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Lost in translation

AUTHOR: Lachlan Colquhoun   DATE: 14.12.06   ISSUE 2, 2006

Mergers and acquisitions (M&A) are increasingly popular as growth strategies for organisations, and yet so many of them fail to deliver the anticipated financial benefits.

AGSM’s Professor Murali Chandrashekaran and Dr Kristin Rotte are investigating if the missing ingredient in the M&A equation is the one most executives tend to ignore – the customer.

Basing part of their research on customer satisfaction data from US uniform supplier Cintas, Professor Chandrashekaran and Dr Rotte presented their findings in the US at the Institute of Business Markets Conference at Kellogg School of Management.

Research has shown that in many situations, it is the customers of the acquiring organisation who have the potential to fall harder.

Illustration: Gregory Baldwin

There has been a lot of research done into why so many M&As fail, yet the findings have not shown any systematic reasons for these failures.

Professor Chandrashekaran suggests perhaps researchers haven’t been looking at the right set of variables.

“Organisations say, ‘let’s do this acquisition – it's a quick way to grow’ and managers (who may be focussed on personal goals) engage in an M&A.

In their excitement they can tend to pay more than they should because of that escalating commitment.

When it is complete, efficiencies must be delivered, and often one of the first things to suffer is customer service, because the merged entity uses stretched service systems to deal with the growth in customers.”

The result is existing customers who may have been otherwise happy feel the pinch because service has become strained, while the new customers are anxious because they are dealing with a totally new service system.

Mergers and acquisitions (M&A) are increasingly popular as growth strategies for organisations.

Professor Chandrashekaran says the flurry of M&A activity at the end of the 1990s in the financial sector around the world saw a customer churn rate of around 15 percent and this phenomenon undermined the success of many of the takeovers.

“The motivation was to grow and all of a sudden you have lost 15 percent of your potential new customer base, and your growth targets have dropped by 15 percent,” he says. “In a situation like that, it’s no wonder that companies failed to meet their financial objectives.”

Part of the dilemma is in the question: Who owns the customer? Is it the acquiring firm or the acquired firm which still residually deals with customers? How fast does this integration take place? These issues are vitally important to success, says Professor Chandrashekaran.

“When you have two large organisations with two different support systems all hell can break loose. You people didn’t respond at the new phone number, and they feel they were better served by their old service representative.

Buyer beware
“So there is a lot of confusion from a merging of two cultures, two service support systems, two customer management and retention systems. It is not as easy as putting together a Lego system,” he quips.

Professor Chandrashekaran and Dr Rotte presented their findings at the Institute of Business Markets Conference at Kellogg School of Management.

Photo: Professor Murali Chandrashekaran

Unexpectedly, the research has shown that in many situations it is the customers of the acquiring organisation who “have the potential to fall harder” and ultimately become more alienated post M&A. They are more likely to respond negatively to any deviation in service level because their expectation is that things will remain stable.

“Customers of the acquired organisation already think that it is going to be a bumpy road, and expect change, but the customers from the acquiring firm have the potential to be hurt the most,” says Professor Chandrashekaran.

“The more loyal you are the harder you can fall. For those customers, the deviation in service levels looms very large all of a sudden and consumers can very easily fall prey to a negativity bias so any deviation can hurt quite a bit.”

Customers who have ‘multiple touch points’ and whose satisfaction is not solely dependent on one aspect of service, however, are less likely to become disaffected by the transition.

“When a customer’s satisfaction base is non-diversified, then we see that they are vulnerable,” says Professor Chandrashekaran. “But if their satisfaction basis is diversified they can stay satisfied, so the lesson is that in order to really manage transition you need to understand where the customers are in relation to this point. [It is more effective to] increase the sense of diversification and try and maintain them that way.”

Dr Kristin Rotte is investigating if the missing ingredient in the M&A equation is the one most executives tend to ignore – the customer.

Photo: Dr Kristin Rotte

A case in point
Cintas, he says, is a particularly good example to research because the company has been growing over the last three decades. It has been on an acquisition-based growth path since 2001, and also has a well-defined customer satisfaction tracking system.

As the largest uniform supplier in North American with 500,000+ clients and more than US$2.5 billion in annual sales, Cintas has been regularly ranked among Fortune magazine’s ‘Most Admired Companies’. “It is a very progressive business service organisation and we have been very lucky that their executives were willing to cooperate by providing us with their data,” says Professor Chandrashekaran.

“We have been able to analyse the data before and after acquisitions, and they factor customer satisfaction very centrally into their customer relationship management.”

The first Cintas acquisition, in 2001, went “really well”, according to the data, and the company made another acquisition in April. “The jury is still out on that, but it will be very interesting to monitor how that progresses,” says Professor Chandrashekaran.

“I think, like many companies, they have learned a lot from the financial services sector and in this case they have measures to track customer satisfaction on a monthly basis. They are taking the pulse of the customer and the voice of the customer is constantly on their dashboard, so they have the right metrics in place and are poised to manage this well.”