Achieving economies of scale is one of the axioms of modern business, a driver for mergers and acquisitions across all industries. This relatively simple concept helped drive a huge swath of industrial companies to impressive degrees of success: in many many cases, buying at massive scale, building at massive scale, and delivering at massive scale has helped drive up revenues and profits, improve market share and share price, and improve share of wallet in accounts large and small.
But does this drive to bulk up always work as well as its proponents – many of whom are all too often conflicted by the huge fees they and their companies stand to gain in the M&A business – would have us believe? And what about the customers supposedly at the center of these transactions – is there anything in it for them?
I think the answer, particularly in our tech-driven service economy, is increasing no. We’ve seen a side of this in the “too big to fail” phenomenon that was the main side show to the current recession: financial institutions whose very size made them too big to just cast them off into the depths of an economic Tartarus. And so as a society and global economy we bailed out these miscreants and clucked our tongues at the notion that we had no choice, that they were just too big to fail.
But isn’t the fact that they needed bailing out really highlight the notion that these institutions were indeed too big to succeed? Too big to move quickly, too big to think smart, too big to act responsibly, too big to provide great customer service, and too big to get out of their own way?
I’ve reflected on this problem of too big to succeed as I have reviewed the trials and tribulations of a number of tech companies that have become or are at risk of joining this misbegotten club. These are companies that have been buying up customers, products, and market share with increasing frequency and avariciousness. In many cases they have made their owners wealthy and their shareholders happy, but all too often they have failed to deliver on the promises that were meant to justify a growth-at-all-costs strategy. What looks good on paper – bigger is better – is looking more and more to be as healthy for tech companies as an IV drip of anabolic steroids is for an athlete . Good for the seasonal batting average, but increasingly bad for the long term.
I spent some time doing strategy work for Hewlett-Packard during the brief reign of Leo Apotheker, and saw firsthand the effect of too big to succeed. My favorite among many examples was the next generation router that I was shown precisely because it couldn’t be brought to market by HP as it was organized in the Mark Hurd era: the different product, manufacturing, sales, and marketing groups that would be needed to work harmoniously together to bring this prototype to market simply had no mechanisms or processes that would allow them to actually do so, regardless of the potential for value.
This lacuna was in force across the company: well-established product lines, like printers, servers, and PCs all had their own sales forces, and their own lead gen activities. There was simply no way for a customer to strike a pan-HP deal, or for HP to combine its sales efforts and leverage all its product lines in the kind of synergistic sale, that if done right, could have significantly improved a half-dozen financial and customer satisfaction KPIs.
In other words, while at the time HP was a $50 stock beloved by its investors, riding on a succession of big ticket acquisitions, inside the company was a rotting core that would eventually begin to ooze out through the edges in bad quarter after bad quarter. The company that a succession of CEOs, from Carly Fiorina to Mark Hurd, had bulked up by buying the likes of DEC, Compaq, EDS, Vertica, Palm (and Autonomy, during Apotheker’s time) had become too big to succeed. And, as far as I can tell, remains so today.
Some of my impressions on the too big to succeed concept have been gleaned from my experience as a consumer. AT& T is a good case in point. They sell a wide range of services that they simply cannot seem to coordinate effectively. My experience last summer moving my home and office was a case study in too big to succeed: AT&T sales and marketing pumped the hell out of their Uverse services, but the technical side of the company couldn’t fulfill on the promise. Instead of turning on new services they shut off existing services, they dispatched technicians without a clue what they supposed to be doing on site, and those poor schmucks frequently made things worse: within the space of two visits from AT&T’s technicians my office mate’s internet account was taken down and the telephone service to my new landlady was fried, my office internet and voice couldn’t be connected, and our home phone number rang into the great digital void, disconnected from our new home. For the better part of a week.
More importantly, all of the above took place after I contacted AT&T’s senior executive vice president for Home Solutions about my problems executing our move, and was assigned not one but two special purpose managers. These two gentlemen are part of a full time team in the office of the President created to sort out the intractable problems that, for the lucky few who know how, are able to escape the labyrinth of the AT&T disservice center and find their way to the exec who is actually responsible for AT&T’s customer sat.
But finding my two new BFFs was more of a Pyrrhic victory than a genuine triumph: Even with one of these top guns helping out, and identifying himself to his colleagues as a way to make sure they understood the importance of satisfying this customer, AT&T simply couldn’t execute one of its most basic customer-centric business processes: move and upgrade service to an existing account. Too bleeping big to succeed indeed. Two months later, they’re still getting it wrong.
I’ve had similar experiences with Chase, egregious enough to cancel my Chase card and vow never to do business with Jamie Diamond again. I think some of the post-hoc analysis about Chase’s role in the financial crisis would put them squarely in the too big to succeed category. There’s also United Airlines, and Sprint to add to the list, and more where that came from.
Not every company is willing to march, lemming-like, off the cliff without a fight. I think it’s safe to say that Steve Ballmer’s reorg at Microsoft is predicated precisely on the desire not to become road kill on the too-big-to-succeed highway. I could literally write a book (or at least a post) about how many times I’ve personally witnessed one part of Microsoft proceeding in willful ignorance of an opportunity in another part of Microsoft to sell a better product, fill a strategic hole in an existing product, provide strategic justification for why two products should go to market together, or provide competitive cover for another product against a larger, outside competitor.
One Microsoft is Ballmer’s answer to that mess, but the strategy is still in its infancy, Microsoft is still standing on the precipice of too big to succeed, and the company just got bigger by executing a $7.5 billion deal for Nokia’s phone business. But there’s solid signs that Microsoft is trying to buck its destiny, and, from what I can see and hear, it might just succeed.
GE is another company that has impressed me with its foresight. One of the major reasons the company has built GE Software and is pushing a new platform for the industrial internet is to rationalize its different and often siloed industrial lines of businesses and make sure that GE and its customers can leverage the massive opportunity represented by sensor-based data analysis and operations optimization. It’s impressive that one of the most success industrial companies in the world realized that it needed to make sure that the structure and business model that got it to where it is today didn’t stop it from succeeding in the next big opportunity.
Other companies could do with a similar hard look in the mirror. Oracle is definitely one of them: anyone visiting Oracle OpenWorld this year would have seen a company teetering under the sheer bulk of the steroid-drip of acquisitions it has made over the years. The Sun acquisition has proven to be too high a price to pay to keep Java away from IBM, and the engineered systems strategy is clearly an attempt to justify a hardware strategy whose time has come and gone in the age of cloud computing and low-cost, high-performance, standard hardware.
In this light the company’s enterprise software strategy is the main victim of Oracle’s too-big-to-succeed tendencies: instead of leading the innovation charge, enterprise software at Oracle is more of an enabler of the company’s doomed hardware strategy than a crucible of new ideas and new capabilities. And as long as Oracle’s enterprise software is forced to march to the company’s hardware and database drum, success in enterprise software will be harder and harder to guarantee.
I have to add SAP to the mix as well as a potential member of the club. While not as acquisitive as Oracle or Microsoft, SAP has also bulked up its product and customer base, and there’s a genuine risk that, at least when it comes to the SAP field sales team, it has become increasingly difficult for anyone outside to top echelons of the company to articulate the full value of SAP’s vast portfolio to customers and prospects. What is saving SAP for now is a mono-maniacal focus on HANA, mostly because HANA is a concept and product line that can be relatively easily distilled for the field to sell. Just don’t ask them to explain the full breadth of what SAP can bring to the table, there’s too much in the kit for them to handle. This should serve as an early warning sign to SAP management that they’re at risk for joining the too big to succeed club.
I think it’s time to admit that economies of scale work well in industrial companies with industrial processes, but sheer size is no advantage in a service economy. In a service economy, or any economy that depends on getting people to come together in order to provide innovative services to customers, doing more with less – the mantra of the economies of scale mavens – simply doesn’t work.
AT&T thinks it can grow it service offerings without significantly altering its service delivery and support, and it pays the price for having products and services its field technicians and help desk personnel don’t understand and can’t support. Chase, and let’s throw Citi under the same bus as well, thinks that it can continue to fail in coordinating its services across its multiple product lines, and provide completely sub-standard customer service along the way. As long as it makes its numbers, or at least appears to be.
Oracle thinks that it just needs to keep offering more products while collecting huge maintenance revenues, regardless of whether the products work together or are providing real innovation to its customers. And HP – I simply don’t know what Meg Whitman thinks she’s going to do, but it’s clear that recapturing the mantle of innovation and leadership in Silicon Valley isn’t going to happen given the current strategy.
Of course, success and failure are relatively ambiguous terms, so it’s easy to say that AT&T, HP, Oracle, Chase, and Citi are all successful companies, depending on how you measure them. But if the measure of success is the ability to deliver value, innovation and great customer service – simultaneously and at scale – then I would argue that the companies above are members in good standing of the too big to succeed club. And they’re not the only ones.
Can this problem be solved? I think, I hope, that the Darwinian forces that are embodied in another great market maxim –the customer is always right — will help tilt M&A fever in the right direction: towards genuine customer value, not just shareholder value or the lip service that spawns such laughable corporate slogans as We’re a financially strong company with a proven commitment to our customers, community and economy (Chase), Bringing it all together for our customers (AT&T), or Oracle’s Less complexity, more innovation – which basically reads like the headline of an analyst report on the requirements for getting Oracle out of the morass it has created in the race to join the club.
(There’s also Citi’s rather baffling slogan: Informed by the past and inspired by the future. You almost wonder if they’re trying to be contrite or have simply failed to see the irony in calling out the need to be informed by their checkered past. Or maybe they used the same branding company that came up with Oracle’s slogan.)
In the end, the real question we as customers, consumers, and tech executives should ask ourselves is whether value, innovation and great customer service are a realistic goal for a merger or acquisition, or if these terms are used as a smoke screen to mask a financial transaction that benefits everyone but the customer.
If my wish that Darwinian karma will eventually wreak revenge on the over-acquisitive, then perhaps that eventual karmic justice will become part of the equation in evaluating the long-term prospects of a merger or acquisition. Because if the result of customer neglect is the destruction of equity through customer flight, then maybe, just maybe one day more attention will be paid to what’s in it for the customers. And then posts like this will seem to be a quaint example of a far-gone past, like an Upton Sinclair expose or a Thomas Nast cartoon.
You gotta dream…