How might ethnography be used in making investments? According to some excellent insights from consultants at Jigsaw Research in London, more and more businesses are using social science methods to drive business innovation and learning. Does it translate into a transactional setting? Rest assured, when allocating large amount of capital to invest in a business, professionals will covet any tool that can sharpen their understanding of value.
Ethnography takes a holistic approach to examining a phenomenon, particularly a culture. Anthropologists approach their subjects with broad objectives. They iterate on models and refine them as they go. This parallels the due diligence process in investing. In due diligence, the wider the scope, the better; the more in-depth, the more likely you are to uncover something that might just cost you millions down the line.
Investing in corporations is effectively betting on the future cash flows that the employees can drive from the assets of the business. In many ways it is actually the culture that you are purchasing. Without understanding the flow of value that comes from power centers within the culture, buyers are at a huge disadvantage. As such, they may be misled their findings during due diligence.
Standard due diligence in M&A is extremely direct and focused, perhaps too so. Potential buyers take information that is available (management reports, public information, contracts, purchased background searches on execs). They talk to the people who are made available (top managers, reference customers). They go on site, collecting more financial, tax, and contractual information.
If they’re lucky during due diligence, buyers will get a brief glimpse using the holistic lens of the ethnographers in a couple of instances. They’ll walk through the production or distribution facility. Also, in the group interviews they may be fortunate enough to gain a window into the relationships upon which so much of business is based.
To mitigate the impact of the culture on a particular investment however, there are several certainties to fall back on. For the most part, the financial reports will preserve a reality of history. Does the historical context of those results promise to be reasonably consistent with the future results of the business? Triangulation from industry sources, customers, plus sales & marketing teams offers a competitive context for future success, too. Lastly, when in doubt, go with certainty: well written, long-term contracts will make almost any business intrinsically valuable.
