After The Merger: Making Talent Integrations Work
Most mergers fail.
The good news is that the main reasons they fail are all internal factors that are completely within your control.
First the bad news:
There is a large number of research out there today that suggest that the majority of significant mergers and acquisitions from the past 15 years have actually destroyed shareholder value, with published research reporting failure rates ranging of 50% to 80%. In fact, one recent study from KPMG found that 83% of M&A deals were unsuccessful in delivering any discernible business benefit whatsoever.
But why? There’s certainly a sea of very intelligent executives out there still committing to inorganic growth strategies and asking exhaustive questions before committing their dollars for new merger and acquisition deals. Upon closer inspection, while successfully integrating enterprises are always highly complex endeavors with a great many variables at play, the very high failure rate of acquisitions frequently comes down to two primary reasons:
(1) The diligence and evaluation process was flawed.
Many executives bring insufficient discipline to the evaluation process that fuels these deals — as a result, they often get deals wrong. Despite the importance of accurately identifying and calculating company synergies, diligence work frequently results in an overly optimistic view of the revenue synergy opportunity. While cost synergy projections tend to be relatively accurate, often the weakest assumptions involve estimates of how much additional revenue the companies can generate when combined. This, in turn, leads bidders to overpay.
(2) The impact on people and corporate culture was underestimated.
You’ve probably heard that old quote from Peter Drucker many times in your career but it bears repeating one more time here: ‘Culture eats strategy for breakfast.” And as it relates to post-MA integrations, it’s evidently a very large 5-course breakfast at that. In a 2017 McKinsey survey of over 500 C-level executives less than 3 years removed from a major acquisition, three of the top four biggest impediments to a more successful integration were: #1 –culture clash, #3 – inadequate internal communication/ and employee training and #4 – poor alignment of the vison, mission and values of the legacy cultures. In other words, looking back the executives wish they spent much more time and resources internally focused on their people and not just their processes, policies and market projections which would have prevented a great deal of inefficiencies, lost productivity, retention headaches, and reduced operational savings.
Now the good news
The vast majority of reasons talent integrations fail are based on internal factors and thus are completely within your control.
Of course, integration action plans and timelines will and should look very different. For example, integration plans will look vastly different when a mid-size chemical manufacturer acquires a competitor to expand their global footprint to enter new markets versus when a massive pharmaceutical company buys a small start-up biotech seeking their next blockbuster drug by adding to their R&D pipeline. However, regardless of the size, scale, motivation, and cultural dynamics of each deal, research indicates there are a number of universal best practices and strategies that are essential during the integration phase. Along with the more technical aspects of mergers - such as aligning operating systems, controls, policies, workflows and regulatory/compliance approaches - organizations should:
1) DEFINE INTEGRATION SUCCESS FACTORS EARLY AND CLEARLY
It’s not uncommon for employees and leaders to feel overwhelmed with the volume of daily changes and large decisions needed
in the first 90-120 days after a merger. This gets compounded exponentially when a post-merger integration lacks clear focus.
It’s vital for the senior leadership team to clearly define and communicate how they will define the merger and integration a success with measurable metrics. Be sure to link the
due diligence work directly and tangibly to internal PMI’s to show integration and merger progress internally.
2) ASSIMILATE NEW SENIOR LEADERSHIP TEAMS PROMPTLY
As soon as possible, it’s imperative that the executive and senior leaders of the newly combined organization take some time behind closed doors to assimilate and create effective team dynamics. This can sometimes an awkward and challenging task with c-level personality types. (Tip: It’s usually best to hire an external and experienced neutral facilitator to lead these sessions versus your CHRO or other in-house staff). Along with strategic and growth discussions for the new entity, you may want to consider creating an internal SWOT analysis as it related to the merger. In addition, it’s advisable for some time to be carved out to honestly and candidly assess the two legacy corporate cultures in granular detail and have
the c-suite then define what the desired future corporate culture should look like. This exercise and decision will drive many of the follow-up integration steps you elect to pursue more than you may expect.
3) TRAIN AND INTEGRATE MID-LEVEL LEADERSHIP FUNCTIONAL TEAMS
Although some wait too long to do so, most merging organizations inevitably are able to integrate the c-suite from both legacy cultures successfully. Unfortunately, many organizations stop there and fail to provide similar attention and training to those most critical to successfully integrating their workforce: mid-level managers. Commonly, while the executive teams have created a shared vision of post-merger goals and actions director and middle managers are left in the dark and are sending very mixed messages to the bulk of employees based on their legacy cultures.
4) COMMUNICATE INTERNALLY FROM THE EMPLOYEE’S PERSPECTIVE
This is perhaps the most common fatal flaw in post-M&A talent integrations. A recent study by Mercer and the International Association of Business Communicators (IABC) asked CEOs after a merger what changes they would make if they had to do it over again. Their top response: the manner and frequency in which they communicated with employees. The most successful internal communication plans are internally branded and focus on employee engagement. They also match the change management cycles of the employees instead of the executives. Because of their access to information and involvement in the decision-making process, top leaders acclimate early to the change and understand the new opportunities inherent in the deal. By the time employees learn of the change, leaders are enthusiastic proponents, ready to drive execution. The broader employee population, however, isn’t there yet. They are more likely to be confused, anxious and fearful – of job cuts, more work, loss of stature, a new boss and the need to adapt to new work processes or technology. They may see only the risks, not the opportunities, and become more resistant as the change plays out. Timely, candid and frequent internal communications are vital to help them with the more seamless and quicker transition.
5) ADOPT REAL-TIME REPORTING AND COLLABORATION TOOLS
With the limited internal resources of many Operations, IT and HR professionals focused on compliance, systems and controls and operative structures priorities during a merger,, the importance of implementing and utilizing formal collaboration tools and channels are can be easily overlooked. The most successful talent integrations IT platforms extensively. Beyond simply setting up share drives and joint access to files, consider creating real-time dashboards and tracking reports and implementing and promoting an enterprise social media platform.
6) AVOID PROLONGED STAFFING DECISIONS AND MULTIPLE ROUNDS OF CUTS
Typically, the first few months of an integration include the need to make difficult headcount decisions to achieve the staffing models and cost synergies planned for in the diligence phase. Rarely do integrations occur without there being some duplication of resources that logically require headcount reductions. As one might imagine, these difficult staffing decisions between two merging organizations is most commonly the area where corporate culture clashes, personality differences, power struggles and personal agendas are most pervasive. In the end, however, most integration teams are able to make those difficult personnel decisions effectively to achieve the desired staffing models with the top performing, most integral and valued employees retained and lesser performers selected for dismissal. Be cautious in these situations not to draw out the process as the anxiety and insecurities involved in this phase from workers can be toxic to the overall integration goal. It’s far better to cut a larger number of jobs once and promptly than to not cut enough in the first round and have repeated waves of layoffs or job eliminations over a period of months.
7) MANAGE ENGAGEMENT AND RETENTION CLOSELY
Unfortunately, many talent integrations fail after the difficult, initial staffing decisions are made because they fail to manage to retention goals. A recent KPMG report suggests that retention rates are typically an average of 39% lower the first 6 months the desired staffing headcount had been achieved. In short, the very same employees that you deemed as your top-talent or with the highest future potential and are counting on to achieve your synergy, performance and growth goals are also the employees most likely to voluntarily depart immediately after the integration staffing decisions have been made. The senior individual contributor and frontline leader populations are the most at risk for voluntary departure during this time. Retention bonus plans can help in the short term, but the most successful integrations include a timely launch of revamped and sustainable performance incentives and reward programs and a highly visible increase in professional and leadership development programs available across the lower and mid-levels of the organization. Many post-merger communications focus on how the deal presented opportunities and benefits for the organization(s) and the future balance sheet. Remember, it’s vital to also create excitement and show tangible growth opportunities with new training and incentive programs for employees who are asking ‘what’s in it for me?’.
8) DEFINE THE LEGACY CULTURES AND YOUR DESIRED FUTURE STATE
As nearly all veteran executives of M&A integrations reported in the McKinsey study, merging workflow and operating systems is a much easier task than building a cohesive and common corporate culture. Still, many integration teams fail to actively address this ‘culture conundrum’ upfront and then are forced to reactively roll out programs when inevitable clashes begin to visibly impact operations efficiencies, employee morale and retention rates (typically 6-9 months into the integration). Even then, without a formal process to define the corporate cultures, many programs rely on anecdotal examples of corporate cultures that often invoke unintended emotional reactions.
Early in the integration process, be sure to define the business norms and corporate cultures of each legacy organization. It’s best to involve multiple levels of employees in this process and not just capture the sometimes skewed executive perspective, You’ll want to closely compare the most salient dimensions of corporate cultures for the two legacies upfront, such as: (1) corporate values, (2) risk tolerances, (2) innovation mindsets, (3) go-to-market mindsets, (4) approaches to customer service, quality, and quality, (5) performance orientations with metrics and KPIs, (6) hierarchy and deference chains, (7) time orientation, and (8) collective versus individual mindsets to name just a few. If the merger also transcends global cultures, a comparison of the geographic footprints and cultural work norms of the contrasting footprints is also valuable. A candid and formalized assessment of both legacy cultures will allow you to: (1) anticipate the expected friction points when implementing organizational change programs, and; (2) expedite the change acceptance process with employees.
9) OFFER CORPORATE CULTURE & TRAINING PROGRAMS
Research indicates that the most successful talent integration training programs adopt a candid and straightforward tone that balances acknowledging the strengths, weaknesses and business norms of both legacy cultures with the messages surrounding the reasons for the merger and the growth plans and potential of the future organization. Unsuccessful programs are commonly: (1) designed with a bias of the acquiring or majority culture, or; (2) have adopted a marketing-like tone of excessive optimism that focuses mostly on the positives of the merger and integration without duly acknowledging the legacies past history and business norms. Be sure to also include audiences comprised of all merging cultures together for these workshop to promote open, balances and candid conversations
Lastly, remember that ‘you cannot have an ‘us’ without a ‘them’. Initially it’s important to acknowledge legacy cultures and their differences. However, don’t fall into the common trap of referring to these legacy cultures in internal communications after the initial integration phase. Doing this will only serve to continue these cultural divisions. Instead, always define the ‘them’ as your external competitors and the marketplace, and ‘us’ as your merged cultures (regardless of which division, business unit or legacy culture being referenced).