“Our assets walk out of the door each evening. We have to make sure that they come back the next morning” — Narayana Murthy, Founder, Infosys, 2007
“Mindtree has not been designed as an “asset" to be bought & sold”— Subroto Bagchi, CoFounder-Mindtree, 2019
The two quotes, with a lag of over a decade, had different contexts but they fundamentally mean the same. Just that the latter quote has been made in distress to humanise the asset.
Services companies have invariably always counted people as assets. However, during acquisitions, the definition of these seems to be changing. “I get calls from entrepreneurs on Fridays or Saturdays related to their people issues,” an HR head of a top VC firm told me. “Product, Profit and then People — that’s the order in which our entrepreneurs think,” he added.
In my view, that pretty much sums up the hiring, retaining and cultural challenges start-ups face today. We can rationalise this to an extent by saying founders are under pressure to move beyond the survival phase. But it is no different in large enterprises either. The contrast is quite stark when investors are knocking on the doors vs how we articulate about our people on a daily basis.
When it is business as usual, leaders tend to make statements like “we have a great team, our culture drives performance, talent is our asset” etc, etc... But when investors are at the gate, talent is no longer an asset. It’s a battle of survival for the incumbent leaders while for the acquirer, it is about ‘gaining control’. Talent tends to get lost and becomes collateral damage in this priority change.
Acquisition priorities
Whenever organisations are targeted for acquisitions, the first question they ask is if it’s a strategic fit. Then comes the consideration of the product and customers. Yes, financial metrics, geographic spread also play a very important role. Not to forget the most important part — the valuation. People are considered as an asset, if at all, in the fine print and not in the headlines.
In product companies, even if the owners change, the products continue to sell as the customer doesn’t care about the seller. In the services sector, although they say people are key to the business, indications are otherwise, going by the current developments unfolding at Jet Airways and Mindtree.
Once in the middle of an acquisition, we were presented with two companies which had different business models. One had a predominantly high-margin consulting model where people’s expertise created revenues. The other had annual services contracts where the business was rather commoditised, with very little differentiation compared to competitors. During the integration, employees from the consulting business voiced strong opinions about the new owners. One of them even went on to say it feels like they will now enter the sweatshop culture. I know that sounds similar to the initial reactions from a few Mindtree employees.
Back to our scenario: Many senior employees became vocal against this acquisition though technically this was happening at a global level. Soon enough the acquisition went through and most of our senior employees predictably quit. Their own publicly stated opinions made it untenable for them to continue and our acquirer did not care for them either. The consulting business fell apart due to the attrition and the services business, in spite of the leadership attrition, sustained itself. Although they had a relationship with the previous leaders, customers quickly realised that the processes and services did not get affected by the new management and continued.
Acqui-hires
The only acquisition context where people become assets is in the acqui-hiring scenario. Companies that acqui-hire start-ups place founders at a premium and a relatively lower value on the rest of the pyramid. Founder-focussed acqui-hires eventually let go of the rest of the talent either clinically or organically. While shutting down the products or projects of the acquired entity is by design, the loss of talent is an unfortunate by-product. Yahoo was a feisty acqui-hirer once upon a time and dropped the model later when it did not yield results. A borrowed strategy from Silicon Valley, and once vastly practised by Google, Twitter, Apple and Facebook, acqui-hiring speeds up critical talent acquisitions but it can leave a trail of damage. Besides senior engineering talent, acquirers here are equally interested in the potential IP that these start-ups may possess.
Acqui-hiring is a dignified way of recruiting talent from failed start-ups and employees are treated better. It also works due to the belief that the failed entrepreneur engineers may give them the longevity of talent their organically hired talent may not provide. The scale of these acquisitions is not significant and cannot be compared to the large enterprise acquisitions where people pangs get the least attention.
Before and after
In their day-to-day operations, organisations rightfully build the self-esteem of employees by giving them space and recognition. Moreover, managers and CEOs talk quite passionately about their team in the town halls and make them feel special. It’s a no brainer that talent is the differentiator between successful and struggling companies. However, when it comes to acquisition, emotions about people take a back seat.
Some of the largest acquisitions have worked in spite of initial resistance from board, leaders and key employees as eventually, the brand power took over. Sometimes it might sound harsh to say employees come last and in the least priority. In Jet Airways’ case, it’s the lenders at the gate who will dictate terms whereas in the L&T-Mindtree case, the first priority for L&T is to get through the acquisition. Unfortunately, in both cases, the mindset so far has been “Employees? Oh! They can wait!”
Kamal Karanth is CoFounder of Xpheno, a specialist staffing company