Choosing the Right KPIs

One of the most common mistakes that less experienced acquirers make is to apply their company’s standard Key Performance Indicators (KPIs) to the newly acquired target or to the integration/transition process itself.

As The Merger Verger has harped on over and over again, integrating two companies is not like running one larger one. It’s just not. (If you still can’t accept that premise, I suggest you’ll get more out of Archie and Jughead than any further reading of TMV.)

There are three key elements of successfully executing an acquisition:

  1. Keeping the underlying business running successfully
  2. Keeping the acquired business running successfully (or getting it to that state)
  3. Integrating the two successfully

Well, DUH! The point isn’t that that list represents any rocket science on TMV’s part but it evidences why the next concept is so important:ruler-dsc9068-edit_1024x1024

If you’re performing three different activities,
you measure and assess them using three different standards or sets of measurements.

That’s the key here: for your integration you need to “think different.”

Start with these questions:

  • What is the strategic intent of my deal?
  • What are the keys to achieving that intent?
  • What are the impediments or risks to getting there?

The answers to these questions should be the basis upon which all your integration KPIs are developed, quantified and prioritized.

Read that again: KPIs for an integration are about achieving
the core purpose behind the deal: what to focus on achieving, what to focus on avoiding. They are not about measuring the integration against your normal yardsticks; they’re about measuring it against the point of the deal.

Needless to say (but I’ll say it anyway): the intent behind basically every deal is unique. So The Merger Verger can’t tell you what KPIs to monitor.   IT ALL DEPENDS!!

That said, if your acquisition is about revenue growth through expanded territory, for example, track your sales in that territory alone (particularly sales to existing customers’ locations in the new territory), look for growth rates based on new standards not old, watch your new-customer intact; track your regional cross selling, measure after-sale follow through and reorder rates. In each case quantify your KPIs at levels that are appropriate for the new business, not the existing.

If your deal is about new technologies, for goodness sake measure your retention of key innovators but also watch the degree to which existing customer services or solutions are being repositioned with new capabilities, track your training of existing staff on new systems and their translation of that training into sales calls and revenues.

Figure it out for yourself. But THINK DIFFERENT. Focus not on how you’ve done it before but on what and how you measure to achieve the new specific objectives of the deal.Archie Veronica_Banner copy.jpg

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When to Change Financial Reporting Systems

When is it appropriate to cutover reporting systems immediately upon closing and when does it make more sense to wait? 

The Merger Verger was asked this question in an email from a friend who is the head of the Americas for a global logistics company headquartered in Europe. This company and this individual have both had fairly deep deal experience so the fact that the question still arises suggests that the answer is not a simple one.
 
One the one hand, prevailing deal logic says to integrate most business elements as quickly as possible.  Cutting over to new financial reporting systems clearly gives the acquirer more immediate control.  It also makes a statement about urgency, old ways of doing things and other issues that may need visible reinforcement.
 

However, retaining an existing system for a period of time may also be useful.  As my friend states, keeping an old system theoretically “allows the acquisition target to continue to look at their financials in the manner they are accustomed to so as not to lose focus on the results during the critical post-merger period.” Excellent point.

The issue here is monitoring financial performance and, to a lesser extent, not having the demands of a new system distract from the performance of the very business that system was intended to measure.

A couple of thoughts occur:

  • In deciding whether to retain temporarily an old reporting system at a target, there had better be pretty compelling evidence that the change could be so potentially disruptive as to be counterproductive. Do not cave to mere whining.
  • Likewise, there had better be a clear date for the eventual transition to the buyer’s normal practices.  Postponing so critical an element of integration leaves a flavor of “business as usual” at the target.  If there are operational challenges that require close attention, a sense of business-as-usual is decidedly one that you want to avoid.
  • Is the decision to postpone cutover aimed at preventing the finance team from being temporarily over burdened or at ensuring that the key performance indicators (KPIs) that are produced each month follow the target’s old system so that its managers can continue to understand and monitor performance effectively?
  • If the latter is the case, could the target’s historical results be recast to reflect (or closely approximate) the buyer’s reporting practices so that relevant KPIs could be derived for pre-acquisition periods in order to track future performance against them.  This can be complex or expensive undertaking obviously but it could be better than postponing cutover.
  • Could there be some reason why the buyer would want to revise or refocus the target’s historical KPIs?  If so, an immediate change might make the most sense: get on with the new because both the old numbers and the old measures don’t cut it under the new regime.

There will be pain in any merger.  As a general rule delaying it does not lessen it.  Usually, the contrary. 

Questions:

What are those special circumstances that would lead a company to postpone a cutover of reporting practices in order to ensure focus on operational matters and better tracking of ongoing KPIs?

Has anyone had experience with postponing a cutover?  How did it work?  Did it accomplish the objectives?

Are there “half-way” measures that can allow the immediate cutover yet permit better KPI tracking at the target than might occur under an entirely new reporting system?