The new corporate offices of the SEI Corporation outside Philadelphia have institutionalized a culture of change. There are no walls. The desks and file cabinets are on wheels, connected to power and networks by snaking wire pipelines dangling from the ceiling. The company can reorganize as quickly as a football team can execute a new play. Employees can move their desks themselves across the office — even to different floors through oversized elevators. No interior designers, no space planners, no clawing your way to a corner office. The goal, in the words of SEI founder and CEO Al West, WG’66, is to create “a cultural signal” that everyone has to be prepared to change at any time.
Although change has been a concern of management for decades, today it is more pervasive. Changes used to be discrete events — moving from one model to another. Now change is continuous and the ability to change quickly is seen as a core competency. As companies need to shape and reshape their organizations more quickly and efficiently, skills in change — including handling acquisitions and alliances — are becoming crucial to competitive success.
It’s Risky Not To
“When everything is changing so rapidly, the riskiest position is not to change,” says Jerry Wind, Lauder Professor of Management and co-author of the forthcoming book, Driving Change (Free Press), with former Fortune editor Jeremy Main. When change was less frequent, companies focused on finding the right structure. “Now they realize they have to deal with organizational architecture — culture, processes, people, technology, incentives, and vision, as well as structure. They are all interrelated,” Wind says. “And because of the speed of change, it is not just architecture but strategy that has to change rapidly.”
Corporate change has traditionally been a draining process — in resources and human energy. Managers had to make tradeoffs between rigid efficiency and flexible inefficiency. With change becoming more continuous, managers need to do both. Like SEI’s office furniture, they need to put their organizations “on wheels,” creating the skills and capabilities to be efficiently flexible. Two areas where companies are developing these skills are in mergers & acquisitions and managing alliances.
Managing Acquisitions and Alliances
Acquisitions used to be the domain of high-powered specialists who were brought in to design and close the deal. Alliances used to be long-term marriages. That was when acquisitions and alliances were occasional events. In today’s rapidly moving environment — where acquisition follows acquisition, as industry boundaries shift and networks of alliances are reshaped on an on-going basis, the ability to effectively handle acquisitions and alliances is becoming essential for the firm, particularly in rapidly moving industries such as financial services, defense, telecom and biotechnology.
“As companies increasingly move from hierarchical approaches to more networked approaches, managing acquisitions and building alliances are becoming a core competency in many industries,” notes Harbir Singh, associate professor of management. “Although some companies are quite sophisticated, the average company is probably underprepared for this. I think there will be dramatic winners and losers down the road.”
Post-Acquisition Integration is Key
On average, mergers & acquisitions are a wash. Dozens of studies in the United States and abroad have found no evidence of either improved value or performance overall. It is the company’s skill at managing the process that appears to determine whether the acquisition is a boon or a bust.
The skills that count most may not be the up-front abilities in valuation and deal-making — the traditional focus of M&A education and research. A recent Wharton study — the largest study ever of post-acquisition management — found that post-acquisition integration skills are one of the key factors in gaining advantage from mergers & acquisitions.
The study examined 483 acquisitions from 1968 to 1996 in the financial services industry, involving 52 companies that represent nearly half of the assets in the industry. It found that acquiring firms that had specific post-acquisition plans for integration were more likely to generate higher returns.
“Acquirers that have created and documented specific routines and carried these over to new transactions fare better than those who treat acquisitions as one-time, ad-hoc exercises,” Singh says. “It is not so much how often you do it, but how well you learn from experience.” He says processes need to be codified and routinized, with manuals, document procedures, consistent integration teams and other knowledge-based processes. “This has more of an impact on performance than factors such as the quality of the acquired firm or whether it is an in-market or out-of-market transaction.”
There are many effective ways to design the transition process. For example:
- Banc One has created a highly sophisticated process for integration, including converting information systems and “affiliating” human resources through training and socialization. At the same time, product lines are not standardized, and the acquired management team is given a high degree of autonomy.
- Norwest uses another systematic approach, achieving much higher levels of integration by centralizing data processing and standardizing product lines.
- The process at NationsBank, in contrast, not only centralizes the information systems and product lines but also creates tight centralized management control by replacing top management of the acquired firm.
There is no one right recipe for successful post-acquisition integration. Having an effective process and learning from each acquisition seem to be the keys to improving performance.
The growing awareness of the importance of post-acquisition integration may be why banking institutions are increasingly using strategies to enhance the effectiveness and performance of the new entity.
Shifting Networks of Alliances
Similarly, the focus of alliance building has shifted from solely building single, long-term alliances to managing shifting combinations of both short- and long-term allies. Biotech firm RPR-Gencell has established a process for assembling and transforming a complex network of allies needed for new gene therapies. It has organized more than a dozen partners to solve the puzzle of new gene therapies. With only 280 researchers in its in-house division, Gencell has access to more than 2,000 researchers through alliances. It can create new partnerships and dissolve old ones. But to do so, it has had to develop a strong process for managing the network.
“The challenges in biotechnology make alliances essential,” says Thierry Soursac, president of the Biotechnology Division of Rhône-Poulenc Rohrer and general manager of RPR-Gencell, who attended a Wharton conference co-sponsored by the Wharton Emerging Technologies Management Research Program and SEI Center for Advanced Studies in Management. “There are many complex possibilities for combinations of genes, and technologies are evolving at lightning speed. Even for major corporations, resources are scarce.” Flexibility is also needed. “When you are opening a new way in the jungle, you don’t see more than 10 feet ahead of you,” he says.
The alliances are designed for flexibility. Gencell establishes milestones so allies can be moved in and out of the network. “The deal is structured so that at each point we can decide whether to continue or step out,” Soursac notes. “The milestones are linked to specific achievements of technology within a certain time period. This structure creates a lot of fluidity. In this network, players are coming in and out almost every quarter.”
The strengths of the flexible network approach are lower investment costs and flexibility to exit or to build a deeper relationship if the collaboration proves fruitful. “The structure gives the company great access to research,” Soursac says. “We can adapt to new technology very quickly.”
On the downside, there are legal and confidentiality issues, management challenges and a difficulty with developing the competitive intelligence to foresee coming advances in technology. Continuity also provides a challenge. But, in biotechnology, the benefits of not being locked into a relationship with only one partner whose gee-whiz technology turns out to be unworkable or unneeded more than balance these drawbacks.
Overall, a focus on creating the perfect structure for alliances and acquisitions has given way to a focus on establishing the right processes for managing their evolution. “There has perhaps been an overemphasis on structure,” Singh says. “Companies believed that if they structured the alliance properly, it would work. The emerging view is that we need to think about a process for managing relationships. Firms more experienced in the M&A arena tend to rely less heavily on formal contracts and rely more on their relational skills.”
Reprinted with permission of Executive Issues, a publication of Wharton’s Aresty Institute of Executive Education