Acquiring a Services Company - Have You Valued the Human Assets?

What is the greatest asset when you acquire a Services company?
- Knowledge
- Process Expertise
- Goodwill
- Balance Sheet
- Client List

Wrong - it is the people. Frequently I see acquirers forget the simple unseen force behind service companies, its management and employees. Jack Welch notes the HR managers have one of the most important jobs in a firm, then why do HR departments take a back seat resigned to figuring out 401(k) plans and exit packages during most M&A's?

The biggest offenders of this game are offshore firms acquiring international service businesses. With the recent spate of buyouts of western firms by cash rich offshore companies I see over and over again aggressive operations managers and cash flow paranoid accountants drive a new acquisition to the ground through hasty and insensitive people decisions.

Acquiring a service business, especially one that is not profitable during the acquisition is frequently bungled by offshore acquirers overzealous to cut costs and bring the unit to profitability. Service businesses hold on to their biggest assets, their people, during lean times as the business owners are acutely aware of which employees form the backbone of the firm. M&A teams are quick to discount this excess head count as unnecessary baggage and one of the first avenues to cut cost. Especially, if it a closely held or family owned firm the thought process is the owners are holding on to their family and friends sacrificing their own financial future. I have found this to be further from the truth. On the contrary the owners typically hold on to their core team during lean times.

An acquiring firm overzealous to make cuts removes (or replaces with offshore staff) in the first round the very knowledgeable but underutilized "worker bee" employees from the payroll ignoring the owners pleas. Remember, these are the same owners they sweet talked to before the acquisition about tall tales of strategic fit and common goals. Next come cuts on the inner core comprising of employees that hold the most knowledge. For even the most organized firm all knowledge cannot be captured in process flows and documentation. The subtle subjective nuances of elements such as client relations, market sensitivity, etc are lost with this round of cuts. Finally the axe comes on the management themselves who have since maligned themselves from the acquirer who thinks they are nothing more than roadblocks trying to protect their employees and ways of doing business which was unprofitable in the first place. With the acquired company demolished, the customers are disillusioned and follow suit out the nearest exit.

The saga repeats over and over again in the same predictable fashion like a cheap horror flick that you have seen a million times.

What's the solution, here are my opinions:
a. For services business acquisitions, a minimum of 6 months (or more depending on the complexity and/ or size of the firm) of "as-is" time has to be computed into the acquisition costs. i.e that's 6 months of losses if it is a loss making organization. This is the transition period, where the acquirer gets to understand their acquisition and the acquiree gets to trust the good intentions of the acquirer. This is a time of joint process mapping sessions, revenue analysis and discussions on future viability of the company's business lines. All of this has to be driven by the incumbent management team and assisted by transition managers to make it a collaborative team decision.

b. Post acquisition the parent should place 1 or 2 transition specialists in the acquired company who have strong subject matter knowledge (a non SME will not be taken serious by the acquired company). The typical transition manager has to be a diplomat, empathetic communicator and a human relations expert who is able to build bridges and remove all doubts about the intentions of the parent on the future course of the business.

c. At the end of the transition period, employee cuts and offshoring/ right shoring decisions made with full communication to all employees of the acquired firm. Sunset teams need to be formed from departing employees with lucrative exit packages and given incentives to do knowledge transfers to their replacements.

So remember what you are buying in a service business, it's the people. People make processes not the other way round. Have empathy for the acquired company, hear their voices, acknowledge their achievements, communicate the challenges to them clearly and you will be well on your way towards a successful acquisition that will pay many multiples on your investment.