Application of Indications and Warning Intelligence to Mergers and Acquisitions
During my career in naval intelligence, I was always drawn to indications and warning intelligence (I&W) work. I&W attempts to predict threats to the U.S. Navy and/or the United States as explained in this definition:
“Indications and warning intelligence (I&W) are those intelligence activities intended to detect and report time-sensitive intelligence information on foreign developments that could involve a threat to the US or allied and/or coalition military, political, or economic interests or to US citizens abroad.”
What makes I&W so powerful was its framework, specifically focused on “indicators” and “indications.” Indicators are precursor events established by years of watching hard intelligence problems like submarines going to sea, for example. Over time, certain activities or events are observed that form a pattern. From this pattern, indicators are derived that act like a “threat” checklist. In this framework, some indicators have greater levels of significance than others. For example, seeing trucks on a pier, indicating the submarine is getting supplies, may have a greater level of significance as an indicator of a submarine getting ready to go to sea than seeing diesel exhaust indicating that the submarine engine is running.
As more indicators for a particular event are checked on the list, the more likely this the event will occur. I&W allows military commanders to reduce risk by anticipating events proactively, instead of reactively. A classic example of I&W is the Cuban Missile Crisis in 1962. The first indication of Soviet nuclear missiles in Cuba didn’t come from images of the actual nuclear missiles, themselves, but from images of surface-to-air missile systems arranged in a similar pattern to those in the Soviet Union defending its nuclear missile bases.
The forewarning approach of I&W allows for quicker decision making that can change the outcome of an event. This approach can be applied to the M&A environment.
Application of I&W in M&As
Like the Cuban Missile Crisis, M&As bear close watching for indicators of both positive and negative outcomes, particularly during the integration phase. We can assume that most serial acquirers, like Cisco and IBM for example, through their multiple M&A experiences, have established frameworks by which they can see when things are going well (or not so well). However, given that many different corporate functions are involved in deal integration, it is possible that lessons learned have not been implemented systematically across the organization to create an M&A I&W framework to aid in providing early warning when elements of the deal are heading south.
Establishing an M&A I&W Framework
The most effective M&A I&W framework will come from getting the right people to discuss and critically review what went right and wrong at the end of each deal. During these discussions, these steps should be followed to create an actionable framework for the next deal.
- Achieve clear understanding of the M&A objectives. Any M&A I&W framework has to understand explicitly AND completely what the objectives are for the specific deal. Access to new markets? Access to innovative products? Access to new talent? Something else? By understanding these objectives, your team can brainstorm what events would have to occur to derail the attainment of the specific objective(s). Once you have a firm grasp of the events that could negatively impact success, your team can start to identify indicators.
- Identify indicators for each M&A objective. Then your team can develop the list of indicators that will inform business leaders that achievement of a M&A objectives is in danger. For example, let’s assume that one stated objective is 80% retention of the R&D team over the next two years. One obvious indicator is the actual retention numbers during the next two years. Other indicators could include employee engagement scores, employee’s assessments of R&D leaders in 360-degree leadership assessments, R&D promotion rates, and R&D performance bonus trends. Any one indicator could provide early warning of potential problems, but a collective view of all the indicators allows for precise and targeting actions to enable achievement of the objective.
- Establish metrics for indicators. Once your team has established the indicators, it is time to identify the metrics that should be tracked and how they will be measured. For the retention rate of R&D employees, we are staring at 100% and wont want to go below 80%. But other indicators will need careful thought to understand organizational norms, and where new data might indicate problems as a deal progresses.
- Monitor and watch closely. Once your M&A I&W framework is in place, it is time to monitor the data of your indicators. While the U.S. Intelligence Community monitors certain worldwide events 24/7, that is unlikely necessary in M&As. A good rule of thumb in the beginning of the integration is to monitor at least monthly, and maybe more often often, dependent upon the particular M&A objective and the data source. The frequency of this monitoring can be adjusted over time.
- Take action. The most important reason for an M&A I&W framework is to spot smoke before the fire. But once the smoke is sighted, action must be taken. For instance, if you see indications that R&D retention is moving in the wrong direction, it will be time to review contingency plans and actions to address the situation. This may require a review of retention incentives and potential leadership changes to prevent a loss of critical talent.
The mission of the U.S. Intelligence Community is to provide the right intelligence at the right time to mitigate potentially catastrophic events to the United States. I&W plays a key role in this mission by providing warning of events that could impact critical military operations or political decisions. The same can be said regarding using a formalized M&A I&W framework to identify when potential crises are on the horizon that could impact whether your M&A is regarded in history as a success or a footnote in failure.
Change the mindset. Change the model. Change the outcome.
Dr. J. Keith Dunbar is founder and chief executive officer of Potentious. He can be found connecting and sharing knowledge on Google+, Twitter, and LinkedIn.