Jeffrey Pfeffer and Robert I. Sutton
08/01/06
If you made investment decisions the way most companies make merger decisions, you would lose a lot of money. Your typical investment would have a 70 percent chance of underperforming the S&P 500. You would keep making bad investments because you suffered from the delusion that you are smarter than other people. You would rarely question the nonsense and half-truths from an entire industry of people who urge you to make these investments—even though they benefit whether you win or lose, so long as you keep making bad decisions.
Sounds
absurd, but this is exactly what a large and rigorous body of research shows
about the fate of most mergers, especially those that result when a public
company buys another company with stock. Mergers are a troubling—but not
especially rare—example of smart executives who keep doing the same (typically)
dumb thing over and over again.The time has come for companies to start practicing evidence-based management, which means, first, being committed to facing and acting on hard facts. Unfortunately, piles of evidence show that—whether it is a bad merger decision or a bad management practice—most managers typically remember and believe only evidence that supports their prior beliefs, no matter how much evidence contradicts those beliefs. As Simon and Garfunkel sang, “A man sees what he wants to see and disregards the rest.”
Second, evidence-based management means treating your current beliefs as provisional and your organization as an unfinished prototype. It means having the courage to act on the best knowledge you have right now and the humility to change your views and organization when better information comes along.
Third, companies need to discover the best evidence about the practices used in other companies and identify why those practices were effective, if those practices will work for them and—this is very important—avoid mindless imitation of “best-of-breed” companies that succeed despite, rather than because of, their practices. Despite GE’s ABC ranking system (where the bottom 10 percent are moved out each year, the top 20 percent get 80 percent of the bonus money and the middle 70 percent get the remaining crumbs), there are dozens of rigorous studies in peer-reviewed academic journals showing that creating bigger spreads in pay leads to worse organizational performance. Not a single careful study shows that creating big spreads in pay increases organizational or team performance. Yet company after company keeps imitating GE, and installing rank-and-yank systems because GE is the “best of breed.”
Questioning Quirks
Good companies often do bad things,
just like successful people often succeed despite, rather than because of, their
quirks and habits. Take Herb Kelleher, who led Southwest Airlines to year after
year of profitability, while the rest of the industry lost billions. Herb drank
large amounts of Wild Turkey bourbon during the years he led the company—a fact
he has bragged about publicly. If you follow the best-of-breed logic, this means
you should focus on investing in companies where the CEO drinks large amounts of
bourbon. It sounds ridiculous, but it is exactly the same logic that many
consulting firms and gurus use to sell best practices.
We spent the last
five years researching evidence-based management. We found that when leaders and
companies use evidence-based practices, they trump the competition. Let’s return
to mergers to see how a company can use an evidence-based approach to succeed at
something at which most companies fail. Cisco demonstrates how to defy the odds,
having swallowed 108 companies in the past 12 years, expanding its dominance in
the industry. Nearly 50 percent of the 10,000 employees it has acquired are
still with the company.
Cisco is dedicated selecting merger targets
that—based on the best research—are likely to succeed. It acquires companies
that are small and geographically close, because mergers of equals and
long-distance mergers fail at far higher rates. Cisco selects acquisitions on
the basis of cultural fit and rejects targets that have promising technologies
but won’t fit. Cisco not only finds, faces and follows the best evidence, it
also treats its merger process as an unfinished prototype. After each merger, it
does a systematic postmortem to identify what went right and what went wrong. It
is constantly improving the processes it uses.
Management, like medicine,
is a craft learned through years of experience. But management is also like
medicine in that practitioners make more effective decisions when they find,
face and act on the best facts, rather than on ingrained, but flawed, beliefs or
on dangerous half-truths they are told by biased salespeople with suspect
incentives.
Art by Matt Mahurin.
 | Stanford professors Jeffrey Pfeffer and Robert I. Sutton are the authors of Hard Facts, Dangerous Half-Truths & Total Nonsense. |