Houston, We Have Lift Out
Lift outs, or the acquisition of entire teams of employees by one company from another, are increasingly prevalent. More businesses, including those in financial services and health care, are luring groups of talented individuals from competitors instead of acquiring or merging with companies.
In fact, about 30% of analysts move in teams, says Boris Groysberg, assistant professor at Harvard Business School and co-author of "Lift Outs: How to Acquire a High Functioning Team," an article in the December, 2006, issue of the Harvard Business Review.
In the article, Groysberg and co-author Robin Abrahams, a research associate at Harvard Business School, lay out the steps to a successful lift out. The article is the culmination of extensive interviews with leaders of lifted-out teams and work groups in multiple industries and countries, analysis of over 40 high-profile moves, research into best practices as reported by headhunters who facilitate these maneuvers, and two in-depth longitudinal case studies.
Once taboo, lift outs are now a viable alternative for companies who want to avoid the headaches of a merger. "You don't want to buy the back office, you don't want to buy support people," says Groysberg. "Instead of buying the firm, you just acquire the team of individuals that has been working together a long time and works well."
Lift outs have become more acceptable, in large part, because more U.S. employees are less loyal to the company that signs their paychecks and more aligned with their direct supervisors, Groysberg says.
Through his research, Groysberg noticed that this and other changes in business culture have contributed to the lift out trend in recent years. That's what led him to study the topic now. He recently spoke to B-schools reporter Francesca Di Meglio. Here are edited excerpts of their conversation:
What are the benefits of a lift out?
One benefit is that you can buy what you really want. You don't have to buy other stuff that comes with the acquisition of a company. That makes the integration more manageable because you don't have to fire people you no longer need.
The other difference is that companies lift out teams that perform well. There are some acquisitions where a big company acquires a little company that is not doing well and then invest in them and turn around their performance.
With lift outs, the only teams that move from one company to another are by definition already high-functioning ones. Nobody wants to acquire a team that is not doing well.
The other difference is the price. If you have a small company that is being traded at $20 a share, you might have to pay $25 to buy it, right? We find that with lift outs there is not as much of an acquisition premium. In some cases the only premium you have to pay is to the leader of the team, so it's a less expensive proposition.
Is this subject coming up in business school?
Actually, no. There was one case taught just last week looking at lift outs as a substitute for acquisitions (see BusinessWeek.com, 11/22/06, "Taking the Measure of Merger Mania").
We haven't yet developed course material that would allow us to teach it. It's hard to provide advice, but we can provide the framework of how people should think about certain situations. I think that's something we'll do in the next few years by developing cases that would allow students to learn about being a part of lift outs and how to think about them.
When did lift outs start to become more popular and acceptable and why?
We found that lift outs became more acceptable in the late 1980s. I think in some ways, it ties in well to my point about where loyalty lies.
If you think about downsizing, you realize that employers created a different type of relationship with employees. In the 1990s, we were all fascinated with becoming a free agent nation full of knowledge workers. Knowledge workers are becoming a lot more portable than before. A lot of work in U.S. companies is now being done in teams. I think that's where it all started.
There are some groups that look at lift outs as a substitution for acquisitions. On the one hand, you can hire stars from a bunch of companies and then you must convince them to work together. On the other hand, you can buy the company, and integrating the company and the human capital inside this industry is very complicated. Lift outs are in the middle as something that might work better than acquisitions of individuals or acquisitions of companies.
What are some of the disadvantages of lift outs?
It's still a taboo, even if to a lesser extent than before. Some lift outs never get fully integrated into the new company.
Another thing is that there are some people in organizations that are threatened by the new team coming in getting lots of attention and resources and being positioned as a star team that is going to show everyone else the way. That can sabotage the integration of the newcomers—from resource sharing to coordination problems.
It's very challenging to get them accepted as part of the organization. Arthur Kirsch's team from Drexel [Burnham Lambert], for example, moved to County NatWest. They created a big franchise and were very successful in the first year.
But after that, the entrepreneurial Drexel culture of the team was not able to survive in the bureaucratic commercial banking culture of County NatWest. Kirsch left, and the team disappeared. Operations were closed down in 1997.
What are some of the indicators of a poorly handled lift out, and how can a company avoid that?
It all starts in the courtship stage or the conversations before a team even gets an offer to go to another company. It's stage one, when you're trying to assess the cultural similarities between the team and the company. We should not underemphasize how important it is for everyone to be on the same page and for the expectations to be aligned before the offer has been made.
You talk about integration before there is even an offer because you have to agree on the timeframe, pace of integration, goals, strategy, and vision for the team. Lift outs that work happen when the leadership of the company and the leader of the team are on the same page.
And there must be some leadership integration at the top. If there's conflict among the leaders, then the lift out is doomed to fail. You also have to have operational integration.
It sounds basic. But there have been lift outs where people didn't even have offices or desks. The true sharing of best practices and so on comes from cultural integration, which is essential because an island in the middle of the ocean cannot survive forever. At the end of the day, it is going to be overcome by the ocean.
We find that a lot of lift outs don't get integrated properly, and that is what makes them unsuccessful. In some cases, that team might not be the right group for you to buy. How will the rest of the company feel when these seven people are getting an entirely different compensation package from everyone else?
Employees might be saying: "I've worked for you for 15 years, and here is this group of people who haven't been here for a day and they're getting paid two times more than I'm getting paid." You can imagine what happens to motivation of existing employees. All of that must be considered beforehand.
What steps should a company losing a team to a lift out take?
If you're allowing a high-quality team to move to one of your competitors, it weakens you and strengthens your competition. One thing to do is to break the team apart. The other thing is to prevent lift outs in the first place.
You have to develop a certain kind of loyalty from people. If that happens, we will see fewer lift outs. One thing that companies do is try to legally protect themselves. Leaving it up to lawyers is another option.
What do you think the future holds for lift outs?
We'll see more and more. People will continue to realize it takes more than one person to make a difference, and it's not enough to hire a star.
Teams have become such an important part of American business culture. Companies will continue to be more thoughtful about putting together high-performance teams, whether they do it by hiring from different places or by acquiring a team. People who are skillful at organizing teams will do so internally, and those who are not will try to steal an A-team from somebody else.