– By Vineet Nayar
The other day I was reading this interesting research from McKinsey which made me think. The study delved into the performance of companies over a 25-year period and reached two very interesting conclusions. One – almost 90% of the companies go through a crisis at one or the other point of time in their lives, and two only 10% of them are able to recover their pre-crisis value!
Only 10 per cent! That’s a revelation. One of the reasons for such a low recovery rate is that we fail to recognize that there is a crisis brewing inside our organisation. The first step to rectify a crisis is to recognize that there is one and identify the reasons causing it. Here are my explanations on why crises happen.
External threat – the attack of the Innovator
Ever so often a small, innovative, nimble company comes in with a new product, proposition or a new way of doing things and slowly takes away market share. Usually innovators will breach around 5% of the market. But once in a while there will be one like an Uber or an Airbnb which will completely upstage the market and create crises in incumbent organisations.
The self-inflicted wounds – head in the sand syndrome
But more crises, in my opinion, are created by self-inflicted wounds. Companies slowly become irrelevant to the market purely based on self-created blunders like an acquisition mistake, a wrong transition etc. And to top it, they refuse to see or admit such challenges.
Did you know that the majority of mergers and acquisitions fail? According to Harvard, companies spend more than $2 trillion on acquisitions every year, yet the M&A failure rate is between 70% and 90%. Organisations falter on various counts when it comes to M&A’s. While integrating they think that there could be replacements in two companies without realizing other dynamics at play. One company I was aware of got rid of all the services’ employees of the company they acquired because they had their own service team in place. They failed to realize the unique talent or skills of the services team of the acquired company. The team that was made to exit had their own (successful) ways of service delivery and relationship with clients. Ultimately after a few years the company had to write off billions of dollars in value of the acquired company.
Mergers and acquisitions sound exciting and create an imagery of a bright future. But a merger process should be painstaking and look at all finer details. There are many examples of quick mergers that have gone wrong. Companies going the path of mergers should be extremely cautious by looking at not only the logic of hard numbers but also softer issues like culture.
The pandemic has changed the employee-employer relationship forever. Companies that now wants to go back to a pre-pandemic office environment where all employees are present physically in the office are mistaken in their belief. A recent study by CIEL HR Services has said that about 88 per cent of employees in top IT companies are ready to quit their current jobs and look for flexible options as companies are asking their employees to come back to office. This is what I call the as the ‘head in the sand syndrome’. Because ones’ head was buried in the sand of the past, what was happening outside in the industry could not be seen and understood. Presently, a lot of companies are trapped in the rearview mirror and are increasingly loose relevance with the employee of today. The recent debate around Moonlighting is a similar case in point.
Management strategies
Management is essentially of two kinds. One who is perpetually paranoid which I call growth-oriented management. A growth oriented management is always going to be focused on relative performance. The second kind of management is what I call as value-oriented management and they focus on portfolio management, margin improvement and cost reduction.
Every company usually goes through a growth and stabilization phase. A Value Manager is very good for the stabilization phase but if he or she hangs on too long in the company by cutting costs then the company is doomed. For example one way of showing growth in a company could be through EPS improvement which is an indicator of cost cutting rather then revenue growth. So the management outlook to growth versus value creation is therefore another important reason for crisis creation.
Misalignment of internal teams
The last catalyst of crises is misalignment of internal teams. Teams in some companies are not aligned to tackle opportunities or threats and therefore even if they recognize a crisis they are unable to tackle it. The reason is the incompetence of the management to encourage collaboration and urgency. For example, an Indian manager needs to collaborate with a service line manager in the US to jointly address a new threat or opportunity effectively. But some companies are so rigidly structured that they do not allow such nimble action. This inability of such companies to reconfigure themselves creates fan crises.
Executives within organisation often fail to see the obvious because they are happy with the status quo. Companies also fail to recognize the true cause of a crisis and often blame it on external factors like a slowdown while the danger lies within the organisation. There are of course ways to get out of a crisis but the first step is always to recognize and identify it. So, start looking hard within.
(Vineet Nayar is the former CEO of HCL Technologies and founder and chairman of Sampark Foundation.)
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