Finances and balance sheets are usually at the top of the M&A agenda. The people element, though, is often forgotten pre-deal and then, post-deal any considerations along these lines may be too late to be successful. Far from being forgotten before or during a merger (or botched post-deal) people should be considered right from the start... and at the top of that agenda.
“Cultural alignment is very important. On a scale of 1 to 10, I would give it about an 8,” says Andrew Hosty, CEO, Morgan Ceramics, Morgan Crucible plc. Bob Emmins, Finance Director at ABF Ingredients agrees: “The understanding of the organisational culture in both the acquirer and acquired businesses is essential for a successful integration. A company’s culture is the hardest thing to change and is normally only achieved as a result of a severe crisis or over a generational period. Compatible cultures enable trust to be established quicker... and this eases integration.”
So, if it is so important, why do so few companies consider cultural alignment pre-deal?
Time is usually the scapegoat, “culture clash can become a major ‘derailer’ and consume a significant amount of management time,” says Bob. With time usually scarce and numbers seen as being of the utmost importance, cultural alignment is often put to the side and left to be tackled once the deal is done. By then it may be too late though. In fact, the ability to align cultures should be assessed ‘pre’ or ‘post’ deal but rather throughout the deal.
Adam Tyner, Principal, M&A Integration Strategy, Planning and Management at Beyond the Deal says: “A solution to this problem is for organisations to evaluate and address their culture in tactical, real-world terms. By tightly linking cultural understanding to their firm’s tangible attributes, a tactical approach to culture will enable leaders to make the necessary decisions and take the required action to improve cultural alignment and forestall culture induced problems.” Andrew agrees, recommending that you should “measure your own culture (now) and assess your target’s culture via due diligence before you can close the deal.”
What is a ‘culture’?
Organisational culture is not easy to pinpoint, so what is it? Definitions generally agree that an organisation’s culture is defined by the values, beliefs, norms, assumptions and expectations that influence how individuals and groups work, interact and communicate within and outside the organisation.
Stuart Green, the CEO of ZOO Digital Group plc suggests that, “the culture of a business is a consequence of its core values. However, it is only the minority of businesses that take the time and trouble to identify and codify their core values, and then use these as a benchmark for behaviours, recruitment and development in the business. One of the big challenges here is that there is no easy or standardised way to capture the essence of a business in a values statement.”
Adam says, “One likely reason why cultural alignment isn’t looked at is because traditional approaches to organisational culture generally focus on the description and comparison of cultural traits between the merging firms. In short, they can tell you all about the firms’ cultures, but they say very little about what leaders can do to align or improve them.”
The importance of an aligned culture
Having said all of this, it is a common misconception that merged organisations should share a single culture - a more realistic goal to achieve cultural alignment. Most organisations have multiple cultures that vary by business unit yet, while the cultures of these groups will vary, they must align in three areas:
- Organisational goals – the overall purpose and specific objectives of the company
- Core values – the qualities and characteristics that the organisation considers important
- Inter-group communication standards – the norms and expectations for how individuals and teams from different groups communicate with one another.
“The real skill lies in knowing the differences in culture, and how to show respect to them whilst simultaneously achieving your acquisition goals,” says Bob.
June Boyle, Performance & Organisation Capability Director, Lloyds Banking Group, says: “In banking, the success of a merger is doubly critical. We have a wider societal role and are playing a key part in bolstering the UK economy – the stakes are high and, as such, we take on that task with the utmost focus.”
She continues, “A fully embedded and supportive culture, post merger, encourages individuals to ‘do the right thing’ and expect that others will do likewise. We have found that it has contributed to a sense of trust and belief that individuals will be rewarded for acting ethically and doing their job professionally, rather than by taking inappropriate risks to bring in short-term rewards. As such it is important that all of our colleagues understand and practise our values.”
But how can this all be achieved?
Based on the three areas of alignment suggested above, here is some advice:
1. To ensure alignment around the overall purpose and objectives of the two organisations, you should:
- Clearly define your organisation’s goals and communicate them frequently. Every employee should know what they are and how he/she contributes to them
- Investigate how well employees understand these goals and adjust your communication approach as needed - employees must internalise them
- Review and adjust incentive, reward, compensation and performance management systems to support the combined organisation’s goals. Make this a priority and do it quickly
2. To ensure alignment around the qualities and characteristics each organisation considers important, you should:
- Enable and expect leaders to model the organisation’s core values. Publicly recognise and reward employees who set the standard for these values. Review incentive, reward, compensation and performance management systems to ensure they support the desired core values
- Review hiring and promotion standards to ensure they support the selection of employees who model the core values
- Move high potential leaders between the legacy organisations. As people learn values from seeing them in action, having high potential leaders who model these actions throughout the organisation will expose more employees to the organisation’s core values
- Communicate the reasoning behind decisions made based on the core values. This will allow employees to see the values in action
3. To develop a consistent set of communication standards across different groups, you should:
- Identify and clarify the communication standards
- Model the standards that the group should adopt
- Provide the infrastructure and resources necessary for everyone to adopt the preferred standards
Taken together and done smartly, alignment across these three areas will provide a solid foundation for further cultural integration if needed. The first step in further cultural integration is to understand how the combined organisation intends to operate – and this is done with a thorough area-by-area review of the future organisation. Once a clear understanding of how the combined organisation will operate, the second step is to take specific actions that will remove any points of cultural conflict and facilitate the appropriate degree of integration.
To finish off, here are some additional words of advice from two Members. Kelvin Harrison, Chairman of Maxima Holdings plc, advises that you “ensure that there is basic compatibility before even embarking on a deal. During due diligence, work out who will fit, who won’t and how you’ll handle each group. And tell them all about your plans at the earliest opportunity.”
June, who is working on the integration of the cultures between Lloyds TSB and HBOS, shares these pointers:
- Accept that there is no right answer from either heritage. Rather, through dialogue, allow the best way to emerge
- Continually check on the temperature of the organisation by frequent and consistent employee check-points both formally and informally
- Be seen to act on feedback from the ‘temperature checks’
Please get in touch if you have any comments about the issues raised here.
I hope to see you soon,