Mergers fail to meet financial expectations, more often than not. This is often due to overestimating potential revenue synergies and savings while underestimating the cost and disruption of integrating the companies. But when synergies never show up, or a merger impairs an enterprise’s operations, it’s not just a failure of the financial analysis. It’s failure to execute that plan. And that involves people.
In his book The Heart of Change, John Kotter writes: “Large scale change efforts are ultimately about changing people’s behavior. In fact, whether it’s an issue of strategy, systems, or cultures, change depends on changing people’s behavior.”
And no one changes employee behavior by fiddling with a financial analysis spreadsheet. The behavior of a company’s staff and its surrounding culture are vital to improving the fortunes of the platform company and its add-on acquisitions. Inadequate attention to people issues may drive failure at any of the three key transitions involved in M&A: building a new organizational structure, blending cultures, and shifting employees’ duties and procedures during the change management process.
All these transitions seem like “soft skill” terrain, but addressing those risks involves applying concrete tactics, such as analyzing stakeholders to discern the potential impact of plans, executing a specific set of actions to demonstrate the new culture and implementing an assessment system to gauge responses to that culture.
The most visible – and often controversial – item is building the organization and leadership structure, or moving the right people into the right roles. That can be fraught with political landmines when shuffling execs and employees into new positions – or out of the organization. When individuals see their “place” disrupted it serves to distract them from taking care of the customer and running the business.
If communication lines aren’t kept open, staff members are free to speculate about job security. One GP cautioned that the real stars of the acquired entity might not be easy to spot, so firing most of the senior management team to start from scratch can cost invaluable organizational knowledge. In other cases, the acquiring company may avoid ruffling any feathers and choose to make do with the current management team, citing the value of continuity when it’s really the path of least resistance.
Another transition to manage is the introduction of a new culture – one that might need to be a blend of both the acquiring company and the target. “Culture is a very deep element that’s born very early in the life of a company,” says Pierre Samec of General Atlantic. “So it can be very difficult to introduce a new one, like a liver transplant, where there’s always the chance the body may still reject the organ.”
One GP noticed that it’s too easy for the acquiring company to assume its culture is superior. “Respect for each culture is vital,” says Samec. “It’s all about learning, and sometimes the facet of a culture which seems to be a weakness may actually be a strength.”
Recently, General Atlantic managed the merger of Network International and EMP. Even though both were leaders in the payment processing industry in the Middle East and North Africa, the cultures were very different. “Network International delivered a tailored offering for large customers, while EMP sold a more standard issue product to smaller customers,” says Samec.
General Atlantic saw the potential of building a shared infrastructure between the two, allowing them to stay true to their separate cultures within that single entity. “EMP was bigger in Egypt and North Africa, so we respected EMP’s success there and had Network International’s operations follow its lead in that market.”
Cultural misalignment can derail the nuts and bolts of integration in many ways. Differences in leadership style or decision-making processes can slow down any proposal. If the new culture doesn’t earn the buy-in of the employees, any move can be resisted or, even worse, earn the dreaded “triple bump.”
As Mark Walztoni of Crowe Horwath warns: “That’s when a company loses its ‘A’ players, it can’t recruit ‘A’ replacements, and the rest of the employees adopt a wait-and-see stance.”
There is a reality that as employees move from their old responsibilities and processes to new ones, it will affect performance. “What they hear, see, and experience can increase the depth and length of any productivity drop that often arrives during these kinds of changes,” says Walztoni.
These productivity drops can be tracked to any number of slip-ups in the plan. Personal objectives can be ill-defined, overly complex, or absent altogether. Senior management can discount employee insights into process changes, or not consult them at all.
The values and vision of the newly merged company may be unclear, contributing to uncertainty about why a certain employee was laid off or a new process introduced. The very words “change management” mean little without being clearly translated into objectives, specific actions, and expected outcomes with strong project execution to follow.
One GP noted that it’s vital to appreciate the amount of change any merger or acquisition may have on an employee’s daily life, as staff learn to operate within a new organization. A cautionary tale involves a mid-size law firm that acquired a smaller legal practice in another city. The acquirer believed that the employees of the smaller firm would recognize the benefits of the transaction, so the integration strategy was essentially the promise that business would proceed as usual. The result? Key employees left to join a competitor.
But these transitions can be managed well. Walztoni recalls a successful effort at a medical products manufacturer. “During the HR due diligence, we focused on a substantial workforce consolidation and sales force integration as input into the transaction model,” says Walztoni. “This led to the development of a Day One communication plan, which included the handling of employee issues in a sensitive and comprehensive manner, leading to a smooth transition among the staff. The people aspects were actively managed in a way that really minimized disruption.”
Building a ‘change squad’
The truth is so many of these transition issues can be solved by conducting sufficient due diligence to understand the people and cultural issues at work. That involves taking an in-depth look at the stakeholders and any cultural differences.
Crowe Horwath stresses the value of its stakeholder analysis, which examines stakeholders both for their abilities within the organization and for their support of the transaction. They gauge that support and break stakeholders down into four distinct categories: amplifiers, supporters, skeptics, and bystanders or resisters.
Naturally, the ideal is to make supporters and skeptics into amplifiers and remove resisters from the organization or at least from the area of impact.
“The analysis is really about who’s capable and who’s willing,” says Walztoni.
He recalls a CFO who was more than qualified to stay but had trouble adjusting to the newly collaborative culture, going so far as to hire his own outside consultants to handle an issue. He was let go, as a “resister” who couldn’t be removed from an area of impact.
Invariably, that stakeholder analysis also illuminates the bias or processes that constitute the culture of an acquisition target. It also can prove invaluable in choosing the key people to make up the focused group that will serve as the change management team.
Consultants stress the need for a creative mingling of staff from both companies in selecting the group who will lead any change management effort. IT chiefs and HR leaders are a necessity, but the team may include an influential plant manager or some other less-than-senior employee who offers an “on the ground” perspective of the initiatives being proposed. The team can be more than a committee; it can be the testing ground for the blending of the two cultures as it devises the action plan.In merging EMP with Network International, General Atlantic built a team of smaller units, each dedicated to a different element identified as key to the transaction: sales, facilities, operations, HR, etc. Each unit consisted of one person from each company, a specialist in that area, and a coach to help the process.
“As a coach, it isn’t about making the decision for them, but facilitating the process,” says Samec. Each unit was tasked with making recommendations to the executive committee, and six weeks later, those units delivered.
“The change management charter is the key document that defines the assumptions, the approach, and the metrics for gauging the approach’s effectiveness,” says Walztoni.
As the team discusses various priorities and initiatives, that conversation can go a long way to understanding both cultures and avoiding any tone-deaf moves regarding personnel or decision-making styles.
The charter can also establish the nitty-gritty details of the communications effort, including infrastructure, responsibilities, messaging, and gathering audience feedback. Frequently, polling stakeholders can catch any cultural misalignment well before it matures into a full-blown clash. Change management plans all have numerous moving pieces, so it can be hard to decide which are the priorities, but there needs to be a fundamental bias toward action.
“Speed is of the essence,” says Samec. “If you set big goals with an audacious deadline, people don’t have time to bicker, chatter or let rumors spread. They’re too busy to do anything but execute.”
Several consultants noted the need to address the HR program as early as possible. “Integrate the HR programs quickly,” says Walztoni. “It sets the tone in terms of cultural behavior and the urgency of the effort.”
By making HR one of the earliest priorities, employees can stay focused on the other elements of the project, which often involve staff moves that can be easily misinterpreted.
Steadying the shake-ups
Most change management plans involve shifting roles and even layoffs, so it’s important to help everyone understand the rationale behind the changes. Layoffs can happen in waves, and the remaining employees will be watching closely how the cutbacks are handled. Are they done with dignity and respect? Is there an effort to ensure the layoffs are recorded as “no fault” so employees can continue their careers? In relevant cases, are employees allowed to finish current projects or stay on in some freelance capacity?
One GP stressed that proper layoff procedures are as much about the staff one wants to keep as the staff that has to leave. Too many times, HR leaders can get too focused on a flawless transition of the payroll system to ensure the remaining employees get their checks on time and understand reimbursement policies.
“As critical as payroll and administrative policies are, this tactical emphasis on short-term transition by the HR department can also be a potential pitfall,” says Jerry Larson, Crowe Horwath managing director.
“An equal balance of focus must be placed on those activities that affect the longer-term strategic people transitions. These include things like organization realignment, talent selection, separation, incentives, culture transition, and change management.”
Experts argue that the staff that stays actually needs to be re-recruited. And no, keeping their job isn’t enticement enough. This doesn’t always require a pay raise, but it can involve communicating a chance for advancement or new, exciting projects. In certain cases, these remaining employees are ripe for recruitment by headhunters and competitors.
Re-recruiting current employees will help keep any productivity dips to a minimum by clarifying the new objectives and rewards that come with the upheaval. And when the dust settles, it’s just as important to re-engage with those stakeholders to discover who’s become an “amplifier” and who’s drifted into being a “skeptic” or “resister.”
“It’s so important to go back and poll employees, one, two, three years after the transaction closed,” says Walztoni. “You need to track the progress against the original change management charter.”
Sometimes new employees have missed key cultural touchstones that were shared when the transaction was announced and the communication effort was in full swing. People tend to revert back to fretting their day-to-day tasks and lose sight of the broader goals and direction of the company.
Ongoing polling helps weigh the goal for employee experience against the actual employee experience. It’s important to use the results to teach, not punish, the employees. A survey is only as good as its candor, and candor is often the first casualty after employees witness any complaints being penalized.
The metrics might change as the business matures as a single entity but the bias towards dialogue can’t. The best change management plans never expire, as the best companies will continue to evolve, and that evolution certainly needs a roster of amplifiers and supporters to succeed.
The four kinds of stakeholders
During any change management process, most employees can be broken out into four categories of stakeholders
Amplifiers: The stars who have the willingness and ability to champion the plan. Reward and empower these influential few.
Supporters: Those employees that look favorably on the plan, but still have lingering questions. Address their concerns, and they might become amplifiers.
Skeptics: Those with serious questions about the plan. They might become advocates, but not without a real investment of time to address their concerns.
Resisters/Bystanders: Those who aren’t engaged in the process or are unwilling to support the plan. At best they are either moved from an area of impact, or removed for the organization.
This article is sponsored by Crowe Horwath. It was published in a supplement with the October issue of pfm magazine.
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