Clay Christensen: Hi, this is Clay Christensen and I want to welcome you to a podcast series we call The Disruptive Voice. In this podcast we explore the theories that are featured in our course here at HBS, Building and Sustaining a Successful Enterprise. In each episode, we'll talk to alumni of our course and others who are trying to put these theories to use in their lives and in their organizations. It's great fun to hear from them and I hope that you find these conversations inspiring and useful. If you have an idea about a topic or a speaker that you'd like to hear more about, or if you'd like to comment on our work, please reach out to us here at the school.

Derek van Bever: BJ, it is such a pleasure to welcome you to the podcast studio with us this morning. You've been a guest in our BSSE class for the last several years. In fact, you're coming from a class session right now and, as I believe you know, your presentation is always one of the high points of term for our students. So welcome.

BJ Hess: Thank you very much.

Derek van Bever: I'm not sure what the students like most about you, your career path, your extensive experience in post merger integration, your ability to put up with Steve Kaufman, our teaching colleague here at the school and formerly your boss as the Chairman and CEO of Arrow Electronics, but I'd like to get into all of that in our time together today and maybe starting with your career path. Could you tell us how did you come to the role that we find you in, in the Arrow case as Chief Operating Officer of the company? Did you start at the top?

BJ Hess: I wish I had started at the top. No, actually I don't. I started very far from the top of the company. It was a job, it was not a career, I was the inventory control clerk and it was a small electronics distributor that I worked for. After a while I realized I was good at organizing things and breaking down problems into smaller parts and then getting those smaller parts solved. Then I realized I was good at getting people to work together to solve the problems. I learned how to persuade people to get things done because, as the inventory control clerk, I didn't have any power. I learned later that persuading became a skill that was going to be usable even when I got to the point where I did have power.

BJ Hess: It was a young company, it was immature and, not a startup but it had some of the characteristics of a startup. I decided somebody had to lead that company on operational processes and that somebody was going to be me. It was a decision I made at the time. I took responsibility for things that were not being done, I volunteered, learned other people's jobs, I filled in. Actually I made myself indispensable and then I could make waves and get away with it.

BJ Hess: Then Arrow Electronics bought the company I worked for, that small distributor. Arrow came in and did the acquisition in the way that many companies do acquisitions. It was a miserable experience, it was humiliating and it was agonizing. There were no communications. Nobody knew what was going on. The only time you heard something was when you're getting laid off. I decided at that point in time that if I ever had an opportunity to lead an integration of a company, I would not do it that way. I would get the people to help me. I would involve them in the organization and I would get them to make this thing work.

Derek van Bever: I think that putting the humanity into M and A, I'm sure is one of the things that our students react to so positively when you come in and talk about your approach. From that initial position where you were kind of the unwitting victim of a merger, you rose to a point where you actually oversaw more than 60 mergers across your career. What some people call acquisitions, and I know you've got an attitude toward that word, but before we get to that, the vast majority of mergers fail and we start off the class by kind of going through a rogue's gallery of failed mergers. Why do you think that is? Why do most mergers fail?

BJ Hess: I doubt that there's a single reason why most mergers fail, but overpaying is certainly a common reason. Unfortunately CEO ego is more common than it should be in why mergers might fail. Too often they fail because they're integrated poorly. No one pays attention to culture, no one pays attention to the people.

BJ Hess: I've always appreciated the Harvard Business Review, Bower Note and it's called; Not All M&As Are Alike - and That Matters. In that note he says, "You need to know what you're buying, know what you want it to look like when it's over, and let that drive the integration process, and integrate quickly." I add to that Machiavelli's statement, "Acute pain is preferable to gradual pain." If you're going to have pain, get it over with quickly and get on with life.

BJ Hess: Leadership is really important in integrations and it is amazing how many times there isn't someone clearly in charge. The people need to know who is in charge and it has to be clearly in charge. The Bower Note also says, "Put well-regarded powerful managers on the integration teams and divest them of other responsibilities so that they can focus on this." I like that because that goes along with what I believe, which is that it's all about people. It's about human nature and culture, and companies fail because they don't pay attention to that. The people on both sides of the integration can help you, they can make it uncomfortable for you or they can cause it to fail.

BJ Hess: We worked hard at Arrow on understanding the culture for the target company and we never used the A-word, as you mentioned, acquisition. We used the word merger, and everybody knows it's really an acquisition and that merger is a euphemism, but they respected the fact that we were trying to treat them with dignity and not be big bullies as we were doing this. We were not trying to be heavy handed. In leading Arrow's integrations, my biggest contributions were putting together a great integration team, winning the hearts of the people in the target company, and then driving a critical evaluation of each integration. What did we do well and what would we do differently next time? Because you're not going to do everything well, and then do it differently next time.

Derek van Bever: Yeah. I appreciate your bringing Joe's article into the conversation. We had Joe and Clay together in the podcast studio recently and it's such a good reminder, Joe's work has always had this characteristic that he takes process, that people think they understand, and then he looks for how do people work in these processes and whether it is RPP theory, and trying to understand that ultimately strategy boils down to what people are doing day-to-day to this area. He's had an incredible impact of course on Clay and on all of us by extension.

Derek van Bever: Now you mentioned that notion of, what are we buying and why are we buying this company? A factor that we try to explore in our class is that a lot of acquirers get confused about why they want the deal to happen in the first place. The resources of the target company, is that what we're buying? Its customers, its employees. Is this like an industry roll-up where we want that identity of the company that we're acquiring to essentially go away, or are we acquiring its processes and its business model and we want to hold it at arms length to kind of learn how they're doing this witchcraft that they seem to be able to do that we can't? These are very different reasons and they suggest very different integration strategies.

Derek van Bever: This was the issue that we explore in Arrow's interest in the company that we called Apollo. Could you remind us of what Arrow's typical acquisition strategy was, and how and why Apollo was different?

BJ Hess: Arrow's strategy, beginning in the early seventies, way before Apollo, was to consolidate the electronics distribution industry. There were way too many electronics distributors out there. We thought that exceptional management, sound financing and robust use of information technology, which at that time was in its infancy, would allow us to consolidate an industry, gain economies of scale and become a lowest cost provider. So that's how we went about consolidating the industry, buying companies. That meant we'd buy like companies, we'd roll them into our existing company and realize significant synergies. That was our MO during the eighties and the early nineties. According to the Note, we were leveraging our business model.

BJ Hess: Then we decided to buy a competing military distributor, one that was doing better than we were. We almost used our traditional full integration process, but just as the deal was being signed, Steve Kaufman, our CEO changed course, much to our chagrin. He was rethinking the question, what are we buying? We already sold to the same military customers, we carried the same military products, yet they were well ahead of us in market share and they were growing. Something was different, so Steve decided to keep them separate.

BJ Hess: In answer to the same question I would ask him, whenever we bought a company, I would say, "What do you want it to look like when it's over?" This time he said we should do a reverse integration, move the Arrow military business into Apollo and keep the combined military businesses separate from our commercial business. Well, we did it and it turned out to be a brilliant decision. It was kind of an experiment, but we did it and it worked. Arrow had a profit model that was distinctly different from Arrow's profit model. We would have crushed their model had we absorbed them into Arrow and we would have destroyed any value in the deal.

BJ Hess: The Arrow model was, inventory turns. All of our key metrics, all of our reward mechanisms were tied to moving inventory in and out as quickly as possible. Apollo's model was strategic purchasing of discontinued inventory, because military applications, while they use the latest technology when they're designed, they often stay in production without a change to the design for decades, long after the manufacturers stop making those components. This model is the antithesis of high inventory turns, but with appropriate investment in these discontinued parts, it could be quite profitable. So our method of integrating Apollo actually followed the RBM model, or the reinvent my business model method.

Derek van Bever: One of your favorite moments in class I know is that when we call on a student who's been a pilot in the military or who's got some experience with how much the cockpit of a helicopter resembles the UX of an iPhone and they go, "Oh no, no, no, no, no, you've got it all wrong." And you share an example that's really memorable of how long, how long a life some of these components live. Can you talk about that?

BJ Hess: Yes and that is actually amazing. If you take the F15 fighter plane, and actually the F18 as well, that went into production and into flight in 1976. At that time it had Intel's brand new 8080 microprocessor chip in it. That was the highest technology in microprocessors. Intel stopped making that chip decades ago, but we are still producing F15 and F18 fighter jets. Not for the United States Air Force, we were producing them for Israel, Japan and Saudi Arabia, and we expect to still be producing them for several more years.

BJ Hess: The US Air Force is flying its planes and they expect that they'll be in flight at least until 2025. So where are we going to get an 8080 microprocessor, which is still in that plane, if that plane is grounded because it's processor fails. Someone has to own that part. Somebody had to have bought up all the discontinued inventory at the point in time when they stopped making that part, or somebody had to buy the dye so that they could run another production of that part at the time. So 50 years later, that part is still important and a company like Apollo will actually hold that part in inventory.

Derek van Bever: So that was the trick they understood that Arrow learned, how do you make end-of-life buys in a way that is informed and is likely to create those opportunities half a century later?

BJ Hess: That's right, but what was difficult in looking at the Apollo model was, they may have had the profit formula, but they actually had no profit. So it was hard for us as the acquirer looking at them to think, if they have the formula for how to make this happen, buying end-of-life speculative buys, but they actually have no capital to actually implement that formula, if we have the capital and could infuse them with capital, could we actually make this work? Because they have the knowledge, they know what applications are out there on the military side and about how long they're going to last. So it turned out to be a marriage made in heaven. We can infuse capital, use our processes of information technology and then use their knowledge of the military business.

Derek van Bever: Yeah, so that's one of the key lessons our students take away is you have to understand, what are we buying? Do we care if we hold them independent and learn from them as opposed to integrating them, and depending on the circumstance, therefore, what should our integration strategy be? Could you talk a little bit about how you and Steve would evaluate a partner and then what you think is important as you're trying to build trust with a merged partner?

BJ Hess: Every company, before they do an acquisition, will do due diligence. But one of the things that we firmly believed at Arrow was that there is a lot of information needed in the due diligence process that isn't going to be found in the data room. The data room is where the target company will put their contracts, their business plans, their payroll records, their litigation records, all of the financial and data records that lawyers and finance people like to look at in order to determine if it's a good deal.

BJ Hess: Steve and I firmly believe that there's a lot of information out there that is not in the data room. One example of that is, when Steve and I would go to Apollo, and it would be after hours in the later part of the evening when not too many employees are hanging around, so not too many people are asking you questions. Steve would go in and talk with the CEO because CEOs like to sit and talk with each other.

BJ Hess: I'd wander the sales floor, wander the warehouse. My first stop though was usually the employee restrooms. When I visit the Apollo lady's room, I switched on the light and only some of the bulbs came on. Then I noticed that the room had wallpaper but some of it was peeling off the walls. There were three stalls, one had a lock that didn't lock, the next one had a toilet seat that was broken but the door did lock, and only one of those stalls was actually usable. There were paper towels and toilet tissues strewn about and there was no counter for ladies to put their phones or their purses or lipstick.

BJ Hess: What did this tell me and why is this part of due diligence? This told me that the company doesn't respect their employees and that the employees in turn don't respect their management. This tells me to look for other areas where employees might be disrespected or treated unfairly, like in promotions or raises or job assignments or account assignments, because the unfairness doesn't just stop at the ladies room. And by the way, on this one I didn't bother checking out the men's room, I assumed it was even worse.

BJ Hess: Then as we move past the due diligence and talk about, what are the best practices and integrations, as the integration leader my most important role was to win the hearts of the people in the other company. I don't think that's on the Gantt charts of most companies that are doing integrations. Why do we want to bother winning the hearts of the other people, because we're buying them after all?

BJ Hess: We wanted to win their hearts for a number of reasons. One was because if we could get them to trust us, then the whole thing would go so much smoother. One vehicle that we used was that I would send a message, an email message out to the longterm employees, those who'd been there for 10 years or more. This included people at all levels, the secretaries, the mail room guy, the regional vice presidents, and I would ask them three questions. I really wanted to know who do they trust in that organization that isn't at the top of the org chart. I'd say, why have you stayed at Apollo for as long as you have? What is it about the Apollo family, what would you hate to see lost as you become part of the Arrow family? And, who do you go to at Apollo when are issues to be resolved?

BJ Hess: This was actually the important question. I wanted to find out who they trusted, who the problem solvers were, and these were not normally people at the top of the org chart, they were hidden in the depths of the organization. The amazing thing is that 80% of the time we'd get the same names back from all levels of people for problem solving. Whether it was an HR issue, an account assignment issue or any other issue. They all had people, they were the go-to people. So immediately we would put that person or those people on the integration task force teams and announce them to both companies. Then they thought we were smart because we knew these people, and they began to trust us because they trusted them. If the people in the other company see landmines that were about to detonate because we're making dumb decisions, they're more than likely to inform their own trusted people, because they don't want to see them blow up, and then their trusted people would tell us. It saved us from making a lot of dumb decisions.

BJ Hess: Another method that we used for gaining trust was that at the joint meetings of our general managers of both companies, and usually that was within a week or two of the announcement, we'd give presentations on other mergers, mistakes we'd made. So we'd stand up and say, "At the Schweber integration, these were the mistakes that we made," and, "At the Kierulff integration, these were the mistakes that we made." We wanted to show vulnerability and the fact that we don't expect that we have every answer. Then I would beg them that if they see us doing something stupid, if they see us doing something where they think we probably know that it's stupid and we're doing it anyway, please don't assume that we know, let us know. If you don't want to talk to me, talk to one of these people on the task forces, but please don't sit and watch us while we make miserable decisions.

BJ Hess: We also tried to avoid the devastating productivity losses caused by speculation and rumors. We told them what we knew and we told them when we'd tell them what hasn't been decided yet. All employees have three questions when they hear about their company being absorbed, and they don't really care about anything else until those three questions are answered. One is, will I have a job? The second is, who will I report to? Then, how am I going to be paid? Until we answer those questions, they don't really care whether it's a strategic imperative to put these companies together, so we answered the questions.

BJ Hess: On the day of the announcement of the deal we left them alone, because at that point in time they're going to be shocked, they're going to be angry, they're feeling betrayed. But on day two, we'd make a number of announcements and this was to gain trust as well, as part of what we talked about, gaining their trust.

BJ Hess: We announced that all sales reps would have jobs and that every sales rep who booked a deal before the integration would get paid commission on that deal, and if his order didn't ship until after the companies were put together, he would still get commission on that, even if that was no longer his account. That means we're going to be paying double commissions on some orders because we'll be paying the new salesman commission, and we'd be paying the former salesman commission. Your finance people don't really like this because you're paying money out of pocket upfront, but we found that paying double commissions is less expensive than losing sales reps and their customers, because if a sales rep leaves, he will take some of his customers with him.

BJ Hess: On day two we'd publish a schedule of when every level of employee would learn what their job is going to be and if they have a job. We would tell them that all of the vice presidents and above will know on this date whether they have a job. Then on this date, all of the general managers and directors will know if they have a job. On this date, everyone else will know whether they have a job or not, and if they don't have a job what their separation package will be. We also tell them that, should a job come up before we actually integrate, those who don't have jobs will have an opportunity to accept a continuing job or their separation package, whichever they prefer.

BJ Hess: Then we would send in mid level managers. We used one woman in particular to go into the facilities. She was not intimidating, she was not threatening and she was there to listen to people, to talk to people and to be rumor control, because rumors are always going to spread. This person that we sent in would have access to decision makers, she would be able to get questions answered and she would be able to tell us what people are worrying about.

BJ Hess: Another thing that we did was we never just eliminated entire departments or equal percentages of each department just to cut costs. We believe firmly that, as leaders, it's our job to know that this department is really important to the company and another department may not be. So when I'm doing this in class, I usually tell them if they ever are part of a mass layoff where 10% of every department is being cut, they should do everything in their power to make that be more discriminatory, because it's never 10% across the board of where the value comes. Leaders who accept that are either thoughtless and not thinking it through, or they are cowardly and not willing to say, "I'm going to cut 50% here and I'm going to add people over here."

BJ Hess: An example in the Apollo acquisition was that we got rid of the finance department because, while we kept them separate, to be honest, nobody really cared whether the finances were done at corporate or done in their local division. We were going to do most of the finances at our Arrow corporate office, but we kept three accounts payable clerks in the Apollo business because they were really good at collecting money from government purchasing departments, and that's not an easy job. If you do everything right in an organization, if you get the right franchises, you start the right products, you win customer orders, you ship the parts perfectly on time, and you fail to get paid, it's all for nothing.

Derek van Bever: I think that your cautions, what efficiencies in the short term end up having long term costs and consequences? I think that's not only a welcome message, but it's one that's really familiar for our listeners. It's extremely common when we start off this class that BJ visits, to ask if any of our students have been involved in M and A situations, either as advisors, a number of them come from consulting or banking, or as participants. And a surprising number of our students who were in companies that were acquired took that opportunity, the occasion of the acquisition, to decide maybe it's time to go to business school. And you look around the classroom and you say, "Wow, the human cost of not being attentive to the fears and ambitions of great, great employees like the ones that we see ultimately in our classrooms, those human costs are much, much greater than we can imagine it."

Derek van Bever: I will say that after class you will be absolutely ambushed by a dozen students who come down really eager to connect with you, and I see you giving out cards. I know that you come back to campus to talk with them, but I've never really asked you, what are they asking you about and what are the kinds of counsel that our students are seeking from you? What are some of the insights they want and what do you share with them from your experience?

BJ Hess: That's actually my favorite part of class, when the students come down, because some will ask me questions right there in the classroom. Many have to run off to another class. I offer to anyone who comes down some common sense practical things that I've learned by doing things wrong in my career. For example, like notes I have to offer them on how to fire someone. Harvard Business School teaches you a lot of things, but they don't teach you how to fire someone.

BJ Hess: They teach you that you have to downsize sometimes as a strategic imperative, but it's actually daunting to sit across the table from someone and actually tell them that you're going to uproot their life by taking their job away. There are ways to do that and there are ways that you shouldn't be doing that. I've done it wrong and I've learned from that, so I tell the students I'm happy to share things. I have a one and a half page paper on how to terminate an employee and you can learn from my mistakes and do it in a more appropriate way, a way that's less painful for both of you.

Derek van Bever: What do you learn after you've had to be in that chair?

BJ Hess: Well, the first senior person that I had to terminate, I agonized over that and I knew that he was trying his best, he just couldn't do the job. I told Steve Kaufman, "I'm going to terminate Bob tomorrow." I didn't sleep that night, I knew it was going to uproot his family, I knew how difficult it was going to be for him, but he couldn't do the job. So I sat down with him, I brought him into my office and we talked about it. I told him the things he did well, I told him the things that weren't working and I was really sorry that it wasn't working. We took about two hours talking together and then he left my office and I went, "Phew, it's over."

BJ Hess: About 20 minutes later, Steve came into my office and he said, "I thought you said you were going to fire Bob today."

BJ Hess: I said, "I did."

BJ Hess: He said, "Well, Bob doesn't know it, he thought he had a really tough performance review."

BJ Hess: So what I learned from that was, a session where you're going to be communicating the firing decision is just that, it should take no more than 10 minutes and you start with the words, "I have made a decision." Five words, "I have made a decision." Now that works well in terminating people, terminating romantic relationships, whatever. But you make it very clear that the time we're having right now is not a performance review, it's the communication of a decision that is already made in is not going to change.

BJ Hess: Often you have to say it repeatedly because they don't get it. They go through all of the normal feelings, it's called SARA, shock, anger, rejection, and finally accepting it. Let them go through those feelings because they have a right to feel shocked, they have a right to feel angry. Don't try to make them your friend when you're going through this termination process. But my biggest learning is keep it short, keep it on message, which is, "I have made a decision."

Derek van Bever: That so resonates with me from personal experience, but also I can imagine that our students, many of whom will not have had to be in that situation before, will be scared about that meeting and will do as you're suggesting, which is try to ease into the message and guess what? Easing into it means that you end up with that very ambiguous outcome.

BJ Hess: A number of the students, after I send notes to some, some of the ones that I get to meet with face to face, they want to talk about career opportunities or job offers. My counsel is objective because I'm not their professor, I'm not their parent, I'm not their boss, so there are no consequences if they fail to take my advice. I counsel them to consider the next three to five years after Harvard Business School as part of their continuing education. They're not finished being educated. I ask them, what's lacking from their experience? What do they need to discover? How do they need to broaden, before focusing on what they might want to do longterm? That kind of gives them the freedom to say, "Okay, I'm still continuing my education out here."

BJ Hess: Some want to talk about personal issues, family, marriage, relationships, or the lack of relationships. How do I get a boyfriend when I'm a very bright female and I intimidate all the guys that I'm around? Or when to have a baby and ensure that they still going to be taken seriously if they include children in their near-term plans. One piece of advice that I gave a young woman is probably controversial and you might want to block this out of the podcast, but while it's illegal for an employer to consider maternity or children when making employment decisions, the fact is they do think about it, and sometimes it does matter.

BJ Hess: So this young woman asked about her maternity and plans for having a family and I said, "Well, have you thought about childcare and how you're going to handle that?"

BJ Hess: She said, "Oh yes, my husband's going to be a stay-at-home dad", and it was just a very clear statement she made.

BJ Hess: I said, "Well, that's actually an advantage for you." If the employer knew that your husband was going to be a stay-at-home dad, or that your mom was going to live with you and raise the children, or that you were going to hire a nanny, that actually puts you on a level playing field with others. While you shouldn't have to say that to be on a level playing field, if what you really want is the advantage of having job opportunities and promotion opportunities, and if you have this information in your pocket, it makes sense to share that with your employer. You can start out by saying, "I know that you can't legally ask me about this, but you might be interested to know..."

BJ Hess: So one woman, I gave that advice, but enough of a controversial subject. One student several years ago, at the end of class came up and said, "I'd like to have your card, but rather than speaking to me, would you consider talking to my wife? She's just been promoted in her job and she's overwhelmed."

BJ Hess: I said "I'd be happy to." Because she was so overwhelmed in her job, she couldn't meet me during any normal hours, so I met her for dinner one night and she was overwhelmed. She was an engineer, and she wanted perfection, and she didn't really know how to manage people. That was about three and a half years ago. This young woman and I probably text or talk every eight weeks or so and have since then, because as she was going through each new phase at work, she wanted counsel on how to handle it. One fun message that I got just a few weeks ago was, "BJ, this is happening at work and what should I do?" I've gotten beyond trying to draw her out to what she thinks she should do. I was in a hurry, so I just gave her the answer, do this, and she texted me back right away and she said, "I knew you were going to say that, I just wanted to check."

Derek van Bever: Well we started off this podcast by saying that your visit to our class is a red-letter day for our students, and I think that we've demonstrated amply across our time together why that is. Thank you very much for today.

BJ Hess: Thank you.

Clay Christensen: Thank you for listening to us at Disruptive Voice. If you like our show and want to learn more, please visit us at our website or leave us a review on iTunes. Until next time, good luck everybody.