Using Kaizen to Lower the Risk of Mergers and Acquisitions Failure

The number of Mergers and Acquisitions (M&A) that end in failure is a matter of conjecture but it’s commonly estimated that over 50% of all M&A deals fail to achieve their intended goals. If true, that represents an astounding loss of investment dollars as well as the lost time, energy, reputations and everything else that goes along with closing an M&A deal. Lowering the failure rate by even a small amount has the potential therefore to save billions in lost dollars. While specific reasons are usually cited for individual failures, it’s difficult to generalize about a root cause of the failures that would allow investors to avoid or at least mitigate their investment risk. To find a global means of lowering the risk of an M&A failure we need to look for systemic causes of the problem.

By M&A failure I am referring to failures that occur after an M&A deal has been closed, not a failure to close the deal (a subject all to itself). The specific reasons cited for M&A failure usually include target business issues such as the lack of anticipated or promised performance, culture clash, management team and key employee loss, changes in the market… and on and on. But again, while these may be the cause of a specific failure, citing the cause of an individual failure doesn’t help us identify the systemic causes. For our purpose then, we will need to use a more generic definition of an M&A failure. To accomplish this, we can simply define an M&A failure as a merger or acquisition which, after 2-3 years, the investor wouldn’t do over if given the chance. I limited it to 2-3 years because after that there is a good chance the business failed for other reasons.

To find a systemic cause of failure, we must turn our focus to the M&A process itself. Dr. W. E. Deming was a mid Twentieth Century scientist who did much of the original research on quality assurance techniques. In his work he demonstrated that product failures resulted from the manufacturing processes that were used to produce the product and that, by improving the process, it is possible to reduce the resulting failures. More recently, we have seen this principal demonstrated by Toyota when they adopted the “Kaizen” method. “Kaizen” is the Japanese word for good or positive process change. To improve the quality of their cars, Toyota uses “Kaizen” to remove systemic manufacturing defects. “Kaizen” is now being applied in many other industries. While the M&A process is not a manufacturing process it is a repeatable process and by analyzing that process, it is possible to identify the systemic root cause of some M&A failures. We can then use a “kaizen” approach to modify the process to lower the M&A failure rate.

Overall, the M&A process is a methodical, legalistic process embedded with activities tied to letters of intent, the definition of terms and conditions, the creation of an acquisition agreement and other documents needed to transfer ownership of the target business in a diligent manner. Activities like negotiating the terms of the agreement or preparing the transfer of document can be tedious but they have exacting results and are generally not the cause M&A failures.

Due diligence by contrast is the most subjective step in the M&A process. Many investors don’t fully understand the role of due diligence and begin with only a notional understanding of what they hope to accomplish. This gives us the first clue to the cause of many M&A failures.

To understand the problem, lets break the M&A due diligence process down a little further. To be effective, due diligence should assess three distinct facets of the business; legal, financial, and operations, and these should be performed with equal effectiveness. Most investors do a good job at legal and financial due diligence but fail to perform an effective operations due diligence. This is due to the fact that legal and financial due diligence rely on the frameworks of law and accounting as their guiding principles and, assuming that the investor has a competent attorney and accountant, there is little reason not to perform these assessments effectively. Operations due diligence is a different story. There is often confusion regarding exactly what needs to be assessed during an operations due diligence or how to measure and report on the results. To understand the nature of this problem, this would be a good time for the reader to take a moment to write down what you think constitutes an effective operations due diligence. Later we will see if your definition has changed.

While not totally accurate, it is fair to say that financial due diligence is primarily looking at the past performance of the business while legal due diligence looks at the current state of the business (at the time of closing). Operations due diligence on the other hand is trying to discover potential problems that could impact the future operations and sustainability of the business. If an operations assessment determines the likelihood of a negative future event occurring than, by definition, operations due diligence is a risk assessment. Specific failures, such as cultural mismatch, missing the market, and the loss of key clients are examples of events that have the potential to negatively impact the future operations of the business. If the definition you wrote down didn’t have the word risk in it than you have not fully understood the role of operations due diligence.

What about events that have a positive impact on the business? Is there, for instance, an opportunity for the business to improve its sales after the merger? Risk and opportunity are often described as “two sides of the same coin”. An operations due diligence should also be an opportunity assessment. Opportunity is the likelihood of an event that will positively impact the future operations of the business. If an operations assessment discovers that the business has a great product but sales are weak because the sales group is immature and the acquiring company already has a strong sales organization than an opportunity to improve sales has been discovered. Not capturing potential opportunities is also a cause of M&A failure because the business will fail to achieve its full potential.

Operations due diligence needs to be an enterprise wide assessment. When asked, most people name only one or two key functions to be assessed and fail to provide a holistic, enterprise wide answer. “Operations” is a very broad term and potentially covers a wide range of operating functions. Without an established framework similar to that of law or accounting, the enterprise framework tends to be an ad hoc list of functions. Standardizing a framework that defines the enterprise therefore is crucial for reducing failures. Processes that do not produce repeatable results are prone to error. Without a clearly defined, consistent framework the results are not repeatable and increases the chance of an M&A failure.

Investors rely on their CPA and attorney to establish the financial and legal framework but who do they rely on to perform an operations assessment? A CPA can tell you the financial maturity of the business but how do you determine the maturity of the operations infrastructure of a business? The tendency for most investors is to “go it alone” by focusing on only one or two areas. “It was a software company so we had an engineer look at the code”. The lack of a consistent operations framework, or established practice that defines one, re-enforces the potential that operations due diligence is the weak link in the M&A process due to the potential to overlook business functions during the assessment.

Operations due diligence needs to be performed as an enterprise wide assessment that spans the entire operations infrastructure of the business. There may be more understanding of the operational needs during a strategic acquisition over a purely financial investment but my experience is that a “go it alone” approach during a strategic investment tends to overlook key operations areas. Without a guiding framework, it is difficult to determine what constitutes “complete” and without a framework to use as a guide, the potential to miss an operations function is great and therefore so is the risk that you will overlook the potential cause of an M&A failure. An operations assessment must cast a wide net in order to keep potential risks from slipping through and the lower the risk of an M&A failure. Treating operations due diligence as an enterprise wide risk/opportunity assessment based on the development of a holistic framework and a constant M&A process improvement program is a clear way to lower the M&A failure rate.

Improving the way operations due diligence is performed demonstrates how “Kaizen” could be applied to the M&A process. “Kaizen” requires a continuous process improvement program that continues to remove defects over time. The examples given here are just a first step. Applying a “Kaizen” approach would mean continuously revisiting the operations framework to better identify latent operations risks and opportunities. To accomplish this, we would need to look at the specific causes of M&A failure and constantly ask, would this problem have been discovered during our operations assessment. If the answer is no, then the operations framework needs to be further improved. Continuous process improvement requires resources. Investors that are continuously involved in the M&A process will gain the most from this type of program. The benefits that this type of process improvement program provides by lowering investment risk should justify the commitment of those resources.

The CEO’s Guide To Succession Planning – Managing Risk & Ensuring Business Continuity


Once reserved for the upper echelons of senior management, and often viewed as replacement planning should catastrophe strike, today’s succession planning is being redefined. The discipline has broadened in both breadth and scope to become a central component of board-level strategy.

Succession planning focuses on managing risk and ensuring continuity across all levels of the organization – risk of untimely departures of critical personnel, risk of retirees taking their skills and knowledge with them and leaving nothing behind, and risk of losing high value employees to competitors. It does so by helping your business leaders to identify top performers within the organization, create dynamic “talent pools” of this critical talent that other leaders can leverage, and prepare and develop these high performing employees for future roles.

If this was easy, everyone would be doing it. The problem that exists today is that succession planning is barely automated, let alone optimized. This CEO guide provides five key tips for jump starting your succession planning efforts.

1. Automate and Reduce Costs

Today’s succession planning efforts are characterized by fragmented, inconsistent, paper-based processes. Indeed, 67% of companies are still primarily paper-based, according to a global survey conducted by SumTotal.

Conventionally, business and HR leaders will spend weeks or even months manually scouring different parts of the organization for information needed to build lists and pools of nominees and successors for specific job families or positions. The information required to generate the lists often includes self assessments, past performance appraisals (often paper-based), and 360 feedback. After a lengthy period of information gathering and aggregation followed by manual analysis (e.g., nine-box, gap analysis), the results are printed and collated into large three-ring binders for use in executive planning meetings. This time-consuming, inefficient, and costly process is still commonplace today.

To effectively transform succession planning from a manual, paper-based process to one that is systematic and technology-enabled, CEOs must focus on laying a solid foundation supported by strong executive leadership.

Program & Process Foundation

  • Establish dedicated management function (e.g., program management office) with CEO-sponsored executive leader or council (with senior representation from line-of-business, geography, and corporate HR)
  • Define core succession process along with key constituents and tasks at each step of the process; Clearly articulate touch points to other business processes (e.g., performance management, career development)
  • Understand implications of change with emphasis on managers & employees
  • Align program with broader business strategy
  • Determine initial scope (e.g., enterprise-wide, divisional)
  • Define processes independent of technology

Technology Foundation

  • Must support and enable key processes
  • Must integrate learning and development
  • Must link seamlessly to other business processes, especially performance management
  • Must be flexible and configurable to meet unique needs
  • Must centralize and consolidate key information and data
  • Must be easy for managers and employees to use

2. Drive Succession Planning Deeper into Your Organization

Many CEOs still view succession planning as replacement planning to designate successors in the event of a catastrophe befalling senior company leaders. Indeed, succession planning penetrates only the highest levels of the organizational hierarchy, according to survey data. Only 35% of companies currently focus their succession planning efforts on most critical roles within the organization.

Yet a most dramatic transformation is underway: 65% of the organizations surveyed plan to extend succession planning to all critical positions within the two years. Applying succession planning beyond the top layers of management is critical to retaining high performers across all levels of the organization and mitigating the risk of untimely departures of personnel in high-value positions.

The key to extending succession planning into the organization is to provide career development planning to employees. Indeed, fully 97% of business and HR leaders believe that a systematic career development process positively impacts employee retention and engagement. These leaders also believe that providing career advancement opportunities as well as dedicated development planning to employees are the two most important mechanisms for retaining high performers.

Retaining existing employees not only has the potential to minimize the effects of talent shortages, it also provides significant and tangible cost savings (since replacement costs range from 100%-150% of the salary for a departing employee).

3. Establish Dynamic Talent Pools to Improve Pipeline Visibility

Centralized talent pools provide CEOs with global visibility into their talent pipeline and overall organization bench strength. They provide a mechanism for ensuring that the organization’s future staffing plans are adequate, thereby reducing risk and ensuring continuity. To be truly effective, talent pools need to be dynamic in nature. For instance, if an employee is terminated, that person should be automatically removed from existing successor pools. Alternatively, if an employee closes a key skill or certification gap that had previously kept her from being considered as a successor, the pool should be updated appropriately. Talent pools that are inaccessible or not up-to-date are of little use to decision makers.

A key element of making talent pools accessible is in-depth searching for talent exploration. A talent pool is not much good if managers cannot easily view, track, update, and search for potential successors. Dynamic talent pools should take the guess work out of succession planning by aligning employee assessments, competencies, development plans, and learning programs. Proactive system monitoring ensures that as employees learn and grow, talent pools are dynamically updated to reflect the changes. It is this element in particular – supported by robust reporting and analytic capabilities – that helps CEOs make more objective staffing decisions and better plan for future staffing needs.

4. Promote Talent Mobility to Retain High Performers

Industry analyst firm Bersin & Associates defines talent mobility as “a dynamic internal process for moving talent from role to role – at the leadership, professional and operational levels.” The company further states that “the ability to move talent to where it is needed and by when it is needed will be essential for building an adaptable and enduring organization.”[1]

Talent mobility is:

  • A business strategy that facilitates organizational agility and flexibility
  • A mechanism for acquiring and retaining high performing and potential talent
  • A recruiting philosophy that favors internal sourcing over costly external hiring
  • A method for aligning organizational and individual needs through development
  • A proactive and ongoing approach to succession planning rather than a reactive approach

A systematic talent mobility strategy enables business leaders to more effectively acquire, align, develop, engage, and retain high performing talent by implementing a consistent, repeatable, and global process for talent rotation. Without a cohesive talent mobility strategy, CEOs face several risks:

  • Focus on costly external recruiting vs. internal sourcing
  • Wrong hires (cost can be 3-5x person’s salary)
  • Increased high performer churn
  • Reduced employee engagement
  • Reduced flexibility as business conditions change

CEOs should consider the following integrated processes – and a complete technology platform to support them – to promote and enable talent mobility:

  • Current workforce analysis:Includes detailed talent profiles, employee summaries, organization charts, competencies, and job profiles.
  • Talent needs assessment: Assess employees on key areas of leadership potential, job performance, and risk of leaving.
  • Future needs analysis:Development-centric succession planning to create and manage dynamic, fully-populated talent pools.

5. Integrate Succession Planning to Broader Business Processes

Succession planning is not a silo. It implicitly relies on other talent processes and data, especially assessments that provide a performance and competency baseline. Yet unlike a performance management process, which can be executed in a relatively self-contained fashion (assuming it has access to core employee data), the same is not true for succession planning.

Succession planning requires foundational data (e.g., competencies, job profiles, talent profiles, and employee records) and inputs (e.g., appraisals, feedback). Outputs include nominee pools, successor pools, development/learning plans, and reports. To facilitate the level of integration required to get succession planning right, a single, natively-integrated technology platform that centralizes key talent processes and information is required. With this single platform, the time to develop succession plans can easily be reduced from weeks or months to mere hours. The benefits can be significant: reduce costs, reallocate personnel from tactical activities to more strategic endeavors, and mitigate the risk of untimely departures of essential personnel.

Additionally, a single technology platform promotes the linkage of learning and career development to succession planning. By bridging these processes, nominees who are not ready for advancement can be assigned detailed development plans that guide them to improve the competencies and skills required for new job positions. Learning paths and specific courses can be established for employees to facilitate their career growth. By providing learning opportunities and development plans to employees, CEOs can take a more active role in promoting employee growth, retention, and engagement.

Finally, with a single system of record, reporting and analysis is vastly improved, since all relevant talent data resides within a single data structure. Strategic cross-functional metrics can be readily established (e.g., measure the impact of learning and development programs on performance). Reporting and analysis are key to the CEO’s success in managing employee resources and implementing strategies that support corporate objectives and initiatives.


Organizations can realize significant efficiency gains and cost savings by moving from a manual, paper-based succession process to one that is fully technology-enabled. The shift to a single technology platform facilitates extending succession planning deeper into the organization, since a well-architected solution seamlessly links succession to career development and learning. A complete platform improves senior management’s global visibility into the talent pipeline and bench strength, and promoting talent mobility to retain high performers becomes a viable engagement strategy. Succession planning, done correctly, is all about process and supporting technology integration. Without integration, succession planning becomes just another organizational silo.


[1]Lamoureux, Kim. “Talent Mobility: A New Standard of Endurance.” Bersin & Associates, November 30, 2009.

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