Today, many companies consider merger and acquisition (M&A) integration skills a core competency of their management teams. They understand the mechanics of operational integration, as well as the art of the deal. But despite this wealth of experience, one nagging question persists: why hasn't increased proficiency in integration translated into improved bottom line results?

The importance of customers in the M&A integration process is often overlooked. Corporate objectives and culture dictate how the new entity will be integrated. But one element remains constant: retaining and enhancing the customer relationship is vital. Where integration is poorly managed from a customer perspective, success of the integration and performance of the new entity is unimpressive, and shareholder value is not achieved.

Financial institutions must move beyond recognizing that customers are important and develop strategies to retain them. The answer lies in the nether regions of customer management: the detail-oriented world of customer contact.

This underscores the pressing need for early and effective efforts to get the internal organization externally focused in the M&A environment. That means addressing customer retention and relationship profitability enhancement as doggedly as systems and operational integration. At one overseas insurance company, the acquisition of a mortgage finance firm presented enormous opportunities to cross-sell insurance products. These opportunities were deliberately put aside until systems issues had been addressed. Two years later, systems integration still drains capital from the parent company; the mortgage company missed an important market differentiator; mortgage customers still buy insurance elsewhere; and revenues have remained flat.

In M&As, customer retention risks arise in the earliest stages of integration. At this point, the symptoms seem isolated and rare, and statistics don't show much run-off. During this period, companies typically focus on planning and executing internal integration activities. Usually some voice, management individual or group is assigned responsibility for customer issues. There are also customer-oriented staff who do their utmost to answer questions, communicate proactively, and retain client relationships. However, most of these efforts are too little, too late to impact the experience of the customer.

Meanwhile, competitors see predatory opportunities and act swiftly to execute initiatives to take customers away.

Sometimes these events are considered a short-term price for higher integration priorities. Consider the substantial increase in households gained from the merger itself. The first priority is to get their internal house in order.

The longer term effects of the first wave of customer attrition are bundled and compounded.Financial projections, revenues, expenses, key ratios and ultimately share price are directly related to customer retention. When the integration is declared a victory, statistics typically include staff reduced, expenses cut, efficiencies gained, productivity enhanced, and market share increased. Rarely is the focus on customer retention, which is reflected in revenue or profitability. In addition, further acquisitions and profitability growth will be less attainable depending on customer impacts of earlier integration efforts.

What should be done? Customer retention and relationship profitability enhancement should be top priorities. Customer wins are an early performance measure for integration teams and customer contact staff. This and other internal performance measures focus on winning at the customer interface and capitalizing on strengths of the new entity.

A second, closely related action involves overcoming resistance to customer interface changes. This is particularly difficult amidst the instability and uncertainty stemming from internally focused integration activities. Staff performance measures, reward and recognition programs, team building, process redesign and training are integral parts of the solution. Without them, customer retention and profitability growth will remain unrealizable goals.

The good news is that these initiatives appeal on an intuitive and common sense level; what your customer contact staff believes is what your customers will believe. The better news is that you can start immediately;without multimillion dollar technology support. In the longer term, technology plays a decisive role in ensuring that changes gearing the organization toward customer retention and profitable growth are strengthened. Executives practiced in M&A integration can reverse the trend by reprioritizing day one efforts: invest early in that detail-oriented world of customer contact and reap the rewards in enhanced bottom line results.

Dan Nagy, Director; and Randye J. Farmer, Partner and Practice Leader; are part of Price Waterhouse's Financial Services Change Integration Practice.

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