Focusing Less on Cost Synergies to Increase Value Creation

Kison speaks with Anirvan Sen, the Founder and Managing Director of Fifth Chrome, a professional advisory firm that specializes in M&A integration and operational growth. In this podcast, they discuss creating deal value by focusing more on growth capabilities and revenue synergies than cost synergies.

Focusing Less on Cost Synergies to Increase Value Creation

18 Dec
Anirvan Sen
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Focusing Less on Cost Synergies to Increase Value Creation

Focusing Less on Cost Synergies to Increase Value Creation

I think what's very important is that you have a very, very clear value strategy defined up front. This should be your number one priority on day one. You should have a blueprint rather than a checklist of things that you need to do. And when I say value creation, I mean value creation, not just by doing financial and organization restructuring by saving costs here and there, but more importantly, how do you sort of unleash the hidden efficiency opportunities? Once you've got the blueprint, I think what is very, very important is that you back it by a strong leadership team. - Anirvan Sen

Kison speaks with Anirvan Sen, the Founder and Managing Director of Fifth Chrome, a professional advisory firm that specializes in M&A integration and operational growth. In this podcast, they discuss creating deal value by focusing more on growth capabilities and revenue synergies than cost synergies.

special guests

Anirvan Sen
CEO of FifthChrome

Hosted by

Kison Patel

Episode Transcript

Let’s kick-of with a brief background on yourself.

I’ve done mergers, acquisitions, and business transformation in different parts of the world, which gives me a wide array of experiences in M&A, not only at the strategic level but the execution level as well, having worked with IT, HR, R&D, and manufacturing. 

What is the harm of focusing too heavily on realizing cost synergies during post-merger integration?

Quite often the exercise of coming up with the estimation of cost synergies happens beyond closed doors, where information is shared with a very small group of people.

When the actual process of integration starts, quite often this is just handed like a box of things to do to the operational team and it is expected from the operational team to just go and blindly do what needs to be done.

It takes years to develop a capability to create the ecosystem of roles, people working together, responsibilities, and governance. When it becomes a cost synergy exercise, it becomes a big problem and that capability is easy to kill overnight.  

How do you identify true cost synergies and the ones that aren’t going to affect the value creation opportunities?

Synergies can not be the prime reason why companies acquire other companies. It should always be hinged on growth and capability build. Synergies are a result, rather than the final destination.

This approach should give an indication of where the potential cost synergies opportunities would be. Also, I see very few companies use that lens to identify potential efficiency opportunities when it comes to processes, procedures, and organization operational governance.

Instead of focusing on headcount redundancy, there are so many hidden opportunities that can be unleashed using lean management or operational excellence management, that you may not even have to go that deep into cutting headcounts.

The focus always has to be on the capability you want for the future, on how you want it to grow, and then accordingly optimizing and making your processes more efficient.

As I understood, instead of firing people, you would rather focus on introducing and looking for opportunities to bring in a process improvement framework.

Absolutely. I have practiced this whole concept of operational excellence over a number of years, and what I find is that the amount of synergies or operational efficiency that can be gained quite often outweighs the amount of money that we would have got just by getting rid of headcount.

While private equity normally tends to have a portfolio and something like a step-by-step plan where the moment they start working on value creation to go after it, making sure that the efficiency opportunities that are hidden in the processes can be unleashed very quickly.

Strategic buyers, on the other side, believe that their race ends the moment the company is bought, wheres, in reality, it starts when you actually buy a company and there are plenty of opportunities you can get.

Has there been anything that really struck out that you see companies often miss?

One of the challenges is not having a unified voice when it comes to tactical steps and one of the examples I see work very well is when you start externally from a customer journey, which I call the key customer journey.  When there is a key customer journey identified you can have an entire organization rally behind those areas.

You have different departments interact with customers at different stages and requests coming from a customer can be put into some sort of majority that a certain request from a customer goes through before it gets fulfilled.

When you identify which of those requests are key journeys, you then look at each of the functions and how they are contributing to that flow. This is when you start subordinating metrics as the flow takes place through the organization.

This matters because typically an organization is very silo-based, whereas here silos are being cut.

I am curious if you can maybe take me back to the beginning. At what stage in the life cycle of the deal you should start thinking about that? Can you maybe give me a step-by-step approach?

This needs to start at the strategy level or when the strategy is getting decided. This happens even before the company decides that they want to do an M&A integration or an M&A area they want to focus on in the strategy.

At that point in time, the organization needs to start mapping out the customer profile they are targeting and what sort of key customer journey they are going to support.

When it comes to active assessment and due diligence, that’s where, apart from the trinity of finance, legal, and tax due diligence you would send at least three other due diligences, which would be tech, operational, and people due diligence.

Based on the portfolio strategy, you start identifying what the companies that are available are and how they fit into the strategy. The period between signing and closing the deal is when you start putting your pieces in place and this is how you create a blueprint for creating value.

How do you go about aligning and prioritizing that customer journey that we talked about through those steps? How does starting with the customer journey essentially drive the strategy?

The starting point has to be the capability build. The second thing is, you have to go through divergent thinking of identifying every single customer that you are likely to come across.

Once you have your count of customer journeys that the company will go through you strat identifying top key customer journeys which are those that will have the highest impact on your number one metric, be it profitability, geographical expansion, market share, or something else.

Any other tips in terms of aligning teams around these customer journeys as you go through those phases, start riling them around and tying it to those process improvement initiatives?

What is very important is that the organization is aware of this and has acknowledged the need to do this key customer journey, mapping and aligning the organization. If you don’t have the capability in-house then you must source out people who can come externally to help on this journey.

They will do a risk versus reward ratio, analyze the impact of key customer journeys, identify the key ones, and do some scenario planning. It is important to have people who have experience of running process efficiencies and who have experience of managing transformation.

What’s your practitioner’s focus on in order to optimize value and growth capabilities? 

The first one is that there needs to be a lot of awareness that’s set in adapting from the early stages, so people understand what is required and rally people around it accordingly.

The second thing to know is that while it is important to identify key customer journeys it is as important to identify what the leadership goals, operational goals, and financial goals are going to be.

People need to be aligned to the purpose, so when the financial goals are set in, that gives the leadership a definite purpose and this will probably result in restructuring and redefining what the future of the organization is going to look like.

Revenue synergies are hard and a lot of the plans tend to fall through. What can you do about it?

Number one thing is, revenue synergy is usually closely connected to what you can do internally to increase the revenue, which is usually the cross-selling, the upselling, or coming up with a new set of solutions.

If you have gone with a key customer journey in mind, they would have given you a very clear indication of what and where to sell as well as what sort of things to sell.

The second thing to have in mind is, in order to make that successful there is a need for the HR, leadership and the sales to work in tandem to work out what is the best way for a commission to be attributed for new revenue, bonuses, how are the sales guys going to be compensated, etc.

The third thing is, once you have done key customer journeys, the right level of bonuses and commissions, you need to have a very clear go-to market strategy, knowing what channels to use, how the territories are going to be divided or redesigned, how are customer segments going to be defined and so forth.

These three things drive the revenue synergy, so if done well, these will ensure good revenue synergies.

Is there any way of validating things early to understand what impact is that going to have, just so it is possible to start validating what the feasibility is on revenue synergy captures?

The number one practice I have seen is the use of leveraging consultants or advisors, who are rated professionals who have models they can work with and give you an idea of what you should be looking for.

The second is the usage of some of the efficiency tools. Overall, I find that people who understand integration very well show more ability to create value.

Additionally, if you look at how organizations evolve grade, the first stage is usually around just getting processes, the second would be more functionalization.

As the company grows, you will have some functional verticals getting created, and the more you grow, the more you step into what is called a prioritization based on certain products and this should be something that is customer-focused customer focused. This is essentially the kind of thinking organizations need to have. 

Do you have an example of a deal and its outcome that focused on optimizing growth versus strictly just costs?

Quite a few, unfortunately, all of them private equity-based. With private equity, on one side they had a lot of cost transformation projects going on, but what they were trying to do was release the expense or the cost and funnel them into growth in new businesses.

I have one example that worked really well, which is a media company that successfully expanded into the UK because they had figured out that they could build a larger capability of what they were trying to do with a focus on a certain type of customer.

They had set up a pretty decent back office, with writers, copywriters, and content generators and that capability build gave them a lot of growth in the UK, the European market, and allowed them to establish better relationships with the Asian market. 

What are some other ways practitioners can create true value and optimize post-merger success?

I think what is very important is that you have a very clear value strategy defined upfront, which should be a top priority on day one. You should have a blueprint, rather than a checklist of things that need to be done.

The blueprint needs to be backed up by a strong leadership team, and there needs to be a leader that’s able to drive the transformation and run the course of the value creation. In addition, they need to be well-supported in terms of human resources, capital resources, and financial resources, all supported by advanced technologies.

What is the craziest thing you have seen in M&A?

I have seen people buy a company because they have a strong group of developers, programmers, and people in general. It’s called acqui-hiring, meaning they weren’t interested in the company or the product, they just wanted the talent.

Another example, which I see very often, is when a company that has a good amount of money sets up a corporate venture and they are not sure if they want to acquire the company or they see it as a corporate venture, which creates a lot of confusion.

What, in your opinion, makes acqui-hires crazy?

Because I always wonder how they convince their shareholders. It’s intriguing to hear that someone is putting a business case where they claim they strategically want to grow while killing the product and the business just because they want to hire the people.

The conventional way of capability building is that you either look at the product or the service that you want to acquire. I am not saying acqui-hire is a bad practice, it’s just not a usual M&A approach. 

Ending credits

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