subway tracks with colorful lights
subway tracks with colorful lights

One CFO’s M&A Secrets: How Integration Speed Stems Talent Drain

Jim DeLoach, Managing Director Host, The Protiviti View

The big picture: After a prolonged lull, M&A activity may be on the cusp of revival.

What to watch: One organization has sustained an aggressive approach to acquisitions throughout the dry spell, contributing to 500% growth as it snapped up more than 20 companies over a short period.

How it works: The organization’s CFO describes an approach that:

  • Prioritizes integration.
  • Emphasizes talent retention and cultural fit.
  • Embraces unbiased financial assessments of deal performance.
  • Carefully manages the triangular relationship of the board, CEO and CFO to align expectations.

This M&A strategy and approach offer a helpful case study and guide for organizations seeking to capitalize on what could be a new wave of M&A activity over the next 12 months.

Go deeper.

After a prolonged lull, M&A activity may be on the cusp of revival. An organization that recently caught my eye has sustained an aggressive approach to acquisitions throughout the dry spell, heavily contributing to 500% growth as it snapped up more than 20 companies over a relatively short period. Desiring to learn from the experiences of someone who has literally been “in the trenches,” I had the pleasure of speaking with David Woodworth, CFO of insightsoftware, a global provider of enterprise software solutions for the office of the CFO that include reporting, analytics and performance management solutions, about his organization’s active M&A strategy.

Woodworth’s three-plus years with the Raleigh, N.C.-based company coincide with its aggressive stretch of acquisitions. The company has more recently registered substantial organic growth. All told, Woodworth’s story is one of an M&A game plan baked into the core of the business that evolves constantly based on external conditions and changing corporate objectives aimed at consolidating the corporate financial reporting market. He describes an approach that prioritizes cultural fit, talent retention, clear and well-planned board and workforce communications, and intensely impartial assessments of each investment thesis. This approach offers a beneficial blueprint for organizations and CFOs looking to reignite their M&A focus.

“The types of companies we targeted in the early stages of our acquisitions strategy might not be what we’re targeting today,” Woodworth reports. “We initially wanted to scale and build out our customer base, but that’s morphed into an emphasis on product expansion to drive our organic growth engine. We want to keep that flywheel moving. That means we have to be careful not to bolt on companies that might slow things down.”

While earlier acquisitions focused on consolidating financial reporting solutions aligned to insightsoftware’s core product line, recent targets include FP&A technology, controllership solutions, capital management software and analytics applications—assets that help address the comprehensive collection of challenges confronting CFOs and finance groups. The M&A team at insightsoftware has also transformed over time. Three years ago, the company’s private equity sponsors drove a significant portion of the deal identification process. Today, insightsoftware executives perform more than 90% of the selection, due diligence and integration work.

In addition to constant recalibration, Woodworth describes an approach that:

  • Prioritizes integration;
  • Emphasizes talent retention and cultural fit;
  • Embraces unbiased financial assessments of deal performance; and
  • Carefully manages the triangular relationship of the board, CEO and CFO to align expectations.

As the finance leader of a software company whose solutions help CFOs and their teams, Woodworth plays a unique role. “I’m not just the guy with the clipboard on the bench, calling out the score and trying to keep the game fair,” he notes. “I’m also on the court to ensure the voice of the market is heard to capitalize on our unique market position.”

These dual responsibilities help Woodworth focus on the selection criteria for acquisitions (e.g., cash conversion, annual recurring revenue and EBITDA increases, and customer retention) as well as the enablers that drive integration success. “It’s all about beating the plan, delivering the returns and minimizing surprises that aren’t uncovered during due diligence,” he says. “It’s not just M&A—it’s really about acquisitions and integration.”

Effective Integration Is Key

“We integrate all of our companies after acquisition,” Woodworth emphasizes. “We operate as one company and from the same mindset to serve our customer base in a unified manner.”

That commitment requires a careful balance between speed and quality. Most smaller companies can be integrated quickly. “Ripping the band aid off,” as Woodworth puts it, by embedding the company “as part of our systems as soon as possible” helps strengthen talent retention of the acquired company and enhance insightsoftware’s product offerings in ways that provide more immediate customer experience improvements and revenue gains.

With larger acquisitions, especially when the target is itself the result of previous acquisitions, the integration timeline lengthens to identify and mitigate issues that, if neglected, would create larger problems down the road. “We need explicit reasons to press the pause button,” Woodworth notes. “You find out as much as you can during due diligence, but we’ve learned that you sometimes uncover issues post-close that require immediate fixes and monitoring.”

Retain The ‘Master Violin Makers’

Talent is a critical part of insightsoftware’s due diligence and integration activities—and its overall strategy. “We’re all about getting the best people and the highest quality skills, and then retaining them,” Woodworth asserts. “We’re essentially a people company. Talent accounts for 80% of our cost, so when we think of integrations, we focus on intellectual property, people and cultural fit.”

Swifter integrations (“integrate with speed,” as Woodworth describes it) combined with clear, frequent communications limit post-close brain drain. “Slower integrations give employees more time to wonder how they’re viewed, how their role will change and whether they might have a job next month,” Woodworth explains. “We try to answer all of those questions as quickly as possible to eliminate that feeling of waiting for the other shoe to drop.”

The due diligence team also identifies people who one of the company’s board members describes as “master violin makers” (MVMs)—specialists within the target company who possess singular skills through their knowledge of valuable IP, customer markets and/or crucial business processes. “We ask CEOs and executive teams about their MVMs during our due diligence,” Woodworth notes. “Once we identify MVMs, we assess the risks that would materialize if they leave. Oftentimes, we’ll have them sign an agreement before we close. In some cases, having those crucial employees sign a retention agreement will be a contingency to closing the deal.”

Measure Results Against The Investment Thesis

Senior leaders at insightsoftware invest substantial time and effort evaluating the success of recent acquisitions via both quantitative and qualitative measures (e.g., MVM retention and how quickly products are assimilated into the company’s offerings to its customer base). “We look back and track how an acquisition is performing compared to the investment thesis—and depending on how we changed our product strategy as a result of the acquisition,” Woodworth reports. The organization regularly asks, “Why are we above or below our projections?”

Scrutinizing the retention of high-value employees is a priority. “We want to identify how well we did in retaining those MVMs and the extent to which that correlates to our actual financial performance,” Woodworth continues. “If we lost MVMs but overperformed, that probably means that we didn’t identify the right MVMs. If we lost MVMs and underperformed, we ask what we can do to improve identification and retention of these high-value employees on the next acquisition.”

Manage The Triangle

Woodworth describes the “evolutionary” process of aligning purpose and priorities among the board, insightsoftware CEO Michael Sullivan and himself as “managing the triangle,” in a company where M&A is a core element of the business strategy. Doing so effectively, he says, requires three things:

  • Knowing how to break news: “Bad news doesn’t get better with age,” Woodworth says. “We’d rather build trust through transparency and honesty. We’d rather face reality sooner so that we can do something about it right away. We also understand that good news should be taken, and delivered, with a lot of humility.” In my view, this sage perspective is good advice for all of us.
  • Communicating frequently: Woodworth provides weekly updates to the board on the company’s overall financial performance, forecasts and integrations. (Note: While this reporting frequency is not typical of most boards [insightsoftware is funded by private equity], it does underscore the importance of periodic reporting whenever there is a portfolio of acquisitions. In Woodworth’s case, this reporting nuance is not only a feature of his approach, but it is also reflective of the board’s expectations.) These briefs are in addition to monthly calls with the board and quarterly in-person board meetings. While the CEO engages in ongoing dialogue with board members, Woodworth also discusses financial performance and projections with directors and investors on a regular basis. “We don’t wait for a big boom or a catalyst,” Woodworth explains. “It’s an ongoing, two-way conversation: Here’s how we think about acquisitions. Here’s how we think about how they drive long-term value creation. Where do we have gaps in our thinking? What else should we layer on here? Where should we improve? Are we all aligned?”
  • Designing a consistent reporting format: Each deal highlighted in Woodworth’s weekly board report is structured and assessed in the same way. “They know what they’re going to see,” he says. “We try to keep it tight—headline and message—so they don’t have to search for the takeaway. Framing is everything from my point of view. We’re not perfect at it, but we certainly try to be as direct and forthright as possible.”

Woodworth’s emphasis on reporting consistency is valuable given that insightsoftware’s M&A strategy continues to shift in response to changing corporate objectives (e.g., vertical product integration) and external factors (e.g., the soaring cost of capital). Most important, it engenders trust as it sustains what I call the “institutional memory” of the board and executive team.

“Today, we’re at that point where we need to have more vertical orientation,” Woodworth reports. “So, the question is: How does the next tranche of M&A fit with all of our products? We definitely continue to evolve in how we identify targets, and we’re not done learning. While our acquisition and integration execution is always evolving, our overall strategy isn’t changing. We will continue to execute a high volume of transactions that are strategically important for insightsoftware in broadening its offerings to the office of the CFO.”

As to learning, Woodworth acknowledged several times that he and insightsoftware don’t have all of the answers. For example, building culture—particularly for an acquisitive company—is always a work-in-process. But the M&A strategy and approach that he and his colleagues are pursuing offer a helpful case study and guide for organizations seeking to capitalize on what could be a new wave of M&A activity over the next 12 months.

This article originally appeared on Forbes CFO Network.

Add comment