One of the issues that constantly amazes us is the lack of focus on human capital assets around mergers and acquisitions. We recently met with the head office of one very acquisitive company who, at the beginning of the meeting, told us how their senior management expected them to avoid professional recruiters because of the cost. Later in the meeting (and I have changed the numbers for confidentiality reasons) we were able to establish that they had a payroll of about $350m which would equate to (professional services) revenues in excess of $1bn. Cost? Here’s the real cost…. improve retention of high performers by just 1% and there would be a profit impact of $10m. If professional recruiters were responsible for this, the recruitment costs would be around $630k at really healthy margins. Where else can you get a return on working capital employed of over 250%, or more in the case of high performers, in a year? (Salaries + Recruitment Costs). In our experience, firms worry about turnover of staff, rather than retention of the talent that creates value and we often see turnover on that category as high as 30% – sometimes more. Compare that to professional sports teams that routinely make massive investments to retain their top talent – they understand value creation. Wayne Rooney is worth a lot more than his salary to Mancester United as is Kobe Bryant at the LA Lakers. Interestingly, the LA Galaxy was able to identify real, cash value created in David Beckham‘s first year there at levels more than three times his salary.
So, what of current activity? Just focusing on FMCG in Australia and in beverages (a category in which my 1st Executive business is active) we are aware of a couple of acquisitions or mergers in different, but advanced stages. Fosters Brewing is selling to SAB Miller, while Asahi has acquired United Distillers. We think sales people will come under real scrutiny – acquirers will clear our non-performers and hunt for high performers. The threat is to those FMCG companies that don’t know who their best performers are, or who have HR policies that encourage the mediocre to stay and the high performers to try their hand elsewhere. This video gives some more perspective.
