How cultural diagnostics contribute to effective M&A consolidation

By Towers Watson

Following the extended economic downturn, which slowed merger and acquisition (M&A) activity, corporate transactions have been on the rise again since 2009. Many business experts predict that trend will hold, given the large cash reserves created from several years of cost cutting, increased pressure to grow the top line and the larger number of “distressed” targets struggling for survival post recession.

From a strategic perspective, an acquisition or merger is typically a path to faster growth or market dominance. But the ability to achieve those goals is far from assured, as many deal makers have found over the years. When deals fail to meet financial, competitive or other objectives, the reason often comes down to how well the entities fit together in terms of culture, strategic priorities, leadership style, and a variety of workforce and workplace practices and processes.

Ironically, periods of heightened deal activity often lead to a diminished focus on culture and leadership issues due to the pressure to complete deals quickly. But in any transaction requiring effective integration of multiple workforces, especially those involving knowledge workers, overlooking these elements increases the risk of reduced productivity, engagement and effectiveness later on.

For large serial acquirers and other veteran deal makers, culture and leadership routinely come into the process early ― in some cases, even during the target evaluation phase. Identifying the challenges as early as feasible makes it easier to work with differences efficiently and avoid cultural-fit issues that can persist for years after all operational issues have been satisfactorily resolved.

For midsize and smaller organizations, the issues of cultural fit and return on investment can be even more important, given the commitment and business impact that a deal can represent. And, while most executives understand the significance of cultural issues, many still struggle to address them effectively.

Part of the problem, traditionally, has been the lack of a rigorous way to identify the nature, extent and likely impact of differences and similarities between merging companies. Informal discussions among management teams, sharing examples and organizational practices, help but rarely provide the fact base and level of detail required to bridge gaps and build upon similarities.

Therefore, array of diagnostics can be useful in identifying both the facts and the subtler attitudes and behaviors that lie beneath the surface. These diagnostics are an important element in developing the insights necessary to build appropriate and detailed implementation plans that engage the joint workforce in a newly defined culture.

Getting started: comparing cultural attributes

Corporate culture is one of the most elusive concepts to identify and measure, as well as one of the most important. It’s nothing less than an organization’s DNA ― the foundation for the structures, systems, processes and actions that support its strategy, and explicitly or implicitly define interactions among employees, customers and other stakeholders. In some organizations, everyone has a clear and shared view of their culture. In others, even people within the same organization may not view the culture in the same way. So finding out what people in each organization think about their current culture lays important groundwork.

While a cultural diagnostic typically comes into play after deals are announced, in some cases, such a tool can be used in the target evaluation phase, potentially contributing to a “no go” decision, thus sparing untold time and resources. More often, however, it helps prevent early missteps that result from an ignorance of cultural differences that are often magnified by employees’ already heightened anxiety over the impact of the deal on their careers.

Building the new entity: aligning culture with strategy

A body of evidence, including Towers Watson’s research on the cultural drivers of organizational performance, underscores the importance of a high level of alignment between a company’s business strategy ― its chief basis for competition ― and its internal culture.

For example, a manufacturer competing mainly on cost and efficiency needs a very different culture from a luxury goods retailer for which personalized customer service is the primary differentiator. Ensuring that culture reinforces and reflects the attributes needed to deliver on a company’s strategy is a hallmark of high performing companies.

Through Towers Watson’s research, a set of workplace cultural attributes associated with financially successful organizations that excel at five specific business strategies were identified. Support for risk taking is one of several cultural attributes critical for companies competing primarily on the basis of innovation. Well-defined structures and processes, by contrast, are more important for companies differentiating themselves through efficiency and cost savings.

In the early stages of integrating two companies, it’s valuable to test whether current attributes align well with strategy and, even more important, which attributes will be most important given the planned strategy shifts. There are special tools designed for this purpose, which is to enable executive leadership from the legacy organizations to describe both their current culture and the one they think will be necessary for the merged entity.
One of Towers Watson’s clients, acquiring a small competitor, used one of these special tools, to validate the relevance to the strategies set by the company previously. In this instance, the leaders of both organizations agreed their primary basis of competition currently was brand, which the results confirmed. Both also agreed that brand would remain critical for their combined future culture, giving them an important area of similarity upon which to build.

At the same time, the analysis revealed two important gaps. First, although both sets of leaders agreed that innovation would be very important in the future, the diagnostic results and follow-up analysis showed
that only the target’s culture currently supported two attributes important to innovation — diversity of thought and opinion, and a bias for action.

Neither of these attributes, however, was present to any extent in the acquirer’s culture. Given leadership’s shared agreement on the importance of innovation for the combined entity, preserving these elements of the target’s culture and expanding them into the broader merged company became one of the top integration priorities.

A second gap appeared in the area of customer service. The acquirer’s leaders saw customer service as far more critical to future success than the target’s leaders did, which is why the diagnostic results showed the buyer’s culture to be more closely aligned with this strategy. So the challenge for the leadership team was to:

• Develop a shared vision of the relative importance of customer service as a basis for competition
• Find ways to engage the target’s employees and embed this attribute in the new culture

Confirming the integration process

Once integration kicks in full force, it’s useful to take a baseline measure of how well the process is working ― and learn where and to what extent course corrections could be necessary. A relatively straightforward survey is well suited for this purpose and can be repeated on a regular basis (e.g., every three months) to assess changes over time.

This diagnostic asks direct questions about the progress of the integration. Common topics include:

• Understanding of the deal’s rationale
• Level of personal commitment to the new organization
• Confidence in the integration’s success
• Clarity of merger-related communications
• Confidence in leaders’ ability to manage integration successfully
• Impact on one’s role and career development prospects

Towers Watson used this diagnostic recently during the merger of two large manufacturing companies, administering 20 questions to a representative random sample of employees from both companies. The findings highlighted several key issues for follow-up, as well as some important differences across the two companies.

Specifically, employees from ABC Company were significantly less confident that their company’s strengths would be maintained in the new entity than were employees of XYZ Company. At the same time, more of the ABC employees also believed leadership was doing a good job communicating about the merger than did their colleagues at the other company.

Towers Watson also used the results of this survey to identify the top statistical predictors, or drivers, of employees’ personal motivation to make the new company a success. In this case, three motivational drivers that carried across employees of both the merger partners were identified:

• Confidence they could achieve desired career objectives at the new company
• Belief that the new company will deliver higher quality products and services than either of the legacy companies
• Perception that leadership will confront and resolve issues arising from the integration

Interestingly, while these issues were equally important to employees across both legacy companies, distinct differences in their views about whether the new company could deliver on these motivators were found. At ABC Company, employees were far more positive that product quality would improve. At XYZ Company, however, employees had more confidence that leadership would take them successfully through the integration.

Armed with these insights, the leadership team could identify not only what to focus on in building new processes ― career development and quality programs, as a start — but also which areas should be a particular focus for each group of employees. While focusing on all three areas would help increase the commitment of all employees, there was a specific need to help XYZ Company employees understand how the company planned to improve product quality and delivery, and a similar need to demonstrate to ABC Company employees how leadership would address integration issues. This led to a more segmented and efficient approach to managing the integration process as well as a better way of determining the right communication and change management strategies for all employees.

Putting it all together

The impact of culture is like a strong ocean current.

In countless ways, both obvious and invisible, it influences what employees focus on, talk about and look forward to. It guides their behavior in ways that can either enhance or erode performance. A cultural undertow can even wash out deals that otherwise have great strategic and operational potential.

Any corporate transaction brings with it cultural integration issues; they simply come with the territory. Getting ahead of these challenges ― understanding what the differences are, how strong they are and what people expect to happen ― is the only way to determine how best to address and resolve them. In M&A integrations, as in every other important endeavor, forewarned is forearmed.

This article was provided by Towers Watson.