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Tuesday, Nov 24, 2009
A Harvard analyst says government consolidation won't improve the fight against terrorism quickly, and maybe not at all. The reason: Most big corporate mergers fail.
Nov 21, 2002 | On Tuesday, the U.S. Senate approved the creation of the Department of Homeland Security, a mammoth federal agency whose chief goal -- to protect Americans against terrorism -- is daunting. But leaving aside the matter of terrorism, the mere creation of the new department, which will employ about 170,000 people and bring together 22 government agencies, will be a huge challenge for the officials charged with the task.
What are the department's chances -- not only of surviving the harrowing merger process, but of actually making us safer than we are today? Ashish Nanda, an associate professor at Harvard Business School and an expert on corporate mergers, says that we shouldn't expect any magic soon.
In the business world, most mergers don't work, Nanda says. Many fail to produce the sort of spectacular results that their promoters promised at the time of the merger, and the merged entity is often less successful than were the individual parts brought together. Inflated expectations, "culture clashes," and the inevitable shuffling of positions in the new firm can cause problems in the merged firm several years after the integration, he says.
There are obviously significant differences between business organizations and government institutions, Nanda concedes. Businesses have a profit motive, and their success is measured easily -- by their quarterly statements or by their performance on the stock market. The Department of Homeland Security, on the other hand, will be measured by something much harder to quantify -- its effectiveness in preventing terrorism. The only way we'll know if the department works is if it happens to foil a terrorist attack. The way we'll know it doesn't work is if it fails.
Tom Ridge, the White House's domestic security advisor and the man most likely to lead the new department, appears to understand that he has a tough job. He told the New York Times on Thursday that he has spoken to executives at Hewlett-Packard and Lockheed Martin -- two firms that have recently been involved in mergers -- for advice on how to smooth the Homeland Security integration. "I would be foolish to ignore the reality of the logistics of this," he told the paper. "We're going to look for advice and counsel from a lot of folks."
In an interview with Salon from his office in Cambridge, Mass., Nanda said that he essentially agrees with Ridge. The Homeland Security reorganization won't be impossible to accomplish, but he guesses that it will take several years before we see any gains from it, and that the task will still be extremely difficult -- "Herculean" was a word that came up several times.
Is it possible to look at this government merger in terms of your own expertise in mergers?
Yes, I can, and I can give you my observations based on that. But ... I'm not an expert in government organizations.
So, first, an empirical fact. A very large percentage of mergers fail. A number of studies have been done over several years that tend to show that they do not succeed. They tend to fail.
When you say "fail," what does that mean?
Different people have used different metrics for this. There was a McKinsey study done in the mid-'90s, and the way they have tended to look at failures of mergers is by asking, what has happened to the stock market value of the firms? Or sometimes they go and ask the people themselves if the merger has achieved its goals, etc. And sometimes it's just, how long does the merged firm last? Survival.
So the number in the private sector that people use is about two-thirds to about 70 percent of mergers tend to fail. And the reason they say they tend to fail is that post-merger integration is extremely challenging. And I think that the issue of post-merger integration is an issue that the Department of Homeland Security will also have to meet to a considerable extent.
So this is after the merger -- the difficulty of putting the organization together ...
Yes, the difficulty of putting the organization together after the merger. And when I'm talking of the failure rate being 60 to 70 percent, this is when two firms merge to form one firm. Imagine the order of magnitude of the challenge when you say 20-plus departments are going to be smooshed together into one. So it's going to be a Herculean task.
When I look at other people in terms of businesses merging together, there are several cases of mergers between law firms. There's the famous case of Clifford Chance, a British law firm merging with a New York law firm. And it has taken them three years and they're still going through post-merger integration challenges. A very famous accounting firm, Price Waterhouse, merged with another firm, Coopers & Lybrand, five years ago, and they are still talking about post-merger integration issues. There are cases on the consulting side: a well-known case of Cap Gemini merging with Ernst & Young consulting services, and again post-merger integration challenges are still continuing four and five years later.
So when you talk about the challenge of merger integration, whether you look at it from the point of view of the possibility of success or of how long it takes, these are challenging, difficult things.
And it's going to be more challenging, even more challenging, for the Department of Homeland Security for two reasons. The first is that in all the mergers I'm talking about there are only two organizations, and here there are 20-plus.
The second is, in the case of commercial firms it is very clear -- there is one very clear metric, which is economic performance. And so you can look at economic performance and say that's what we are driving toward, and you have a great amount of autonomy in terms of hiring and firing people, changing their roles, etc.
When you look at government departments, there are very many more metrics. One is of course the economics. Can we achieve the same kind of results that we were achieving earlier at lower costs? Then there's a second measure, which is social welfare. Are we doing things more or less effectively? Then there's a third measure, which is political. Are we achieving our political goals through this organization or not?
So there are three measures of success or failure. The result is there is likely to be much greater pressure to resist significant changes in the case of government merger than there would be in the case of a firm.
So what I'm saying is, one, the private sector is tough. Two, this is even tougher in the public sector. It's going to be quite a challenge.
