McKinsey on

Finance
Perspectives on corporate finance and strategy

Active resource
reallocation
Plus, prepping assets before divestiture,
best practices in M&A integration, and a useful
mechanism for killing projects

Number 71, July 2019

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 Table of contents

2 Admit it, your investments are stuck in neutral

New research shows that companies that know how to shift critical resources
where and when they’re needed share common traits. Rigor is the first one.

7 A case for restructuring before spin-off

Making big operational changes before spinning off assets can be daunting,
but our research indicates that doing so can dramatically improve the odds
of deal success.

10 Compound growth at MilliporeSigma

CEO Udit Batra describes what it took to fuse two vibrant R&D organizations—
and the business value realized from their integration.

18 Knowing when to kill a project

You’re keen on encouraging enthusiasm for innovation and letting a thousand
flowers bloom, but how do you sort the weeds from the seeds?

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 Admit it, your
investments are stuck
in neutral
New research shows that companies that know how to shift critical
resources where and when they’re needed share common traits.
Rigor is the first one.

by Massimo Garbuio, Tim Koller, and Zane Williams

© z_wei/Getty Images

2 McKinsey on Finance Number 71, July 2019

 Studies show that companies that actively reallo- processes and project cycles in sync, and they
cate resources outperform those that don’t.1 In recognize the importance of offering incentives that
many companies, however, a range of obstacles— encourage managers to move critical resources
cognitive biases and inconsistent decision-making where they’re needed, when they’re needed.
processes, for example—keep planning teams
and senior executives from being as “active” as they
could be. As a result, when executives are faced How to be rigorous and flexible
with opportunities outside of the traditional budget- One of the main themes we heard from survey
ing cycle, they can get caught flat footed.2 respondents is that having the right kinds
of processes for making investment decisions is
Pervasive as this problem is, it can be overcome. important—not just for clarifying who has the
Our research on how companies make investment power to propose new projects but also to monitor
decisions (capital expenditures, marketing and how flexible the allocation of resources is over
sales, R&D, and the like) suggests there are tangible the course of a year or a project. Here are some
ways to get better at promptly reallocating of the more common processes these com-
resources when the need arises. panies follow.

We surveyed executives in more than 500 distinct Pushing decisions down in the organization. A
companies across a range of industries. We telecommunications-equipment manufacturer gave
asked them 35 questions about their investment business units in some locations leeway in making
and decision-making practices, as well as investment decisions: they had “universal” targets
managers’ appetite for taking risks and the incen- for revenues and margins, same as everyone, but
tives that were present in their companies. We they also had the freedom to invest and make trade-
identified common traits in these companies, and offs as needed to hit targets at the local level.
we used cluster and regression analyses to The only rule was that those additional investments
quantify the impact of those traits on companies’ needed to be signed off on by the business-unit
performance generally and on their growth head and the finance head. Some of the local
and innovation more specifically. We supplemented business units used a rolling 18-month performance
those data with 16 in-depth interviews with a forecast to ease this process. The forecast allowed
subset of respondents. them to understand trade-offs and model the impli-
cations of potential actions in real time.
As we looked more closely at the outperformers in
our data set—or, the companies that actively Minimizing the number of meetings and decision
reallocated resources within their portfolios—three makers. Several of the executives we interviewed
traits kept turning up: agility, a commitment to said they held only two or three meetings to
project discipline, and a higher-than-normal review a project proposal and typically designated
tolerance for taking risks (see sidebar, “The three only two to four people, on average, to formally
characteristics of active reallocators”). approve a project. These companies did not want
to court recklessness, however, so they also
Follow-up conversations with the most active implemented clear, consistently applied criteria for
reallocators revealed that when it comes to how projects should be evaluated. Executives
organizing operations, they appear to do two things know in advance what to include in their investment
particularly well: they are simultaneously proposals, what metrics they should present,
rigorous and flexible, keeping decision-making and how to defend their proposal to decision makers

1
 arc de Jong, Nathan Marston, and Erik Roth, “The eight essentials of innovation,” McKinsey Quarterly, April 2015, McKinsey.com; see also
M
Stephen Hall, Dan Lovallo, and Reinier Musters, “How to put your money where your strategy is,” McKinsey Quarterly, March 2012, McKinsey.com.
2
Ronald Klingebiel and Christian Rammer, “Resource allocation strategy for innovation portfolio management,” Strategic Management Journal,
February 2014, Volume 35, Number 2, pp. 246–69; see also Andy Dong, Massimo Garbuio, and Dan Lovallo, “Generative sensing: A design
perspective on the microfoundations of sensing capabilities,” California Management Review, Summer 2016, Volume 58, Number 4, pp. 97–117.

Admit it, your investments are stuck in neutral 3

 The three characteristics of active reallocators

Our data and conversations with exec- Project discipline. The idea that a visionary tors tend to establish cultures and reward
utives in the field reveal that the companies CEO or CFO can decide to bet every- systems that make it safe for employees
that actively reallocate resources tend thing on some disruptive new technology is to explore projects that may or may not be
to excel in three main areas. enticing, but that’s not what happens that far afield from the current business—
in most organizations. In our experience, identifying new ways of serving existing
Agility. Active reallocation of resources most of the companies that are active customers, for instance, or new custom-
requires managers to be systematic about reallocators have specific metrics in place ers and new geographies. They provide
their pursuit of opportunities outside the that everyone understands up front. training and well-defined career paths for
traditional annual capital-budgeting cycle. They consider a range of potential out- project managers. And the rewards
This means adding to (or subtracting from) comes or scenarios for a given project for substantial successes include both
investment budgets during the year so and welcome input from all organizational financial incentives and job promotions.
managers can allocate extra cash to fund functions, no matter what the project
new projects as they arise—and so man- is about.
agers can accelerate the timeline or expand
the scale of projects that are doing better Risk tolerance and incentives. Many of
than expected, even if this increases costs.1 the companies that are active realloca-

1
A nother survey of more than 2,000 executives found that a large proportion of strategic decisions takes place outside the annual planning process, either because the
decisions are prompted by external factors or because there is no formal annual process. See “How companies make good decisions: McKinsey Global Survey results,”
January 2009, McKinsey.com.

without a ton of unnecessary back-and-forth. One affected if resources were pulled from, say, a solid
oil and gas company wanted to minimize politics but stagnant product line and shifted to newer,
in its decision making, so it does not allow business- emerging initiatives. By positioning marketing and
unit heads in the room when allocations are made. design executives as part owners of the proposal
Written proposals are submitted, and only the CEO, rather than just reviewers or evaluators, the
CFO, and head of technology meet to review company was able to identify and handle issues
requirements and decide on resource allocation. early in the process, eliminating errors or the
need for rework.
Encouraging cross-functional collaboration. One
consumer-products company made sure that Setting clear strategic goals. Project teams need
marketing and design executives were primary to understand the boundaries within which smaller
contributors to resource-related decisions, decisions can be made more rapidly. Executives
alongside business-development, finance, and in a hospital chain, for instance, maintain demand
other leaders. The senior team understood forecasts for medical services offered in the
that marketing and design leaders’ perspectives different locations in which it operates. The company
(at both the early and end stages of product uses these forecasts to identify potential areas
development) were just as critical as any others’ for for expansion. Its finance function also maintains a
understanding how business strategy could be 15-year cash-flow forecast, so the company can

4 McKinsey on Finance Number 71, July 2019

readily determine how many projects it can fund at set of performance criteria without noting the prior
any given time. These two forecasts have enabled year’s budget. The criteria included market
the company to respond quickly when opportunities size, potential market-share growth, and sales-
arise. When it was offered a potential site for a force head count relative to competitors. Using
hospital—a commercial office building by a dis- those criteria, the company built a predictive
tressed seller—executives knew in less than a day model to answer the question, “If you did not know
that they had the funding and that the location what your sales targets were this year and were
was a desirable one for the company. This acceler- relying only on the criteria you defined, what would
ated the subsequent due-diligence process, as be the targets for next year?” It then positioned
the COO and CFO jointly prepared proposals that that model as a new anchor—using the results not
were quickly reviewed and approved by the board. to make decisions but to challenge status
quo investments. This new process changed the
Prototyping new ideas. Several respondents dynamics of the budgeting discussions: the
mentioned the importance of casting a wide net for team was encouraged to ask “why?” about every
ideas and frequently testing new concepts with line item, instead of “why not?”
customers. Some even require project sponsors to
submit variations of a project idea (a different size Considering budgets to be rolling, not fixed.
or scope, for instance) alongside original proposals. Many of the executives we spoke with said they
Executives at one telecommunications-equipment consider the annual budgeting cycle to be
company routinely assign technical and sales too slow; instead they add spending to the capital
staffers to work at customer sites for long periods, budget throughout the year, so they can act
so they can better understand customers’ needs quickly when markets shift. When executives at
and share with the home office real-time one advertising agency were presented with
observations about what’s working and what isn’t. a new market opportunity, they were encouraged
Using this information, the home office has to pursue it even though it would lower the
been able to identify emerging trends sooner than company’s margin for the current year. Instead of
competitors did. Over time, the company has being penalized, the team was simply asked
been able to significantly increase the number of to revise its revenue and margin forecasts as the
new systems it is designing and selling. project progressed. This process allowed the
ad agency to adapt to technology changes in the
Removing budget anchors. To avoid rubber- market more rapidly than peers did.
stamping the same allocations year after year, one
large luxury-goods company instituted a Killing underperforming projects. Several of the
reanchoring procedure. It defined a fact-based managers we interviewed cited the need to set

Many executives we spoke with said they

regard the annual budgeting cycle
as too slow; they add spending to the
capital budget throughout the year.

Admit it, your investments are stuck in neutral 5

 the ground rules for early termination and reported However, the lack of nonfinancial incentives
the use of contingent road maps and other tools and associated with this initiative eventually proved to
approaches to achieve this goal. Managers agree be problematic. The roles on the EMR imple-
up front on specific project milestones and specific mentation team for IT and medical professionals
metrics for evaluating progress—for instance, were designated as temporary, and those
did it meet thresholds for growth or profitability? that moved to the project team had their old jobs
When such targets aren’t met, they wind down backfilled. It was unclear what career path they
projects quickly and reallocate resources to more would return to after the project. As a result, many of
promising ones. In these companies, the burden the more experienced and skilled IT staff avoided
of proof is on the business units to prove that working on the project, leaving the implementation
a project should continue rather than just assume team shorthanded in certain skill areas.
that it should.
Some of the managers we spoke with also cited
the importance of establishing incentives to take
Establishing the right incentives risks and innovate. One software company
Having the right kinds of processes for investment convenes a committee of midlevel executives each
decision making is important, but our experience year from different parts of the organization—
suggests they will fail if companies’ incentive struc- managers charged with gathering ideas for new
tures do not reward risk taking. Ideas will suffocate products and features. The committee members
on the front line before they can even be considered. pool, refine, and share the ideas with a group
of senior executives who further refine them and
Many of the executives we interviewed said they use develop proposals. The proposals are then sent
financial and noncompensation incentives to to the executive committee for debate and approval.
make it safer for employees to support potentially Once the process is complete, successful ideas
risky investment decisions. Having a good are sent back to the business units for execution—
balance of both is critical: one hospital chain was essentially completing the circle.
installing a new electronic-medical-records
(EMR) system. Senior leaders said employees’
bonuses and other longer-term performance-
based compensation would be tied to this particular Executives need to see and fund the most promis-
project’s success, not the company’s success. ing investment opportunities at any time, no matter
And the technology partner in the project agreed to where in the organization they originate. The
send out interim status reports to the hospital best practices shared here can help them do just
CEO and other senior executives, assigning letter that. With the right processes and incentives in
grades to various stages of the implementation place, managers at all levels will be better positioned
and calling out specific roadblocks and challenges to feed senior executives the innovative ideas
for the project. The financial incentives and and proposals needed to fundamentally transform
performance-tracking mechanisms were clear. The their organizations as technologies and market
idea was to make team members feel fully trends change.
accountable for keeping the project on track—not
an insignificant matter for an initiative that was
likely to cost $1 billion over ten years.

Tim Koller ([email protected]) is a partner in McKinsey’s Stamford office, Zane Williams (Zane_Williams@
McKinsey.com) is a senior expert in the New York office, and Massimo Garbuio is a senior lecturer at the University of Sydney
Business School.

The authors wish to thank Dan Lovallo for his contributions to this article.

Copyright © 2019 McKinsey & Company. All rights reserved.

6 McKinsey on Finance Number 71, July 2019

A case for restructuring
before spin-off
Making big operational changes before spinning off assets can be
daunting, but our research indicates that doing so can dramatically
improve the odds of deal success.

by Obi Ezekoye and Anthony Luu

© Teekid/Getty Images

A case for restructuring before spin-off 7

 The goal of most executives leading large spin- Better to wait until the deal closes, they think, and
offs is to establish two (or more) successful then focus on making any big changes. Our research
and focused companies instead of just selling off suggests just the opposite is true: companies that
noncore assets. Such transactions represent undertake significant restructuring prior to spin-off
opportunities to create more value for shareholders. tend to outperform those that don’t.
Since eBay spun off PayPal in 2015, for instance,
PayPal has become one of the largest payments
companies in the world and has been able to grow Exploring the differences
its base of active users, potentially exceeding We examined spin-offs with a value greater than
300 million accounts by the end of 2019—up from $10 billion that occurred between 2008 and 2017, in
169 million active accounts in 2015.1 a range of industries. Specifically, we looked at
the restructuring charges the companies in these
But as many managers can attest, such transactions deals incurred two years prior to separation all
are always highly disruptive. Management teams on the way up to two years after separation.
both sides of the deal must address all stakeholders’
concerns—assuaging employees, customers, The sample size is small but still instructive. The
suppliers, and regulators—while protecting their companies that had higher restructuring charges in
base businesses and managing the market’s the eight quarters prior to divestiture tended to
perceptions of their companies. What’s more, perfor- produce greater total returns to shareholders than
mance in such deals varies widely, especially in did those companies that invested more in restruc-
larger, more complex transactions. turing after separation.2 The companies that
MoF71 2019
restructured prior to close also outperformed those
A case for restructuring before spin-off
Because the process is so daunting, managers that did not in terms of revenue growth, gross-
Exhibit 1 of 1 are often reluctant to make improvements to margin change, and EBITA3-margin improvement in
business units or other assets ahead of spin-off. the two years leading up to the spin-off (exhibit).

Exhibit

Companies that restructure business units or assets prior to spin-off outperform those
that do not.
Performance after spin-off1
Restructured after spin-off (n = 17) Restructured prior to spin-off (n = 14)
Revenue growth 2 years
–4.5 1.5
after divestiture, %

Change in gross margin 2 years

–4.6 1.1
after divestiture, %

Change in EBITA2 margin 2 years

–2.0 2.1
after divestiture, %

Average total returns to

–7.8 1.3
shareholders after closing, %
1
Large divestitures with value >$10 billion in 2008–17.
2
Earnings before interest, taxes, and amortization.
Source: Expert interviews; McKinsey analysis

Matthew Cochrane, “The complete PayPal stock history,” Motley Fool, April 29, 2019, fool.com.
1

We looked at returns produced by both the parent company and the spin-off when assessing performance.
2

Earnings before income, taxes, and amortization.

3

8 McKinsey on Finance Number 71, July 2019

 The numbers suggest that the companies that company. It created unnecessary and redundant
restructured prior to separation were able to build legal entities to house the assets being divested:
and sustain momentum for transformation within senior leaders thought doing so would allow
both the parent company and the spin-off once the the company to close the deal more quickly.
deal closed. By contrast, the companies that However, the way the deal was structured forced
did not restructure ahead of separation were likely the company to take on extra IT, legal, financial-
bogged down by the need to manage stranded reporting, and other costs, which proved to
costs and misaligned strategies, creating an overall be a huge drag on the pharma company’s
drag on business performance in both the parent postclose earnings and on its ability to launch
company and the spin-off. its new strategy.

—— Identify and manage leveraged costs ahead

Lessons learned of separating. Corporate functions need
These findings and our experiences in the field point to be managed in a way that sets up both the
to a few lessons for companies seeking maximum parent company and the divested entity
value from spin-offs: for success. Before finalizing organizational
structures, management teams from both
—— Activate the new business strategy as soon as the parent company and the divested business
possible. Spin-offs and separations can create unit should perform rigorous benchmarking of
significant value that accrues to the bottom their cost structures, looking at operating
line, but only if companies emphasize strategic models used by “target” peers rather than the
and operational improvements at the outset. parent company’s peers. While time consum-
Timing is everything. For example, a diversified ing, this exercise can uncover areas of inefficiency
industrial company spun off one of its commodity and highlight new ways of working. In a large
businesses. Well before close, the executive industrial spin-off, for instance, senior manage-
team in the divested business unit began operat- ment boldly announced cost targets associated
ing with a leaner mind-set—for instance, with the separation and, to help meet those
reducing its general and administrative expenses, targets, implemented significant changes to
moving toward a flatter organizational struc- back-office functions at both the divested
ture, and improving its management of working company and the parent company ahead of sep-
capital. By the time the deal had closed, the aration. The spin-off became the catalyst for
divested unit was ready to stand on its own and increased productivity in both organizations.
was already realizing positive earnings.

—— Don’t forget about the long-term implications

of short-term decisions. It’s true that speedy Our research cuts through the complexities
separations create more value than do those of deal making to reveal one critical point: forward-
that lumber along.4 However, in the rush thinking business leaders can achieve outsize
to separate quickly, companies can create performance from their divestitures, spin-offs, and
orphaned entities and inefficient systems separations simply by considering opportunities
and processes, which can lead to extra costs. for improvement before deals close and then acting
That was the case at one pharmaceutical on them.

Obi Ezekoye ([email protected]) is a partner in McKinsey’s Minneapolis office, and Anthony Luu (Anthony_Luu@
McKinsey.com) is an associate partner in the Dallas office.
The authors wish to thank Tim Koller, Kristin Meyer, and Tim Wywoda for their contributions to this article.

Copyright © 2019 McKinsey & Company. All rights reserved.

Obi Ezekoye and Jannick Thomsen, “Going, going, gone: A quicker way to divest assets,” August 2018, McKinsey.com.
4

A case for restructuring before spin-off 9

 Compound growth at
MilliporeSigma
CEO Udit Batra describes what it took to fuse two vibrant
R&D organizations—and the business value realized from
their integration.

© Getty Images/Cultura RF

10 McKinsey on Finance Number 71, July 2019

Expectations may have been tempered when discovery teams have spent roughly $300 million
Merck KGaA, Darmstadt, Germany, a 350-year-old to $400 million on toxicology studies before a drug
global pharmaceutical and chemical company, and gets into early-stage clinical studies. Now we have
its EMD Millipore division acquired Sigma-Aldrich in technologies where you can do screenings in in vitro
2015 for $17 billion. After all, the business land- settings with genetically modified cell lines that
scape is littered with the remains of “transformational” often mimic what’s happening in the human body—in
deals that fail to deliver. many cases, better than rodent or primate models.
Imagine the amount of savings you could generate
Not so, in this case. Four years after the deal closing, and how much you could speed up drug discovery
the merged entity, MilliporeSigma, as it is known and development if you were to substitute toxicology
in Canada and the United States, has established its studies on animals with in vitro tests.
place as a leader in the life-science-tool market.
The parent company gained the critical e-commerce McKinsey: What other big changes are under way,
capabilities and geographic reach it needed to beyond technology?
grow, and the merged entity is now reaching more
customers than ever. Udit Batra: Researchers’ expectations have also
changed. In the old days, scientists would order the
In this conversation with McKinsey’s Roberta compounds, equipment, and any materials they
Fusaro, MilliporeSigma CEO Udit Batra describes the needed over the phone or through a catalog. They’d
strategy that motivated the deal, the customer- get their order probably five or ten days later. Now
centric focus that animated the integration process, researchers expect the same fast service and deliv-
and the ways in which he and his colleagues ery they receive when they order retail products
approached myriad operational, organizational, from online sites like Amazon: with a deep and easily
and cultural challenges. searchable list of product categories and delivery
24 to 48 hours from the time they initially thought of
McKinsey: Let’s start by helping readers the experiment.
understand MilliporeSigma’s business. What
products do you provide to customers? Finally, you don’t have this dichotomy of emerging
and developed life-science markets as much as you
Udit Batra: We have a portfolio of more than used to. There’s a lot of global learning taking
300,000 products that we market to researchers, place. For instance, many CDMOs [contract develop-
regulated laboratories, and manufacturers. We ment and manufacturing organizations] and CMOs
sell filters, pipettes, high-grade research chemicals: [contract manufacturing organizations] are using our
essentially, all the products you’d need in a lab products in China, much more so than in the devel-
to conduct experiments. We also offer what we call oped world. So we’re learning how technology is
“process solutions”: the devices, systems, and developing in China and adapting that and bringing
compounds required in manufacturing environments it back to developed markets.
to make and then purify small molecules and
biologics that then become drugs. These range from McKinsey: What was the strategic rationale for the
bioreactor systems to chromatography equipment merger between EMD Millipore and Sigma-Aldrich?
to filtration equipment to needles and filling
equipment. The third part of our business is applied Udit Batra: The previous chairman of EMD
solutions, which is a mix of both segments. Millipore and leaders in the Merck family saw the
impact of emerging technologies, connectivity,
McKinsey: How has your industry been changing? and globalization in the marketplace, and they
wanted to establish a successful scale player in the
Udit Batra: Technology is dramatically changing life-science-tool industry. EMD Millipore was
the way drugs are discovered and developed. Take already strong in the process-solutions segment,
toxicology testing as an example. Traditionally, with a broad portfolio of products to serve

Compound growth at MilliporeSigma 11

 Merck KGaA, Darmstadt, Germany
(2011–14)
CEO, consumer health

Novartis Vaccines and Diagnostics

(2009–11)
Head, global public health and market access

(2008–09)
CEO and country president, Australia and
New Zealand

Udit Batra (2006–08)

Head, corporate strategy

Vital statistics
Johnson & Johnson
Born January 7, 1971,
(2004–05)
in New Delhi, India
Global brand director, wound care

Married, with 2 children

Fast facts
Board member, Greater Boston
Education
Chamber of Commerce and Massachusetts
Holds a PhD in chemical engineering
Biotechnology Council
from Princeton University and a BS in
chemical engineering from the Univer-
Vice chairman, Massachusetts High
sity of Delaware
Technology Council

Career highlights
Advisory-council member, University of
MilliporeSigma
Delaware and Princeton University departments
(2014–present)
of chemical engineering
CEO, life science

early-stage biotech customers. We had also built the shelves, how will you find what you need? Here,
up expertise in regulatory and quality-control we saw ourselves falling short.
domains, both of which are key success factors in
the process-solutions space. Sigma-Aldrich’s e-commerce platform gave us
a simple interface with customers. We wanted to
The story was quite different in the research- provide customers—especially small biotech
solutions space, however. To succeed there, you companies that are often able to do experiments but
needed a wide portfolio of small lab products, not scale them up—with a one-stop shop. EMD
as we had, but our portfolio was not broad enough Millipore could sell you what you needed to purify a
to include certain chemicals and reagents. You also protein; Sigma-Aldrich had the cell-culture media
needed to be able to share this portfolio with you needed to actually make the protein. We wanted
customers in a very simple way. Think of going to a upstream and downstream processing to come
retail store: if products are not well organized on together with this integration. We could load legacy

12 McKinsey on Finance Number 71, July 2019

EMD Millipore products on SigmaAldrich.com McKinsey: The relative speed of that decision
to make more than 1.6 million SKUs available to cus- seems counterintuitive when you think about this
tomers. Finally, we wanted to expand our presence being a 350-year-old company.
in North America—where Sigma-Aldrich already had
a toehold in research and applied solutions—and Udit Batra: I had been told when I joined the
build on EMD Millipore’s existing reach in Europe company, “Well, we’re very fast.” I responded, “Right.
and Asia. There are four different boards in the company
where you have to present quarterly results. How
McKinsey: What was the state of play when you can we be that fast?” But being more than 70 per-
arrived at EMD Millipore? cent family owned puts the company in a unique
position. I’ll give you an example. There was a point
Udit Batra: When I joined EMD Millipore as CEO in when a very small group of us were negotiating
2014, I didn’t know about the proposed deal. At the final deal. We had gone to the limit that had been
that time, it wasn’t absolutely clear which approach approved by our board as a premium, and the
would be best: organic or inorganic growth. The other side was asking us to go higher. Our chairman
chairman and family said, “Here’s what we’re think- went into another room, picked up the phone,
ing: go explore, come back in six weeks, and tell and got permission from the head of the Merck
us what you think.” I got together with my team, and family to increase the premium just a little bit;
we considered the options. We estimated that if waiting for another board meeting, another month,
EMD Millipore went it alone, it would take five to ten maybe even another quarter to get the per-
years to get into the research-solutions market. mission we needed could have delayed the
We’d need to build an e-commerce platform and set momentum we already had in the deal. Instead, we
up an organization that could manage all this were able to get to terms quickly.
complexity. Acquiring Sigma-Aldrich could accelerate
everything. We proposed it to senior leadership after McKinsey: How did you go about bringing these
the six-week exploration period. Six weeks after two companies and cultures together? What were
that, in July 2014, we developed the financial case your first steps?
and presented it to the Merck family. In September
2014, we announced the acquisition. Udit Batra: We started by explicitly defining what
needed to happen in the period between when
the deal was announced, in September 2014, to when
it would close, which turned out to be November
2015. Rakesh Sachdev, the CEO of Sigma-Aldrich,
and I had to balance our respective teams’ enthu-
siasm for the change with the need to keep them
doing their day jobs. There were a lot of good ideas
coming from both sides. We heard a lot of “we
could do this together, we could do that together.” But
we had to follow a careful process because we didn’t
have regulatory approvals yet. And during this interim
period, we wanted to ensure that teams remained
focused on existing customers. We convened a small
planning team comprising leaders from both
organizations to build a fact base on the joint portfolio,
the financials, the organization, the customers—
everything. This team worked independently; the
process was kept entirely separate from the
Senior leaders use a specially
designed learning map to existing management and existing operations so as
guide employees through all
the phases of integration. not to disrupt what was already working.

Compound growth at MilliporeSigma 13

 “Central to everything was a relentless
focus on the customers.”

McKinsey: What regulatory challenges did you face did not have a great e-commerce platform,
during this period? so we did not know what “great” looked like. We
thought it best to let the Sigma-Aldrich team
Udit Batra: We got conditional approval from the do what it was already doing best while we
European Commission in June 2015, with the observed, so we kept the e-commerce, digital,
recommendation to divest some assets. We had and even IT-infrastructure teams separate
already received the go-ahead from the US, at the beginning.
China, and Brazil, so this requirement to divest could
have been a big distraction, but we remained McKinsey: How did you track your progress?
focused on the deal with Sigma-Aldrich. The negotia-
tions around the divestiture took a lot of time Udit Batra: We established something we called
and energy: 14 months, to be exact. I remember at the “integration-steering committee” to make sure
the time feeling like I was doing three distinct that integration efforts writ large were being
jobs—integration planning, managing EMD Millipore, managed and examined day in and day out and that
managing the divestiture—each with its own we were on target with our goals. It included me,
distinct set of concerns. our CFO, and the CEO of Sigma-Aldrich.

McKinsey: How did you organize and govern Central to everything was a relentless focus on
the merged company? the customers. To that end, we created a war room,
where we monitored things like order-fill rates,
Udit Batra: We established several core teams. My delivery rates, customer-satisfaction scores, and
team, the life-science executive team, would other detailed customer-oriented metrics.
meet monthly to make decisions on administrative Looking at revenue synergies, we wanted to put all
topics. We also set up several oversight committees. EMD Millipore products on to the Sigma-Aldrich
One focused on identifying, monitoring, and e-commerce platform, and we wanted to make sure
managing innovation efforts across the merged customers in Asia and Latin America had quick
organization. Another committee focused on and easy access to Sigma-Aldrich products. On the
operations—for instance, ensuring that we were cost side, we set detailed spending targets that
managing our joint supply chain properly and were cascaded down into the organization, and we
harmonizing processes. These committees were looked at them every month. We made sure
created specifically for the integration, but to share as much information as we could with
we’ve maintained the ones that still make sense in employees; transparency was crucial to
the postintegration world—like supply chain. the integration.

We set it up so that most of our functions and McKinsey: How did you manage the integration
systems radiated out from our parent company. of talent?
That included HR systems, compensation
systems, procurement systems—the only exception Udit Batra: We were worried about losing critical
was IT. One of the biggest value drivers for the skills and institutional knowledge, particularly
deal was the e-commerce platform. EMD Millipore in IT and e-commerce; we felt like we didn’t have

14 McKinsey on Finance Number 71, July 2019

enough expertise in this area to make critical
staffing decisions. This is partly why we kept IT and
digital functions separate. We were quite deliber-
ate about giving them freedom, letting them maintain
their culture, and observing what worked and
what didn’t. In the end, that proved to be the
right approach.

We also knew that in any such integration, we would

lose the top layer—because you can’t have two
CEOs, two CFOs, and so on. In this case, many of the
Sigma-Aldrich executives took on different roles in
the merged company. Initially, there were two
integration heads, one from Sigma-Aldrich and one
from EMD Millipore. After closing, there was only
one. At the next level, on my team, we spent a lot of
time considering how and where to place people.
Everyone was evaluated based on merit and fit for
The merger sparked the creation of incubator-type businesses called
available positions. I would say we had about a “promise ventures.”

50-50 split between EMD Millipore and Sigma-

Aldrich people on my team, and over time, the best
of the best have thrived. At the research level,
if you’re a scientist, you’re less concerned about
bureaucratic processes and more concerned
about having the freedom to pursue experiments. McKinsey: Can you share examples of any tensions
So from the scientists’ perspective, things in the lab that emerged during the integration and how you
weren’t changing that much. alleviated them?

McKinsey: Was there an overarching philosophy Udit Batra: Well, when you acquire a publicly
behind everything, something you could articulate traded company, the center of its universe is
to employees? wherever its headquarters is. St. Louis was the
center of the world for Sigma-Aldrich, and
Udit Batra: The overarching principle in all this was suddenly, all decisions were being made in either
to simplify. We used an approach we call “logic Boston or Germany. We had to combat that
and love.” This was our language for change manage- perception directly. From the time I was announced
ment. It refers to the balance we try to achieve as life-science CEO, I was going back and forth
between the hard aspects of transformation—like to St. Louis every week. Eventually I was going
defining a clear strategy, metrics, and governance— every two weeks, and now I go once a quarter or
and softer aspects, like encouraging brand unity even twice a year. And it wasn’t just me: mem-
and a sense of passion and purpose in our work. We bers of my team visited with employees at more
reiterated to all involved that our purpose was to than 20 different sites within a 72-hour period
solve the toughest problems in life science in just before the deal closed. We wanted to make
collaboration with the global scientific community. sure that people understood that decisions
We were already working in a dynamic culture, were not being made in a vacuum.
full of curiosity, and we wanted our strategy, our
brand, and our talent to reflect that. We didn’t There was tension initially with our IT organizations
want employees at Sigma-Aldrich perceiving us as and the need to reconcile technology systems.
the big company in Germany coming in and This function had traditionally resided at our head-
imposing our processes. quarters in Germany. But now there were two

Compound growth at MilliporeSigma 15

 IT departments, and both wanted to showcase and least once a week. In the case of distribution,
maintain their own best practices. Keeping them for instance, fill rates became very important. How
separate initially helped to diffuse the tension, or at fast can a product be shipped once it’s ordered?
least it bought some time to take inventory of If a product or category of products could be shipped
systems and capabilities and how those supported within 24 to 48 hours, it received a “1” score, and if
our new strategy. In all decisions, we followed not, it received a “0” score. Then we took a weighted
the principle of first among equals—whoever had average to calculate fill rates. Before the acquisition,
the better idea, the better system, the better EMD Millipore had achieved fill rates of roughly
process won the day. To that end, we convened 80 percent. Sigma-Aldrich was getting to the 90 per-
working groups drawn from both IT organizations cent mark. After the acquisition, the fill rate for
and from other functional groups in both com- the combined entity was at 95 percent.
panies to identify particular infrastructure require-
ments and issues. And by the middle of 2017, McKinsey: It’s been four years since the integra-
we were able to combine teams and address many tion was finalized. What does MilliporeSigma look
of those pain points. like today?

McKinsey: How do you think the integration looked Udit Batra: We’ve essentially outpaced the market
through the eyes of your customers? in terms of sales growth since we announced
the deal. We are gradually realigning all our SKUs
Udit Batra: We waited to bring the sales forces into just a handful of umbrella brands and providing
together until the end because we wanted to simpler ways for customers to interact with
get ourselves organized internally before doing MilliporeSigma. Our margins are now 400 to 500
anything to alter customer interactions or basis points higher than the next competitor,
perceptions. We acknowledged that we would and our innovation intensity is now twice what it was
have a bit more head count for a while, but we when we started this process. In 2014, roughly
deemed it a priority and found ways to cut costs in 2 percent of our sales were driven by innovation of
other areas. We said, “The focus has to be on products launched in the previous five years. Today,
preserving sales and customer service.” We really that number is slightly shy of 5 percent.
didn’t want to experience a decrease in either
area. For the most part, customer-satisfaction scores We’ve reorganized ourselves to emphasize this
showed that people were staying with us through- innovation. Two years ago, we formed three
out the transformation. “promise ventures,” which are small, incubator-type
businesses within MilliporeSigma. One is focused
It all starts with the top line, which sounds rather on gene editing and cell therapy, which are both hot
straightforward, but to get it done, you really areas in life science right now. The second promise
need to make sure the processes are right. For venture is focused on building and selling end-to-end
instance, Sigma-Aldrich had a state-of-the- processing solutions for small biotech companies.
art e-commerce and distribution system. It used We started off with three customers that wanted us
automation and had established centers that to help them make their first processes to get their
were shipping 15,000 to 20,000 small packages drugs into the clinic; within a year and a half, we grew
every day. EMD Millipore had built a system to about 15 customers, and we’ve established
designed for shipping large products, like bio- dedicated sites in Boston, France, and Shanghai to
reactors and mixers, but had less success deal with the demand for these services. And the
managing small products with fast turnarounds. third promise venture is focused on digitizing the lab.
We had to marry all these discrete EMD Millipore It involves developing a platform where scientists
products to Sigma-Aldrich’s systems. As I men- can get data from their instruments, manage the
tioned, we established a war room, where our head inventory in the lab, and do it all remotely. It’s kind of
of supply chain was monitoring performance like the thermostat-monitoring technology you
numbers daily and then sharing them with me at have in your house but for the lab.

16 McKinsey on Finance Number 71, July 2019

Each promise venture has its own P&L and is led by instance, and introduced problem-solving
its own CEO. They’ve been successful enough frameworks to help focus the organization and
that we are now thinking about what the next promise remove some of the fear of change.
ventures should be. Fifty percent of our capital
expenditures go into these growth drivers. Third, focus on the top line before you focus on costs.
It can be tempting to quickly go after cost targets,
McKinsey: What advice would you offer to but you run the risk of losing sight of what had made
other companies that are undergoing integration these companies so successful in the past.
or transforming themselves through M&A?
Finally, build a personal connection to the culture.
Udit Batra: First, you must spend time listening and As a leader, you need to present a fact-based case
learning. And it doesn’t have to be for an inordinately for change, but you also need to appeal to
long time, but you need to get a comprehensive employees’ desires to feel included in decision
understanding of the situation. You can conduct deep, making and to be part of something bigger
fact-based analyses; or you can read through than themselves. When you walk around, people
analysts’ reports or other literature; or you can just will know if you’re interested in the products or the
talk to people, colleagues. Probably, it’s best to company mission or not. You cannot fake it.
do all of those things.

Second, you must be the “simplifier in chief.” Provide

tools and processes people can use to guide them
through the integration. We used learning maps, for

Udit Batra is the CEO of MilliporeSigma. This interview was conducted by Roberta Fusaro, a member of McKinsey Publishing
based at McKinsey’s North America Knowledge Center.

Copyright © 2019 McKinsey & Company. All rights reserved.

Compound growth at MilliporeSigma 17

 Despite their best intentions, executives fall prey to cognitive and organizational
biases that get in the way of good decision making. In this series, we highlight
some of them and offer a few effective ways to address them.

Our topic this time?

Knowing when to
kill a project
by J. André de Barros Teixeira, Tim Koller, and Dan Lovallo

18 McKinsey on Finance Number 71, July 2019

 The dilemma proposal than to the merits of the proposal itself.
In the past six months, the product-development Compounding this belief is the sunk-cost fallacy,
group in your company has generated a dozen in which managers who are assessing projects lend
concepts that would breathe new life into existing more weight to the costs they’ve already incurred
brands—for instance, foaming variations of the from an initiative rather than the costs to come. Not
company’s established line of bar soaps. In fact, the wanting to see past efforts go to waste, they
team is coming up with more promising ideas put their pruning shears away and let projects
than there is funding to support them. These would grow indefinitely.
be small investments relative to the rest of the
company’s overall R&D expenditures, but altogether
they would account for a significant percentage The remedy
of the limited resources tabbed for product develop- One global producer of baking ingredients, oils and
ment. As the head of R&D, you’re keen on spreads, and other types of food designated a full-
encouraging this sort of enthusiasm for innovation time “project killer”—someone with deep knowledge
and letting a thousand flowers bloom, but how of both food technology and the business aspects
do you sort the weeds from the seeds? of the industry—to rein in project creep.

Researchers at the food company were motivated to

The research find the next “home run” product. But over time,
Multiple studies have indicated the degree to the number of R&D investments was disproportion-
which business leaders are loath to kill projects. One ate to the value being generated from them.
such study developed by IESE Business School The project killer sits within the R&D team at the
professor Luis Huete found that companies and company but loosely reports to different functions
individuals that have had a track record of success within the business. He maintains a database
have a harder time killing projects because of all active projects, noting areas of repeated ineffi-
they carry with them an ingrained belief that they ciency, or lack of success, or lack of opportunity.
can turn everything into gold, so long as every- Using these data, he builds a dispassionate case for
one works hard enough.1 Managers under these why a project should continue (under changed
circumstances attribute more credit to the circumstances) or be killed. The project killer’s review
person making or supporting an investment of the database considers the costs and benefits

As the head of R&D, you’re keen on

encouraging enthusiasm for innovation
and letting a thousand flowers
bloom, but how do you sort the weeds
from the seeds?

1
For more on Luis Huete’s work, see www.iese.edu/es/claustro-investigacion/claustro/luis-maria-huete/.

Bias Busters Knowing when to kill a project 19

 of all projects in play, not just individual initiatives, The project-killer role is a better fit in some scenarios
and this happens on a rolling basis, not as part than in others—useful in fast-moving consumer-
of a meeting or event. As such, there are few formal goods companies, for instance, but not necessarily
opportunities for project ombudsmen to repitch in the film industry or in oil and gas companies,
failing initiatives. where production lead times are very long. Still, the
theory behind this approach—mandating
In the three years since it designated a project objectivity—is worth noting, regardless of company
killer, the food company has been able to cull its or sector. Companies absolutely need to invest in
portfolio—from more than 560 projects to just new ideas. They must be entrepreneurial and
over 200. And the effect on profitability has been imaginative. But they also need to adopt mechanisms
overwhelmingly positive. that take some of the emotion out of their resource-
allocation decisions.

Tim Koller ([email protected]) is a partner in McKinsey’s Stamford office; Dan Lovallo, a senior adviser to
McKinsey, is a professor of business strategy at the University of Sydney; and J. André de Barros Teixeira, a former executive
at Coca-Cola, Campbell Soup, and Goodman Fielder, is a professor of innovation at Antwerp Management School.

Copyright © 2019 McKinsey & Company. All rights reserved.

20 McKinsey on Finance Number 71, July 2019

Podcasts How activist investors are changing
public-company boards
Why do some projects have higher
internal rates of return?
Rotman professor and experienced board Internal rates of return are not all
Learn more about these and other
director David Beatty considers several created equal—and the differences
topics on the McKinsey on Finance
profound changes. between projects or funds can
podcast, available on iTunes or
David Beatty, with Tim Koller be material.
McKinsey.com. Check back frequently
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for new content.
The CFO’s role in war gaming with Werner Rehm
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are uniquely positioned to lead a war- How do share buybacks affect
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fast”: they carefully think through all the
Thomas Meakin and Jay Scanlan, What’s driving the recent increase in
strategic and operational considerations
with Werner Rehm share buybacks and dividends, and does
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Obi Ezekoye and Andy West
China M&A—and what does it mean What managers need to know about
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Starting from zero
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Zero-based budgeting (ZBB) is experi-
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why now? An expert in the field helps
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us understand how digitization has given
It’s a form of borrowing known as
new life to ZBB, the benefits it offers,
factoring, but it isn’t always necessary or Divestitures: How to invest
and how to implement it in both large and
even possible. for success
small organizations.
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Wigbert Böhm
Werner Rehm divestitures are critical—but a positive
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how can CEOs and CFOs work together to Sean O’Connell, Michael Park, and
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of shifting resources into more produc- panies rush to stem potential losses. What
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passive investing contributing to
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M&A 2015: A conversation with Overcoming obstacles to effective
with Dennis Swinford
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M&A surged again in 2015, led by Using scenarios to plan for uncertainty can
M&A 2016: Bullish on M&A
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deals. What happened and why? the mind’s inner workings. Here’s how to
prior year. So why are we optimistic?
Andy West, with Werner Rehm get more out of planning efforts.
Michael Park, with Werner Rehm
Drew Erdmann, Bernardo Sichel,
and Luk Yeung
July 2019
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