Customer-focused companies outperform the market
five-to-one. For these companies, the customer perspective is in demand and
the customer strategist in charge is, as
Seth Godin would say, a
linchpin.
While there is a demand for the customer perspective, there are two areas where the demand should be inherent, yet oftentimes it's overlooked. These are:
Walker has an approach to leverage the customer perspective from the target company to help inform the acquisition strategy. The approach helps the buyer manage risk during the due diligence phase and accelerate the accretion of value post-acquisition.
Product Development - In the MIT Sloan Management Review article titled, "
Giving Customers a Fair Hearing," authors Anthony Ulwick and Lance Bettencourt state that "... not even 5% of the companies said there was agreement within their company as to what a customer need is." They discuss how this lack of understanding impacts the innovation process.
Companies need to improve how they are leveraging the customer perspective when assessing the market potential for innovation efforts. This will help companies prioritize innovation initiatives, avoid wasting resources on improvements that aren't necessary, and improve the success and speed of their initiatives.
Customer focused leadership creates a demand for the customer perspective throughout all facets of the business. Is your company leveraging the customer perspective during mergers and acquisitions due diligence and product development strategies?
In an effort to keep up with the latest news related to mergers and acquisitions, I am continually educating myself by pilfering through a never-ending inventory of content, online and elsewhere. Recently, I have read a number of very good articles and blogs on merger and acquisition strategies, processes, trends, etc., and many of these articles are very articulate in how they advise completing a successful merger or acquisition.
Most recently, I read an article in Consulting Magazine that mentioned some staggering statistics related to the percentage of CEOs that were interviewed not knowing the clear strategic rationale or the long-term financial contribution that the deal would bring to the company. The article was well done and went on to talk about the right questions to ask and shared many strong points related to today’s mergers and acquisitions climate. However, nowhere in the article, or in many other articles on this topic, was there any mention of the need to clearly understand the customer base that is being acquired.
I realize that many mergers and acquisitions are aligned to a pure financial play or intellectual property or other non customer-related attributes, but for those mergers and acquisitions that have greater strategic implications the goal still remains to impact the multiple or potential market share gain or successful entry into a new market. So shouldn’t it be of primary importance to include a thorough examination of the customer base? Thorough, meaning a deep, fully representational view crossing segments, geographies, and the population as a whole? I have seen, first hand, the fall-out of completing an acquisition without proper due diligence on the customer base. Needless to say, it didn’t end well. This does not have to be the case. Understanding your customers to create competitive advantages begins before and culminates with the completion of an exit with favorable valuation multiples.
Here is the link to the article from Consulting Magazine – it’s worth a read.
Michael Good
Vice President, Strategic Account Manager
Many companies are focused on growing through acquisition, and those with a lot of experience are starting to get good at it. However, companies still want to know whether or not a strategy of mergers and acquisitions is a smart approach in today’s economy. Do acquiring companies outperform those who are continuing to focus on organic growth? When is the right time to acquire? Will my company get a better deal today than I will in 2011?
Some experts say that “deal-making” companies are in fact outperforming others today, particularly when it comes to cross-border deals. Others stand firm on the belief that making acquisitions in today’s economy is still too risky. Recently, Forbes released a list of the “Top 10 Deal Makers in 2010”, adding to the commentary of whether or not making acquisitions is a smart decision now and in the near future.
Those who believe that now is the time to “make a deal” should keep these success factors close at hand:
Know the risk of the customer base you are buying. It is extremely critical to take the due diligence process seriously, investing appropriately in order to make a sound decision. This includes predicting the future loyalty and growth of the customer base, in addition to understanding historical trends.
Find the hot-spots. An acquirer doesn’t have to know every single area that needs improvement within a company they are hoping to purchase, but having indicators of weak areas or hot-spots will give a clear indication of whether or not that company is a good fit. If customer support has always been a weakness for the acquirer, adding more customer support problems will only create more headaches (not to mention risking greater financial losses).
Gather customer comments. Simply gathering comments from the customer base that an organization would like to acquire can provide clarity to any current feelings. Tone comes through clearly in comments customers provide, and typically can shed a lot of light on areas that could have already been a concern.
Gathering insights from a customer base that an acquirer can analyze during the due diligence process should be done by a third party to keep neutrality. It is something that can be done fairly quickly and is an absolutely critical component prior to making an acquisition.
Are you thinking about making a deal? Do you have all of the information you need to make a good decision?
Katie Kiernan
Vice President, Consulting Services
You know the Pareto Principle—in most cases, 80% of the effects come from 20% of the causes. This allows us to focus on the important stuff, the stuff that results in 80% of our objectives. But when it comes to mergers and acquisitions, Pareto would roll over in his grave thinking about our inability to apply his principle.
Think about the due diligence done in most acquisitions. Groups of attorneys pore over documents proving the value and ownership of hard assets. Accountants wear out their green eyeshades worrying about how those assets and the related liabilities are recorded in the financial statements. Both groups do a great job of executing their assignments. But let’s be clear—their assignments are to give comfort over about 20% of the value of the total business.
Don’t believe it? Across many industries, the average Price-to-Book ratio is about 5. What that means is that for every $5 of value, $1 is made up of the recorded value and the other $4 is made up of intangible assets. Companies focus their due diligence efforts on the $1 and virtually ignore the $4!
What makes up the $4? A lot of things, but nearly all of them are either the value of the customer base or things directly impacted by customers. A company with a loyal customer base is much more valuable than one whose customers are not loyal. In fact, in a study of IT companies that we performed, the price/book ratio of loyalty leaders was 5.7 times versus 2.7 times for loyalty laggards.
Before your company buys another after scouring records to prove the value of the hard assets, make sure that the assets that really drive the value—the customers—get a good solid investigation as well.
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