Leveraging the lessons

Research conducted with a group of global organisations reveals how they are proactively addressing cultural integration issues in mergers and acquisitions.

In the complex pas de deux of a merger or acquisition, few outcomes are as challenging as capturing the full value of the deal. While success in M&A often translates into identifying and achieving cost synergies on or ahead of time, it's also about success over time, as the combined organisation realises the synergies of increased revenues, leverages its capabilities, cross-sells products and services, and sees its teams come together in new ways to focus on the customer.

This kind of full-value success relies heavily on the two organisations understanding each other’s culture — how each company operates; the similarities and differences, opportunities and risks — and identifying the actions required to align those respective "ways of working” towards what is required to drive business results well into the future.

 

And yet, only 25 per cent of the global organisations that responded to Mercer’s culture integration survey in 2007-2008 were addressing culture in their transactions in any sort of planned way. Given the subsequent global economic crisis, and as M&A transaction volume has slowed for many companies, both our experience and research now show that highly acquisitive organisations are focusing on strengthening their culture integration processes, tools and practices.

This concept is well-recognised by each of the organisations involved in our most recent research. Mercer conducted in-depth interviews with the HR leadership of a select group of global firms that are proactively addressing culture integration in their transactions. These included BAE Systems, BW Shipping, Hill-Rom, Microsoft Corp, MillerCoors, and PTTAR.

The aim of the research was to understand what drove them to address culture so proactively; what approaches, practices and methodologies they were using; what they regarded as their key learnings; and what advice they would offer to other companies undergoing M&A activity. Across the organisations and individuals interviewed, the research uncovered four core elements of an approach to M&A transactions that was highly consistent and reinforced in example after example:

 

Discover and define direction: Senior leadership was engaged early on in the deal to discover and define the cultural characteristics required to deliver on the transaction and business strategy. Time was set aside for the leadership teams to come together, debate, agree and clearly articulate the behavioural patterns needed in the forward-going organisation. These culture characteristics were then cascaded through the organisation.

 

Dig deeper: Time was set aside to truly understand each other’s “ways of working.” A concerted effort was made to look for alignments and similarities as well as differences, risks and potential derailers of success - from a variety of perspectives.

 

Determine drivers and deploy: Each organisation had its own approach to addressing cultural issues, depending upon the nature of the transaction, its perceived value, the existing organisation culture, and the characteristics of its leaders. However, a common characteristic was that each organisation identified a series of levers that were required to reinforce specific behaviour patterns. This was done in a very targeted and deliberate way.

 

Determine traction: The fourth core element related to how each organisation tracked progress and monitored success of its culture-alignment efforts over time. Many realised that it wasn’t sufficient to wait until the business results were in. Instead, each tracked (and continues to track) lead performance indicators that gave early indications of progress and shortfalls.

The organisational perspective
Let’s look at these four elements from the perspectives of the organisations we surveyed. In terms of the first - discover and define direction - the firms reinforced the value of giving leaders the time, space and permission to focus on the critical behaviours required to drive value. For some, it required extensive discussion and debate to gain alignment about what success would look like, before consideration was given to the behaviour patterns required.

As a Hill-Rom executive put it, “The culture that needed to be changed was to eliminate the legacy thinking of entitlement - and move to one of engagement, proactivity, risk taking, innovation, entrepreneurship…. We realised this through discussions at the CEO and operational leadership team levels.”

Similarly, at MillerCoors, “Our leadership spent a significant amount of time together when they were initially formed, answering questions such as ‘What do we want that culture to look like? What parameters do we need to put around it?’ They spent a lot of time, energy and care to develop our winning strategies (our business goals and objectives) and our critical success factors (definitions of our behaviours).”

A key part of this early-phase success was positioning HR in the right way to enable the culture-change process. Two things were clear in our interviews about the role HR plays: One, HR needs to be positioned to facilitate the process; it does not own the culture efforts, nor does it own the resulting culture or its change-leaders do; and two, HR can best enable leader-led culture change by equipping leaders with the logic, practical tools and mechanisms for reinforcement and recognition to support the required change.

In one organisation interviewed, the champion of the culture change effort is also the HR leader of the technology and operations business. With a close working relationship with the CEO, she has a clear mandate to facilitate culture change across the business using the acquisition as her stage. She is very clear that the culture change is not brought about by her own actions; she sees herself simply as a trigger to enable leaders to “do their job.”

The big dig
As for the second element - dig deeper - one organisation observed of an M&A transaction, “Looking back on it, we should have done an even more detailed cultural analysis… we did just a quick view from the senior management level. We should have extended it further. It would have changed people’s perception that we were very much alike, when, in reality, our day-to-day ways of working were very different. An assessment puts those differences on paper, and if you share that information, it stirs the pot, and questions are raised, discussed, answered, and these lead to positive action.”

Several of the organisations found that when they conducted a deeper “culture dig,” they discovered several areas where they were fundamentally different, and these differences could have a significant impact on the success of the integration. For instance, while vision, mission and values might have overlapped almost “word for word,” the way decisions were made, or the way internal processes were organised, or how customer relationships were viewed were substantially different. It is these ways of working that can prove deadly if they are not anticipated and managed.

MillerCoors, for instance, commissioned a third-party early-stage due diligence review of the cultures of the two combining organisations. In the first few months of integration, they relied heavily on that information to anticipate and prioritise issues, and to make decisions about the direction to take. It also served as an education to each of the companies about what to expect and what the key integration challenges might be. Another organisation adopted a multi-sourced assessment approach to ensure that a good read was obtained on the cultures of the two organisations.

Microsoft offers another example of how to dig deeper. For larger transactions and many smaller ones, Microsoft takes both a qualitative and quantitative approach to culture, conducting structured interviews with the executive team and undertaking a semantic differentials survey of acquired employees early after the acquisition closes. This data is then analysed and key findings of similarities, differences and implications are presented to the senior teams of both organisations. These early conversations and observations are found to be invaluable and practical in providing insights into decision-making processes, how work gets done, how information flows, and so on — all of which helps to identify the sources of value. In selecting the drivers to deploy in order to influence the desired behaviour patterns — the third element — the organisations we interviewed shared four areas of best practice, some of them currently utilised and some more aspirational:

 

Focus on those elements that will drive real value in the transaction — in other words, a line of sight to value. This means gaining a clear understanding about the streams of work that drive value and success in a given transaction, and focusing closely on the behaviours that are required to optimise these. It is about truly understanding what elements of the target’s culture must be preserved to retain value, and which are not so critical, although may be “nice to have” and contribute to engagement.

As Microsoft explained: “We need to look at why we are buying them and where the value stream is. For example, having computers with different operating systems, company-provided lunches and different PDAs might be attractive to the employees of an acquired company, but is it where value comes from? We knew in our last integration that focusing on the sales force was key to creating value, while understanding what really mattered to employees was something we needed to ensure we built into the on-boarding process.” In the case of PTTAR, the CEO and senior team saw that value would be created through cross-business integration and teamwork. Therefore, employees were asked to work together to develop new key performance indicators (KPIs) and a clear view about how they would achieve these targets. By having people involved in teams to help identify KPI and synergies, PTTAR has generated more ideas (and revenue) than an initial study indicated.

 

Select the drivers, or levers, that have the most impact on the required behavioural shift. In selecting these drivers, organisations were very conscious to focus on a few levers and made assessments about how hard they needed to pull each, and in which direction. At Hill-Rom, for example, the focus is about driving a shift towards a culture where employees are empowered to make decisions and act in the best interests of the organisation and its customers. This culture of “owner-operators” continues to be created by pulling a few very well-chosen levers involving reward and recognition, employee engagement programmes, and an “intense focus” on performance management.

 

Be very deliberate about choosing and re- enforcing the “appropriate” language and terminology. This was identified as a key driver in culture change in several cases. For instance, in one transaction, due to their geographical footprints, one organisation was referred to as “East” and the other as “West.” Rather than reinforcing the concept of one team that has simply come from different backgrounds, this terminology reinforced “us and them” and so was quickly addressed and replaced with “legacy.”

Getting language right is also about taking the time to understand what is being referenced; the same terminology can mean very different things between organisations. For instance, in one organisation, “planning” may mean undertaking detailed research, rigorously testing the business case and preparing a 300-page document, while in the other organisation it may refer to having a proposal, testing it with customers, piloting it and modifying it, as captured in a six-page document.

 

Encourage “leveling.” HR leaders and managers must be sufficiently confident to “tell it like it is” and use the differences in culture as points of discussion and decision-making in their day-to-day conversations. Culture can be difficult to deal with, and speaking about it is uncomfortable for many people. However, cultural differences are the elements which present the greatest opportunities for moving forward. A technique used by one organisation was to literally address “the elephant in the room” by having the facilitator leave a stuffed elephant with the management team to remind them that they need to put the real issues on the table and address cultural differences openly before any friction arises.

Traction and measurement
The final theme highlighted in our research was to determine the traction of the culture alignment initiatives and identify early signs that culture integration efforts were paying off. For several organisations, this included the use of specifically designed culture pulse-check surveys and integration pulse surveys administered over time (for instance, quarterly from between day 1 and up to 18 months out) to identify trends in culture change and alignment.

For BAE Systems Australia, the need to track progress from a culture and people perspective was a high priority well before close. “In the integration with Tenix Defence, we were merging two organisations of about the same size,” said the HR leader of BAE Systems Australia. “We knew that success would depend upon us working well together to retain people and restructure the business. With so many moving parts, we had to ensure we were making progress in securing people’s hearts and minds.”

BAE chose to track culture change efforts by way of a pulse-check survey run every four or so months. It has paid off in strengthened engagement levels, and BAE has reinforced its communications and taken action to address the feedback it is receiving from the surveys. Ultimately, organisations must move at their own pace as they combine cultures. For BW Shipping (formerly Bergesen and World-Wide Shipping) the integration journey has spanned five years after the decision was made not to rush integration until there was a good understanding of the business objectives and clarity around behavioural similarities and differences. With the realisation that a globally consistent, internal and external brand was needed, senior leaders came together to debate, draft and finally articulate the behavioural non-negotiables.

When it comes to merging cultures, of course, timing is everything — moving too fast or too slowly can lead to resistance on one hand, atrophy on the other. But by heeding the core elements of success in cultural integration — as exemplified by the aforementioned organisations — the daunting dance of M&A can flow smoothly and successfully, proving that even the most complicated change-management challenges can be met and mastered in these transformative times.

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ABOUT THE AUTHORS
Len Gray is a partner and the Asia Pacific leader for Mercer’s mergers & acquisitions business.
Padmaja Alaganandan is India business leader for Mercer’s human capital business.