Confirming your Post-close Operating Mode: Due Diligence

Confirming your Post-Close Operating Model: Due Diligence

Due diligence has begun. You can already feel the energy and momentum building. But unlike previous deals, you’re ahead of the game: You have an agreed, clear set of deal and integration objectives to guide your post-close efforts. Each of them is specific and measurable. Timing is firmly agreed by management. While integration success is by no means guaranteed, it is at least defined. Now to start detailed planning…

Not yet! A critical step remains before you dive into action. To complement programme objectives, you need to define your ‘end state’: what aspects of the business will need to be integrated, aligned, improved, or change in any way to allow you to achieve those objectives? Often referred to as your ‘post-close’, ‘future’ or ‘target’ operating model, this should consider every aspect of the business, from branding and market proposition to products and pricing, to processes, systems, metrics, and yes, organisational structures and roles. 

You need not ‘boil the ocean’ and define every aspect of the future combined business, but you need to consider what must change, and when. Of particular import are interdependencies: the implications these changes may have on other parts of the business.

Remember, everything is interconnected: a new IT platform has significant knock-on impacts to processes, roles, and even culture. Perhaps the greatest single issue we find in failed integrations is a disconnect between one ‘element’ of an operating model decision and another. Real-life examples including managers stripped of commercial responsibility while remaining accountable for revenue; product rebranding no longer aligned with core strengths; and yes, new IT systems driving centralised decision-making, in turn forcing unwanted cultural change on a business.

You can think of many others. The result? Lost acquisition benefits increased operating costs, demotivated employees, lost customers.

Conceptually, getting the target operating model (TOM) right, including interdependencies, is simple: Get the right group of individuals – those familiar with the business and accountable for running it post-close – around the table. Hold methodical, structured conversations about each of the elements (shown above) and some ‘simple’ questions: What will need to change in that area of either the target or the acquiring company to achieve your stated objectives? To support the long-term strategy?

While areas may be unaffected, the complexity comes in considering detailed implications to those areas you do decide to change or integrate (e.g., What metrics should change to ensure your proposed new Capacity Planning process is monitored and supported? How will pricing need to adjust to reflect the new product suite? How many CRM systems should we have? What organisational accountabilities will best drive our new product development capability?).

You should enter these workshops prepared to ‘pressure test’ the group’s ideas. Have ready a set of difficult situations that might challenge the target operating model. These might include customer defection, supply disruption, regulatory delays, or a manufacturing strike. How does that TOM fare in each case? What are the implications?

Even more challenging is the second objective of this exercise: ensuring leadership alignment with the end result. The plan is useless, but planning is indispensable. Getting your leaders to agree, really agree, not nod their heads, on the right operating model often is key to integration success. The process is at least as important as the result. BTD knows that the agreement requires meeting three conditions:

1. Clarity – all agree the meaning of words, ideas and actions, no buzzwords or vagueness
2. Choice – the team makes explicit, mutually consistent choices; trade-offs are explicitly acknowledged (e.g., the geography-based organisation places pressure on global product & service consistency)
3. Commitment – executives are not reluctantly ‘going along,’ they are willing to subsume personal and functional interests to drive overall success

Objective, experienced challenge and fresh thinking is important to ensure all the bases are covered, to confirm that you can actually be delivered the TOM and that it will work once in place.

A good Operating Model document informs every aspect of the deal and integration. Yet it should comprise no more than 20-30 pages – top-level organisational charts, systems architectures, brand principles, etc. Details are for appendices or supplementary documents. Remember: a 1-page summary understood and agreed by senior management is far more valuable than 300 pages of detail that are read by few and understood by even fewer.

That’s not to say the detail is useless. Once agreed, this document cover, or help you determine:

• What elements of the two businesses you will integrate? Align? Leave separate?
• What specific changes will deliver and sustain each of your deal benefits?
• When will these benefits start to be realised?
• What needs not to change post-close? (Avoid dissipating resources and management attention on the unnecessary.)
• What to say to employees and customers about how the business will change?
• How to structure and assign accountability for your integration programme?
• How much will your post-close integration and improvement activities cost?
• Where is implementation (and therefore benefit delivery) especially risky or challenging?
• When will your integration programme end? How will you know you’re ‘there?’

And that’s just the beginning! A good operating model, and the process you took to deliver it, will also help you:

• Build support across your leadership team on the shape of the future business, and their role;
• Use due diligence to test your ability to deliver the benefits;
• Identify incoming leaders who are critical to post-close success;
• Improve the accuracy of your target valuation and detail sensitivities;
• Find and use your red lines, strengths, leverage in deal negotiations.

Not bad for a 20-page document! Get this step right, and you’ll enter your next deal well prepared.

Having now defined your benefits and objectives (why) and your operating model (what), you now need to develop the third piece in the puzzle: How you will achieve both. In my next post in the series, I’ll discuss the fourth step: Developing a plan to deliver your post-close integration and improvement programme.