Reducing Acquisition Risk with Pre-Mortems
Acquisitions are fraught with risk. According to The Harvard Business Review, the 4 most common M&A risks are:
Lack of Due Diligence
Overpayment
Miscalculating Synergies
Integration Issues
At Avanti, we primarily assist our clients with addressing risks 1 and 4: Lack of Due Diligence and Integration Issues. We bring to our clients decades of acquisition integration experience and help them strengthen their due diligence process or develop high-quality integration plans. One of the tools we have found most valuable in reducing the risk of an acquisition is the Pre-Mortem.
What is a pre-mortem?
You are likely familiar with the medical practice of conducting a post-mortem on a deceased patient to understand the cause of death. Similarly, corporations have adopted the term “post-mortem” to assess project and product failures.
A pre-mortem is a very different approach in which you imagine a future in which an event – a project or product launch or the acquisition of a new company – has already transpired and failed miserably and then reflect back on it to identify why it failed. Harvard cognitive psychologist Gary Klein introduced the technique in a 2007 Harvard Business Review article. It is based on research findings that “prospective hindsight—imagining that an event has already occurred—increases the ability to correctly identify reasons for future outcomes by 30%.”
Why are Pre-Mortem’s Effective?
Psychologists believe that people tend to overestimate the probability of good outcomes and underestimate bad outcomes or failure. This is known as the planning fallacy, a phenomenon proposed by Nobel laureate psychologist Daniel Kahneman and his colleague Amos Tversky in 1979. Our plans tend to reflect our optimism and often underestimate the time, costs, and risks of future actions. Often, other people can see our plans' weaknesses and potential pitfalls but are afraid to speak out since they wish to avoid conflict or are worried they will be viewed negatively or "not a team player" by leaders. Nobody likes the killjoy — you don't want to be "that person" who frequently criticizes the organization's plans.
At other times, the momentum behind a plan or big launch is just too great to stop it. One of the most horrific cases of such a failure is the space shuttle Challenger disaster. In a June 2014 episode of the Freakonomics podcast, Klein discusses this disaster and how engineers from the firm Morton-Thiokol believed there was a high risk of failure of the space shuttle’s O-rings due to the cold weather forecasted for launch day. Several engineers spoke up, but their opinions were disregarded. There was too much pressure to move forward with the launch, and as we know, disaster struck.
The same thing can happen when acquiring a company: sometimes, there is too much pressure to move forward with a deal - or with the go-live of a major system as part of the integration - to pull the plug, even when leadership knows there are issues.
Group dynamics are different when you conduct a pre-mortem. During a pre-mortem exercise, you are granting the entire team the permission to be skeptical, to poke holes in the deal or the integration plan, and to express negative views. You may consider going as far as rewarding people for identifying holes in the plan - perhaps by giving out treats or company swag. People are free to question, and conducting a pre-mortem with a group can generate new risks that might not have been identified if done individually. The more diverse opinions you have in the room, the better.
We offer one cautionary note: it takes a strong leader to invite criticism of their plans, one who welcomes feedback and won’t later hold anything against team members or other stakeholders. Teams that have a high degree of psychological safety may be more comfortable doing a pre-mortem. We also believe that conducting pre-mortems as a regular practice can build psychological safety and improve team dynamics over time.
Pre-mortem Process
Our standard process for conducting a pre-mortem is as follows:
Plan:
Identify a facilitator, ideally someone without a vested interest in the outcome of the acquisition. Invite representatives from all major stakeholder groups. Depending on where in the acquisition lifecycle you are conducting the pre-mortem, the stakeholders will vary but may include leadership and business function SMEs from sales, operations, compliance, quality, and IT. Budget two to three hours for the workshop, depending on the group size.
Paint:
Have the facilitator paint the picture of the acquisition failure. They should describe a future state – either a few months post-integration or several years later – in which the acquisition has been an abject failure. You can paint a picture as bleak as you wish, although adding too many descriptive details may inadvertently lead the exercise in a particular direction.
Reflect:
Next, allow for a period of quiet reflection, in which each participant records the reasons why they believe the acquisition has failed. Ask people to record these notes on a piece of paper or sticky notes (if doing this in person - the exercise can also be done virtually).
Share:
Next, the facilitator goes around the room and asks each person to share one of their reasons for failure. Generally, we prefer a round-robin approach so no one dominates the conversation. Depending on the group size, you might go around two, three, or four times, asking each person to give their most likely reasons for failure.
Discuss:
Depending on the size of the group and the number of reasons collected, you can simply begin discussing them, or you can first rank them in terms of impact or likelihood and then dive into dialogue. When discussing them, first seek to make sure everyone understands the reason for failure, and then consider ways that you might prevent or mitigate the reason for failure. This exercise usually concludes the workshop.
Improve:
After the workshop, the leadership team shifts through all the inputs, including ones not discussed, and shores up their acquisition plan to address any weaknesses identified.
For those people who don’t want to focus only on failure, there is a version of the pre-mortem exercise that breaks the team into two groups – a “failure team” and a “success team” which envisions a smashing success and identifies all the reasons why the event was successful.
We advocate that companies look at both outcome extremes, allowing them to juxtapose the path to success against the potential for failure. This is referred to as a “Best Case/Worst Case Pre-mortem Workshop.” We facilitate the process similar to the one described above but add in the success team, followed by a facilitated session in which participants reflect on the two outcome extremes. We seek to gain consensus around which elements of each scenario are most likely to occur. It can be a powerful tool to enable teams to envision the full range of potential outcomes and prepare them better to face the uncertainty ahead.
Whichever approach you take, Avanti strongly encourages leadership teams or the Integraion Management Office to conduct a pre-mortem exercise either during due diligence or during integration planning. Even if the exercise uncovers only one previously unidentified weakness in the plan, that weakness could be the one that results in a devastating outcome.
Don't hesitate to contact us for assistance or guidance on conducting a pre-mortem workshop.