Consolidation... In Perspective...
Challenges, Guidelines & Opportunities
' When it works...when it doesn't work.
' Is it good for customer interaction and the CRM industry?
Mergers and acquisitions (M&A) usually occur when the economy is good. Currently, as indicated in my July 2005 editorial, the state of the contact center/customer interaction/CRM industry is extremely dynamic and many companies are growing vigorously.
Conventional wisdom dictates that M&A as well as consolidation can be great ideas, provided:
a. They are well thought out and;
b. They actually work out as expected.
But through many years of experience, we have learned that in practically any consolidation situation, there are plenty of pitfalls ahead as well as opportunities. In the call center industry, for example, one needs to look at prospects for future legislation, the impact of offshoring, technological advances and most importantly, how the nature of the industry is changing virtually all the time.
The fundamental principal of M&A, besides enhancing profitability, should be a new value proposition for customers. In addition, M&A should produce measurable results and synergies, which would be beneficial to both M&A parties as well as users and Wall Street.
All too often, bottom-line matters and cost-savings projections blind management from seeing many problems that could lie ahead.
Traditionally, one always notices that consolidated companies eliminate ten, fifteen, twenty thousand or more jobs and thereby considerable money is saved. The theory is, downsizing or consolidation could add to the bottom line provided it is done judiciously. Unfortunately, all too often, companies throw out the baby with bath water. For example, when a company acquires another company, you are actually acquiring core competency and the know-how that comes with the acquired company, and that is where real value exists. In other words, you are not buying the building or furniture or the technology per se, but you are buying know-how and that usually comes with the people who have contributed significantly to make the acquired company successful. Stated differently, core competency and expertise come from people, which are every company's greatest asset.
Having gone through the merger mania of the 1990s and observing so many pitfalls and costly mistakes made by financial institutions that were buying literally every teleservices agency they could find, we have learned the hard way that without having a sound strategy and following some important guidelines, many companies were destroyed and many millions of dollars were lost in the process. In order to help our valued readers and potential acquirers to learn from the mistakes of the past, I would like to share with you some of the guidelines that will hopefully help our valued readers make judicious decisions when acquiring other companies.
Here are some guidelines to avoid the mistakes of the past:
1. Know what you are acquiring ' When an industry is growing as fast as ours (please refer to my July 2005 editorial), a merger mania is created where every investor likes to jump on the bandwagon and literally buy whatever they can find. We have learned the hard way that 'haste makes waste,' but nevertheless I am amazed at the millions of dollars wasted by those who don't know what they are really acquiring!
2. Extensive due diligence is vitally important ' I recall when in the hasty M&A activity of the 1990s, a major call center company was acquired for about a hundred million dollars. However, the buyers found, after the fact, that the technology in the acquired company was not compatible with other acquired companies within the portfolio. In other words, there was no interoperability between the acquired companies. Obviously, this created a disastrous and extremely costly situation for the acquiring company, which, by the way, did not know a damn thing about the industry, as they were just a group of Wall Streeters interested in making a fast buck. Obviously, this transaction did not work. For the record, the acquired hundred-million dollar company does not exist today!
3. Keep all the key players ' A major mistake made by acquirers is to listen to the bookkeepers on how much can be saved by reducing staff by the thousands. As indicated above, the gigantic mistake is that you are buying a company for the technology and know-how and after the acquisition you are getting rid of the know-how. I simply can't find any sense in this activity.
4. Proper convergence and interaction of the acquired companies are vital ' During the rush to acquire companies in our sector, companies often neglect the importance of appropriate convergence of the acquired company. Don't just look at the numbers and figure out how much you can save by cutting people. Instead, figure out how you can best combine the core competencies of both companies to generate a tremendous synergy. In other words, look at the big picture and ask the question: how can I make 1+1=3?
5. The cardinal rule of corporate cultural compatibility is also vital ' Unfortunately, all too often, many companies rush to acquire a company that seems extremely profitable, hoping that they can improve their own bottom line through an acquisition. Practically none of the buyers pay enough attention to the phenomenal importance of corporate cultural compatibility. Perhaps I can use a chemical analogy to explain this situation a little better. As a trained chemist and chemical engineer, I learned a long time ago that a polar substance does not mix with a non-polar substance. We all have heard the proverbial adage that 'oil and water don't mix.' The chemical reason for that is that oil is non-polar and water is a polar substance. Therefore, according to the laws of chemistry, they do not mix. Stated differently, if you would like to get a homogeneous mixture of two substances, they both have to be either polar or non-polar. In other words, like will dissolve with like. Incidentally, not to get sidelined, the same principle works with adhesion. Namely, that a polar adhesive is necessary to adhere a polar substrate to another polar substrate. I'm hoping that this chemical analysis will clarify how vitally important it is for corporate cultures of acquiring companies to be compatible with those of the acquired companies. Otherwise, that would be a formula for disaster.
6. Technological interoperability is also vital ' It goes without saying that if the above guidelines are met, the next area you need to focus on is to make sure that the acquired companies are technologically interoperable with the technology of the acquiring company.
7. The impact of offshoring ' As stated previously, offshoring and legislation should also be the concerns of acquirers. On the legislative side, no one can predict what may come down the road. However, as unpredictable as politicians are, it is virtually impossible to imagine that they will eliminate the use of the telephone. As I have stated frequently in these editorials, no company can exist without the use of the telephone. Consequently, one would have to assume that, hopefully, the politicians will come to the realization of this extremely important and vital fact of business in spite of themselves and leave our industry alone.
On offshoring, companies are finding out the hard way that the cheap labor of India and elsewhere comes at a tremendous price in loss of customers. This explains why many companies that were burned by pursuing only cheap labor are coming back. Furthermore, as stated in the last several editorials, the application of IP contact center, speech technologies and remote agent principles would enable one to drastically reduce cost even beyond going offshore while offering superior service in proper English that everyone can understand. Another benefit of adoption of the above technologies is that one would have less to worry about regarding identity theft and data security.
You might then ask why are so many companies still going offshore? My answer is as follows:
a. The CEOs of those companies are unaware of the major problems of offshoring.
b. They are influenced by uninformed and shortsighted bean counters.
c. They have not read the volumes of literature that exist indicating that offshoring is no longer what it's cracked up to be.
8. Avoiding the kiss of death ' Some ego-driven executives acquire a company strictly for ego reasons. Then they lay off many people and violate all of the above guidelines and they wonder why the company went under. One wonders, what are they really thinking? It's your money (or VC money). Spend it wisely!
The Value Proposition After The Merger
Like anything else in life, the combined company must offer a value proposition or value-add to encourage present customers and prospects to do business with the new combined corporation. What you need to explain is: how can a potential customer gain competitive advantage from the joint offering of the combined companies?
Competitive Strategy, Positioning And Differentiation
Once again, the tendency of looking at the numbers primarily always obscures the necessity of having a sound competitive strategy. One question to ask is: can the combined company move as fast as smaller, leaner and meaner competitors? In today's digital world, speed is everything!
The next vital question is: what is the positioning statement of the new combined company? As we have stated in numerous editorials in the last few years, nothing is more important than positioning and differentiation. Accordingly, what is the key differentiation of the products and services offered by the combined company as opposed to those offered by competitors? If this particular question is not properly answered, there is no reason whatsoever for any new accounts to do business with a combined company.
Some Other Costly Mistakes To Avoid
Based on lessons learned from the mistakes of the M&A mania of the 1990s, I would like to share the following mistakes that have actually been committed by many companies that have either vanished or are about to.
Mistake 1 ' After consolidation ' change your company name, but don't tell anyone, don't market it and don't inform users and prospects. Believe it or not, several companies did just that in the 1990s and they are no longer around.
Mistake 2 ' After the merger, change your company name to an utterly stupid name that no one can remember. Believe it or not, this has also happened.
Mistake 3 ' After the merger, stop all marketing, promotions, advertising, merchandising and PR. Once again, believe it or not, many companies also did that and they barely exist today.
The Bottom Line ' A Word To The Wise
Think of what other companies in our industry experienced after they were acquired before you jump into an agreement with another group of investors whose unrevealed plans are to cut costs and employment of key people, which leads to running the company into the ground. Logic dictates that no one benefits from this type of activity.
Therefore, I urge you to study hard, assess the situation and be extremely careful if you are going to get involved with M&A once again. Don't destroy the fine reputation of our industry by being shortsighted and blow our chances once again.
As always, I welcome your comments. Please e-mail me at [email protected]. CIS
Executive Group Publisher, Editor-in-Chief
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