The best and most persuasive evidence of overconfidence and hubris comes from the world of corporate mergers and acquisitions. Empire-building CEO’s have created what is now a multi-trillion-a-year making orgy.

Yet study after study- carried out over the last 30 years - shows up two out of three mergers and takeovers fail. Instead of creating wealth for the buyer, they destroy it.

A prime reason: An overconfident ego-driven buyer paid too much for the acquisition in the first place.

In Ego Check: Why Executive Hubris is Wrecking Companies and Careers and How to Avoid the Trap, author Matthew Hayward says while overconfidence is essential for business success it can also be highly destructive.

Ego Check identifies four sources of overconfidence. The first source is “excessive or exaggerated pride.” The symptoms are needing to impress others and inflating data to exaggerate their achievements.

The second source of destructive overconfidence is “isolation.” The isolated person shuts herself off from negative feedback. Hayward uses former Hewlett Packard CEO Carly Forina as his prime example. In the days before her fall she surrounded herself with protective assistants - who were unwilling to tell her that she was wrong.

The third source of destructive overconfidence is in “selective judgments.” Whenever you get feedback that doesn’t fit in with your view of the world you discount or ignore it.

The fourth source of destructive overconfidence is “underestimating the consequences” of their decisions. Failing to think about tomorrow fuels hubris in decision making today.

If any of Matthew Hayward’s four sources of overconfidence are present in your organisation, Beware.

The opportunity cost of pocketing the dime is $9.90.

Profitable deal making invariably involves opportunity costs — the costs of not landing an alternative deal.

In deal-making, before you even start negotiating, you need to assure yourself you are talking with the right party. If you want to achieve your Best Possible Agreement (BPA) you must talk to the right people.

Too many deal-makers pursue sub-optimal deals with the wrong party. So, instead of ending up with the Best Possible Agreement (BPA) they end up with a Barely Acceptable Deal (BAD).

In a recent webcast I ran with over 200 C level executives, over 60% in an online poll reported over half of their deals could be classified as Barely Acceptable Deals. If you have a high proportion of BAD deals you need to review your dealmaking process now!

“We lose money on every sale… but we make it up on volume.”

- Insolvent Retailer

If you substitute the word acquisition for sale, this quote describes the behavior of more than a few CEOs who pursue expansion without disciplined negotiation strategies in place. The fact is, that in the orgy of acquisitions and mergers at least 50% of buyers lose money. In essence, they overpay. The skillful ones, such as G.E. and Pitney Bowes, who pursue disciplined plays, executed by highly trained staff, enjoy markedly superior results. In the last six years, Pitney Bowes has acquired 70 companies. In the words of their CFO Bruce Nolop:

“For us buying other companies couldn’t be a seat of the pants adventure, it had to be tracked as a business process.”

Manage the process, shape the result. Smart dealmaking is much more about process management than few dealmakers care to acknowledge.

]]> http://blog.millsonline.com/2010/01/18/the-price-of-dumb-deals/feed/ http://blog.millsonline.com/2009/12/28/instant-judgments/ http://blog.millsonline.com/2009/12/28/instant-judgments/#comments Mon, 28 Dec 2009 03:07:34 +0000 Harry http://blog.millsonline.com/?p=36 I am often asked how long it takes someone to make their initial judgment on a person when they first meet them.

I used to answer, “4 minutes.” This reply was based on research on the time it took job interviewers to make up their mind on the suitability of a job applicant. However, I now answer “10 seconds.”

In their remarkable studies, social psychologists Nalini Ambady and Robert Rosenthal, have shown that we often form positive or negative impressions of people in a mere “blink” or “think slice” of time.

After subjects watched three two-second video clips of professors teaching, their teaching ratings predicted the actual end-of-the-term rating by the professor’s own students.

To get a feel on someone’s energy and warmth, the researchers concluded just six seconds is usually enough.

First impressions matter because, we lock down on our first impression. Once we have made a judgment we tent to look for confirming evidence to reinforce our initial impression — good or bad.

As your options shrink, time pressure increases, you concede more and the deal turns from your Best Possible Agreement (BPA) to at best Barely Acceptable Deal (BAD).

The triangle of doom warns us:

1. We need to spend more time, investigating and strengthening our alternatives.
2. We need to monitor, capture and analyze problems in real time if possible.
3. For large, complex negotiations projects you need a real time reporting and response process. Some times the best deals you make are the ones you walk away from.The more time we invest in a deal, the more committed we become to sealing a deal – regardless of its consequences.

But the world isn’t so flat after all. Businesses that don’t take into account specific political, cultural, and economic differences are set up to fail. Redefining Global Strategy, by professor and strategy consultant Pankaj Ghemawat, offers a reality based view of globalization - and practical tools to help your business cross borders profitably.

His book is full of insightful, useful information. I love his tools especially his CAGE distance framework which helps you identify barriers that your global marketing strategy will have to overcome.

Here is a summary of the CAGE Framework.

• Cultural distance
  • different languages
  • different ethnicities
  • different values
• Administrative distance
  • closed economy
  • extent of home bias
  • corruption
• Geographic distance
  • physical distance
  • time zones
  • geographic remoteness
• Economic distance
  • rich and poor differences
  • differences in cost/quality in infrastructure
  • economic size

Ghemawat proves differences do matter when you market outside your homeland. Redefining Global Strategy is a must read for anyone with ambition for profits from the international economy.

As secondary consultants they subcontract to a primary consultant.

If they are not careful, they end up taking on the risks of the primary consultant.

In The Fat Tail, The Power of Political Knowledge for Strategic Investing, authors Iam Bremmer and Preston Keat offer 6 practical ways to deal with risks and uncertainty.

1. Isolating: You can isolate and separate critical assets, either to lower their overall vulnerability or simply to ensure that not all our critical assets are open to the same set of threats at the same time.
2. Smoothing: You can distribute risks over time and across various theatres, business subsidiaries and entities.
3. Warning: You can establish warning systems to better prepare for specific contingencies.
4. Agility: You can reduce the time and costs and response to crises and lower the risks associated with them.
5. Alliances: Alliances among firms and private corporations, non-governmental organisation (NGO’s), international instsiutions, and private stakeholders can help mitigate the risks inherent in uncertainty by spreading risk among them.
6. Environment Shaping: You can mitigate risk by influencing the environment where they operate.

Consider these six approaches when you face having to negotiate a complex, risk riddled contract.

Read Bremme’s and Keat’s book The Long Tail as well. It is powerfully argued. Bremmer and Preston Keat have played in the political risk management game for years.

“If you have an important point to make, don’t try to be subtle or clever. Use a pile driver. Hit the point once. Then come back and hit it again. Then hit a third time - a tremendous whack.”

- Winston Churchill

In her book, POP!, Stand Out in Any Crowd, author Sam Horn tells us that one of the most dramatic examples of a crafted soundbite was one used by the late Johnny Cochran, one of the defense lawyers for O.J. Simpson.

Can you remember the trial?

It went on for months. The jury heard testimony from dozens of experts and witnesses. But the dramatic moment came when O.J. Simpson was asked to try on a glove arguably worn by Nicole Simpson’s murderer.

Many people believe O.J. Simpson exaggerated the difficulty of putting on the glove, but Johnny Cochran amplified the doubt over O.J. Simpson’s guilt with this pile driving soundbite.

“If it doesn’t fit, you must acquit.”

Many legal analysts believe that this - Cochran’s summation encapsulated by this one soundbite - won the case. The phrase was doubly impactful because it recalled a visual demonstration.

The best PowerPoint presenters conclude with a pithy statement that recalls an earlier slide that had high visual impact.

Chances are, your memory will mislead you. However that won’t stop you defending your belief regardless of contrary evidence.

How do we know this?

Psychologist Ulric Neisser asked 106 students to write down exactly where they were the day after 1986 challenger shuttle explosion. When he interviewed them just two and a half year later 25% gave remarkably different accounts.

In his new book, On Being Certain (St Martins, 2008), Neuro Scientist Robert Burton explains “The feeling of knowing” - being certain of a fact despite having no (or even contrary) evidence.

One of the startling implications of Burton’s arguments is that we ultimately cannot trust ourselves or others when we claim something is true.

Ronald Reagan had it right when it came to trusting the Russians. For Reagan it wasn’t about trust, it was about verification.

Although he stood just under five foot tall, Andrew Carnegie (1835-1919), as a dealmaker and corporate capitalist, consistently outgunned J.D. Rockerfeller and J.P. Morgan, the two other giants of the Gilded Age.

Carnegie was a remarkable dealmaker, salesman and negotiator who outwitted Rockerfeller and Morgan in most of their big deals. He was often unscrupulous. His business dealings were often unethical though not necessarily illegal at the time.

Carnegie is best known as a union buster. Yet early in his career he was lauded when a proposal for a farsighted deal to steelworkers tying wages to profits, so that both the bosses and the workers would share in good times and in bad. The union agreed to cut wages and increase working hours during a market downturn.

However, when the boom time returned, Carnegie reneged on his promises. The steel workers went on strike calling him a liar, hypocrite and scoundrel.

Carnegie believed it was contrary to the “laws of civilization” to pay workers more than the minimum they needed. To pay workers more than they needed was to “encourage the slothful, the drunken and unworthy.”

The great benefactor who bequeathed libraries, museums and vocational schools to the nation was happy to see his chief manager call in the Pinkerton guards who fired on striking workers.

President Teddy Roosevelt believed that, “if Carnegie had employed his fortune and his time to doing justice to the steelworkers who gave him his fortune, he would have accomplished a thousand times what he accomplished” with his generous philanthropy.

I agree with Roosevelt.  What do you think?