Culture conundrum

Firms advised to focus not only on the "what" but the "how" of culture

By Sharad Vishvanath

The year 2011 saw growth in M&A activity and momentum picking up at a rapid pace. Although, in the bygone decade, the peak was seen around 2007 and it gradually lost momentum due to the global meltdown; in light of recent economic recovery across the globe, most of the firms are gearing up for inorganic growth again. In a recent Aon Hewitt study on M&A, covering 103 companies, 69 percent of the firms anticipated a rise in M&A activity in the coming two years and 73 percent indicated Asia Pacific as their focus area.

Although deal activity is on the rise, deal success is not. The deal failure rate remains alarmingly high. In the study, 50 percent of the organizations stated that they failed to achieve their desired objectives in past transactions in spite of the fact that they spent most of their time defining the approach and metrics to track deal success — 80 percent of the participants defined formal measures to track deal success.

How many times have we heard of mega M&A deals failing to achieve projected goals and placing the blame on “culture integration” issues? While it may seem cliched, and a convenient scapegoat, research data proves this adage time and time again.

In the study done by Aon Hewitt deciphering the top 10 reasons for deals failing, culture ranked as the second most common reason. Eighty-seven percent of organizations averred that cultural integration was an important and critical driver of transaction success — with more than a third of respondents claiming that it was the top reason for deal failure.

Even more pertinent is that culture was viewed as a major contributing factor to other key causes of transaction failure. For example, close to 80 percent of respondents indicated that failure to achieve synergy, loss of key talent and productivity, and distraction in the organization was due to failure of cultural integration. Aon Hewitt also did a comparative analysis of “overachievers” (those organizations that exceeded some or all of their deal objectives and targets in past deals) to “underachievers” (those that did not) to understand the contributing factors to transaction failure.

Interestingly, these can be directly or indirectly linked to typical business goals of deal success and not just human capital related goals. This is why for overachievers, “culture” integration goals and strategies sit on the CEO’s and business leader’s scorecards and not just HR.

So what are the pitfalls to watch for?

● Not embracing the culture conundrum and earnestly striving to solve it. While successful cultural integration is clearly acknowledged as a critical element in deal success, our research uncovered that most companies do not know how to successfully navigate it during a transaction. Globally, 58 percent of companies reported that they did not have a specific approach to assessing and integrating culture in a deal. Further, none of the responding organizations in the study reported that their cultural integration practices were effective.

Interestingly, in the Asia Pacific while nearly 40 percent (compared to 50 percent globally) of organizations rank culture assessment and integration in the top three areas of importance in due diligence, only 20 percent of companies (compared to 30 percent globally) rank it in the top two priorities. Furthermore, we see a drop in prioritization during integration (only 24 percent globally and 27 percent in Asia Pacific rank cultural integration globally in the top two priorities) when organizations have more access to information and employees.

Does this have an impact you may rightly ask. Of those firms who lost critical talent at a higher than normal rate during a transaction, 68 percent did not have a specific approach to culture.

● Lack of leadership support on culture focus: not breaking down culture into tangible, granular business metrics. Organizations, especially HR struggle to make culture “real” for business goals and decisions. They tend to keep culture discussions at a 30,000 feet level and are guilty of not creating a clear business case of how culture impacts critical business goals of leaders and employees.

It is critical to break down the culture gap problem into specifics. For example, defining how decisions are made (centralized vs. decentralized), how you are organized, how you sell to your customers (customer centricity ethos, sales organizations and sales process.), how you develop products (innovation vs. fast imitation), how leaders and talents are developed (build from within vs. buy bias) helps crystallize the problem statement and its linkages to business goals and employee lives.

Looking at individual entities in an M&A with these lenses yields far more concrete gaps and actionable items. They can also be linked back to business deal goals such as growth, market share, achieving economies of scale/cost efficiency, innovation/new product portfolio and supply chain expansion.

●Missing the opportunity for identifying cultural impact during due diligence phase. Overachievers tend to spend more time on culture and upfront surfacing its direct/indirect impact on the deal model (40 percent vs. 20 percent), purchase agreement clauses (31 percent vs. 18 percent) and integration planning (86 percent vs. 73 percent).

●Bias towards assessment. A lack of adequate focus on actively managing culture rather than an as-is assessment: We uncovered that companies that do focus on culture during a deal, tend to wrongly allocate time and effort between assessment/gap analysis and implementation. Eighty-nine percent of underachievers said they focused on assessing current state cultures, defining future state cultures, and identifying gaps between current and future states while over 90 percent of overachievers focused on changing the organizational structure, redesigning HR programs/practices, and team building sessions. By focusing more on managing culture, Overachieving firms direct their efforts on addressing the challenging culture-related issues that may arise during integration.

What’s the light at the end of the tunnel?

Now that we know some of the pitfalls, what can organizations do to overcome them? You would imagine that overachievers should have figured that out. Surprisingly that’s not the case. Our study revealed that even overachievers have not figured out the right paradigms and struggle to translate their intent into actionable initiatives that drive cultural integration forward.

Let’s discuss some key elements of the blueprint to achieve successful cultural integration.

● Have a clear and granular point of view of the contours of the culture

Break down the culture definition into meaningful drivers that are relevant to business decisions and goals. The what of the culture aspect has to be defined clearly. It has to be firmly anchored to and derived from business goals. This ensures that the approach is both proactive and has the support of leadership right from the outset which our research proves is critical for success.

First, articulate through a value driver analysis, how different aspects of culture impact a deal’s business goals such as growth, market share, operational efficiencies etc. Then do a second level drill down to derive what metrics and drivers you can drive and draw a clear line of sight for business leaders to their deal goals.

Use these granular metrics, drivers and traits to draft the contours of the new culture and how its different elements will impact leaders and employees in terms of business goals, strategies, organization, systems and processes. This makes it very real and tangible for business leaders and employees to understand and support.

● Focus not only on the “what” but the “how” of culture

Often we see organizations focus on comparing the cultural traits (what the culture is) and ignoring cultural drivers underneath those traits (how culture works). By analyzing the drivers of culture, organizations will have concrete data on cultural opportunities and obstacles, and will be able to develop an action plan to drive cultural integration.

● Have a “bias for action” when it comes to cultural integration implementation

Actively manage the cultural integration process. Develop a holistic plan for managing the cultural integration process including its inter-linkages into other HR and non-HR work streams. This includes defining specific targets to gauge progress from the ”and “how” analysis done earlier. Then ensure the cultural integration work stream is aligned and relevant to business processes; is conveying how and why culture is experienced at the employee level and develop a comprehensive change management and communication plan to support the culture change.

Total time allocation by the team should be heavily skewed to action rather than excessive planning. The actions should be visible,

coordinated and backed by a strong communication plan that is led from the front by the CEO, business leaders and facilitated by HR rather than the other way around.

While organizations understand cultural integration is critical to deal success, they continue to struggle to translate their assessment into actionable initiatives that drive cultural integration forward. As even overachievers grapple with this challenge and stakes in M&A go up, evidence mounts on how culture can be the critical aspect having a direct and cascading effect on deal failure issues. There are effective strategies that can be employed to better understand, break down the “Culture Conundrum” and simplify the execution of its solution.

Sharad Vishvanath is the Asia Pacific Regional M&A Market leader based out of the Aon Hewitt New Delhi.