Hypotenuse Enterprises, Inc.

THE CORPORATE DEVELOPMENT COMPANY


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Benchmarking the Corporate Development Function 

Excerpts From:
Benchmarking the Corporate Development Function

The corporate development (CD) department, responsible for executing the external growth strategies of a company, significantly impacts a corporationís growth and future. Yet this corporate staff department is often one of the smallest, least understood and least benchmarked of all corporate activities. 

Corporate Development Practices Survey 
The first in-depth survey of CD practice was launched in 1993 while I was vice president of corporate development for Bausch & Lomb, Inc. We surveyed the Fortune 300 regarding their best CD practices and subsequently obtained the rights to that survey for Hypotenuse Enterprises, Inc., when we launched the company in 1996. The covered subjects range from staffing and budgets to dealing with consultants and intermediaries, from confidentiality agreements and due diligence process to policy, reporting structure and even CD staff/operations relationships.

In 1998 we updated that earlier information by re-surveying the same companies which had originally responded. The 1993 18-page survey had 54 respondents (18% response rate), and the 1998 update survey has a 46% response rate. The last five years have seen substantial change in many areas of CD practice. Nearly three-quarters of the respondents are actually the heads of CD so that their overview of the functionís evolution is particularly valuable.

Increased Pressure on Corporate Development
The updated survey results show a CD head and department under increased pressure over the past five years.

The average CD department size has decreased by about 20%, yet the average number of deals completed per year has increased by a third.

The measure of CD productivity has also changed. The number of deals reviewed matters less, while the time required to complete a deal matters more.

The CD departmentís role in due diligence has increased. Five years ago, 67% of respondents reported CD as the primary coordinator of due diligence. This has increased in 1998 to 83%. CDíS role as primary overseer in due diligence has risen from 73% to 87% over the same period.

There is also an increase in CDís involvement in post-deal integration, from 51% of respondents to 64%. CDís role in post deal integration is primarily coordination and oversight, rather than audit and control.

How Have the Corporate Development Head and Department Reacted to New Pressure?
There are some notable changes in response to increased pressure. There is less willingness to cultivate internal candidates and train them for the future. New CD hires from within the company were 69% in 1993, decreasing to 38% in 1998. CD dropped nearly 10 points in the perception of it as a career position and 15 points in its perception as a stepping-stone to other opportunities. There is a factor of 4x increase in seeing CD only as a temporary assignment. The use of experienced professionals on temporary assignments is consistent with emphasis on productivity and results.

In 1998, this figure dropped to 17%. Apprenticeship as a means to qualify CD personnel as negotiators has dropped precipitously, from 88% in 1993 to 14% in 1998. The reason is most likely the emphasis on only hiring-in qualified negotiators, a rise from 0% in 1993 to 71% five years later. 

The Corporate Development Practices Survey, baseline and update, sells for $495. 

In addition to spending less time recruiting and developing CD professionals internally, CD has cut back non-deal-related or peripheral activities. Benchmarking activity, however, has doubled as CD departments try to learn best practices employed by other companies.

The use of intermediaries to offset lower staffing levels has increased. Use of investment bankers and intermediaries to submit deal ideas is up from 57% to 91%, to submit specific acquisition candidates from 58% to 83%.

Typical fee agreements are slightly larger, and fees have become much more negotiable, with some decline in Lehman-based formulas. Intermediaries are seen as slightly more important to deal flow than they were. The number of respondents who say that a regular system is in place for keeping in touch with intermediaries has doubled, but use of a formal printed intermediary policy is only up slightly. 

Another trend as CD accommodates an increasingly pressured environment is to institute more controls. The use of a standard confidentiality agreement format has increased by 20 points.  Most elements of such policy remain unchanged, but there is more linkage to board-approval levels, and specific board-approval levels have increased slightly. Nearly twice as many respondents are now looking at ďqualifyingĒ negotiators before allowing them to negotiate.

Turnover rate is 19% per year among CD heads, but there is a slight increase in their longevity. The titles of heads of CD have increased slightly in prestige, but their reporting relationships have not significantly changed.

By Diane C. Harris, President, Hypotenuse Enterprises, lnc., 1545 East Avenue, Rochester, NY 14610, a mergers and acquisitions advisory and consulting firm that specializes in outsourcing to the corporate development officer.  The results discussed in this article have been updated by the 2000 Best Practices Survey, available from Hypotenuse Enterprises, Inc.


 

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