The premortem: How to avoid ‘stupid acquisitions’ in one step

My mid-October post about the performance of the ASX-listed recruitment agencies drew a lot of comments on my LinkedIn profile, through emails and in conversations with recruitment industry leaders. One of the common topics of conversation has been the performance (or lack of it) with respect to acquisitions made by the boards of these listed companies.

It seems hard for many people to believe that so many highly-paid and experienced business leaders could make such massive mistakes and, in many cases, keep repeating the same mistakes by making additional poorly-performing acquisitions.

You might be amused (if you are not a shareholder of one of these acquisition-hungry companies) to discover that this level of failure is not only predictable it is the norm. One study (KPMG, 1999) of corporate mergers and acquisitions showed that 83 per cent failed to add any value for shareholders, and half actually destroyed value.

Against this background I was bemused to read, via industry news service ShortList, a report headed No more “stupid” acquisitions for Rubicor, in which Rubicor Chair, John Pettigrew was quoted as saying “Rubicor will not, however, do anything “stupid” like it did 10 years ago, when the company was saddled with debt after buying businesses at “market prices” in a market that subsequently collapsed.”

But aren’t boards meant to be comprised of ‘experienced’ business people who are paid the big dollars to responsibly invest shareholders’ money and to identify among other things, the danger signs of an overpriced acquisition?

I would suggest that many of the directors responsible for these decisions are unaware of the concept of a ‘premortem’.

The premortem is explained in Chip Heath and Dan Heaths’ excellent book, Decisive: How to Make Better Choices in Work and Life (Crown Business, 2013):

‘The psychologist Gary Klein, inspired by his research, devised a method for testing decisions that he calls the “premortem”. A post mortem analysis begins after death and asks ‘What caused it?” A premortem, by contrast, imagines the future ‘death’ of a project and asks, “What killed it?” A team running a premortem analysis starts by assuming a bleak future: “Okay, it’s 12 months from now, and our project was a total fiasco. It blew up in our faces. Why did it fail?’

Everyone on the team takes a few minutes to write down every conceivable reason for the project’s failure. Then the team leader goes around the table, asking each person to share a single reason until all the reasons have been shared. Once all the threats have been surfaced, the project team can Prepare to Be Wrong by adapting plans to forestall as many of the negative scenarios as possible. The premortem is, in essence, a way of charting the lower bookend of future possibilities and plotting ways to avoid getting there.’ (page 203)

The premortem is a very simple and powerful process. Yet how many companies do anything like this when faced with a big investment decision? Very, very few, I would guess.

Of course, what makes it worse is that the people who run recruitment companies are normally pathological optimists who instinctively see the world through a glass-half-full lens. Their default position is ‘I/we can do it!’.

The Heaths also explain how this predictable mindset happens.

‘ … confirmation bias leads us to hunt for information that flatters our existing beliefs … In reviewing more than 91 studies of over 8,000 participants, the (psychology) researchers concluded that we are more than twice as likely (my bold) to favour confirming information than disconfirming information.’ (page 95)

… what it does to our decision making:

‘Overconfidence about the future disrupts our decisions. It makes us lackadaisical about preparing for problems. It tempts us to ignore early warning signs of failure.’ (page 215)

… and where we should direct our focus, instead:

‘ … the premortem stop(s) people from focusing on a single, usually optimistic guess about how the world will unfold and instead compel(s) them to pay attention to the uncertainty of the guess (my bold). The effort it takes to explore the full spectrum of possibilities and to prepare for the worst possible scenarios acts powerfully to counteract overconfidence.’ (page 206)

So what potential problems should be considered in a premortem when a potential acquisition is on the table?

Here’s a quick list of nine things to get you started:

1. The reasons for, and benefits of, the merger/acquisition are not clearly articulated to staff in a way that is meaningful to them, causing confusion and disengagement.
2. Current economic conditions and the competitive environment are expected to continue indefinitely.
3. The merger/integration costs and timeframes are underestimated.
4. Customer service, sales and/or back office synergies are overestimated.
5. Plans are based on how employees ‘should’ behave (ie rationally) rather than how they will behave (ie emotionally).
6. Stakeholder expectations are poorly managed.
7. Key influencers within the business are resentful for not being brought into the communication loop soon enough.
8. Seemingly ‘small’ policy changes to create company-wide consistency (eg dress code, flexi-time etc) cause big disputes among staff.
9. Remuneration disparities across similarly-skilled employees cause resentment.

The critical factor remains the character of the leader at the very top, as the Heaths succinctly encapsulate:

‘To make good decisions, CEOs need the courage to seek out disagreement.’ (page 94)

Will any acquisition-hungry recruitment agency CEO and/or board take any notice of the publicly-listed recruitment industry’s underwhelming track record in this area, and pause to undertake a premortem?

Not a chance. Stay tuned for more ‘stupid’ acquisitions, coming your way very soon.