whattheythink.com
What is the Future of Print?

What could arguably be deemed the strongest of the printing industry trade associations is now surveying its members, asking them to describe whether the future of “print” is grim or bright.  They will get a wide range of responses, and setting aside the value of reporting to their members what those members already think, the question itself is much too broad.  Instead, I’d like to propose a series of different questions that cut to the core.  Here they are:

What is the future of print as a process?
What is the future of print as a medium?
What is the future of print as a business model?
What is the future of print as an industry?
What is the future of print as a trade association?

DemandCreation

 

The Future of Print as a Process

Print as a process has a bright future because our industrialized society continues to “mark on substrates.”  For most of us, that means applying text and images (often together) to paper and other substrates for a wide variety of purposes.  The versatility and diversity of applications guarantee that “print” will thrive.  Certainly digital technology will displace some uses of print.  However, many of those printed products whose demise has long been a foregone conclusion refuse to vanish.  From the telephone directory to the lowly business card, there are applications for which print remains competitive with any digital alternative.  While offset lithography is diminishing, inkjet and other digital imaging technologies are delivering the same sorts of printed products which are fulfilling the same applications.  Will overall demand continue to trend downward?  Certainly.  Will pricing pressure continue as demand falls? Absolutely. But will print as a process vanish?  I wouldn’t bet on it.

The Future of Print as a Communication Medium

Print as a communication medium is certainly diminishing.  Newspapers are the sharp point of that spear.  Magazines and other periodicals have declined more slowly, because even younger readers often prefer the tactile experience and all the other characteristics of print.  The print v. digital discussion often misses attributes of print that help it resist erosion.  Print is self-archiving.  Print requires no external power source.  Print requires no separate device with which to interface.  Print is easily and inexpensively replaceable if damaged or lost.  Print requires no learning of a user interface beyond a third grade education, which is where most of us really began learning to read with comprehension.  Print’s chief disadvantage is distribution.  And its future as a communication medium is largely tied to the fortunes of the USPS.  When distribution is simply far too expensive to sustain, print declines.  And every USPS rate case which has raised periodical and standard mail rates has been mirrored by a decline in print volume.  Will print as a medium vanish?  That’s also very unlikely.  For certain purposes, print’s effectiveness will be worth its expense, even with the distribution challenge it faces. Direct Mail marketing is proving that every day.

The Future of Print as a Business Model

The future of print as a business model is a more interesting and pertinent question.  For nearly a century, nearly all printing firms have had parallel business models.  Commercial print as a stand-alone business emerged as newspapers ceased being the community provider of print other than their own publications.  And commercial printers have nearly identical “job shop” business models.  I’d argue that the business model itself is creating the most pain.  In fact, it is the job shop business model that creates too little customer value to remain viable and relevant even while print as a process and print as a medium retain a good deal of viability.

The “job shop” business model has four simple components:  sell it, make it, ship it, and bill for it.  Inevitably, that’s led to businesses with very simple business structures:  sales, manufacturing, distribution, accounting.  While many printing industry firms have grown enough to add other functional departments, those four remain the core elements of their business models.  And that business model is turning into a sea anchor for far too many.  The job shop business model relies on winning the opportunity to do what someone else has already determined needs doing.  That means selling is all about capturing existing demand.  If demand is diminishing, the job shop business model has nothing to say and no means to respond.  Because nothing about it is focused on creating new demand where none existed before. So the viability of the commercial printing business model is under the most direct threat of irrelevance and obsolescence.  The great good news is that those legacy printing companies who have recognized this threat and altered their business models (which is much more than offering new products and services) are creating strong and sustainable futures for themselves. They just don’t define themselves as “printing companies” any longer.

The Future of Print as an Industry

What’s the future of print as an industry?  If “an industry” is defined as a large number of companies structured almost identically and offering the same products and services, then the “printing industry” is seriously threatened.  Every successful business strategy is based on differentiation.  Success depends on being and acting different than one’s competitors.  When it is more and more difficult to compare a company with others, a sustainable competitive advantage for that company is usually growing.  But if we pair that kind of change with the declining viability of the job shop business model and displacement of some print by digital alternatives, an industry of “printing companies” will continue to shrink and ultimately vanish.  That doesn’t mean that the companies themselves or the great people in them will disappear.  Rather, it means that those firms simply won’t be “printing companies” any longer. They will be something else, most likely many different “something elses.” And that’s a great thing.

The Future of Print as a Trade Association

So, what’s the future of print as a trade association?  That’s perhaps the most immediately pertinent question.  An “industry” of “printing companies” is being deconstructed as many of those companies reinvent themselves (many defining themselves as part of their customer’s industry segments). As that happens, the future for trade associations becomes murky indeed.  When the member business models aren’t almost identical, and their needs are no longer at least parallel (if not uniform) then any association is hard pressed to create meaningful value for a broad enough swath of member companies to sustain itself.  Let’s face it: association members remain members when sufficient value is being created for member companies, their owners, and their employees.  But when the needs of the members are sufficiently diverse, an association cannot create services and programs with an appeal broad enough to attract member participation and loyalty.  And that’s what’s facing the the legacy printing associations now.

Legacy printing associations are having a harder and harder time retaining members.  Attendance at meetings and conferences is declining.  Participation in educational programs of all kinds is more and more difficult to sustain or build.  It’s easy to blame those trends on the decline in the number of “printing establishments” or declining demand for print and the financial condition of printing companies. However, association programs intended to help member companies do more of what they’ve always done (selling, manufacturing, distributing, and accounting) are as much the problem.  Take selling and marketing as one good example.  Most conference presentations on sales and marketing are still focused on capturing existing demand.  Very few of them even mention creating demand.  Fewer still deal with methods to discover what customers want and need, and then develop services to fulfill those wants and needs.  So, if demand for print is declining and demand capture isn’t working well, then learning how to do better what’s already not really working isn’t helpful.  And association members know it. Owners of member companies tend to be bright folk. When association offerings aren’t speaking to what association members are having to face and to do, it’s easy to understand why those owners look elsewhere for actionable information and help.

Creating a Future for Print?

Two of the fastest ways to see a viable strategy are to look at the business model, and to look at how a company behaves with its customers. So don’t claim “transformation” if your business model is still based on “selling-making-distributing-billing” that which someone else has already decided to do. Don’t claim transformation if you’re fielding a sales force only equipped to capture existing demand. Real marketers do neither. And those are the firms that are growing.

© 2014 by Wayne M. Peterson. All rights reserved.

by Wayne M. Peterson, Principal
The Black Canyon Consulting Group Inc.

NAPL/AMSP/NAQP
Disaster Recovery: Keeping Your Customers

None of us wants to spend much time thinking about a potential crisis. The process of leading and growing a business is hard and stressful enough without playing “what if” games about disaster scenarios. But we do it anyway because we know that doing nothing is irresponsible and foolish. However, many of the disaster recovery (or business continuity) plans I see are woefully incomplete because they pay too little attention to the customer component.iStock_000014547996Small

In most cases, recovery plans focus on people and property. Employee safety ranks first, always. No argument. In most recovery plans, that gets coupled with employee communication. Typically what comes next is property — assets. Those can be production capabilities or technology or data. But a plan to protect and restore the assets is typically the second area of focus in most recovery plans. A distant third, when it is present at all, is the customer-facing side of recovery. And that is often incredibly limited. So let me suggest a different perspective.

Your business is now, and has always been, about your customers. They are who you exist to serve. It’s by capturing a portion of the value you create for your customers that you’re able to thrive. Why, then, wouldn’t customers be at the very heart of any disaster recovery plan? Why wouldn’t they be there expressly and directly, rather than by inference? This is an issue about which customers care.

A Case Example

A few months ago I helped a client company create a disaster recovery plan for the first time, triggered by the requirement that it be described and included in a proposal to a top tier customer. The company, a marketing services provider, had an opportunity to radically enlarge the relationship with one of their best customers. It required a great proposal and a contract to define the relationship. And one of the elements the customer required was a solid disaster recovery plan that detailed how the customer should expect to be treated should a disaster strike.

We worked with the client to create a disaster recovery plan that was customer-focused. It started by describing the tangible steps the company would take to insure that the effects of any disaster on its customers were minimized from the first. It described lines of communication, how customer property and data would be protected or restored, how customer confidentiality would be preserved, and how the customer would be compensated should they be effected. The plan then described the resources and actions that would make all of that possible.

At the outset, company management saw the customer requirement for a detailed disaster recovery plan as a deal-breaker. The company didn’t have one when the customer request was made. There was a fair amount of concern that the whole relationship could be at risk, not merely the enlarged one. So this became a priority with a deadline attached.

The outcome was remarkable, and remarkably positive. The plan was developed by starting with the company’s commitment to its customers. That created a framework which made clear the customer experience that the company had to be able to deliver, even during a crisis or disaster. And that drove the creation of processes and identification of the resources necessary to deliver on that commitment. In other words, the need for the disaster recovery plan to be customer-facing from the beginning made the creation of the plan easier because it detailed the results that the plan needed to deliver.

When the plan was delivered to the customer, described in the proposal and included in full as an appendix to the proposal, the customer’s reaction was incredibly positive. Since the customer had secured competing proposals for the enlarged relationship, they were able to compare the company’s approach to disaster recovery with those described by the company’s competitors. The new recovery plan was the only one entirely focused on customer outcomes. It became a solid piece of evidence that the customer had been choosing wisely all along by doing business with the company. And it became a significant driver for the customer to choose to expand the relationship.

Disaster Recovery and Competitive Advantage

Did you catch what happened? The disaster recovery plan became a source of competitive advantage. Now there’s a connection. In the eyes of the customer, the approach the company took to disaster recovery differentiated them from their competitors. And what was different wasn’t the specific actions required to keep people safe and informed, and to be back in operation quickly. Instead, what was different was that the plan was built around what the customer would experience as a first priority, and a defining framework. It made the company’s commitment to its customers tangible in a powerful fashion.

It is all too easy to fall victim to what I call “four walls myopia.” That’s the affliction that treats what goes on within the four walls of the company as of paramount importance. But a company lives and dies in its customer interactions, in how it behaves with its customers and in the experiences it creates for those customers. When fulfilling the company’s core commitment to its customers (what I call a “brand promise”) outranks all other priorities, then even disaster recovery planning is guided by that commitment.

So what’s your core commitment to your customers? What is your brand promise? Do you believe that your customers should be understanding if your firm is struck by a disaster, and give you a pass on keeping that commitment because disaster struck? If so, then you’re in the majority, you’re failing to live up to the customer commitments you’re claiming, and you’re missing a significant opportunity.

If your customer-centered disaster recovery plan was described and included in each of your proposals, how quickly would that set you apart from your competitors? Would it underscore that your customer commitments are more than the claims or platitudes that echo in all of the other proposals your customers and potential customers receive? In the minds of your customers, would it make your disaster recovery process genuinely valuable?

Creating Your Plan

Creating a customer-centered disaster recovery plan need not be daunting or scary. What it requires is a different starting place. You can identify the necessary resources and processes to insure that the impact on your customers of any disaster you suffer is minimized and fast. AMSP members have a wealth of resources available to insure that the delivery of services to your customers resumes and continues. So finding the resources is rarely the most difficult piece of the puzzle.

What is required involving different people in your disaster recovery plan than you would typically task with creating it. Most often, operations and human resources folk are given the task of creating the plan. And that makes sense if your priority is people (your own) and property. But if retaining and protecting your customers is the top priority, then customer service and business development will need to take much bigger roles in the plan’s development. They are the folk best equipped to describe the best possible customer results. They are also the folk best equipped to vet your plan with your key customers before you adopt and implement it. And customer feedback is critical.

Customers that have been through a disaster with a company and been well cared for through that experience tend to be incredibly loyal to the company. Their thinking is: “If the company lives up to its aspirations and promises under extreme circumstances, then it can be trusted to live up to them under routine circumstances.” Companies that take great care of their customers through a crisis have proven that they mean what they promise. That has real value to your customers because it is the ultimate demonstration that you walk your talk.

So, who is at the center of your disaster recovery plan?

by Wayne M. Peterson, Principal
The Black Canyon Consulting Group Inc.

NAPL/AMSP/NAQP
“You’re a Marketing Services Provider. Congratulations! Now What?”

Let’s face it: creating and running a “job shop” sort of business was less complicated. You really only needed to do three things well — sell enough jobs, process the jobs efficiently and accurately, and get paid for doing them. That meant a simple structure was enough. You needed someone paying attention to sales, someone paying attention to operations and someone paying attention to accounting. If the accounting side could also manage the HR piece, you could call that “Admin” and be good to go. Then everything changed.

Chasing down enough jobs got much harder. The jobs themselves got more complex and more demanding. And if getting paid wasn’t already difficult, getting paid enough suddenly became much more challenging. A business model that was robust enough to work for decades suddenly started to sputter and stall. Bummer.

Unfortunately, becoming an MSP isn’t as simple as bolting new services onto the existing job shop business model. An effective MSP doesn’t create value in the same way. The largest value that an MSP can create lies in finding and solving customer problems. Or, put another way, it lies in identifying and filling customer needs and opportunities. That means helping the customer determine what they should do rather than merely executing what they have already decided to do. In that, the recommendations you make may have much more value to the customer than the actual work you do. And for many who have run successful job shops for decades, that’s a hard thing to accept.

Successful MSP’s (in all their various forms) have one thing in common: exceptionally strong and deep customer relationships. They have learned that the customer relationship is everything. And most of them have learned that they need fewer and larger customers than they did before. That’s another disconnect with the job shop model. In a job shop of any kind, having more customers makes you less dependent on any single customer. Most of us can recall being counseled by accountants, other advisers and associations not to let any one customer become too large or too important. Case examples of companies that suffered Confused, Baffled, Bewildered - Arrow Signsbecause they became too dependent on too few customers became the stuff of legend.

What was true for a job shop is not true for an MSP. And that’s because the depth of the customer relationship is now vital where it rarely was before. And that changes everything.
When the depth and strength of customer relationships becomes more vital to your business than anything else, you have to get very good at creating and keeping them. And that means working in three areas that didn’t get much attention until now.

Building a Brand

No, I’m not talking about advertising and sales promotion. The key here is seeing the connection between the purpose of your business (who it is intended to serve and how) and the commitment you’re making to those who become your customers. Think of it this way: if your business is intended to create a certain kind of value for a certain kind of organization, that’s your purpose. Your commitment to create that value for those organizations that become your customers is a promise. That’s why the most powerful way to capture a business strategy is to express it as a brand promise: “If you become our customer, this is what we’re committing ourselves to do for your benefit.”

Every business has a brand because a brand lives in the minds of your customers. It’s not your logo or slogan. It’s not your website or the color scheme on your trucks. Rather, it is the perception of your business that’s been created and sculpted by each contact a customer has with your business. When left to chance — to the vagaries of unguided and unplanned customer interactions — the resulting brand is rarely very strong or strongly positive. But it is always still there.

A brand must be built on purpose — on your purpose. Social media has been touted as making traditional marketing obsolete, and that’s bunk. The claim that social media enables an “ongoing conversation” with your customers is true, but someone needs to start the conversation. In nearly all cases, that responsibility still falls to you. And that brings us back to the vital need to build a brand on purpose by making and keeping commitments to your customers.

A strong statement of brand promise is a powerful tool to clarify the focus of your employees as well as to engage the minds and hearts of your customers and potential customers. It’s also the foundation on which strong marketing and selling can stand. Recognizing the need to build a brand intentionally and well doesn’t mean you’re grandiose and trying to mimic Procter and Gamble. It does mean you recognize that deep and strong customer relationships are now essential, and your brand as it lives in their minds is where those begin.

Going to Market

A fairly low-powered sales force can represent a job shop reasonably well and easily. But building deep and strong customer relationships — where those customers are looking for analysis and recommendations — is much more demanding. And it has little to do with the technical expertise of the salespeople in the DMM, fulfillment or distribution.

You yourself value someone who can deliver a business outcome that you need much more highly than you do someone who can merely offer you a lightly-customized “solution.” That’s because what you need is the real, tangible, and measurable business result. The elegantly integrated and packaged “solution” may be intriguing, but it isn’t likely to capture and hold your attention as well as a proposal that guarantees a business result for you. The best and most successful MSP’s are focused tightly on the business results created for their customers. And a focus on business results make the role of the salesperson much more demanding as I described in an earlier column. But that focus also means that how you go to market needs to change too.

Large businesses have often suffered from rivalry between those in marketing and those in sales. Small businesses dodged that conflict simply by having no one doing the work of marketing while they relied exclusively on their salespeople to bring them new customers and to keep their existing ones. If the work of marketing is communicating your brand promise and engaging potential customers, that’s also the work of selling. Why should the two be in conflict? Successful MSP’s resolve that potential conflict differently — by integrating marketing and selling into a single, seamless process. For that, I like the term Business Development.

Business development is much more balanced than either traditional marketing or selling alone. It balances the short term and long term because it is responsible both for short-term sales revenue and long-term value creation. It is responsible for creating demand now and for strengthening the brand over time. It is responsible for targeting individual customers now, and for developing markets over the longer term.

Business development requires different sorts of people than we typically see in job shop sales roles. In essence, it requires people who can see your business and your customer’s organizations from multiple vantage points and then integrate those into a real understanding that reconciles the apparent contradictions. And that’s why driving business development often becomes the primary task of the business owner or ranking executive. She or he may be the only person on board now with the necessary knowledge and skills. Regardless, the business development process — the process of making deep and strong customer relationships — is now the engine driving the business.

Creating an Experience

Perhaps I should be describing customer relationships differently. Rather than describing them simply as deep and strong, perhaps I should also describe them as lasting. Certainly deep and strong infers that they are long-lasting as well. But that doesn’t happen by accident.

Since your brand lives in the minds of your customers, and since it is shaped by every interaction they have with your business, shaping their experiences is the fulfillment of your brand promise. It needs to happen intentionally. And that’s the third area that’s gotten little attention from job shops until now.

Three-quarters of your customer interactions are predictable and highly-repetitive. Certain parts of delivering value to your customers apply across all of your customers. In a job shop, where the focus is on “doing the job”, the customer takes a back seat to the work of processing the customer’s job. For an MSP, where delivering business results trumps any intermediate process, that cannot stand. The experience that the customer receives directly shapes his or her perception of the value you’re creating and what you’re worth paying for the results delivered. And that’s huge. Therefore, designing the experience your customer is going to receive at each point now warrants attention and effort.

A customer experience can be mapped. And it can be described from the customer’s viewpoint (the only one that counts.) That means describing it as the customer is experiencing it rather than describing what you’re doing for the customer at that point in time. And once that map is created, each of those points where your business touches a customer can be planned and developed so that the experience they have is consistent and consistently positive.

We’re through the looking glass. No longer is a focus on selling, processing and getting paid sufficient. Even small business owners need to manage brand-building, business development and the delivery of a strong customer experience. And there’s no MSP that’s maximizing its opportunities without those three elements.

by Wayne M. Peterson, Principal
The Black Canyon Consulting Group Inc.

whattheythink.com
Murders and Accusations or “Why not to do a deal at all”

No, that title isn’t a typo. Mergers and acquisitions are getting lots of attention again. That means mine will probably be the most contrarian voice on the subject. Over the past 14 years, I’ve watched 8 different deals up close. So let me apologize in advance: I’m not a fan of mergers or acquisitions. Here’s why:

“Mergers” aren’t.
“Acquisitions” don’t.Different.

There are very few “mergers.” The term is a fig leaf. In almost all cases, someone is acquiring someone else. So let’s drop the term “merger.” In most acquisitions, things die. Often, they die badly and needlessly. What tends to die in acquisitions? Let’s look at four things.

Shareholder Value Dies. An acquisition is an incredibly bad idea for everyone except for a seller who is being cashed out. Everyone else involved in an acquisition tends to lose. They often lose badly. There is good research demonstrating that acquiring companies average a 10% drop in value over the five years following the acquisition. 80% of mergers fail to deliver their anticipated value, regardless of the deal size, structure, financing, or good intentions of the principals involved. For smaller-scale companies, the results can be devastating. I saw the fallout for a client who had pursued an ill-advised tuck-in two years earlier. The deal took nine months to complete. It was expensive. The acquired firm successfully liquidated its equipment and operation, and a handful of people moved to the new firm. Two years later, all the acquiring firm had to show for the effort and expense was a one mediocre salesperson.

Competitive Advantages Die. I watched a client firm be acquired by another regional competitor because the selling shareholder was no longer actively involved in the business and was ready to cash out. For the selling shareholder the deal was a good one. For both the acquiring company and the acquired company the deal was a huge disappointment despite very conservative expectations. Eighteen months later the combined revenue of the two companies was barely 80% of the pre-deal level. Significant customer defections were the driver. Different companies offer different kinds of value even to the same marketplace. Therefore, they will attract different kinds of customers who are looking for different kinds of value. And if the kinds of value that two companies offer are substantially different, the likelihood of a successful merger or acquisition is very low. That’s because some group of customers, most likely the customers of the acquired company, are going to be disappointed. I’ve even seen cases where the customers of an acquired company felt actively betrayed and said so in a customer survey and again in focus groups.

This isn’t hypothetical or academic. I watched the deal I mention above become a huge disappointment as many of the customers of the acquired company chose to go elsewhere. The warning of that risk was in plain sight but misunderstood and misinterpreted. During the due diligence and planning process, the two companies compared their respective customer lists. They were pleased to see very little overlap in the top 50 for each company. And what should have been a warning flare was treated as good news. For two companies to have existed for decades as nominal competitors in the same region was a clear signal that they created different kinds of value for different customer segments. In other words, they had completely different and incompatible competitive strategies. The fact that they were of similar sizes and had similar equipment meant almost nothing to their customers.

Organizational Cultures Die. Trying to force two incompatible organizational cultures together is like trying to transplant an organ when the donor and the recipient aren’t compatible. Tissue rejection sets in. That’s because organizations are much more like organisms than like mechanisms. And the typical plans for putting two organizations together are almost exclusively mechanical. Those plans bear a strong resemblance to the instructions for bolting a cargo hitch on to your Ford pickup.

To successfully integrate two organizations into one, there’s work that needs to be done beforehand and work that needs to be done after the deal is inked. On the front side, an assessment needs to determine whether the two cultures are compatible at all. And that means you have to assess elements of the enterprise that make the dealmakers very uncomfortable.

Make peace with the reality that the acquiring culture is going to win. It always does. On the back side, significant effort will be required to integrate two separate cultures into one. And that effort is rarely made. It’s overlooked because of the huge distraction of integrating processes, systems, and structures. The expectation is that everything will be fine if everyone will simply go along and get along. Because someone is acquiring someone else, a dynamic of winners and losers is inevitable even if it’s not explicitly acknowledged.

Organizational defensive routines run rampant following an acquisition. And defensive routines are simple to understand and powerful. They have four simple steps. First, we say and do things that are inconsistent. Second, we act as though they are not inconsistent. Third we make those inconsistencies or ambiguities undiscussable. Finally, we make the undiscussability of the undiscussable also undiscussable. (Yes, that’s a mouthful.) It’s a self-sealing process. You’re rolling your eyes and shaking your head, aren’t you? You’ve seen defensive routines in action, up close, and too often. Those defensive routines will slow or stop well-intentioned integration intentions and efforts as lip-service is given but nothing changes.

Defection of key employees — often referred to as brain drain — gets little mention. But those defections are a frequent byproduct of an acquisition. Ironically, it can be high value employees both from the acquiring firm and the acquired firm who vote with their feet when everything is ambiguous and the integration isn’t managed well. These defections fuel a loss of organizational memory and organizational knowledge. And they directly affect the ability of the combined organization to fulfill the promises that have been made to its customers. If value delivered to a customer is coming from an enthusiastic member of that organization, the loss of that individual can directly affect the value being delivered.

Brands Die. Strong organizational cultures and strong brands go hand-in-hand. It’s rare to find a strong brand where there is not a strong organizational culture. A brand can be every bit as meaningful to those inside an organization as to its customers. And brands often die in an acquisition, sometimes intentionally.

There are three questions I ask business owners and CEOs when I’m trying to understand what kind of value the company intends to create for its customers, and therefore how it intends to compete in the marketplace. I get clear answers to the first two most of the time. It’s the third one that’s hard. The three questions are: Who are you? What do you do? Why does it matter? The answers to those can quickly give me a sense of the probable brand strength I’m going to find.

When customers are invested in (have an attachment to, have an affinity for, have a meaningful history with) a company brand, that attachment almost never survives the disappearance of that brand identity. And yet the value of a brand is rarely considered during the due diligence process for a graphic communications company. Here’s why:
Few firms wading into the surf of acquisitions make the right kind of preparation. Nearly all the common preparation is financial and legal. Due diligence is limited almost entirely to those two realms. Everything else is based on assumptions. Those assumptions include the anticipated responses and behaviors of employees (including key employees), customers, and competitors. In very few cases are those assumptions tested.

The outside players are the primary drivers. It’s easy to see why. Investment bankers, attorneys, and accountants have a vested interest in getting the deal done. And they have little if any vested interest in the success of the enterprise afterward. For a selling shareholder that’s fine. Those essential experts, necessary to the process, have interests most closely aligned with those of the selling shareholder. Like a selling shareholder, they want a deal done quickly and cleanly. And like most selling shareholders, they don’t want downstream encumbrances or challenges. That positions those functional experts almost directly at odds with the interests of the acquiring company.

The process itself is built with a strong bias toward things that are easy to measure and value. That’s where investment bankers, accountants, and even attorneys, are most comfortable. So the due diligence is limited to things that are tangible. Raise the issues of cultural fit, employee behavior, competitor behavior, customer behavior, or brand value and those advisors get uncomfortable in a hurry. I had one M&A accountant refer to organizational culture as a “social disease.” And yet those are the factors that most directly affect the performance of an enterprise post-acquisition.

Accusations and frustrations fly when acquisitions fail to deliver on the expectations that motivated them. And yet we’re in an industry in “wholesale transition” as one CEO described it, which motivates many to consider an acquisition.

What To Do Instead:

The motivation for an acquisition (by the acquiring company) is to improve results: competitive results, market results, or financial results. And an acquisition can look like a faster and easier way to get larger. But since it rarely works, let me suggest two alternative places to focus your attention, energy, and investment.

Get better at organic growth. Instead of trying to buy someone else’s book of business, develop the internal capability to meet a new customer need. Research my firm has done confirms that nearly all new services are developed in the context of a single customer relationship. That means it’s the need of a given customer that prompts the development of that service, which is then refined and polished and offered to others. Customer relationships within which new services are developed get stronger because they get deeper during the development process. More and better information is exchanged, stronger and better individual relationships are created. Collaboration builds bonds. Collaborating with the customer to meet a new need through a new service also builds a deeper understanding of the customer’s business which brings more opportunities to the surface. It becomes a self-reinforcing, virtuous cycle. All of those facts argue for developing new services and capabilities rather than grabbing them through acquisition. The development path is far less disruptive and the new services are far easier to integrate into the enterprise.

Build alliances. Yes, that sounds like heresy. Graphic communication firms of all kinds have never been strong on alliances. They’ve been led to believe that their performance will inevitably erode and that risk will climb if they sell services not performed in their own operations. After all, your “value added” will decline. While that advice may have had value when graphic communications firms were purely manufacturing operations, it no longer holds. So look for allies rather than acquisition candidates and then cultivate those relationships intentionally.

Alliances with other resources and other firms can be faster to create, much less difficult to manage, and far less risky then any acquisition. And as a response to competitive needs and customer needs, they tend to be far more effective. Specific resources can be identified and brought to bear to meet specific customer needs. They can be organized around specific projects and specific campaigns. Given the quality of freelance talent that is available today, alliances make much more sense. And our research demonstrates that customers care little about what you do on your own floor, but care a great deal about your willingness to take responsibility for a whole program or campaign.

Too many acquisitions are made either for the wrong reason or for no reason. Growth is the worst motivator for an acquisition. In far too many cases, firms that pursued acquisitions have been disappointed as they found themselves in the cycle of “acquire and shrink, acquire and shrink” rather than acquire and grow. The risk, the expense, the difficulty, and the distraction of an acquisition should make it much less attractive than it tends to be. That 80% or more of acquisitions fail to deliver their expected results (even when those results are conservatively estimated) should give you pause. Frankly, an acquisition should be a last resort and not a first choice. It should be seen as a high risk and difficult path to travel, and not as something easy, fast, or attractive.

If you’re determined to pursue an acquisition, then break out of the rut that fails. Get the hard work of strategic due diligence done. Get solid confirmation of the strategic and cultural fit. Then develop an integration plan where your customers, culture, and brand get more attention and more resources than are focused on “leveraging synergies” in the back office and on the plant floor. Do those things and you just might find yourself in the 20% of acquisitions that deliver the results expected.

by Wayne M. Peterson, Principal
The Black Canyon Consulting Group Inc.

whattheythink.com
Really Great Deals! Eight Keys to Create One

“For every problem, there is a solution that is simple, neat, and wrong.”
― H.L. Mencken

Consolidation looks like the obvious play in a shrinking industry space: put two friendly competitors together, eliminate redundant / duplicative activities, pocket the savings and move along happily.  Sounds simple and neat.  Uh oh.

Newsflash:  M&A isn’t easy to do really well. It’s tough. And it demands tough-minded and clear-thinking preparation that goes well beyond routine “due diligence.”  Due diligence is usually insufficient — it uses old data to understand and describe a situation that will not be relevant to the marketplace in the immediate future.  What’s missing is the hard work of assessing the future and how the business will compete after the deal is done.

While the investment bankers, accountants, and attorneys can get the deal mechanics done, the much harder stuff is all strategic and anything but mechanical.  That’s because it isn’t merely about doing the deal itself.  Rather, it is the process of making a single enterprise out of two separate ones so that the resulting enterprise has a durable competitive advantage.  In other words, the hard stuff is what gives you confidence that the expectations for future performance are reasonable and attainable.

1.  Deep or Due?

Due diligence is a funny term.  In the M&A context it means “expected” and “adequate.” And the due diligence usually done is barely sufficient.  Too often it skirts the strategic entirely. Thorny questions that will have a material impact on the marketplace effectiveness of the combined enterprise become the proverbial tin can being kicked down the road until after the deal is done.  That serves the financial and legal specialists well, who want the deal completed quickly and cleanly.   But I wouldn’t want to bet the farm on homework that’s barely “adequate”, and understood to be.

A strategic assessment is essential.  How do the two firms go to market?  Is one a cost leader and the other a customized solution leader?  Is one high tech and the other high touch?  In the marketplace, is there a competitive advantage that the combined enterprise can create that the acquiring company cannot create alone?

Here’s a simple example of an issue that should never be kicked down the road and decided later: which brand is going to survive?  Be careful about how you answer that.  When First Union Bank acquired Wachovia, they dumped the First Union name and took the Wachovia name.  For many customers, that was a wolf now wrapped in sheepskin coat, but my point is that the decision was made in advance and the brand was a great deal of the value being acquired.  First Union had fairly negative brand reputation while Wachovia had a great marketplace presence.

“A whole new brand” is a cop out, and typically tells me that no one knows the real value of either of the legacy brands as the courtship begins.  And a brand new brand has no brand equity.  Why on earth should we expect a deal to thrive that abandoned that value of two legacy brands in favor of a new one devoid of value at the outset?

2.  Scale or Scope?

What are you trying to gain?  Are you trying to get significantly bigger?  Or are you trying to diversify the spaces in which you compete?  Shy away from the latter.

Playing in more spaces isn’t lower risk than dominating the space you know best.  If getting larger (revenue) gives you more resources to create new customer value, the deal will likely succeed.  If the deal widens your scope it may overtax your management capacity even to understand the enterprise, much less lead it effectively.  Creating a “micro-conglomerate” isn’t a recipe for competitive success for which I can find a single case example.

Gaining significant scale can be valuable, though.  If your larger scale enables you to innovate more quickly and more consistently, if it gives you the resources to build new sources of customer value, that can be well worth the effort to acquire.

That’s why answering the “scale or scope” question is incredibly important.  If the combined enterprise is going to be more challenging and more confusing to manage once the transaction is complete, run the other way.

3.  Capability or Capacity?

If you’re gaining new capabilities that will enable you to do more for your primary, core customer segments, great.  That’s likely to be very effective.  You’re going to become more valuable to your current customers, the easiest people to whom you can sell more services and win more revenue.
However, if you’re simply getting “more of the same” capacity (“Oh boy, we’re going to have FOUR 40″, six-unit presses all with inline coating!”) what are you really gaining?  The ratio of revenue to assets employed may not improve a whit while the risk climbs notably.
The trick is to avoid looking like a trade show floor (“We’ve got one of everything!”) at the end of the exercise without knowing what it will actually enable you to do that your customers will value.

Therefore, an acquisition candidate that provides a different suite of services into your current core markets will usually be much more useful than an acquisition of a firm that already looks much like yours.

4.  Material or Marginal?

I’m not a fan of “tuck ins.”  “Bolt-ons” can be better.  Tuck-ins rarely amount to much more than an escape plan for the selling owner.  To be worth doing, a deal should have a material impact both on revenue and profits at the end of the first year.  If you don’t expect to increase revenues by at least a full third, and to double your net pretax profit dollars and percentage, why are you doing the deal?  Any acquisition is so demanding (done well or not) that it needs to offer a big payday.

This is counter-intuitive because a smaller acquisition can look “safer.”  The rub is that any acquisition is demanding and distracting.  It is never as easy as snapping up the salespeople and customers who are worth keeping, relocating the equipment worth keeping, and liquidating everything else.  So the anticipated gains need to be measured against the real difficulty and distraction of the post-deal integration.  If the deal isn’t a game-changer for you, why bother?

So, look for acquisition opportunities that will redefine the scale of your business and the range of services you can provide to your core market segments and primary customers now.  An acquisition that enables you to become much more important to your core customers could well be worth doing, especially if it is a sizable deal.

5.  Serial or Single?

If you’re going to invest the effort necessary to learn to do this well (rather than be lead solely by the financial and legal specialists) why would you make that effort in order to do it only once?  Instead, acquisitions need to be the core of your ten year plan for growth, and your intention from the beginning should be preparing for multiple deals.
Those firms that make the preparation, build the skills, and create the systems to manage the whole acquisition process understand that it only makes sense if you’re going to leverage it repeatedly.  A good metaphor is building muscle: do it to use it.

Multiple, strategic, and serial acquisitions can build both scale and capabilities.  In some cases, acquisitions can build competitive capabilities faster than you can grow them internally.  That temptation can be incredibly seductive, and it needs to be tempered.  It is most effective if you’re looking to gain completely new capabilities rather than simply better ones than you already have.  And that doesn’t mean simply production or manufacturing capabilities either.

6.  Strategy or Synergy?

Are you looking for a deal that offers strategic gains or merely one that offers synergistic gains.  “Synergy” is, of course, the fig leaf used to refer to savings that comes from eliminating duplicated expense and duplicative staff.  And it is important, particularly during valuation, to understand clearly what to pay for the acquisition.

The acquisition and integration costs need to be offset directly by the anticipated synergies over an appropriately short period.  If they don’t cancel each other out, you’re paying too much.  But the synergies are typically as short-lived as are the transaction and integration expenses when the objective of the deal is sustained, organic growth.

If there is a strategic marketplace advantage you can create through an acquisition, the acquisition is much more likely to succeed.  If the benefit is primarily leveraging back office expenses across the combined entities, the deal is more likely to go sideways than deliver the anticipated results.  Two struggling firms that believe they can get more breathing space together aren’t likely to do much with it if they lack a clear, strategic intent for what they are going to do in the marketplace and for their customers.

7.  Focused Integration or Futile Integration?

Do you intend to integrate the existing enterprises completely — to the greatest degree possible?  Why?  What do you gain?  Some of the smartest acquirers have learned that treating the existing enterprises as divisions can be much more productive than trying to force every possible integration. Is it really vital that every division look alike in every way?  Resources are spent uselessly trying to achieve the sort of consistency Emerson was talking about when he said: “A foolish consistency is the hobgoblin of little minds.”

If there is nothing to be gained by making things consistent or identical, leave them alone.  And the gain needs to be significant and financial.  If the process of achieving consistency cannot be justified based on its one year payback, forget it.  Instead, focus on where integration really matters.  It rarely matters on the back end, but it matters much on the front end.  Integrating the disparate parts of how you go to market matters a great deal.  The objective is to have customers looking at the results of the deal, seeing that they won in the process, and continuing to rave about being your customers.

8.  Market-facing or Myopic?

Too many deals infect the acquiring enterprise with a life-threatening case of what I call “four walls myopia.”  Eyes get taken off the marketplace and turned inward.  The attention paid to customers is cursory and short-lived (first 90 days) because all attention is trying to wring “synergies” out of the combined operation as fast as possible. Resolving critical market-facing and customer-facing integration needs become back-burner tasks.  Customers defect, new business development wobbles, and the integration goes sideways.

I know it is heresy to urge you to focus on brand, business development, and customer retention ahead of anything else.  But where those are the areas of primary focus the deals thrive.  That’s why I warn against deals where no one is excited about what they will be able to do in the marketplace that they cannot do now.  If you’re not a bigger, stronger, tougher competitor at the end of the day, why are you doing the deal in the first place?  Why invest that much effort, expense, and risk if you’re not going to scare the heck out of your competitors once the deal is done?

Taking Action

A few weeks ago, I offered a viewpoint to understand the strategic implications of the RRD / CGX acquisition.  Interestingly, industry analysts still question whether “synergies” will help justify the expense and difficulty of integrating CGX into RRD.  I rather doubt that Tom Quinlan and the RRD leadership team is worried about it.  They know there’s likely limited opportunity for “synergies” because Joe Davis has run a tight ship for decades.  Davis hates unnecessary spending like Mr. Clean hates dirt.  But if you consider the customer-facing aspects of the deal, it is genuinely strategic and very interesting.  And it is being pursued by a team for whom this acquisition is anything but their first rodeo.

Strategic due diligence easily beats settling for the perfunctory, mechanical approach which focuses on the short-term risks and leaves the success of the deal to be sorted out at some future, post-transaction point in time.  Strategic due diligence looks at the future rather than the target company’s past.  It focuses on whether the acquisition will succeed, rather than on whether the deal can be done.  And it digs into the strategic assumptions on which the acquisition is based, rather than solely working to avoid unpleasant surprises.  It’s the vital effort that can make an acquisition (or series of acquisitions) genuinely strategic.

If you’re seriously considering an acquisition in the near term, what are the strategic criteria any deal needs to meet?  And are you already preparing to do the necessary strategic due diligence to make yours one of the deals that delivers?

by Wayne M. Peterson, Principal
The Black Canyon Consulting Group Inc.