2 + 2 equals what exactly for M&As?

I recently read an article posted by McKinsey about the impact of corporate culture on mergers (McKinsey: Organizational culture in mergers, addressing the unseen forces.).   I was drawn to it because I’ve been involved in mergers and acquisitions (M&A) and have always been amazed that so little cultural due diligence is conducted, given the high stakes associated with bringing together potentially dissimilar organisations.

People don’t agree on the exact proportion of M&A that fail to meet with shareholder expectations –they vary from 60% to 85%.  KPMG, for example, arrived at 83% of under-performance compared with expectation in a 2015 report.

Regularly conducted studies do agree on one thing:  the main reason for expectation-deficit is people-related issues. 

According to research by Korn Ferry and the Hay Group 91% of the mergers that fall apart are attributed to misalignment of corporate cultures; issues ranging from poor communications and inconsistent leadership to cultural dissonance between the acquired and acquirer.

What is culture?

McKinsey refers to culture as “the outcome of the vision or mission that drives a company, the values that guide the behaviour of its people, and the management practices, working norms, and mindsets that characterize how work actually gets done.”

Primeast’s PrimeFocus™ model recognises and supports this connection between organisational mission and culture.  The definition of culture as ‘the way things get done around here’ (Drennan, 1992) is more succinct and memorable. The Schein definition (1985) is one of the most used – ‘the learned product of group experience which affects the behaviour of individuals.’

 

Whichever definition of culture we use, appreciating the cultural risks in M&A enables acquirers to develop a robust approach to talent needs, talent retention and people risks.

 

The McKinsey article highlights the necessity to have a process for understanding how the cultures of two merging organisations will impact short- and long-term performance. In summary, McKinsey advocates:

  • Diagnosing how the work gets done – the practices, working norms and decision-making processes; how people are held accountable and remunerated for what they do
  • Setting priorities – how to maximise the value of the merger and how meaningful culture differences are to be managed
  • Hard wiring and supporting changes into new ways of doing things – redesign of policies, processes and procedures.

Doing the necessary analysis to establish ‘ways of doing’ is important, although this seems a little ‘left-brain’ and perhaps overly process focussed.

Primeast has a more useful approach to culture in M&A from the work that the Barrett Values Centre has done.

This starts from the need to generate values alignment – alignment between the values of the leaders of the merging organisations and those of their colleagues – and to achieve structural alignment, between the emerging culture and the displayed behaviours.

The question is, how to identify and codify values?

Barrett’s Cultural Transformation Tools (CTT®) provide a simple and very insightful approach to doing that.  Using this methodology enables the leaders of both merging organisations to have fundamental and meaningful conversations about the best ways of working going forward.

We have used this method successfully with clients over the years, and an example of our work with Rolls Royce can be seen here.

Poor performance and dissonance between management and workforce

A client in the pharma ingredients and services division of a global chemicals organisation brought us in after an acquisition.  They were alerted by plummeting performance and clear dissonance in management and workforce relations. Consulting with Primeast enabled them to rethink their organisational shape, management practices and approach to employee relations.

Our 2-year association radically improved performance of this division – beyond all their expectations.

Experience enables us to show how organisations can:

  • Close the cultural ‘stretch’ between two organisations
  • Recognise and become familiar with how the future is perceived by both parties
  • Surface the potential risks around cultural differences or ‘pinch-points’
  • Demonstrate their broad interest in understanding how to engage culturally with their employees
  • Develop a more comprehensive integration plan than would otherwise have occurred.

This puts the onus on leaders to be open and to let go of any preconceived, fixed views they might have. Open leaders will embrace the concept of values-based culture and be able to take an ‘inductive’ approach to understanding culture. It will encourage them to be more challenging in their desire to develop values-alignment, which will harness the potential of both parties and create employee engagement and higher performance.

Importantly, using our values-based understanding of culture enables leaders to develop a clear, relevant and pragmatic ‘action plan for change’ that employees will recognise is a direct response to their own values survey inputs.

Read the full case study here.

Sounds pretty simple?

If you think this sounds pretty simple, I offer you some words of caution.  Taking this approach is tough because it requires leaders to put their ego to one side, to be prepared to hear things that may not be on their agenda, to take time to allow the organisation to ‘speak’ and to engage in some fundamental discussions about values, behaviours and role-modelling.  All of which takes time.

Of course, the one thing many of us have only in short supply is … time.

Introducing the idea of a cultural due diligence early in the merger process and understanding that getting the desired culture right will deliver a 2 + 2 outcome that definitely equals more than 4 – can only save time and pain in the long run!

  • David Evans, Head of Consulting at Primeast