You Cannot Absorb a Culture By Acquiring It

Right at the start of the Web 2.0 phenomenon, I heard Esther Dyson speak at a conference in New York. If I recally correctly, she was the keynote speaker.

Besides her technology investments, she sat on the Board of one of the largest advertising companies. The company was concerned, justifiably, about the rapid growth of online media and advertising, and had neither the relationships nor the experience, let alone the critical culture, to build into that market. As online was growing by leaps and bounds - and we can see with a decade of hindsight how legacy advertising is hurting compared with online - it was quite astute of them to be aware of the issue and plan for it. I suspect that was why someone like her was on their Board in the first place.

As she presented it, they had acquired a small, nimble but successful digital media agency, in order to absorb the culture. Similar to a vaccination, they wanted the mindset of the acquiree to spread throughout the parent.

I was very skeptical at the time.

Acquirers inevitably enforce their culture on the acquisition: risk tolerance; purchasing procedures; dress code; compensation and promotion; etc. "Sure," they will say, "we want your risk culture, but we cannot have everyone just buying ad placement with their personal Visa and expensing it! And besides, it is just administrative, an expense policy."

Yes, it is just an expense policy.... and it changes how the hypercreative content person does their job, and therefore whether or not they enjoy it, and if they can move quickly enough, and soon enough the parent culture permeates the child, rather than the other way around.

The same is true for software vs operations companies. Cloud companies - Salesforce, NetSuite, Google, Facebook, FreshBooks, Mint - are all operations companies. If they had the best software but regular breaches, or terrible performance, or long and unexpected downtimes, they would fail. Conversely, if their software is reasonably features and easy to use, but always there when you need it, they have a shot at winning.

Software companies regularly try to get into the online space, either by setting up a "Cloud" division or acquiring several "Cloud" companies. While this is a great way to get online, it can only succeed if the executive management understands that the fundamental business of Cloud is different than software. The culture must be different. The sales structure must be different. The R&D priorities must be different.

Sadly, most such internal divisions struggle greatly to deliver product reliably and securely, not to mention profitably. Almost all such acquisitions fail as the acquirer's VP Sales focuses on revenue today, as opposed to recurring (CMRR), the CTO focuses on "new market, just put in a server or a rack or two", and the marketing team continues to push the benefits of the software over the service. 

A software company can convert into a successful service company. It just needs real expertise that knows how.