In our last post we discussed where accountability for synergies should rest. Here we pick up the discussion with the next logical step, the do’s and don’ts of synergy measurement and reporting.
Do align synergy measurement with synergy accountability. This seems like a no-brainer; however, over the years I’ve seen several companies mis-align synergy accountability, measurement, and span of control over synergy achievement, so it is worth a call-out here. A common way this plays out is to have Finance be held accountable for not being tough enough in the budgeting and forecasting process while simultaneously holding Corporate Development accountable for the published deal metrics being missed, all while the acquiring business unit exercising span of control is either not held accountable, or is allowed to obscure results with clever reporting tactics. Align accountability with span of control and then put measures and metrics in accordingly.
Do tie non-transformational operating metrics into your company’s existing measurement framework. There is no need to re-invent the wheel when it comes to measuring results of operations; furthermore, it is counter-productive to have multiple measures for the same items. Simple operating metrics that don’t require large transformational projects should transition to run-the-business measurement approaches soon after change of control. Accretive revenue would fall into this category, as would ongoing cost synergies that can be achieved in the first 90 days and have few dependencies. Day 1 headcount reductions and simple integration items such as standardizing on a common payroll platform could be two examples of the latter.
If you utilize a lot of comparative or long-term measures, carve out one-time items such as costs to achieve that might create distortion. Ideally these one-time costs will be captured in your synergy business cases prepared during deal valuation anyway (See November, 2019 post Deal Valuation: Inclusion of Costs to Achieve Part 3) and can easily be tracked as program costs instead of operating items, preventing distortion in future comparative measures.
Do measure transformational items centrally until most dependencies have cleared. One of the more common, and damaging, mistakes that I’ve seen is to incentivize an acquiring business to achieve dramatic transformation in an acquired business while simultaneously trying to get through an earn-out period or other deal contingency that’s managed outside of the BU, i.e. by Corporate Development. This usually will also occur while Finance, IT, and HR have their own extensive transformation/integration programs underway, with lots of dependencies to go around for all sides.
On truly transformational programs it is better to centralize synergy accountability and measurement until most of the dependencies have cleared. The PMO can then reinforce near-term synergy priorities with incentives, balancing any contingencies such as earn-out arrangements via interaction with the executive steering committee, and create a step-plan that recognizes the timing, costs, and dependencies of synergy realization. When enough dependencies have cleared so that the span of control over outcomes can be dispersed, transition the program to a run-the-business model and follow the approach described above, using existing measurement frameworks for ongoing operational results.
Don’t apply a traditional framework to a “blue sky” acquisition. Recall from our target operating model series that acquisitions to boost innovation and/or creativity usually optimize at lower levels of integration; furthermore, there is usually neither a prescribed timeline nor a pre-determined value defining the desired outcome of the transaction. As such, traditional measurement frameworks are inappropriate and may even be detrimental. Leave golden-egg-laying geese alone in the near run, until the business has progressed to the point where measurable outcomes can be defined for measurement. At that point determine the appropriate metrics, ensuring they are aligned with span of control as always.
Don’t forget to include qualitative and/or macro-level measures. Identify, define, and subsequently track qualitative items that you expect to be key to value capture. These often include employee engagement and/or retention, measures of influence such as social media followers, gains in customer awareness and/or perception favorability, etc. The acquiring business is usually the appropriate accountable party for these metrics and, while they are often overlooked, they are also vital to ensuring that synergy capture is approached holistically.
Don’t forget to adjust for new realities. Static measures soon become stagnant measures whose disconnect from reality leads to a lack of engagement or worse. Markets change, competitors and customers make moves. Pandemics happen. If something irreversible transpires and impacts a previously determined metric, then adjust it accordingly.
Overall, remember that what gets measured gets managed, and what gets managed gets accomplished. The goal of measuring synergy realization is to create an environment of accountability and corresponding incentives that gets results. Measurement is not an end in itself, but rather a means to a desired end. For this reason, it is important to balance the rigor of the measurement approach with its corresponding administrative burden. Keeping synergy measures simple, aligned, and balanced as described above helps companies both achieve the synergies from completed transactions and ascertain strengths and weaknesses in their overall M&A approach for use on future deals.
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