April 16, 2018
Forecasters are predicting mega M&A activity in 2018. If the past is any predictor of the future, more than half of these exciting new deals are at risk of failing to achieve their intended synergies and results. What can help you succeed when playing against these odds?
Two key drivers going into any M&A deal: a list of immediate synergies and a long-term jump in revenue. If both seem imminently possible, then due diligence begins. Unfortunately, another critical component of success is either forgotten or relegated to a low priority: culture. Ignoring the need to be intentional about culture or worse yet, simply hoping it will work itself can lead to disaster or greatly inhibit your ability to realize the full potential—financial and otherwise—of your next M&A.
This is one of those times when you have to face the obvious. As Lou Gerstner, former chairman of IBM, acknowledged:
“I came to see, in my time at IBM, that culture isn’t just one aspect of the game, it is the game. In the end, an organization is nothing more than the collective capacity of its people to create value.”
Every merger, every acquisition sets the stage for a potential culture clash. We are, after all, bringing together two corporate cultures that are already established. And that’s a setup for the biggest risk (or the biggest opportunity, depending on how you handle it) any business can face.
An internal culture clash can literally handicap your value agenda. No doubt you are familiar with the famous quote attributed to Peter Drucker: “Culture eats strategy for breakfast.” Have you heard its latest update? Bill Aulet, Managing Director of the Martin Trust Center for MIT Entrepreneurship at MIT, tells his students: “Culture eats strategy for breakfast, technology for lunch, products for dinner, and soon thereafter, everything else too!” The rational course of action in M&A integrations should be to make culture a priority, rather than to leave the two cultures to duke it out in the meetings rooms and corridors of your business. It can take a long time for a winner to emerge (we’ve seen it take years in some cases). Meanwhile, your intended synergies stall out and value creation dips. Culture then becomes your biggest liability.
CULTURE AS AN ASSET
A couple of years ago, the board of a mid-sized manufacturing company approached us about this very issue. Nine months earlier, their company had merged with another manufacturer of about the same size. Both enterprises were very successful in their own right, but they were run in entirely different ways. One culture was very entrepreneurial: the other, very structured. During and after the merger, the CEO of the integrated enterprise had ignored the issue of culture, declaring it would “take care of itself”. The process of integration began, but things moved along at a snail’s pace. The board approached us after they got wind of what was being prepared for the first annual report. The news was not good. Few of the synergies and none of the expected revenue growth had yet materialized. In the face of a potential fiscal meltdown, they were asking us, “Can you help?”
Our answer was an emphatic yes, with two caveats. One, they had to tell the truth to their shareholders. And two, the CEO and the entire leadership team had to commit to come together to create a unified culture and publicly share that commitment at the Annual General Meeting.
Why did we ask for that specific commitment? It’s been widely known for a long time that culture can be an asset that positively and significantly impacts performance. In 1991, Kotter and Heskett reported the bottom-line differences over an 11-year period between 12 companies with performance-enhancing cultures and 20 companies without. More recently, there’s been a lot of focus in culture conversations on improving engagement to drive profitability. In 2017, Gallup reported “highly engaged” business units demonstrating 21% greater profitability overall.
PERFORMANCE-ENHANCING CULTURE DELIVERS
|Companies With||Companies Without|
Over the last decade, we have worked with many clients like this manufacturing company. We and these clients learned, often the hard way, that leaders have to intentionally cover three bases to ensure their culture becomes an asset in an M&A situation: the buzz at the bottom, the mood in the middle, and the tone at the top.
BUZZ AT THE BOTTOM
Decades ago, MIT professor Edgar H. Schein distinguished three aspects of culture: behaviors, values, and assumptions. According to Schein, “What really drives the culture—its essence—is the learned, shared, tacit assumptions on which people base their daily behavior.”
People’s tacit assumptions get revealed in the day-to-day buzz that happens during hallway chats, face-to-face meetings, and through emails. This is where culture challenges often surface first. Yet, all too often, we’ve seen CEOs and their leadership teams dive directly into a conceptual conversation about the company’s integrated culture among themselves at the top without paying attention to the buzz. Without this connection to what’s happening at the bottom, their “design” conversations end up being uninformed or ill-advised.
Intentionally tune in and listen to what’s being said and done both inside and outside official channels, especially on the frontlines, during due diligence.
The idea is to observe what employees are consistently saying and doing in each of the two cultures now. Three things lie behind people’s behaviors: the corporate values they are actually living; their beliefs about their fellow employees, customers, suppliers, and competitors; and expectations they have about the future. Taken together, these three things reveal the work that will need to be done to build bridges in people’s minds so the two companies can truly become ONE.
That work starts with senior executive leaders creating a list of a few corporate values that merge the best from each company’s culture into a single, cohesive whole. From there, they will want to design a short list of model behaviors that capture the essence of those integrated values. And then they will need to select two or three specific behaviors to rollout in the integrated organization and start realizing their chosen ONE culture.
MOOD IN THE MIDDLE
Once senior executive leaders clearly communicate the two or three new behaviors they want people throughout the organization to exhibit to middle management, each and every manager will have an eye on those executives to see how they’re behaving. Leaders in the middle of an organization act as the “translators” of corporate culture. Their mood—whether it’s essentially accepting or resisting change—essentially tells us how fast a culture shift can happen.
If executives don’t walk their “new” talk, then managers will resist the new dictates, either covertly or overtly. If executives consistently walk their “new” talk, then managers will be more likely to accept the new standards as their own. Time to reflect on the new standards, to adapt performance assessments and rewards and incentives, and to dialogue with executives about their questions and concerns will also improve adoption. Some companies rely on annual employee surveys to give executives a sense of what the prevailing mood is among middle managers: however, since surveys are, like financial statements, a look in a rearview mirror, we don’t rely on them for what’s happening right now. Real-time polls and text message surveys are a better way to quickly take the pulse of a company’s middle.
Once middle managers shift their behaviors, supervisors of frontline employees will follow their lead. Then, and only then, the frontline, now assured that this is indeed what the organization now expects of everyone, will follow on cue.
When you’re trying merge and change two cultures at once, you really need strong middle managers and champions across the organization at all levels.
Three things make organization-wide change possible: communication, communication, communication. That’s why fostering relationships with supportive champions in the middle and at the bottom before announcing the new behavioral expectations works wonders to accelerate the shift. Champions are often willing to make the time to patiently explain the changes in “life speak” (instead of “corporate speak”), to discuss the implications, and to talk through any execution challenges with those who are right there with them in the trenches. They can translate change into very clear and specific things that each individual can do in the work they’re doing each day to bring the new culture to life.
Culture champions, if they are really passionate about the changes being made, almost always do a better job of influencing the troops than leaders and managers. Champions are also more likely than leaders to be able to identify outliers who simply can’t or won’t come along—and they can help managers determine the greatest areas of risk.
TONE AT THE TOP
Countless organizations focus on the tone at the top. We do too. But we leave it to last, primarily because it is where executives are already most comfortable. If you’ve listened to the buzz at the bottom and managed the mood in the middle, then by the time you get here, you’ve taken care of the “intangibles” that make or break what you need to do next.
Now you’re ready to tie concrete business objectives to your culture change. In today’s fast-moving world, a micro-battles approach works best, rather than a protracted three to five-year strategic planning process. Pick specific, measurable “first” battles in various areas of the business. Ones that are small enough to accomplish and big enough to matter. Give each a specific timeline and a dedicated cross-functional team. If necessary, adjust decision making to support each team’s success. Win those first battles. Celebrate. Then repeat the whole cycle again and again until the new behaviors become second nature for everyone in the organization.
The ultimate objective in all this is, of course, to continue to build a sustainable company that creates significant value. There’s no need to wait until a cataclysmic event is about to happen to bring to life the culture that is right for your enterprise. Treat culture as the priority it should be in your company. Buzz. Mood. Tone. Now is your culture an asset or a liability?
1 Louis V. Gerstner, Jr. Who Says Elephants Can’t Dance (New York, NY: HarperCollins, 2002).
2 Bill Aulet, “Culture Eats Strategy for Breakfast”, TechCrunch, April 12 2014. Accessed January 15, 2018 at http://tcrn.ch/2lgaPNm.
3 John P. Kotter and James L. Heskett, Corporate Culture and Performance (New York, NY: Simon & Shuster, 1991), p. 11.
4 Jim Harter and Annamarie Mann, “The Right Culture: Not Just About Employee Satisfaction”, Gallup®News, April 12, 2017. Accessed January 25, 2018 at http://bit.ly/2zdNreP.
5 Eric Beaudan and Greg Smith, “Corporate Culture: Asset or Liability”, Ivey Business Journal, March/April 2000. Accessed January 15, 2018 at http://bit.ly/2nlLfdh.