility and TRS are not linked.

Investors, we believe, realize that the world isn’t smooth. … In fact, sophisticated investors tell us they get suspicious when earnings growth is too stable, since they know that isn’t how the world works.

Image via WikipediaPart of the explanation for the results of our research is that smooth earnings growth is a myth; almost no companies have it. Exhibit 2 shows five that were among the least volatile 10 percent of all large companies by earnings growth from 1998 to 2007. The one with the most stable earnings was Walgreens, with annual earnings growth between 14 and 17 percent from 2001 to 2007. But after Walgreens, we quickly ran out of companies to compare. We looked at 500 others and couldn’t find any with seven such years of steady earnings growth. In fact, we could find only a handful of cases where it held steady for at least four years.

Exhibit 2: Even among the least volatile companies, earnings growth is rarely smooth.

Most low-volatility companies follow a similar pattern. Anheuser-Busch, for example, had four years of steady growth, around 12 percent, from 1999 to 2002. Then, after 7 and 8 percent growth in 2003 and 2004, respectively, the company’s earnings dropped by 18 percent in 2005. This pattern is common. Of the 500 companies we examined, 460 experienced at least one year of earnings decline during the period.
Investors expect the natural volatility associated with industries in which companies participate. ... Companies therefore shouldn’t try to reduce natural volatility, especially if it means reducing expenses like marketing and product development.
Nor should they try to reduce volatility through more diversified corporate portfolios. The argument for them is that different businesses have different business cycles, so earnings at the peak of one business’s cycle will offset the lean years of other businesses, thereby stabilizing a company’s consolidated earnings. If earnings and cash flows are smoothed in this way, the reasoning goes, investors will pay higher prices for the company’s stock.
The facts refute this argument, however. First, we haven’t found any evidence that diversified companies actually generate smoother cash flows. … Second, and just as important, we found no evidence that investors pay higher prices for less volatile companies. In our regular analyses for our clients, we almost never find that the summed values of the business units of a diversified company differ substantially from its market value.
Investors expect the natural volatility associated with the industry in which a company participates. Instead of trying to manage volatility, senior executives should spend their time making decisions that fundamentally increase a company’s revenues or its returns on capital.

About the Authors

Cover via AmazonBin Jiang is a consultant in McKinsey’s New York office, where Tim Koller is a partner. This article is adapted from chapter nine of Value: The Four Cornerstones of Corporate Finance, by Richard Dobbs, Bill Huyett, and Tim Koller (Wiley, 2011). Tim Koller is also a coauthor, with Marc Goedhart and David Wessels, of Valuation: Measuring and Managing the Value of Companies (Wiley, 2010).

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Notes

¹ See Brian Rountree, James P. Weston, and George Allayannis, “Do investors value smooth performance?” Journal of Financial Economics, December 2008, Volume 90, Number 3, pp. 237–51; John M. McInnis, “Earnings smoothness, average returns, and implied cost of equity capital,” Accounting Review, January 2010, Volume 85, Number 1, pp. 315–42; and Ronnie Barnes, “Earnings volatility and market valuation: An empirical investigation,” LBS Accounting Subject Area working paper, ACCT019, November 2002.

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Three steps to building a better top team

When a top team fails to function, it can paralyze a whole company. Here’s what CEOs need to watch out for.

McKinsey Quarterly
FEBRUARY 2011 • Michiel Kruyt, Judy Malan, and Rachel Tuffield



Few teams function as well as they could. But the stakes get higher with senior-executive teams: dysfunctional ones can slow down, derail, or even paralyze a whole company. In our work with top teams at more than 100 leading multinational companies,¹ … we’ve identified three crucial priorities for constructing and managing effective top teams. Getting these priorities right can help drive better business outcomes in areas ranging from customer satisfaction to worker productivity and many more as well.

1. Get the right people on the team . . . and the wrong ones off

Determining the membership of a top team is the CEO’s responsibility—and frequently the most powerful lever to shape a team’s performance. …
The key to getting a top team’s composition right is deciding what contributions the team as a whole, and its members as individuals, must make to achieve an organization’s performance aspirations and then making the necessary changes in the team. This sounds straight-forward, but it typically requires conscious attention and courage from the CEO; otherwise, the top team can underdeliver for an extended period of time….

2. Make sure the top team does just the work only it can do

Many top teams struggle to find purpose and focus. …
…Too often, top teams fail to set or enforce priorities and instead try to cover the waterfront. In other cases, they fail to distinguish between topics they must act on collectively and those they should merely monitor. These shortcomings create jam-packed agendas that no top team can manage properly. Often, the result is energy-sapping meetings that drag on far too long and don’t engage the team, leaving members wondering when they can get back to “real work.” CEOs typically need to respond when such dysfunctions arise; it’s unlikely that the senior team’s members—who have their own business unit goals and personal career incentives—will be able to sort out a coherent set of collective top-team priorities without a concerted effort….

3. Address team dynamics and processes

A final area demanding unrelenting attention from CEOs is effective team dynamics, whose absence is a frequent problem: … Here are three examples of how poor dynamics depress performance:
The top team at a large mining company formed two camps with opposing views on how to address an important strategic challenge. The discussions on this topic hijacked the team’s agenda for an extended period, yet no decisions were made.
The top team at a Latin American insurance company was completely demoralized when it began losing money after government reforms opened up the country to new competition. The team wandered, with little sense of direction or accountability, and blamed its situation on the government’s actions. As unproductive discussions prevented the top team from taking meaningful action, other employees became dissatisfied and costs got out of control.
The top team at a North American financial-services firm was not aligned effectively for a critical company-wide operational-improvement effort. As a result, different departments were taking counterproductive and sometimes contradictory actions. One group, for example, tried to increase cross-selling, while another refused to share relevant information about customers because it wanted to “own” relationships with them.
CEOs can take several steps to remedy problems with team dynamics. The first is to work with the team to develop a common, objective understanding of why its members aren’t collaborating effectively. There are several tools available for the purpose, including top-team surveys, interviews with team members, and 360-degree evaluations of individual leaders. The CEO of the Latin American insurance company used these methods to discover that the members of his top team needed to address building relationships and trust with one another and with the organization even before they agreed on a new corporate strategy and on the cultural changes necessary to meet its goals (for more on building trust, see “Dispatches from the front lines of management innovation”). One of the important cultural changes for this top team was that its members needed to take ownership of the changes in the company’s performance and culture and to hold one another accountable for living up to this commitment.
Correcting dysfunctional dynamics requires focused attention and interventions, preferably as soon as an ineffective pattern shows up. At the mining company, the CEO learned, during a board meeting focused on the team’s dynamics, that his approach—letting the unresolved discussion go on in hopes of gaining consensus and commitment from the team—wasn’t working and that his team expected him to step in. Once this became clear, the CEO brokered a decision and had the team jump-start its implementation.
Often more than a single intervention is needed. Once the CEO at the financial-services firm understood how poorly his team was aligned, for example, he held a series of top-team off-site meetings aimed specifically at generating greater agreement on strategy. One result: the team made aligning the organization part of its collective agenda, and its members committed themselves to communicating and checking in regularly with leaders at lower levels of the organization to ensure that they too were working consistently and collaboratively on the new strategy. One year later, the top team was much more unified around the aims of the operational-improvement initiative—the proportion of executives who said the team had clarity of direction doubled, to 70 percent, and the team was no longer working at cross-purposes. Meanwhile, operational improvements were gaining steam: costs came down by 20 percent over the same period, and the proportion of work completed on time rose by 8 percent, to 96.3 percent.
Finally, most teams need to change their support systems or processes to catalyze and embed change. At the insurer, for example, the CEO saw to it that each top-team member’s performance indicators in areas such as cost containment and employee satisfaction were aligned and pushed the team’s members to share their divisional performance data. The new approach allowed these executives to hold each other accountable for performance and made it impossible to continue avoiding tough conversations about lagging performance and cross-organizational issues. Within two years, the team’s dynamics had improved, along with the company’s financials—to a return on invested capital (ROIC) of 16.6 percent, from –8.8 percent, largely because the team collectively executed its roles more effectively and ensured that the company met its cost control and growth goals.
Each top team is unique, and every CEO will need to address a unique combination of challenges. As the earlier examples show, developing a highly effective top team typically requires good diagnostics, followed by a series of workshops and field work to address the dynamics of the team while it attends to hard business issues. When a CEO gets serious about making sure that her top team’s members are willing and able to help meet the company’s strategic goals, about ensuring that the team always focuses on the right topics, and about managing dynamics, she’s likely to get results. The best top teams will begin to take collective responsibility and to develop the ability to maintain and improve their own effectiveness, creating a lasting performance edge.

About the Authors

Michiel Kruyt is an associate principal in McKinsey’s Amsterdam office, Judy Malan is a principal in the Johannesburg office, and Rachel Tuffield is an alumnus of the Sydney office.
The authors wish to acknowledge the contributions of Carolyn Aiken, a principal in McKinsey’s Toronto office, and Scott Keller, a director in the Chicago office.
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Notes

¹ For the purposes of this article, we define “top teams” as groups of executives responsible for either an entire corporation or a large business unit or division, but not boards of directors or supervisory boards.

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Why 70% of All Changes Fail

Repeated failures can kill an IT department’s reputation, but these three actions that can help IT leaders build support for their ideas and projects.

Baseline magazine
By Rick Maurer
2010-12-21

Image via WikipediaNearly 70 percent of all the changes in organizations fail—and IT is not immune from that alarming statistic. Every day, good ideas die before they ever get started, and organizations go through the motions of adopting a new system but actually keep using their old system.

Obviously, all these failures are costly, but they are more than that. Repeated failures can kill an IT department’s reputation. This happened frequently in the past, when IT professionals overwhelmed clients with technical jargon and got them to agree to implement things they didn’t understand.

Image via WikipediaWhen the dust settled, many of those projects failed. … Understandably, these failures left a bitter taste in the mouths of potential users of IT services.

Savvy technology departments have learned from those mistakes. Here are three actions that can help IT leaders build support for their ideas and projects:
1. Speak so they’ll understand you.
Smart IT professionals don’t make the client speak computerese. Instead, they use plain everyday speech. This helps internal customers understand your project and become engaged in the process. …
2. Listen and learn.
Smart IT leaders are willing to be influenced. They realize that the internal clients are the real experts when it comes to what they need. The clients may not know what to ask for in terms of process, but they usually know what they want to have happen differently as a result of all this effort. …
The willingness to listen to and be influenced by others may sound simple, but it’s the foundation on which business relationships are built. The clients trust that you won’t try to sell them a solution they don’t need. Consequently, when you do have an idea that could help their productivity or their bottom line, they are far more willing to give you the benefit of the doubt.
3. It’s the people who matter.
Smart IT leaders know that technical changes start and end with people. …
… Some IT professionals inundate people with PowerPoint slides By communicating with their clients, IT leaders can find out why people resist change and why they support it. They can predict how the mere mention of a new enterprisewide system is likely to go over in a specific organization. And they know how to use that knowledge to create strategies that build support for change.
Change is difficult, but it's not impossible. IT professionals who understand that the soft stuff is really the hard stuff get more of their ideas across.
Rick Maurer is a change management expert, speaker and adviser. He is also the author of Beyond the Wall of Resistance: Why 70% of All Changes Still Fail—and What You Can Do About It.

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Eight Ways to Ensure Outsourcing Success

Here are eight suggestions to help make certain that your next outsourcing project will be successful.

Baseline magazine
By David Strom
2010-12-21

Image via WikipediaOutsourcing isn’t new, but, by now, many IT shops have accumulated enough experience to use this service more effectively. According to Houston-based consultancy TPI, even though the overall outsourcing market is down 13 percent from last year, growth remains strong for U.S.-based contracts.

Certainly, the cost-saving motivation is still significant: The cost for programmers and support services overseas can be less than half of what their domestic equivalents can be. Nevertheless, to achieve those savings, you have to know how to work with the outsourcing vendor.
We spoke with several managers who have used outsourcers to build and augment their systems, and we came away with eight suggestions to help ensure that your next outsourcing contact—and contract—will be successful.
1 Make sure there is a strong cultural fit between your two organizations. This involves both the country of origin of the outsourcer and your own corporate culture. …
2 Top-to-top commitment. Senior-level management at both organizations should meet regularly and understand what success means in each other’s terms. …
Just because your top execs meet, don’t expect them to be mind readers. “Don’t expect that your outsourcer has intimate business knowledge about your own operations,” says Scott McDonald, the CTO of FCI USA, in Etters, Pa. Spell it out in terms they can understand.
3 One plan, one goal. Make sure that your outsourcer has the same measurements for success that you do. … Be open with the outsourcer if the arrangement isn’t working out, and figure out what is needed to fix things. …
4 Putting the right work with the right partners. “… Part of this effort involves rightsizing your outsourcing needs, which means making adjustments when it’s time to add or subtract resources as your business grows or contracts. …
Part of rightsizing is understanding what your actual needs are—whether you are outsourcing your infrastructure or your technical skills. …
5 Allow your outsourcer to fail often and quickly. Part of this process involves putting in place checkpoints that are frequent enough to evaluate progress, and ensuring that the outsourcing team is on the right track. …
6 Find the win-win. “We have to make the entire pie bigger, but not at the expense of my outsourcing partner,” says Kim Kehling, the director of global business services for Procter & Gamble (P&G), in Cincinnati. “You don’t get a win-win without thinking of your outsourcer as a partner.”
7 Is the A-team in place? Do you have your best people managing the outsourcer, and do they have the outsourcer’s best team working on your project?…
8 Don’t choose an offshore outsourcer that is too far or too many time zones away. …
Managing outsourcing involves a delicate balance among various factors, including personnel, costs, geography and culture. By using some of these suggestions, you should be able to avoid the pitfalls and enjoy the benefits of outsourcing.

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