A Harvard analyst says government consolidation won't improve the fight against terrorism quickly, and maybe not at all. The reason: Most big corporate mergers fail.
On Tuesday, the U.S. Senate approved the creation of the Department of Homeland Security, a mammoth federal agency whose chief goal — to protect Americans against terrorism — is daunting. But leaving aside the matter of terrorism, the mere creation of the new department, which will employ about 170,000 people and bring together 22 government agencies, will be a huge challenge for the officials charged with the task.
What are the department’s chances — not only of surviving the harrowing merger process, but of actually making us safer than we are today? Ashish Nanda, an associate professor at Harvard Business School and an expert on corporate mergers, says that we shouldn’t expect any magic soon.
In the business world, most mergers don’t work, Nanda says. Many fail to produce the sort of spectacular results that their promoters promised at the time of the merger, and the merged entity is often less successful than were the individual parts brought together. Inflated expectations, “culture clashes,” and the inevitable shuffling of positions in the new firm can cause problems in the merged firm several years after the integration, he says.
There are obviously significant differences between business organizations and government institutions, Nanda concedes. Businesses have a profit motive, and their success is measured easily — by their quarterly statements or by their performance on the stock market. The Department of Homeland Security, on the other hand, will be measured by something much harder to quantify — its effectiveness in preventing terrorism. The only way we’ll know if the department works is if it happens to foil a terrorist attack. The way we’ll know it doesn’t work is if it fails.
Tom Ridge, the White House’s domestic security advisor and the man most likely to lead the new department, appears to understand that he has a tough job. He told the New York Times on Thursday that he has spoken to executives at Hewlett-Packard and Lockheed Martin — two firms that have recently been involved in mergers — for advice on how to smooth the Homeland Security integration. “I would be foolish to ignore the reality of the logistics of this,” he told the paper. “We’re going to look for advice and counsel from a lot of folks.”
In an interview with Salon from his office in Cambridge, Mass., Nanda said that he essentially agrees with Ridge. The Homeland Security reorganization won’t be impossible to accomplish, but he guesses that it will take several years before we see any gains from it, and that the task will still be extremely difficult — “Herculean” was a word that came up several times.
Is it possible to look at this government merger in terms of your own expertise in mergers?
Yes, I can, and I can give you my observations based on that. But … I’m not an expert in government organizations.
So, first, an empirical fact. A very large percentage of mergers fail. A number of studies have been done over several years that tend to show that they do not succeed. They tend to fail.
When you say “fail,” what does that mean?
Different people have used different metrics for this. There was a McKinsey study done in the mid-’90s, and the way they have tended to look at failures of mergers is by asking, what has happened to the stock market value of the firms? Or sometimes they go and ask the people themselves if the merger has achieved its goals, etc. And sometimes it’s just, how long does the merged firm last? Survival.
So the number in the private sector that people use is about two-thirds to about 70 percent of mergers tend to fail. And the reason they say they tend to fail is that post-merger integration is extremely challenging. And I think that the issue of post-merger integration is an issue that the Department of Homeland Security will also have to meet to a considerable extent.
So this is after the merger — the difficulty of putting the organization together …
Yes, the difficulty of putting the organization together after the merger. And when I’m talking of the failure rate being 60 to 70 percent, this is when two firms merge to form one firm. Imagine the order of magnitude of the challenge when you say 20-plus departments are going to be smooshed together into one. So it’s going to be a Herculean task.
When I look at other people in terms of businesses merging together, there are several cases of mergers between law firms. There’s the famous case of Clifford Chance, a British law firm merging with a New York law firm. And it has taken them three years and they’re still going through post-merger integration challenges. A very famous accounting firm, Price Waterhouse, merged with another firm, Coopers & Lybrand, five years ago, and they are still talking about post-merger integration issues. There are cases on the consulting side: a well-known case of Cap Gemini merging with Ernst & Young consulting services, and again post-merger integration challenges are still continuing four and five years later.
So when you talk about the challenge of merger integration, whether you look at it from the point of view of the possibility of success or of how long it takes, these are challenging, difficult things.
And it’s going to be more challenging, even more challenging, for the Department of Homeland Security for two reasons. The first is that in all the mergers I’m talking about there are only two organizations, and here there are 20-plus.
The second is, in the case of commercial firms it is very clear — there is one very clear metric, which is economic performance. And so you can look at economic performance and say that’s what we are driving toward, and you have a great amount of autonomy in terms of hiring and firing people, changing their roles, etc.
When you look at government departments, there are very many more metrics. One is of course the economics. Can we achieve the same kind of results that we were achieving earlier at lower costs? Then there’s a second measure, which is social welfare. Are we doing things more or less effectively? Then there’s a third measure, which is political. Are we achieving our political goals through this organization or not?
So there are three measures of success or failure. The result is there is likely to be much greater pressure to resist significant changes in the case of government merger than there would be in the case of a firm.
So what I’m saying is, one, the private sector is tough. Two, this is even tougher in the public sector. It’s going to be quite a challenge.
What are some of the post-merger problems that often come up?
Post-merger problems I would discuss as three kinds. The first is, it’s a reflection of a pre-merger problem. It’s typical. When we talk of mergers in the private sector, we call this “managerial hubris.” People go in with very high expectations and the reality is of course not so. In other words, there are expectations of cost cuts or synergies which just don’t pan out, which are just not possible. So you set it up to fail.
The second reason for merger failures is culture clash. You have a number of different organizations coming together and forming a new organization and each one of them has its own internal work environment, internal way of doing things, relating with one another, expectations about career progress, the way they relate with the outside world. And then you put them all together, sometimes the way Part A behaves is totally different from and in fact sometimes very opposed to how Part C may be doing things.
Then the tension that arises is: Whose approach is the right approach for the merged entity? Who’s going to feel that their approach is being overwhelmed by others? That creates a tremendous amount of angst within these organizations.
And the third is that when you merge organizations together, you have a new structure and a new allocation of decision rights that takes place. Some people win and some people lose. In addition, there is a great deal of uncertainty who the winner and the loser will be. The net result is that there is a resistance that builds up to change, there is a sense of ambiguity about what your roles will be, there is politicking that takes place. There is a sense of winners and losers that develops and that creates a negative work environment.
Now we’ll go to your question. So you are saying, in the Department of Homeland Security, how much of this do I see as a problem?
Yes.
I think they are all going to be problems. Merger integration takes a long time just to work through. So very often the real value of a merger begins to come through only after a certain period of time has elapsed, and if you will make any claim that by mooshing these together we will have quick, short-term results, then you are bound to end up disappointed.
So if a claim to make is that by putting everything together in Homeland Security, some magic solution will be found to a short-term problem — such as that our war on terrorism will immediately show short-term success, I think that is a case of hubris. Because in the short term you are going to have a lot of dislocation, a lot of tension, a lot of jockeying for position, a lot of restructuring internal focus. So what one ought to say is that in the long run, perhaps, this will be a good organization. But if the logic given for a merger is short-term gain, then that’s probably not the right way to do it.
If we’re going to expect this merger to make us much safer in a year, that would be unreasonable?
That would be unreasonable. See, there are two sides to this coin — one is safety and the other is the efficiency with which that safety is delivered. If you expect that you will be both safer and more efficient in delivering that safety within a year because of the merger — no, that will not happen. In fact, because of all the difficulties related to mergers, you will have difficulties in short-term efficiency. It might make it more inefficient, and if you want to retain the same level of security or in fact increase it, you might have to pay a significant cost. But maybe in the long run it might make sense to put these things together, and there may be some overlapping functions that can be removed, there may be some economies of scale, but those benefits will begin to show in the long term.
The other thing you mentioned is the culture clash. Now I imagine the culture clash will be worse with these many organizations than with just two?
Especially if those organizations have been there for decades and decades. You should look at the names of the departments. One of their strengths has been that they have very strong distinguishing cultures. And you’ll put them together and then what do you want? Do you want the whole department to have a particular shared culture? How much of a commonality will there be and how much of a difference? This will resolve not right away but over a period of time.
So what’s your answer — should the cultures assimilate?
The best thing is what we call “differentiation integration.” There should be some commonalities and some differences. The last merger that took place in the government side was the Department of Defense. And basically there are differences between the Navy, Air Force, Marines, and there are commonalities also. But what happens is you evolve toward that after a period of time. You cannot order by fiat that this will be the common culture. Through people’s interactions in working together and working through conflict a shared culture evolves.
So my answer to this is that the success or failure of the Department of Homeland Security will begin to be seen years from now, three years from now, five years from now. It’s a gigantic Herculean task, to get it into a well-functioning efficient organization that delivers on the three dimensions that I mentioned — economic, political and social welfare — effectively.
Any claims or any measurements that are made short-term I think are bound to be negative.
Do you think because it’s so difficult — is it near impossible?
No, I don’t think it is near impossible. I am not a government scholar, so it’s an outsider’s point of view, but I am somewhat convinced that there are some efficiencies and synergies possible. It might be useful to put things together. All I’m saying is, the merger is not an answer to short-term problems. The merger will not help the U.S. fight a better war against terrorism, as several politicians have said. It is maybe the most efficient way of organizing these separate departments, each of which is now at an efficient level of scale. Putting them together might make them more efficient, but that’s over the long run. It’s not going to have an impact in the short run.
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