Due diligence: the emotional angle
Michael J O'Malley is a consultant and lecturer who specialises in developing solutions for the relationship problems among business members, outside stakeholders and management.
Larry McEnerney is the director of writing at the University of Chicago.
There's more to forming a business relationship with another company than just the balance sheet. It's the people and the system as a whole that can make or break a deal
The deal looked good, but it went bad. A deal when not only the financials looked good but so did the people – yet it turned into a nightmare. You spent a fair amount of time with these people – not as much as you would like, but much more than in previous deals. You not only met with the leadership, you took a good look at the support staff, and you spent time with the people outside of the business, outside of their work life. You even went to their company picnic. It looked good. But the deal went bad – and it went bad because of the people.
The management team had seemed energised by the new opportunities; but now they couldn't make anything happen. There were suddenly a dozen reasons why things couldn't be done. The atmosphere had felt positive, communications seemed good; but now all you heard was sniping. They knew that there would be re-structuring and the president had promised leadership; now he wasn't even returning your calls. New projects weren't happening and old customers were leaving. What happened? What did you miss?
Probably not much – in the places you could look. It is as though you saw only half a balance sheet or only one quarter's sales or cash flow projections on a cocktail napkin. Enough information to be dangerous, but not nearly enough to make a decision to invest, merge or acquire.
Not many companies make investment decisions without crosschecking the financials, but they trust their hunches about the people. They'll close their eyes and jump – even though they know that the people are the key. No matter how good the financials look, the deal depends on the people.
Every business is made up of people and every group of people is a system of emotions. When the emotions are positive, the system works; when the emotions go bad, the system breaks down. So, before you make a deal, you need to look as hard at the people as you do at the financials: you need to do emotional due diligence.
Emotional Due Diligence (EDD) is a process for developing an objective profile of leadership, management, culture and the shadow side of business. By looking at the business system as a whole, the process accomplishes two goals. First, it cross checks the accuracy of individual impressions. Second, it looks at the significance of an individual within the system they work in.
The first step is to determine the goals and concerns of the clients, typically venture capital firms and acquiring companies. Then the key people in the target organisation and those who emerge as key figures in the group's emotional system are interviewed. The results of these conversations are sorted and assigned values, and a map is laid out of how the system works. These results are then discussed with the interviewees, giving them a chance to comment. Finally, a meeting is held with the client, confirming or dispelling assumptions, establishing realistic expectations and outlining a process on how to move forward.
The conversations
When you sit across from people in a business setting, you're seeing only part of the picture. Not only will upper management be saying all the right things, so will the people around them. The script has been written and the spin has been well thought out. You may hear clues, you may see cracks, but mostly what you'll hear is what they want you to hear.
The EDD process can't eliminate this behaviour. People know that the reason for the process is to check things out, to get to know them. They're working almost as hard to impress the EDD consultant as anyone else.
Most often, clients want to know what the consultant thinks about the target organisation and whether together they will make a good match. Client questions are often quite direct, though they are being asked indirectly: "What are those guys like?" "How do you think this is going to work out?" "How do you think we'll get along?" These questions create a different relationship in the conversation.
The questions clients ask can reveal specific problem areas in the business; they illuminate the people who are for and against the deal. These questions are often not directly addressed between firms and provide the first good look at a company's emotional system.
The questions
EDD sees any business as a system of emotional relationships. Consequently, questions cannot be focused in just one place or only on a handful of people. People need to be to be asked more unusual questions. Often, the most valuable insights come when people begin their answers with: "I hadn't thought about that before."
Some questions that generate the most powerful answers are:
- Who has the power?
- What do people do to make life miserable for each other?
- Where is the friction in the business?
- Who is rubbing whom the wrong way?
- What are the promises that get made by leadership but are rarely kept?
- What are the relationship dynamics among the management team?
- What are the agendas that prevent open, honest, direct communication?
- How does the leader perform under pressure?
The answers
Important questions don't come with neatly packaged answers that tell you what the answers really mean. You always have to sort out what you hear, what it means and whether it matters. And you assign these values according to your own experience. This is especially true in the case of past failures. If a previous deal went wrong in a particular way, you will pay more attention to answers that sound like that kind of failure. The more anxious you are about such failure, the higher value you assign to that answer. You may not even know you're doing it, but these are the answers you value.
The EDD process also requires that a value be assigned to information gleaned from the questions. But because the focus is on the system rather than just on an individual in the system, a weight is assigned to many more factors than normal.
Putting EDD to work
It is safe to say that EDD is unlikely to turn off a great deal. If the financials are fantastic and management seems capable, whatever turns up on the emotional side will not be enough to turn the deal sour.
But if the situation is iffy to begin with, EDD might be the deciding factor. Things previously not thought about will now factor and shape the overall deal and the relationships with the key stakeholders.
EDD finds the person who may not have been on the organisation chart but is the one who holds the system together – the emotional leader. The result of knowing this might mean that key man insurance should be bought on that individual.
The process can also define the need for the type of third parties that should be involved in the business. For example, it may uncover the fact that a CEO is less comfortable than it first appeared with going to a mezzanine investor. So, in order to have good communication between the company and the new investors there needs to be an outsider on the ground regularly to make sure that the investor receives the necessary information.
Conclusion
The EDD process can't eliminate all biases and subjectivity. However, results from the question and answer sessions are presented to the client with much more objectivity. Why? Because it doesn't matter to the consultant if the deal goes through or not. With nothing to risk there is nothing to gain. And rather than force fitting rules and structures that can't succeed in another culture, a relationship can be designed that works. If you know what works in a system and what doesn't, the deal can reduce anxiety and enhance communication, motivation and even leadership.
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