During a large merger of financial services firms, product rationalization decisions – those concerning product selection, product feature sets, and product pricing, are often based on a number of factors that are emotionally driven instead of being driven by the long-term strategic goals of the firm. For financial services firms, product rationalization decisions impacting sales force and client attrition, for example, tend to be especially subjective and may pose significant risk to the financial benefits of the integration. Furthermore, these subjective decisions are often short-sighted and seek to minimize the impact to the employees and clients of the acquiring firm in the present at the cost of future economies of scale and scope.
In examining the product rationalization decision process pre- and post-merger, it becomes even more apparent that the key drivers in a ‘business-as-usual' environment differ from a merger integration environment in their focus and alignment with long-term business objectives. Product, features, and pricing factors in a strategic, business-as-usual environment may include the following:
- client segmentation
- driving recurring fee revenue
These drivers are certainly business-oriented and familiar enough not to warrant further explanation. However, product rationalization decision drivers in a post–merger environment tend to be more emotional because of the inherent uncertainty that employees experience during an integration. The acquiring firm often finds it difficult to make decisions that are congruent with long-term business objectives while balancing the following, more emotionally driven concerns:
- Sales force attrition – retaining sales force by maintaining a product platform that is familiar and comfortable
- Client attrition – foregoing short term fee revenue and other financial synergies in order to minimize economic impact to the client. "Gold Plating" feature sets in order to offer a "best of both worlds" scenario, regardless of the cost implications to the firm
- Home Office cultural dynamics – depending on the nature of the integration, there may be an internal struggle as home office stakeholders (product managers in particular) passionately argue the value of legacy products heading towards the go-to platform.
Given the heightened uncertainty and anxiety characteristic of mergers and acquisitions, it is recommended that when possible, firms do their best to accommodate the emotional interests of all stakeholders, even if only temporarily. Notwithstanding, firms get into trouble when they fail to establish a defined timeline to re-assess the new product platform following the close of formal merger integration activities. In fact, I would argue that the same level of timeline discipline that often exists on the IT side of merger integration should exist on the business side. Product rationalization must be identified as a key post-merger integration activity as is the case for mission-critical Day 1 data integration activities and less critical Day 2 data integration activities.
The purpose of establishing product rationalization as a key post-merger integration or Day 2 activity is to isolate and remove from the rationalization discussion the more emotional and short-sighted concerns mentioned above. By Day 2, the firm should have a good grasp of the sales force and client attrition impacts resulting from the merger and any issues stemming from the home office dynamics have generally been resolved.
There are many objective tools can be used Day 2 to ensure alignment between product rationalization and the firm's post integration strategic objectives. One such tool is based on the Failure Modes and Effects Analysis (FMEA) methodology. FMEA is used to find and rank, by severity and likelihood, the potential failure points in a new product or process. The basis for the ranking is past experiences of similar products and processes. The output is the Risk Priority Number (RPN) - a ranking of the likelihood that a particular action will lead to a failure.
Assuming the strategic objectives of a financial services firm are rational and conducive to the success of the firm and the satisfaction of its clients, we can alter the FMEA process to create an evaluation framework. This altered framework provides an objective analysis to facilitate the decision-making process in establishing product offerings. The output of the evaluation framework is the Feature Priority Number (FPN). The FPN is derived from weight-based scoring assigned to key indicators including the following: strategic objectives, client preferences, sales force impact, revenue generation, competitive landscape, and ease of technical implementation. Using this framework, products, services, and features that are not aligned with strategic objectives become readily apparent because they receive low FPNs. Given the unbiased nature of the tool, offerings which receive low FPNs are therefore less likely to be adopted by the firm or championed by internal stakeholders who may be motivated more by merger anxiety than long-term value creation.
We have witnessed rapid-fire consolidation in the financial services industry over the last decade. Each integration is labeled the "biggest ever". . . right up until the next one. As firms continuously transition from integration to acquisition and back into integration, the issues described here compound. We recommend making product rationalization a key post merger-integration activity. A FMEA-style analysis is a powerful tool in a compressed timeframe to objectively identify the products and features that will best support your strategic objectives.