Expectations of future price increases

I am in the middle of an age old question for consultants.

A prospective client has a multitude of mostly independent and self-directing sub-entities within its organization. This is a result of historical development. Recently a number of small but growing number of negative incidents have occurred.

The first thought in this situation is ‘aggregate all of the entities’. The benefits of aggregation are well-known.

McDonald’s has dealt with this question over the years as it deals with its franchisees. It has to strike a balance of supporting and directing the restaurants but also developing new ideas and incentivising good performance.

But the tension of aggregation is rarely discussed. Smushing something together and then trimming the edges has always had a strong appeal. It feels like powerful work with momentous decisions.

In reality, success is the minority outcome. McKinsey suggests that there is an optimism bias towards merging as the results, the cold hard facts, show that merging infrequently delivers net positives.

What I think is powerful is the concept of ‘expectations of future penalties’ for balancing the need to support and direct the sub-entities but also developing new ideas and incentivising good performance.

So the role of aggregation is to develop a clear line of sight for developing a strong set of expectations.